The cost of measures to mitigate the crisis lower than expected

17 September 2020 | News

The coronavirus pandemic has had rapid and major consequences, both globally and in Sweden. Sweden’s GDP will fall by 4.4 per cent in 2020 and the number of employed will decline sharply. However, there has been an upturn in economic activity and we are expecting the recovery to continue during the second half of the year. Reduced tax revenues and increased expenditure to mitigate the economic impact of the pandemic are causing large deficits in general government net lending. Structural net lending is below the target level in 2020 and Maastricht debt will be somewhat higher than the upper limit of the debt anchor. However, the need to mitigate the economic downturn justifies a deviation from the targets.

The coronavirus pandemic struck the Swedish economy hard during the second quarter of the year. GDP fell by 8.3 per cent compared with the first quarter. While there has been a broad decline in economic activity, forward-looking indicators suggest that the Swedish economy is currently in a recovery phase. GDP is expected to increase rapidly during the second half of the year. This recovery will proceed into next year increasing GDP by 3.9 per cent. The labour market will however remain weak next year.

There is great uncertainty remaining regarding the extent to which the coronavirus pandemic will impact the Swedish economy. There is also a risk of setbacks in the short term. Our forecast is based on a scenario in which, going forward, the spread of infection in the country does not lead to renewed general lockdowns and increased restrictions.

The coronavirus pandemic will result in large deficits in general government net lending, especially in 2020. This deficit will be largest in the central government, with declining revenues due to falling capital gains tax and temporary reduction in social security contributions combined with a sharp rise in expenditure. The local government sector displays a deficit throughout the forecast period due to high levels of investment and relatively low tax revenues this as well as next year. However this year the deficit will be relatively small due to temporarily increased central government grants. Expenditure growth has, at the same time, been relatively moderate this spring since some activities have been postponed due to the pandemic. Structural net lending – i.e., actual net lending adjusted for cyclical variations and one-off effects – is estimated to -1,8 per cent of potential GDP in 2020. This constitutes a significant deviation from the target level. However, the need to mitigate the economic downturn justifies a deviation from the target.

The Maastricht debt will rise to 41 per cent of GDP in 2020, which is somewhat higher than the upper limit of the debt anchor. As the economy recovers, next year this will once again begin to fall as a percentage of GDP.

The downturn in the economy is having a significant impact on tax revenues, which will decrease by SEK 86 billion this year – a significant amount from a historical perspective. Temporary rules introduced to counter the damaging effects of the crisis will also contribute to falling revenues.  Tax revenues will be affected broadly as several major tax bases will decline. The decrease will be greatest for capital gains tax where revenue will fall by SEK 50 billion. Next year revenues will increase rapidly as a result of economic recovery.

Total expenditure in the central government budget will increase significantly in 2020. Expenditure will decline again next year and will then remain at roughly the same level as in 2021. The large increase in 2020 is primarily due to the extensive measures taken to reduce the impact of the crisis on the economy. A temporary negative effect on National Debt Office’s net lending last year is also a factor that contributes to this sharp increase. In addition, the largest increases in expenditure are taking place in the areas of industry and trade, general grants to the local government sector, financial security for the sick and disabled, health and medical care and social services. As many of the measures taken as a result of the crisis are temporary, total expenditure will decrease next year. The spending cap for 2020 has been increased, as a result it will be cleared with a good margin.

After the calculations on which this forecast is based were completed, the Government and the collaboration parties have announced a number of new measures as part of a restart package. The budget bill for 2021 will therefore be very expansive, with total measures of about SEK 100 billion. The net effect will be reduced by the tax revenues generated by some of the proposals. The Swedish National Financial Management Authority (ESV) has not taken this package into account in its regular forecast. Furthermore, the design of all of these measures is not known yet. Given the available information at the present, ESV’s preliminary assessment is that the new measures will boost economic growth during 2021 by approximately 0.5 percentage points. It is mostly due to increased central government grants to the local government sector. At the same time, general government net lending will weaken and Maastricht debt will increase, both to the tune of approximately 1.5 per cent of GDP compared to the 2021 forecast excluding the restart package. Taking the restart package into account, the debt-to-GDP ratio will remain at roughly the 2020 level.

The forecast in numbers (including the restart package in brackets for 2021)

  2019 2020 2021
GDP – annual percentage change
Fixed prices, calendar-adjusted
1,3 -4,4 3,9 (4,3)
Net lending (SEK billion)
Public sector
22 -204 -83 (-160)
Net lending (% of GDP)
Public sector
0,4 -4,2 -1,6 (-3,1)
Structural net lending (% of GDP)
Public sector
-0,3 -1,8 0,0 (-1,5)
Central government budget balance (SEK billion) 112 -249 6 (-70)
Maastricht debt (% of GDP) 35,2 40,9 39,2 (40,7)

Source: ESV and Statistics Sweden

Thematic chapter on economic crises past and present

Crises are a recurring feature of history. The depth of crises and the speed of the subsequent recovery has varied. In a thematic chapter we compare the current crisis with some previous crises.

Production in 2020 falls slightly less than the average decline during the first crisis year in several previous crises we have studied. Furthermore, the recovery is expected to be somewhat faster.

Sweden has faced the economic consequences of the pandemic with an expansive fiscal policy. This has mitigated its effects and facilitated the recovery. In order to be able to handle future crises, both academic research and previous experience show that it is important that general government finances are strengthened after this crisis.