Slow growth weakens net lending

23 September 2022 | News

General government net lending will show a small surplus this year, despite a deficit in central government net lending due to extensive measures in the Budget Bill for 2022, including several amending budgets. Structural net lending will also show a surplus, but lower than the surplus target. High inflation and rising interest rates will force Sweden’s economy into recession and growth will be slow next year. The downturn weakens general government finances but net lending will nevertheless be close to zero. However, the surplus in structural net lending will be higher next year, in fact even higher than the surplus target. At the same time expenditures will exceed the expenditure ceiling both 2023 and 2024.

Sweden’s economy has held up well so far this year. But during the second half GDP is expected to decline as high inflation and rising interest rates will cool off both household consumption and fixed investments. Sweden’s economy will thereby enter a period of recession and GDP growth will be slow next year. A strong growth in employment so far this year has resulted in a sharp decline in unemployment. Next year, weaker demand for labor due to slower GDP growth will cause unemployment to rise again.

Tax revenues rise relatively fast this year, despite considerable tax cuts in the Budget Bill for 2022. That is due to a strong increase in household consumption and private investments, to a great extent because of high inflation rather than a strong rise in demand. Tax on labor is also increasing quite fast since total wage earnings will continue to grow at a high rate. The increase in tax revenues is counteracted by a sharp decline in household capital gains in the wake of falling stock markets and decreasing house prices as well as diminishing house sales. Next year the downturn in the economy and lower inflation will dampen the increase in tax revenues further.

Ceiling-limited expenditures continue to rise this year even though most pandemic-related measures are ending. That is explained by large measures in the Budget Bill for 2022, including several amending budgets. Next year the ceiling-limited expenditures will decrease, mainly because all pandemic-related measures have terminated. However, certain expenditures continue to increase rather fast, for example expenditures on defense and justice. Net lending by the National Debt Office declines sharply this year and will remain negative the next year since the Riksbank will repay their loans in the National Debt Office and a high amount of capacity fees will be paid to Svenska kraftnät. Due to that, total central government budget expenditures will fall both 2022 and 2023.

General government net lending will show a small surplus this year despite increased expenditures and tax cuts in the Budget Bill for 2022. That explains, however, why there still is a relatively large deficit in central government net lending. The surplus occurs in the local government sector and in the old-age pension system. The downturn in the economy next year and the sharp decline in household capital gains weakens general government finances temporarily. Net lending is nevertheless forecast to be in balance. Unlike net lending in the central government the budget balance will show a surplus both 2022 and 2023, at SEK 200 and 154 billion respectively. The large difference is mainly explained by the fact that the Riksbank will repay their loans and that the high capacity fees to Svenska kraftnät are included in the budget balance but not in the net lending.

Structural net lending, that is net lending that does not vary with the business cycle and is adjusted for one-off effects, is expected to show a small surplus this year. But it is still lower than the surplus target. In fact it is in line with the non-adjusted net lending even though the GDP-gap is slightly positive. The effect of the positive GDP-gap is offset since some tax-bases are low in comparison to GDP. Next year, the slow GDP-growth and the sharp decline in household capital gains weakens net lending but structural net lending is on the contrary reinforced and is then above the surplus target.

The Maastricht debt declines both this year and next. To a certain extent that is explained by the amortization of the Riksbank’s loan. Next year it will be lower than the lower limit in the tolerance range for the debt anchor. However, the debt anchor is not an operational goal for the budget process, but rather a benchmark for debt in the medium term.

Central government expenditures will exceed the ceiling by SEK 18 billion next year, even though all pandemic-related expenditures than have ceased, and there is no room for unexpected expenditures. The ceiling is exceeded even 2024 according to ESV’s current calculations.

Compared with the previous forecast, higher inflation and more rapidly rising policy rates have lowered the forecast for GDP growth this year and next. Still, tax revenues has been revised upwards this year, but downwards next year. Above all, this is explained by much lower household capital gains than previously expected. At the same time, the ceiling-restricted expenditures is lower this year but higher next year than in previous forecast. Altogether, net lending is stronger than before this year but weaker next year. The budget balance has been raised quite substantially due to much higher capacity fees to Svenska kraftnät.

Forecast in numbers

  2021 2022 2023 2024 2025
GDP, constant prices, calendar-adjusted, annual percentage change 4.9 2.2 0.4 2.3 2.5
General government net lending, SEK billion -5 8 -2 43 82
General government net lending, % of GDP -0.1 0.1 0.0 0.7 1.2
Structural net lending, % of GDP -0.6 0.1 0.8 1.1 1.3
Maastricht debt, % of GDP 36.2 31.0 26.5 24.0 21.8

Source: ESV and Statistics Sweden.

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