Rising expenditure and lower capital gains reduce general government net lending

14 June 2018 | News

The business cycle peaks this year, and growth will slow next year. Measures in recent budget bills will result in a marked rise in government expenditure this year, despite a steep fall in spending on refugee reception. At the same time, tax revenue grows considerably slower than last year, leading to a lower surplus. The expenditure-to-GDP ratio increases slightly, while the tax-to-GDP ratio decreases. The surplus in general government net lending will therefore be lower this year than in 2017. It will continue to decrease somewhat next year. According to our forecast, the structural budget balance will be below the target level in 2019. The spending cap will not be breached this year or next. The prospects for the local government sector to meet the balanced-budget requirement are sound this year, but less favourable next year.

The general government will continue to show a surplus, but it will be considerably smaller this year compared to last year. This is due to tax revenue growing more slowly this year than last, while expenditure continues to rise significantly this year, mainly due to measures in recent budget bills. It is central government net lending that decreases the most this year, but local government net lending also declines substantially. The prospects for local government to meet the balanced-budget requirement are sound this year, but less favourable next year.

General government net lending will be below the current surplus target level this year, and the target will not be met. From 2019, the surplus target is being lowered to one-third of a percent of GDP, with the prospect of achieving the target being assessed ex ante on the basis of the structural budget balance. In our forecast, structural budget balance is below the target level in 2019.

The surpluses in general government net lending decreases the central government debt and general government gross debt (Maastricht debt).

However, the central government budget balance will deteriorate in 2019. The main explanation is that companies and individuals with capital deposits on the tax account are expected to withdraw their deposits next year.

The boom in the Swedish economy will peak this year, and GDP growth remains high. Next year, growth will slow, mainly due to a slower increase in investments. This affects the labour market, where the employment rate will begin to fall, although it will remain high by historical standards throughout the period. A tight labour market and a peaking business cycle cause higher increases in wages.

Tax revenue rises slowly both this year and next due to weaker growth in the tax bases. Tax on labour and consumption will increase more slowly than GDP, due partly to tax cuts and weak growth in housing investment. Lower housing prices affect capital gains negatively, and revenues from capital gains taxes decrease as a result. In all, this means that the tax-to-GDP ratio will decrease both this year and next.

Measures in recent budget bills contribute to general government expenditure rising rapidly this year. There will be marked increases in spending on health care, education as well as environment and conservation. Child allowance and central government grants to local government are also increasing. Meanwhile, expenditure on migration and integration is falling sharply, as there is still a smaller inflow of asylum seekers than before. Spending on sickness benefit and early retirement pensions will also decrease due to fewer recipients. All combined, the spending cap will not be breached.

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