Savings just above the target level next year, but the expenditure ceiling is exceeded

22 June 2022 | News

Russia's invasion of Ukraine, high inflation, rising interest rates and continued shipping and production problems are dampening growth in the Swedish economy. Despite this, employment continues to rise and unemployment is falling. Next year, the economy has fully recovered from the effects of the pandemic. At the same time, current fiscal and monetary policies are contributing to weak economic growth. Extensive measures in the decided budget for 2022 as well as the amending budgets contribute to the general government net lending continuing to show deficits. Structural net lending is thus below the level of the surplus target for the third year in a row. A deviation from the target level has been justified in the economic crisis caused by the pandemic. However, since the economy is broadly expected to be in balance by 2022, a deviation from the target cannot be said to be in line with the fiscal policy framework this year. Next year, on the other hand, structural net lending is expected to be marginally higher than the surplus target. The ceiling-limited expenditures are so high that the expenditure ceiling risks being exceeded next year if no measures are taken.

Growth in the Swedish economy will be lower this year than last year, when the economy recovered after the fall in 2020. Measured as an annual average, growth will still be relatively high and GDP is expected to increase by 2.4 percent. Next year, growth will slow further and is expected to be 1.2 percent, which is lower than the potential growth rate. The economy has then recovered from what it lost during the pandemic, and fiscal and monetary policy is expected to dampening growth. Despite this, the labor market continues to develop strongly and unemployment is falling both this year and next.

Most tax bases are growing more slowly this year than last year due to the slowdown in growth in the economy. The decided budget and the government's support package also entail tax cuts of a total of SEK 16 billion. Next year, revenues will increase at a slower pace than this year as a result of a more restrained growth in the large tax bases. However, tax increases contribute to increasing revenues. The tax ratio is declining this year, mainly as a result of tax cuts and a sharp decline in households' capital gains. The quota is lower this year than before the pandemic and it remains at a lower level throughout the period as a result of permanent tax cuts since 2019.

Both the ceiling-limited expenditure areas and the total expenditure in the central government budget will increase this year and then decrease next year. The ceiling-limited expenditure areas are increasing despite the cessation of most of the pandemic-related measures. This is due to relatively large expenditure increases in the decided budget and in several amending budgets. Next year, spending will decrease as there is not yet a budget for 2023 and all temporary crisis measures will end.

The deficit in general government net lending decreases slightly compared with last year. Only the state shows a deficit this year, while the municipal sector and the old-age pension system show a surplus. From next year, only the local government sector is estimated to have negative savings, while the public sector as a whole is judged to have a surplus which then grows for each year.

Extensive measures on the expenditure side and further tax cuts mean that structural net lending is below the target level for the surplus target, for the third year in a row. A deviation from the target level has been justified in the economic crisis caused by the pandemic. However, since the economy is broadly expected to be in balance by 2022, a deviation from the target cannot be said to be in line with the fiscal policy framework this year. From next year, a clearer strengthening of net lending in the public sector is expected and the deficit will then be turned into a surplus. At the same time as structural net lending deviates from the target level this year, the Maastricht debt falls below the level of the debt anchor and public finances are basically strong. However, the debt anchor is not an operational goal for the budget process, but rather a benchmark for debt in the medium term. The local government sector as a whole meets the balance requirement by a good margin this year.

The Maastricht debt will fall by 4 percentage points this year to just under 32 percent of GDP. The decrease is largely due to a positive non-recurring effect in the form of repayments of Riksbank’s loans. Next year, debt will continue to fall as GDP grows at the same time as crisis measures end and the Riksbank repays the last foreign currency loans. The debt then becomes lower than the lower limit in the tolerance range for the debt anchor. The consolidated central government debt is also declining and will be 18 percent of GDP this year. It then continues to decline throughout the forecast period.

The ceiling-limited expenses will continue to be high next year and are estimated to exceed the level of the expenditure ceiling by SEK 7 billion. According to the ESV's recommendation, the margin for the expenditure ceiling 2023 should currently amount to SEK 23 billion to take account of unforeseen expenses. The government may thus need to take austerity measures if expenditure is not to exceed the ceiling next year.

It is still difficult to assess how the war in Ukraine affects the global and Swedish economy. There is a risk that the war will be long-lasting and that the impact will be greater than we have anticipated. The current high inflation may be more lasting than we expect and thus have a greater effect on wage formation. High inflation and rising interest rates can also dampen household consumption and investment more than expected. The stock market has fluctuated a lot during the year and rising interest rates may mean that house prices fall more than expected in the future. What the development will look like and thus how large households' capital gains will be is difficult to assess. On the expenditure side, there is mainly a risk that the expenditure on migration will be higher than expected if more asylum seekers come from Ukraine.

The forecast is based on the budget decided by the Riksdag for 2022. It is in turn based on the budget bill for 2022 with adjustments on several points according to the Finance Committee's report 2021/22: FiU1. The Finance Committee's report is in turn based on a joint budget proposal from Moderaterna, Sverigedemokraterna and Kristdemokraterna. In addition to the decided budget, both central government expenditure and revenue are affected by several amending budgets and additional notifications so far during the year.

Compared with the previous forecast, higher inflation and faster interest rate increases have lowered the forecast for GDP growth this year and next. On the other hand, employment and the wage bill have risen slightly, which is one of the reasons why tax revenues have been revised upwards this year. The ceiling-limited expenditure has been increased as a result of the amending budgets presented. Savings in the public sector have been revised up all forecast years. This year, it is primarily in the local government sector that savings have been revised upwards.

Forecast in numbers

  2021 2022 2023 2024 2025
GDP, fixed prices, calendar adjusted, % change 5,0 2,4 1,2 1,9 2,1
Net lending in the public sector, SEK billions -18 -15 29 54 93
Net lending in the public sector, % of GDP -0,3 -0,3 0,5 0,9 1,4
Structural savings in the public sector, % of GDP -0,7 -0,5 0,6 1,0 1,4
Maastricht debt, % of GDP 36,2 31,9 28,1 26,4 24,4

Source ESV