Tax cuts reduce net lending in the public sector

24 January 2019 | News

The Swedish economic boom has peaked. The increase in tax revenue will thus begin to slow down. However, this year the slower increase is mainly due to tax cuts. The Government’s budget had a significant increase in expenditures in 2018, while this year’s increase is only moderate. Net lending is lower in the public sector this year, compared to previous years. Structural net lending is in line with the new surplus target and the Maastricht debt is within the limits of the debt anchor. Expenditure is well below the expenditure ceiling. The local government sector will meet the balanced budget requirement, but with deteriorating accounting results.

The net lending in the public sector is estimated at 0.3 per cent of GDP this year and 0.8 per cent of GDP next year. This year, the budget’s effect on net lending is smaller than last year and mainly consists of tax cuts. Last year, the lending was mainly lowered by major budget expenditures.

From 2019, the surplus target will be lowered to one third of a per cent of GDP. The assessment of the surplus target is based on structural net lending the current and coming year. Structural net lending, i.e. the fiscal position adjusted for the business cycle and non-recurring effects, is estimated at 0.2 per cent of GDP this year and 0.7 per cent of GDP 2020. ESV’s assessment is that the structural net lending is in line with the surplus target.

The surplus in the public sector contributes to continued decrease in the national debt and the Maastricht debt. The introduction of the new surplus target also saw an increase of the fiscal policy framework to include a debt anchor. The debt anchor means that the Maastricht debt shall be 35 per cent of GDP with a maximum deviation of 5 percentage points. According to the forecast, the debt is within the limits of the debt anchor.*

The central government budget balance is significantly weakened in this year and the next. The weakened balance is mainly due to companies and private individuals with capital invested in their tax accounts being expected to withdraw this capital.

The Swedish economy is entering a calmer phase. This year, growth is slowing down as investments are increasing at a slower rate. Next year, GDP will increase at roughly the same rate as this year. Employment is increasing at a slower rate this year, as the slowing growth is reducing the demand for labour. The employment rate will keep increasing, however. It will drop in the following year, but is expected to remain at a historically high level. While growth is slowing down, resource utilisation is still deemed to be higher than normal. The high resource utilisation is, with a slight delay, leading to a rise in the rate of salary increases. 

After a few years of fairly high tax revenue increase rate, this trend slowed down last year. Growth slowed down in a number of tax bases and there were several tax cuts. This slowdown intensifies further this year. This is mainly due to significant tax cuts on labour in the approved budget, but also to growth in several tax bases slowing down. Tax on capital is decreasing as households have lower capital gains. The VAT increase slowed down last year as housing investments tapered off. The increase will slow down even further this year.

Expenditure is increasing moderately this year, after growing significantly in the past year due to major expenditure increases in the 2018 budget. The approved budget for 2019 has lower expenditure increases than 2018. However, there have been significant reallocations between expenditure areas, with new investments in defence, the judicial system, and the medical services, while cuts have been made in the labour market and in environmental and nature conservation. Migration and integration-related expenses continue to drop. This is due to fewer persons in the reception system and fewer migrants placed in municipalities.

* The assessment of the debt anchor shall include the previous, current, and coming year.