Strong GDP growth but low net lending in the public sector

17 November 2017 | News

Both GDP and employment are rising rapidly this year. Despite the expansive fiscal policy in future years, the growth in the economy will slow when the boom period passes its peak. As a result, the tax revenues will increase at a slower rate in the future. At the same time, public expenditure will be raised by the expansive fiscal policy in the budget bill. Despite a slightly slower rate of increase in revenues and increased expenditure, net lending in the public sector will continue to display a surplus in future years, but the surplus target will not be met. However, the expenditure ceiling will not be breached, and the margin to it will be sufficient. The conditions for the municipalities and county councils to achieve the balanced budget requirement appear positive for both 2018 and 2019.

The economic boom in Sweden will continue, and GDP growth will remain high both this year and next year, at 2.9 and 2.5 per cent respectively. We anticipate that the business cycle will reach its peak next year, i.e. the resource utilisation will be higher then than at any other time during the forecast period. After that, we expect the economy to move towards a more balanced state, with growth slowing and becoming relatively weak.

Employment is rising rapidly this year, despite the already strained labour market. More people are being employed primarily within the service sector and the public sector. The considerable increase in the number of people employed during 2016 and 2017 has led to employment being above its potential level. The rate of increase will weaken in future years, however, and the number of people employed will be falling by the end of the period. A strong growth in employment in the short term leads to a continuing fall in unemployment. This is expected to bottom out at 6.4 per cent as the average for 2019. After this it will rise slightly.

The rise in unemployment at the end of the forecast period is partially a result of the weakening of the economy, and partially related to a rapid rise in the number of non-native born people in the labour market and the fact that unemployment among those born abroad is significantly higher than among people born in Sweden. The Government's efforts to increase the number of places in education is keeping unemployment down, as a growing proportion is expected to study instead of actively seek work.

While growth in GDP and employment will slow from 2019, we will see a slight increase in inflation, both in salaries and consumer prices. The reason for this is the labour shortages witnessed in certain sectors and that fact that inflation expectations have risen. As a result of the strong economic situation, and the fact that inflation will be close to the inflation target in future years, the Riksbank (Sweden's Central Bank) will start raising the repo rate next year. We are anticipating a series of increases over the coming years.

While monetary policy will begin to tighten next year, the fiscal policy will become even more expansive. This expansive policy consists primarily of large increases in public expenditure, as well as tax cuts. The expansive fiscal policy contributes to a temporary rise in GDP growth, but the long-term GDP level will not be affected appreciably. As a result, growth in the economy will be weak after 2018 and several important tax bases will grow more and more slowly in the future.

Major effects of the budget bill on state expenditure

After two years of exceptionally large increases in tax revenues, the rate of increase is now slowing, although the economic boom still contributes to tax revenues increasing strongly this year from an historical perspective. Taxes on both labour income and consumer goods are growing strongly. Household capital taxes will fall both this year and next year, although they will remain at a high level.

The rate of increase is expected to slow markedly next year. Both tax cuts and the weaker growth of important tax bases are behind this slowdown. The largest tax cut is for people over 65 years of age, and it is proposed to be implemented in a number of stages between 2018–2020.

In total, the tax ratio will fall by 1 percentage point between 2016 and 2019, to an historic low of 43.2 per cent of GDP.

The investments announced in recent budgets contribute to raising public expenditure. Above all, the proposals in the budget bill for 2018 will entail large increases in expenditure. As a result of proposals in the most recent budget, the expenditure is being raised by between SEK 36–65 billion between 2018–2020. The largest investments are being made in the fields of healthcare, education as well as environmental and nature conservation. Child allowances and state grants to local government are also raised.

The expenditure remains high this year as a result of the large number of asylum-seekers who arrived in 2015, many of whom were not placed in municipalities until this year. Expenditure levels were not much affected in 2015, as the majority of the asylum-seekers arrived during the autumn. Instead, the large increase in expenditure occurred last year. This year, expenditure increases somewhat as a result of changes to the rules regarding the allowance scheme for children arriving alone. As significantly fewer asylum-seekers are arriving now compared to 2015, and as standard benefits for children arriving alone have been reduced, expenditure levels will fall steeply over the next two years. By 2019, expenditure for reception of refugees will have more than halved compared to this year.

In addition, several expenditure areas in the central government budget are increasing as a result of rising wages and prices, as well as due to a growing population.

Negative net lending in the local government sector

This year and next year, we are anticipating negative net lending in the local government sector on a par with the level in 2016. The deficit will be larger from 2019. The deficit will stand at between 0.4 and 0.7 per cent of GDP during the forecast period. Despite the fact that net lending in the local government sector displays a large deficit, we anticipate that the sector as a whole will satisfy the balanced budget requirement. This is because the balanced budget requirement is evaluated against local government profits, which are higher than net lending. This assumes, however, the reining in of demographically motivated increases in expenditure. There is a large surplus in the net income level this year, as central government grants and tax revenues are increasing substantially. Given that the increase in income will slow in future, in part as a result of anticipated unchanged central government grants and tax rates as from next year, the net income level will be low by the end of the forecast period.

Surplus in the public sector

Just as in the last two years, net lending in the public sector will be positive both this year and the next. While net lending in central government is displaying a stable surplus, the local government sector is demonstrating a persistent deficit. The weaker growth in the tax bases, along with the expansive fiscal policy, results in a weakening of net lending, however. The surplus in 2019 is expected to correspond to 0.5 per cent of GDP, compared to 1.2 per cent in 2016. This weakening is mainly taking place in central government.

The budget balance will be SEK 42 billion this year. This is a substantial decrease compared to last year's balance of SEK 85 billion. The decrease is much greater than for net lending. This year's weakening of the balance and the difference compared to the change in net lending can primarily be explained by the fact that the balance in 2016 was strengthened by large, temporary payments into the tax account.

The surplus in the public sector leads to the continued fall in the public sector's gross debt, the Maastricht debt. The strong growth that lies behind the surplus is also contributing to the debt falling as a share of GDP, from 42 per cent in 2016 to 35 per cent in 2019.

The current surplus target, i.e. a surplus of 1 per cent of GDP over an economic cycle, will apply until 2018. The Swedish National Financial Management Authority's conclusion is that the surplus target will not be met. A new, lower target level will apply as from 2019. This target level will also not be met, according to the current forecast.

The expenditure ceiling will not be breached in any year during the forecast period. The margin to the expenditure ceiling exceeds the safety margin that the Swedish National Financial Management Authority is advocating.

The conditions for the local government sector and county councils to achieve the balanced budget requirement appear positive for both 2018 and 2019.