Limited scope for reforms in 2020

04 September 2019 | News

The rate of economic growth is slowing down, but the business cycle is still stronger than normal. The surplus in the public sector’s net lending will fall significantly this year, partly as a result of tax cuts, but will increase again next year. Structural savings this year are clearly below the surplus target. Next year, structural savings strengthen and will be close to the target. If the surplus target is to be met, there is thus a limited scope for reforms in 2020. The Maastricht debt is low and within the limits of the debt anchor.

This year, the surplus in public finances will be very small, only SEK 2 billion. This despite the fact that the Swedish economy is still stronger than normal. The weakening in savings is mainly due to tax cuts and a slower rate of increase for several of the tax bases. Next year, savings will increase to SEK 17 billion, corresponding to 0.3 per cent of GDP. The central government sector reports a stable surplus while there are large deficits in the local government sector. The municipal sector as a whole is assumed to meet the balanced budget requirement for all years, although by a small margin.

Structural savings, i.e. financial savings adjusted for cyclical variations and non-recurring effects, are estimated at -0.3 per cent of the GDP trend this year. This clearly deviates from the target level of one third of a per cent of the GDP trend. Next year, we expect structural savings to improve, to 0.2 per cent of trend GDP. As structural savings are expected to be close to the target level there is, according to ESV’s forecast, limited scope for new reforms in 2020 if the surplus target is to be achieved. The Maastricht debt is low and in line with limits for the debt anchor.

The activity in the Swedish economy is slowing down this year. Next year, growth will slow even further. Employment is also increasing at a slower rate as the demand for labour is attenuated. Although the economy is slowing down, resource utilisation is still estimated to be higher than normal. With some lag, it is expected that the wage increase rate will rise slightly. Inflation is below the inflation target but the Riksbank is still expected to raise the interest rate next year.

Tax revenue does not increase as much this year as last year. This is due both to tax cuts and to a slower development of most tax bases. The development rates for tax on labour and tax on consumer goods and inputs are slowing this year, partly as a result of tax cuts and decreases in housing investment. Capital taxes will only increase marginally this year. Revenue from household capital income taxes are falling as household capital gains decline. This is counteracted by a continuingly high rate of increase in corporate income tax. Next year, the increase in most tax bases will slow further. However, household capital gains will not decrease like this year, and revenues will not be affected by policy changes of the same magnitude. All in all, this implies a larger increase in tax revenue than this year.

The expenditure areas subject to the spending cap are increasing at a slower rate this year compared to last year due to lower spending in the budget for 2019. Expenditure on general subsidies to municipalities and national defence shows the largest increase. Expenditure on migration and integration continues to decline. Total expenditure decreases as a result of considerably reduced net lending. Next year, total expenditure will increase again. The expenditure areas subject to the spending cap will increase at roughly the same rate as this year, by 2 per cent. All in all, the spending cap is observed all years by a good margin.