Strong GDP growth and high tax revenue

06 September 2017 | News

GDP and employment are growing strongly this year. This contributes to a rapid growth in tax revenue for 2017. However, the growth rate will be slower than during the previous two years, when it was exceptionally high. Central government expenditure is increasing moderately over the entire forecast period. Despite the favourable business cycle, net lending is below the target level of 1 per cent of GDP next year. Accordingly, ESV concludes that the surplus target is not met. The margins in relation to the expenditure ceiling are substantial every year.

The economic boom is continuing and growth is expected to remain strong this year. Next year, however, GDP growth will be significantly dampened. Employment will also grow at a slower pace, after a very strong increase this year. The employment rate will rise this year and then fall slightly. However, it will remain at a historically high level throughout the forecast period. The rise in employment will bring down the unemployment rate to a low of 6.5 per cent next year. After 2018 unemployment will rise again. Wage growth and inflation will rise due to the high resource utilization in the economy.

Following two years of exceptionally high increases in tax revenue, the growth rate weakens this year, despite strong growth in the economy and a strong labour market. This is mainly due to significantly lower tax hikes this year compared to the previous. Also contributing is the fact that revenues from taxes on capital have only increased marginally, mainly due to a fall in household capital gains. For the years ahead, tax revenue will increase at a slower rate than this year.

Central government expenditure will increase moderately over the entire forecast period, given current fiscal policy. Already approved initiatives in areas such as education, communications and defence increase expenditure levels. Furthermore, spending on migration and integration remains at the same high level this year as last year, although it will fall sharply as of next year. Expenditure for sickness benefits will decrease this year and next, after seven years of increasing expenditure. Labour market expenditure will remain largely unchanged during the forecast period.

For the third year running, the favourable economic cycle will lead to a surplus in net lending. The surplus will amount to 1.2 per cent of GDP, which is higher than in the previous two years. Next year, the surplus will be lower, 0.9 per cent of GDP, as net lending in the local government sector declines following temporarily high net lending this year. In the following years, net lending will gradually increase. The surpluses accrue in the central government sector.

In contrast to net lending, the central government budget balance will deteriorate this year. The balance is estimated at SEK 38 billion, compared to SEK 85 billion in the previous year. The decline of the balance and the difference compared to net lending is primarily explained by large-scale temporary payments made into the tax account during 2016, which increased the budget balance but did not affect net lending. Next year the effect will be the opposite when large withdrawals are made.

Surpluses and strong growth in the economy will lead to a drop in the consolidated gross debt (Maastricht debt) to 38 per cent of GDP this year and 36 per cent next year.

The current surplus target, i.e. a surplus of 1 per cent of GDP over the business cycle, is valid until 2018. ESV concludes that the target will not be met.