Lower capital gains reduce public sector net lending

05 April 2018 | News

Strong growth, decreasing unemployment levels and low interest rates over a number of years leads to a surplus in net lending. However, growth slows, when the economic boom passes its peak. Tax revenues increase at a slower rate and tax cuts also contribute to reducing public sector revenues. At the same time, major measures in the latest budgets contribute to a quick rise in public expenditure. The surplus in the public sector's net lending is lower than in the previous year as a result. Next year, the surplus will remain at roughly the same level as this year. However, the surplus is lower than the new surplus target level that starts to apply in 2019. On the other hand, general government finances are essentially strong. The debt is within the limits of the debt anchor, which will be introduced in 2019. The margins to the spending caps will be sufficient and the conditions for municipalities and county councils to meet the balanced budget requirement are sound for both 2018 and 2019.

The Swedish economy is experiencing an economic boom with high growth, which creates a surplus in general government finances. But the economic boom will reach its peak this year, after which the rate of growth in the economy will slow. Tax revenues will increase at a slower rate thereafter. Tax cuts in the latest budget will also serve to curb the increase in tax revenues. Simultaneously, the significant increase in expenditure this year, primarily as a result of measures in the most recent budgets, means net lending is expected to be considerably weaker this year. Next year it is expected to remain at roughly the same level. Considering the strong economic boom, the surpluses are small.

Central government net lending continues to show surpluses. The municipal sector shows a steady deficit in net lending, partly as a result of major investments both this year and in recent years. The municipal sector is still expected to meet the balanced budget requirement by a good margin, this year and next. The balanced budget requirement is evaluated based on the municipal results, which are higher than net lending.

The central government budget balance, which is another measurement of central government balance, weakens considerably more than the net lending between 2017 and 2019. The weakening of the balance and the difference compared to the change in net lending is explained primarily by the balance for 2015–2017 improving, by over SEK 50 billion, as a result of large temporary payments into the tax account. These are expected to be withdrawn in 2019.

Strong government finances

The public sector surplus in net lending is too small for the current surplus target of 1 per cent of GDP to be met over the course of an economic cycle. From 2019, the target level will be reduced to a third of a percent of GDP. Unlike the previous target, the new target level shall be evaluated each year in light of the structural balance. The structural balance is lower than the target level for 2019, according to the current forecast.

Nevertheless, general government finances show strength in that the public sector's gross debt is low, both from a historical and international perspective. Surpluses in the public sector mean that the central government debt and the public sector's gross debt (Maastricht) will continue to decrease. The debt remains within the limits of the debt anchor which will also be introduced in 2019.

The economic boom passes its peak

Supported by expansive monetary and fiscal policies, the boom in the Swedish economy reaches its peak this year. GDP growth remains high this year but the rate of growth declines somewhat. Above all, property investments are expected to increase considerably less this year, compared to last year. Next year, the slowing GDP growth will be even more substantial.

The increase in employment will also recede. The employment rate, however – which is currently very high – will continue to rise somewhat. Next year, the growth rate will weaken further. This means that the employment rate will decrease but still remain at a historically high level. Though the employment rate increase will abate, the rate of unemployment will continue to fall. It is estimated to reach a low of 6.3 per cent in 2019 (annual average).

A high level of resource consumption in the economy, a growing labour shortage and higher inflation expectations will bump up the rate of salary increases and inflation. Following the strong economic boom, and the fact that inflation is close to the inflation target the coming year, the Riksbank will raise the repo rate at the end of the year and the rate increases will continue in the coming years.

Slower increase in tax revenues

As the growth in the economy abates, the rate of increase in tax revenues slows down. Tax cuts of SEK 5 billion this year, compared with increases of SEK 4 billion last year, also contribute to slower revenue growth. The biggest tax cuts are for people aged 65 and older, and will be implemented in several stages over the period 2018–2020.

The increase in tax revenues from earned income, business income and VAT is now receding. Revenue from households' tax on capital is decreasing this year but remains at a high level. Next year, they are estimated to constitute roughly the same proportion of GDP as this year.

Tax cuts and lower capital tax revenues mean that the tax ratio will decrease by almost 1 percentage point during the period 2017–2019 to a historical low of 43.1 per cent.

Measures in the budget bill raise expenses

Measures in the latest budgets contribute to raising public expenditure, which grows relatively quickly this year. As a result of measures in the budget bill for 2018, expenditure will increase by SEK 32 billion in 2018 and by an additional SEK 15 billion in 2019. Major measures are being made in the areas of healthcare, education and environmental and nature conservation. Child allowance and state subsidies to the municipalities also increases.

Moreover, several areas of expenditure in the central government budget will increase as a result of rising salaries and prices and a growing population.

Whilst certain expenditures will increase markedly this year and the next, expenditure for migration and integration will decrease drastically due to the considerably lower number of asylum seekers now compared to 2015. The standard benefit for unaccompanied minors has also been reduced, leading to lower expenditure.

Expenditure for sickness benefit and sickness and activity compensation will also decrease due to the lower number of people receiving such allowances.

Spending caps will not be breached any year, and the remaining margin to the spending cap is greater than the safety margin recommended by the Swedish National Financial Management Authority (ESV).

No major revisions since November

The overall macroeconomic situation has not changed notably since our last forecast in November. The assessment of the level of net lending in the public sector is also roughly the same.

Several uncertainties in the forecast

Uncertainty surrounding developments on the housing market are considerable, in terms of both the price development and housing construction. Furthermore, the price trend of stocks and other assets is uncertain. There is also uncertainty surrounding the potential of the economy and the strength of the economic boom. Uncertainty remains regarding global developments, including the effects of Brexit and the introduction of various trade barriers.

Dividend income has increased dramatically

Our report contains two sections with more in-depth perspectives. The first one highlights the dramatic increase in households' dividend income since 2006. We show that the increase is almost entirely attributable to dividend income received by co-owners of close companies being considerably higher. A large part of the dividend income is allocated to a few individuals, with dividend incomes of over SEK 5 million. The increase over the past two years may be due to regulatory changes and proposals for such changes for close companies.

Fewer unemployed people are receiving unemployment benefit

The second in-depth section explains why the proportion of openly unemployed persons entitled to unemployment benefit has decreased drastically since 2005. It is a matter of both regulatory changes and changes in the composition of the unemployed. The decrease in the proportion has led to a fall in expenditure in the central government budget. At the same time, however, other expenditures related to unemployment has increased.