Large deficit in public finances this year – substantially smaller deficit next year

23 June 2021 | News

Strong indicators, substantial household savings, expansionary fiscal and monetary policy and the easing of restrictions as more and more people get vaccinated, all point towards a strong recovery in 2021. GDP will grow by 4.1 per cent this year. However, massive increases in spending and tax cuts mean that the deficit in public finances will be almost as large this year as last year, despite strong growth in the economy. The structural balance are clearly below the target level in both 2020 and 2021. However, in order to mitigate the effects of the economic crisis caused by the pandemic, a deviation from the target level has been justified.

There was a strong recovery in GDP growth in the third quarter of last year, following the sharp fall during the second quarter. As the spread of infection increased again in late autumn, and tougher restrictions were introduced in several areas, GDP fell again during the fourth quarter. Economic activity gradually increased during the first quarter, and overall GDP growth was good in the first quarter of this year. Strong indicators, substantial household savings and the easing of restrictions as more and more people get vaccinated, all point towards the recovery being strong in 2021. An expansionary fiscal and monetary policy is supporting the recovery. Measured as an annual average, GDP will increase by 4.1 per cent this year (calendar-adjusted). This recovery will continue during 2022, when GDP will increase by 3.0%.

There is still uncertainty regarding the development of the spread of infection, as well as the extent of the effects of the pandemic on the economy this year and in future years. The spread of infection remains high in some areas and the vaccination rate is low. However, growth may also be stronger than anticipated as the restrictions are now gradually being removed.

The coronavirus pandemic and the emergency measures introduced to mitigate its economic 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 tax cuts. At the same time, government spending increased sharply. It is increasing further this year, both due to continued extensive support measures, as well as increased defense, judiciary, labour market and education spending. At the same time, central government revenues will increase significantly this year, even if the upturn is being 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, although temporary, increase in central government grants. Spending is increasing significantly more this year, but as tax revenues are developing more positively than last year and central government grants are increasing further, the local government sector is also reporting a surplus this year, albeit a small one.

The deficit will decrease substantially next year, once most of the temporary support measures have ceased. Central government net lending will then show a small surplus. However, in the local government sector, the surplus will be replaced by deficit as a result of central government grants decreasing once most of the temporary support measures have ceased.

The structural balance – i.e. general government 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 0.9 percentage point a higher deficit than last year. Consequently, net lending are clearly deviating from the target level for the surplus target* in both years. Next year, too, the structural balance will be below the target level. The Maastricht debt is above the target level for the debt anchor this year, but just below the upper limit. However, in order to counteract the economic effects of the pandemic, deviations from the target levels are justified. Nevertheless, bearing in mind the reduced uncertainty surrounding the pandemic, a course for returning net lending to the target level should be set out by the government in the budget bill for 2022.

Tax revenues fell sharply last year as a result of the pandemic and tax cuts. This year they will be increasing strongly instead, as the economy recovers. Revenues from all major taxes will be higher than last year. However, the tax-to-GDP ratio will fall by 0.5 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 grow at a relatively rapid pace next year as well.

Expenditure subject to the expenditure ceiling is increasing further this year, from last year’s high level. This is due to increases in appropriations in areas such as health care, defence, the EU contribution and the labour market sector. The emergency measures that remain in place this year are temporary, which means that the capped spending will fall next year. However,total government spending is already falling this year, as a result of a sharp decrease in net lending from the Swedish National Debt Office. This occurs because several 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 in 2022 and 2023, which will further reduce total spending.

Since the previous forecast, increases in spending have been announced in the spring amending budget, a sixth additional amending budget, in a report by the Finance Committee and in press releases.** Overall, we expect spending to increase by SEK 34 billion this year as a result of these.

Proposals regarding SEK 75 billion in additional amending budgets have previously been presented during the winter and spring.*** We estimate that just over SEK 39 billion of this will be paid out.

Spending increases in 2021 as a result of the 2021 spring amending budget, additional amending budget 6, 2021, the Finance Committee’s report and certain press releases

SEK billion

  ESV VÄB, EÄB6, FiU, press Diff
UO 9 Health and social care 10 10 0
UO 10 Financial security in case of illness and disability 9 14 -5
UO 24 Business 5 24 -19
Other spending areas 10 11 -1
Total spending 34 60 -26

Note: Some of the funds allocated to UO10 were already included in ESV’s previous forecast. At the time, we anticipated that spending relating to sick pay costs would exceed the allotted funds.

Source: ESV and the Government.

Compared to ESV’s March forecast, GDP growth has increased marginally this year, while employment growth remains unchanged. Total earnings have increased, however. Tax revenues have been revised upwards in all forecast years. Taxes on labour, capital and consumption are expected to be higher this year, mainly as a result of stronger total earnings, a different composition of the economy and higher asset prices. As of 2022, income from tax on labour is being revised downwards as a result of total earnings being revised downwards and CPI being revised upwards, leading e.g. to a higher state tax threshold. Both total spending and capped spending have been revised upwards in 2021 in this forecast. This is due to proposals in the additional amending budgets that have been submitted since the last forecast. For 2022-2024, the revisions in spending are marginal. The central government budget balance has been revised down in 2021 and up in 2022-2024.

The recent political development, which ultimately lead to the parliament voting in favour for the call for a declaration of no confidence in Prime Minister Stefan Löfvén on June 21st, means increased uncertainty regarding the economic development. We have not been able to take this into account in this forecast.

The forecast in figures

  2019 2020 2021 2022
GDP, fixed prices, calendar-adjusted (% change) 2.0 -3.0 4.1 3.0
Net lending in the public sector (SEK billion) 29 -148 -150 -18
Net lending in the public sector (% of GDP) 0.6 -3.0 -2.8 -0.3
Structural saving in the public sector (% of potential GDP) 0.1 -1.4 -2.2 -0.3
Budget balance (SEK billion) 112 -221 -66 142
Maastricht debt (% of GDP) 34.9 39.7 38.5 34.4

Source: ESV and Statistics Sweden

*The surplus target means that net lending should be a third of a per cent of GDP on average over an economic cycle.

** The proposals first announced in the press releases are also included in additional amending budget 8. This amending budget was submitted to Parliament on 10 June, i.e. after we had completed our calculations, and also contains proposals that we had not taken into account. See the revision chapter for more information.

***Additional amending budgets 1-5, 2021.