Large deficit in general government net lending even 2021

26 November 2020 | News

The recovery in the economy will slow down over the next few months as a result of the increased spread of infection and tighter restrictions. Overall, GDP in Sweden will fall by 3.9 per cent this year and the number of employed individuals will fall sharply. The recovery will pick up speed again next year, and GDP will increase by 3.1 per cent. Reduced tax revenues and increased expenditure to mitigate the economic impact of the pandemic are leading to large deficits in public sector net lending. The structural net lending is below the target level and the Maastricht debt will be slightly higher than the upper limit of the debt anchor this year and next year. However, in order to mitigate the effects of the shock to the economy caused by the pandemic, deviations from the targets are justified.

The Swedish economy strengthened during the third quarter of the year, after falling sharply in the second quarter as a result of the pandemic. The spread of infection has increased again, however, and tougher restrictions have been imposed, both in Sweden and in other countries. This means that the recovery is coming to a temporary halt and we expect growth to be weak at the end of this year and the beginning of next. The recovery is expected to pick up again in the spring, supported by the restart package presented by the Government in the budget bill along with a continued expansionary monetary policy.

There is still considerable uncertainty about the extent of the effects of the pandemic on the Swedish economy. The consequences of the increased spread of infection may be greater than we are currently anticipating, and as a result growth may be lower. However, hopes for a vaccine in the near future have increased.

The coronavirus pandemic will result in large deficits in public finances, both this year and next. The deficit will be highest in central government, as spending is increasing sharply at the same time as revenues are declining. Net lending in the local government sector is reporting a surplus this year, mainly as a result of temporarily increased central government grants, in combination with certain activities not being able to be carried out due to the pandemic. The sector will be showing a deficit for the remainder of the forecast period.

Structural net lending – i.e. net lending adjusted for cyclical variations and one-off effects – are expected to show a deficit of 1.6 per cent of potential GDP this year and 1.3 per cent next year. As such, this is a clear deviation from the target level in both years. At the same time, the Maastricht debt will rise to just over 40 per cent of GDP this year and 41 per cent next year, which is slightly higher than the agreed 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 will fall very sharply this year. This is due both to the pandemic causing a general downturn in the economy and to temporary tax cuts. Revenue from all forms of tax will be lower than last year, as many large tax bases are declining. The tax ratio will fall by 0.5 percentage points, primarily as a result of a sharp reduction in capital taxes. Revenues will increase again next year as a result of the economic recovery. However, the increase will be relatively weak as a result of tax cuts. The tax ratio will continue to fall by a further 0.8 percentage points, mainly due to the tax cuts.

Overall spending is rising sharply this year. This increase is primarily due to the extensive emergency measures that have been implemented. A temporary negative impact on National Debt Office´s net lending last year is another contributory factor to this increase. As the majority of the emergency measures are temporary, spending will decrease next year, despite large increases in appropriations in the 2021 budget bill.

The areas of expenditure most affected by amending budgets and proposals in the budget bill are industry and trade, general grants to the local government sector, financial security for the sick and disabled, as well as health and medical care and social services. Despite large increases in expenditure, the spending caps will be met by a clear margin every year as the caps have been raised for the period 2020-2023.

ESV’s assessment of the impact of the measures in the budget bill and the additional amending budgets presented during the autumn is lower than the impact presented by the Government. ESV is anticipating both lower revenues and lower spending than the Government, although the difference is greater in respect of spending.

Overall, ESV is anticipating a stronger net lending in the general government sector this year compared to the Government’s forecast. However the difference between the forecasts next year is negligible.

Compared to ESV’s forecast for September, we are now anticipating weaker GDP growth next year, even though we did not take into account the effects of the restart package at that point. On the other hand, GDP will increase significantly more rapidly in 2022 than in the previous forecast. Tax revenues have been revised upwards this year, mainly due to collected taxes and upwardly revised total earnings. For 2021 and 2022, the tax revenues have been revised downwards instead, primarily as a result of tax cuts, although also due to weaker GDP growth. Expenditure has been revised upwards for every year, mainly as a consequence of the proposals in the budget bill and amending budgets. Net lending in the general government sector has been revised downwards for every year except this year.

The forecast in figures

  2019 2020 2021
GDP, fixed prices, calendar-adjusted (% change) 1.3 -3.9 3.1
Net lending in the general government sector (SEK billion) 26 -192 -179
6.8 8.5 9.3
Net lending in the general government sector (% of GDP) 0,5 -3.9 -3.5
Structural net lending in the general government sector (% of potential GDP) -0,2 -1,6 -1,3
Central government budget balance (SEK billion) 112 -255 -86
Maastricht debt (% of GDP) 35.1 40.5 41.1

Source: ESV and Statistics Sweden.

There is considerable uncertainty about future developments, and the risk of lower growth has increased since ESV completed its calculations. The spread of infection has increased and tougher restrictions have been imposed in recent days, not only in Sweden but also in many other countries. In an alternative scenario, we have calculated the impact on a number of key variables in the event GDP growth is half as high next year compared to our current forecast. In this scenario, unemployment is projected to be 0.6 percentage points higher in 2021 and reach a level just below 10 per cent. The general government sector net lending would weaken by around one percentage point to -4.4 per cent of GDP, while the debt-to-GDP ratio would be projected to rise to 43 per cent in 2021.

Alternative scenario with lower GDP growth

  2019 2020 2021
GDP, fixed prices, calendar-adjusted (% change) 1.3 -4.4 1.5
Unemployment 6.8 8.7 9.9
Net lending in the general government sector (% of GDP) 0,5 -4.1 -4.4
Maastricht debt (% of GDP) 35.1 40.9 43.0