Large deficit both 2020 and 2021

29 March 2021 | News

The recovery in the economy slowed down at the end of last year due to increased spread of infection and tighter restrictions. In the coming months the recovery will pick up speed again. GDP will increase by 4.0 per cent this year. Substantial increases in expenditure and further tax cuts in the 2021 budget, as well as the extension of several temporary support measures introduced in 2020, will result in an equally large general government deficit this year as last year. Structural net lending are clearly below the target level in both 2020 and 2021. The Maastricht debt also deviates from the target level, but is just below the upper limit for the debt anchor. However, deficits in public finances and a higher debt ratio are justified in order to mitigate the effects of the deep economic crisis caused by the pandemic.

GDP growth recovered powerfully in the third quarter of last year, following the sharp fall during the second quarter. As the spread of infection again increased in late autumn and tougher restrictions were introduced in several areas, GDP fell again over the fourth quarter. Demand is estimated to have remained subdued during the first quarter of this year. The recovery will pick up speed again in the coming months, when the number of people vaccinated increases and as the restrictions are expected to be gradually eased. The restart package presented by the Government in the budget bill, along with continued expansionary monetary policy, will support the recovery.

However, there is still considerable uncertainty regarding the spread of infection, as it has increased again after falling since the start of the year. Several mutations of the virus have also been discovered. There is also a risk that the vaccination rollout will take longer than planned and that the restrictions will remain in place for a longer period of time.

The coronavirus pandemic and the emergency measures introduced to mitigate its effects resulted in a large deficit in public sector net lending last year. Tax revenues decreased as a result of the slowdown in the economy, but also due to both temporary and permanent tax cuts. At the same time, government spending increased sharply. Spending is increasing further this year, mainly as a result of extensive measures aimed at stimulating the recovery. The extension of some of the temporary support measures introduced in 2020 is also contributing to the deficit. At the same time, central government revenues will increase significantly this year, even though the upturn is held back by tax cuts. Overall, the central government deficit will be roughly the same this year as last year.

The local government sector reported a surplus last year, as the growth in spending was relatively weak due to the unfeasibility of carrying out many activities to the normal extent. At the same time, revenues increased strongly as a result of a sharp, albeit temporary, increase in central government grants. Spending will increase significantly more this year, and the local government sector is once again reporting a deficit.

Structural net lending in the general government sector – i.e. net lending adjusted for cyclical variations and one-off effects – are expected to show a deficit corresponding to 2.2 per cent of potential GDP this year. This is by 0.5 percentage points a higher deficit than last year. Consequently, net lending are clearly deviating from the surplus target [1] both years. The Maastricht debt is also above the target level, but just below the upper limit for the debt anchor. However, in order to counteract the economic effects of the pandemic, deviations from the target levels are justified.

Tax revenues fell sharply last year as a result of the pandemic and tax cuts. This year they will instead be increasing strongly, as the economy recovers. Revenues from all forms of tax will be higher than last year. However, the tax‑to‑GDP ratio will fall by 0.9 percentage points. This is mainly due to the fact that the tax‑to‑GDP ratio was maintained last year, as tax on labour did not fall as much as GDP, but also because of further tax cuts this year. As the recovery continues, revenues will increase at a relatively rapid pace next year as well.

Expenditure subject to the expenditure ceiling increases further this year, from last year’s high level. This is due to increased allocations towards health care, defence, the EU membership contribution and the labour market. The emergency measures that remain in place this year are temporary, which means that expenditure subject to the expenditure ceiling will decrease next year. However, as a result of a sharp decrease in net lending from the Swedish National Debt Office, total government spending is already falling this year. This occurs because several of the loans raised on behalf of the Riksbank (Sweden’s central bank) are falling due and are being repaid. Some of the Riksbank’s loans will also mature next year, which will further reduce total spending.

ESV’s assessment of the impact of the measures in the five additional amending budgets that have been submitted to the parliament this year is lower than that of the Government. Above all, spending on career readjustment support is what differs from the Government’s assessment.

Spending increases in 2021 due to Additional amending budgets 1–5 presented in 2021

SEK billion

  ESV EÄB1-5 Diff
UO 9 Health and medical care, social services 15 15 -0,3
UO 10 Financial security for the sick and disabled 4 4 -0,3
UO 24 Industry and trade 23 53 -30,3
Other expenditure areas 2 2 -0,4
Total expenditure 44 78 -31,3

Source: ESV and the Government

Compared to ESV’s November forecast, GDP and employment growth have increased this year. Growth in 2020 was not quite as weak as anticipated in the previous forecast, and the recovery is now expected to be faster. Tax revenues have been revised upwards for all forecast years. Taxes on labour, capital and consumption are expected to be higher, primarily as a result of stronger growth in the economy. Expenditure subject to the expenditure ceiling in the state budget has been increased significantly due to the five additional amending budgets that have been presented. On the other hand, total spending has been revised downwards for the period 2021–2023 as a result of the Riksbank’s repayment of foreign exchange loans. Overall, the deficit in net lending is as large this year as in the previous forecast, but smaller next year.

The forecast in figures

  2019 2020 2021 2022
GDP, constant prices, calendar-adjusted (% change) 1,3 -3,1 4,0 3,3
Net lending in the public sector (SEK billion) 26 -166 -166 -31
Net lending in the public sector (% of GDP) 0,5 -3,3 -3,2 -0,6
Structural net lending in the public sector (% of potential GDP) 0,1 -1,7 -2,2 -0,6
Central government Budget balance (SEK billion) 112 -221 -64 118
Maastricht debt (% of GDP) 35,1  39,3  38,7  35,1

Source: ESV and the Government

[1] The surplus target means that net lending should be 0.33 per cent of GDP on average over an economic cycle.