Net lending close to zero

18 June 2019 | News

This year, net lending in the public sector will weaken from SEK 43 billion to SEK 1 billion. The reduction is caused by a slower increase in tax revenues as the econ­omy starts to decelerate, however tax cuts are also a contributing factor. At the same time, the expen­diture subject to the spending cap will increase moderately. The surplus is small considering the strong business cycle. However, the surplus will increase next year as revenues grow more rapidly, while at the same time expend­iture will continue to increase at a moderate rate.

Central government net lending is still at a surplus of around 1 per cent of GDP. The local govern­ment sector, on the other hand, has a persist­ent deficit, mainly due to major invest­ments. The sector is none­theless assumed to fulfil the balanced bud­get requirement every year. The balanced bud­get requirement is evaluated in relation to local govern­ments’ accounting results, which is higher than net lending.

The central government budget balance, which is another balance measurement for the central govern­ment, is strengthened by almost SEK 20 billion this year. The strengthening of the budget balance and the difference in relation to the net lend­ing is primarily due to the Riksbank's decision not to refinance loans from the National Debt Office which fall due this year. These loans amount to SEK 69 billion.

The structural budget balance is on the lower end

From 2019, the surplus target for net lending in the public sector has been reduced from 1 per cent of GDP over a business cycle to one third of a per cent. The structural budget balance, i.e. the net lend­ing adjusted for cyclical variations and non-recurring effects, is used to monitor the surplus target.

This year, the structural budget balance will be - 0.2 per cent of the GDP trend [1]. This is on the lower end in relation to the target level, even when con­sider­ing a range of uncertainty of ± 0.5 percentage points. The structural budget balance will increase to 0.1 per cent next year, which is slightly below the target but within the range. The scope for unfunded re­forms is therefore very limited next year.

The consolidated gross debt, also known as Maastricht debt, continues to decline in 2019 to 34‑per cent of GDP. Debt is therefore within the limits of the debt anchor that has been introduced in 2019, that is 35 per cent of GDP with a possible deviation of 5 percentage points above or below this level.

The economic boom has started to subside

The business cycle has passed its peak. GDP growth is slowing and will be significantly lower this year than last year. The deceleration is mainly due to the continued decline in housing invest­ments. The growth rate will remain relatively weak in coming years and the boom will continue to slow.

There is also a reduction in employment growth this year. However, the employment rate, which is at a very high level, continues to rise somewhat this year. Next year, job growth will slow further and the employment rate will decline. That being said, it remains at a historically high level.

Unemployment sees a low of 6.3 per cent this year as an annual average and will rise to 6.8 per cent when the business cycle reaches a normal position in 2022.

The high level of resource utilisation has not yet affected the rate of wage growth to any great extent, but we expect it to rise somewhat in the coming years. However, it remains low and price increases also remain relatively low. Inflation measured by CPIF, is not expected to reach 2 per cent in the next few years, and is thus below the Riksbank's inflation target. Despite the fact that infla­tion does not reach the inflation target, the Riksbank is expected to raise the interest rate three more times before 2022, starting at the beginning of next year.

Tax revenues are increasing more slowly

When the growth rate of the economy slows, tax reve­nues increase more slowly. This year, tax cuts of SEK 18 billion in total are also contributing to the reduced rate of increase. The largest effect is from the strengthening of earned income tax credits, which is expected to reduce tax revenues by SEK 10 billion.

Income from tax on labour and consumption is increasing more slowly this year compared to last year while income from tax on capital is largely unchanged. The revenues from tax on labour are held back both by the fact that paid salary is increasing more slowly and that taxes are being reduced.

Tax on consumption is increasing significantly more slowly than last year, which is mainly a result of a sharp fall in housing investments. Lower household capital gains contribute to lower tax on capital. However, tax on capital is being kept up by income on corporate tax which is still increasing to a relativ­ely high degree. In the coming years, reve­nues will increase faster than this year, but they will continue to increase significantly more slowly than they have done in the past four years.

This year, the tax ratio falls by 0.7 percentage points to 43.3 per cent of GDP. This is mainly due to tax cuts and a decrease in household capital gains and housing investments.

Budget investments increase spending

The expenditure subject to the spending cap will increase by 2.1 per cent this year and by 2.4 per cent next year. Measures in previous budgets contribute to increased expenditure. How­ever, measures are considerably smaller this year and next year compared to 2018, and expend­iture will therefore increase more slowly this year than last year.

Expenditure on general grants for local govern­ments, national defence and the judicial system are subject to the greatest increase this year. But expenditure is also increasing to a relatively large degree within the areas of children and family as well as health and medical care. Several other expenditure areas in the state budget are also increasing as a result of rising wages and prices.

At the same time, expenditure on migration and integration is falling as a result of fewer people seeking asylum now compared to the period 2014–2016. The lower number of asylum seekers has resulted in reduced expenditure, with some lag. The expenditure has more than halved since 2017, when it was at its highest level.

Labour market expenditure is almost un­changed. Reduced administrative appropriations and reduced expenditure on labour market policy prog­rammes are counteracted by rising expend­iture on unemployment benefits.

The expenditure on disability insurance is decreasing as a result of a continued high outflow from disability insurance to old-age pension.

The spending cap is observed all years and the mar­gin to the spending cap exceeds the safety mar­gins recommended by the ESV.

Slightly smaller savings than in the previous forecast 

The business cycle outlook is broadly the same as in the previous forecast in March. The forecast for GDP growth has been raised somewhat for 2019, but has been lowered for the subsequent years. Net len­ding in the public sector is slightly lower than in the previous forecast due to the fact that tax reve­nues have been reduced. Savings are smaller both within the central government and in the local government sector.

Risk of lower growth

The uncertainty regarding global economic developments remains high. Among other things, there are still uncertainties surrounding Brexit, and there is a risk that more trade barriers will be intro­duced that can slow growth. Interest rates may also be­come lower than forecasted, even if the economy develops as expected. This may promote growth in the short term, but it will affect the capability to manage a future recession using traditional monetary policy.

Sweden's Maastricht debt is among the lowest in the EU

This report also contains an in-depth section. It highlights the development of the Maastricht debt since 1999 and the reasons for its current historically low level as a percentage of GDP. Sweden's debt is among the lowest in the EU. The continued downward trend that the forecast points to may mean that the debt ratio falls below the lower limit for the debt anchor, that is, below 30 per cent. This however, assumes no new fiscal policy.

[1] The estimation of the GDP trend is based on a statistical method which separates the actual GDP into a cyclical component and a trend component. The GDP trend is not the same measurement as EVS’s assessment of potential GDP.