budget sweden 2011

8/6/2019 Budget Sweden 2011

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Budget Statement


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1 Budget Statement

1.1 Policy basis and summarySweden from crisis to full employment

The Governments priority is to achieve fullemployment in Sweden. Everyone who can workshould also be able to have a job. There is nodivide as great as that between those who havework and those excluded from the labourmarket. Providing more job opportunities istherefore a matter of fundamental fairness.

The route to full employment includescontinuing to strengthen the work-first principleand reduce exclusion. It must be moreworthwhile to work and to get an education. Itmust be easier and less costly to hire newemployees. More companies must start up andflourish in Sweden.

The Government has taken strong measuresto counter the financial and economic crisis andcombat unemployment. Its efforts have beenpossible due to a responsible policy that hassafeguarded public finances and made jobs itshighest priority. Sweden is now coming out of

the crisis. The economy and the labour marketare recovering more strongly than expected. Therecovery must be safeguarded andunemployment prevented from becomingpersistent at a high level. The work to make theeconomy function better, reduce exclusion andsustainably increase the labour supply andemployment continues. Reforms alreadyimplemented will be nurtured.

There is considerable uncertainty aboutdevelopments elsewhere. Many countries havemajor problems in their public finances. Hencethe recovery is fragile. Swedens ability to meet a

new economic downturn has to be safeguarded.The policy stance for the Governments new

term of office is that the public finances will bein balance and show a surplus of 1 per cent ofGDP in line with the surplus target. Anuncertain future scope for reform, which willfirst appear towards the end of theGovernments term of office, should not becommitted too rapidly. The Government willpresent both concrete, detailed proposals for2011 and the next few years and its ambitions forreforms during this term of office, which willonly be implemented to the extent that thesurplus is ensured.

The substantive measures proposed in thisBudget Bill total almost SEK 13 billion for 2011.The aim is to further improve the conditions forjobs and entrepreneurship and to safeguard anddevelop welfare.

Vigorous action will be taken so thatunemployment does not become persistent at ahigh level. Targeted measures are needed for thelong-term unemployed, young people andpeople with a weak foothold in the labourmarket. These proposals include more resources

for work experience placements and coaching,economic incentives to young people who havenot completed compulsory or upper secondaryschool to finish their studies and a strengtheningof the special recruitment incentive.

Immigrants represent a major economicresource for Sweden and for pluralism in society.Immigration helps counteract a decline in thelabour supply when the number of older peoplein the population increases. Increasing thesupply of labour is essential to safeguard welfareand relieve the strain on the public finances onaccount of an ageing population. Moreover,


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research shows that immigration contributes toincreased foreign trade and thus higher growthbecause people with a foreign background have agood knowledge of the business culture, politics,and language in their countries of origin. Thesuccessful integration of immigrants and

refugees is based on the opportunity to workand earn a living. Many immigrants have a firmfoothold in the labour market and it is crucial fornewly arrived immigrants to be able to get a jobas soon as possible. Expanded and acceleratedlabour market entry results in positive economiceffects for municipalities and the centralgovernment in the form of both increased taxrevenue and reduced transfer costs. It is thusurgent to put new immigrants potential to goodadvantage as well as to continue the work to

improve integration.The Government will focus on education.This Budget Bill includes proposals for furthereducation for teachers, more time for teachingmathematics in compulsory schools and anapprenticeship system in upper secondaryschools.

There was an extensive reform of the socialsecurity systems during the Governmentsprevious term of office. The passivity thatpreviously characterised the process has beenreplaced by active measures. Major changes

always lead to concern that individuals willsuffer, something that one has to be sensitive to.During this term of office, the foremost politicaltask is to nurture the reforms that have beenimplemented and ensure that they have theintended effect and do not have undesirableeffects.

The Government will take additionalmeasures to reduce the negative effects of thecrisis and safeguard publicly financed welfare.This Budget Bill includes proposals for further

reductions in the income tax for pensioners andhigher housing allowances for families withchildren. The local government sector will beallocated an extra central government grant in2011 of SEK 3 billion to promote welfare andjobs. A number of new measures are proposedto improve health care and elderly care.

Sweden will assume a special role in fightingthe threats to the climate and the environment.Included in the Governments proposals aremeasures to reduce emissions from cars andinitiatives for the marine environment,environmental technology and energy research.

The Government is presenting substantiveproposals and ambitions for reforms amountingto about SEK 33 billion covering this term ofoffice.

Included in its ambitions for reform are jobstimulus measures and reduced exclusion via

further tax cuts targeting low and middle incomeearners and a halving of the VAT for restaurantsand catering services

The Government wants to introduce a generalincome insurance in the event of unemployment.How such insurance will be designed withouthaving negative effects on the functioning of thelabour market is, however, complicated and thematter is being examined by the cross-partyinquiry into reforming social insurance.

The reform ambitions are conditional on good

order in the public finances. It may be necessaryto forgo making reforms or delaying them, orallocating additional financing if economicgrowth is weaker than expected.

In this way the Government continues to takeresponsibility for Sweden and will safeguard asecure development where more people will havejobs and welfare can be strengthened.

Safeguarding the recovery and forcing down

unemployment

Sweden has fared better than most othercountries during the worst economic crisis sincethe depression in the 1930s. Swedens economicrecovery is broader and stronger than forecast inthe 2010 Spring Fiscal Policy Bill. Both domesticdemand and exports are important engines ofthe economic recovery.

The painful fiscal consolidation weighingdown many other countries economies will notbe necessary in Sweden. Thanks to the strong

position of its public finances, Sweden is one ofthose OECD countries able to conduct themost expansive fiscal policy for dampening thefall in output and employment. Core welfareactivities have been safeguarded and drastic cutshave been avoided. Special measures have beentaken by the Government targeting groups thathave suffered more than others because of thecrisis. The extensive reforms carried out by theGovernment during its previous term of officeto strengthen the work-first principle not onlyincrease sustainable employment but also helpalleviate the effects of the crisis.

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GDP is expected to increase by 4.8 per cent in2010, which is an upward revision of 2.3percentage points compared with estimates inthe 2010 Spring Fiscal Policy Bill.

Table 1.1 Key figures for the Swedish economy

Percentage change, unless otherwise stated

2009 2010 2011 2012 2013 2014

GDP -5.1 4.8 3.7 3.4 3.3 2.8

GDP gap1 -5.7 -3.3 -2.5 -1.6 -1.1 -0.5

Employed2 -2.1 1.0 1.1 1.2 1.3 1.2

Hours worked -2.6 1.9 1.1 1.4 1.5 1.3

Unemployment3 8.3 8.4 8.0 7.4 6.7 6.0

Wages4 3.4 2.5 2.6 3.1 3.3 3.4

CPI5 -0.3 1.2 1.5 1.9 2.4 2.6

Net lending6 -1.2 -1.3 -0.4 1.0 2.0 2.9

Centralgovernment

debt, per cent of

GDP 37.0 34.6 32.4 29.7 25.7 21.11 Percentage of potential GDP.

2 Aged 15-74.

3 As a percentage of the labour force aged 15-74.

4 According to short-term wage statistics.

5 Annual average.

6 General government net lending as a per cent of GDP.

Sources: Statistics Sweden and Ministry of Finance calculations.

Employment continues to increase at a fasterpace than previously estimated andunemployment is falling more rapidly than

previously expected (see Figures 1.1 and 1.2).Unemployment is expected to be 8.4 per cent in2010, which is considerably lower than theestimate in the 2010 Spring Fiscal Policy Billwhen the unemployment forecast for 2010 was9.2 per cent. At the same time, the decline inunemployment is expected to be relativelymodest because the labour force continues togrow, as a result of the Governments policy andother factors. The lasting negative economiceffects of the crisis are expected to be smaller

than previously anticipated.

Figure 1.1 Unemployment

Per cent of the labour force aged 16-74

2

3

4

5

6

7

8

9

10

11

12

89 91 93 95 97 99 01 03 05 07 09 11 13

2010 Spring Fiscal Policy Bill

2011 Budget Bill

Sources: Statistics Sweden, National Institute of Economic Research (NIER) and Ministry

of Finance calculations. Figure 1.2 Employment

Thousands of persons

4 000

4 100

4 200

4 300

4 400

4 500

4 600

4 700

4 800

89 91 93 95 97 99 01 03 05 07 09 11 13

2010 Spring Fiscal Policy Bill

2011 Budget Bill

Sources: Statistics Sweden, National Institute of Economic Research (NIER) and Ministry

of Finance calculations.

The economic problems are not over. Even

though GDP and employment are increasing atan unexpectedly good pace, the large fall in GDPat the beginning of the crisis means that resourceutilisation in the economy is still low. Swedenremains in an economic downturn with highunemployment. There is considerableuncertainty about international developments,not least because of the problems in the publicfinances in many other countries. This indicatesthat the risks of a weaker recovery in the UnitedStates and Europe have increased compared with

the forecasts in the Spring Fiscal Policy Bill.Heavily indebted countries have to finance theirdeficits at the same time that many Europeanbanks have to refinance their operations. Thisimplies a risk that it will be more difficult andmore costly to borrow and this may, in turn,cause renewed stress in the financial markets.Thus there is cause for continuing vigilance.

The recovery, however, may be more rapidthan forecast. Forward-looking indicators arevery positive. But all in all, the risks of negativeeconomic growth predominate. This may delaythe recovery in Sweden or, in the worst case, lead

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to a second economic downturn. Economicpolicy must therefore be designed withparticular caution and with adequate safetymargins to minimise the risks.

Ensuring a surplus is the highest priority

Swedens robust fiscal position has proved to beabsolutely crucial in countering the financial andeconomic crisis. Swedens ability to face apossible new economic downturn must beensured. The surplus target will be upheld andthe established expenditure ceilings will beobserved. Surpluses in the public finances willrelatively rapidly be restored. This Budget Billgives high priority to core welfare activities and

measures to reduce the negative effects of thecrisis. Larger tax cuts, aimed at continuing toreduce exclusion and increase employment, willfirst be implemented when stable surpluses havebeen achieved and sustainable scope for reformis ensured.

The Swedish economys rapid recoverysignifies a strong recovery in the public finances.Including the measures proposed and announcedin this Budget Bill, net lending is expected toonce more show a surplus in 2012, which willincrease to close to 3 per cent of GDP in 2014

This may make possible scope for new reformsduring the Governments current term of office.There is, however, a high degree of uncertainty.The risks are substantial. A new economicdownturn may lead to persistent higherunemployment and thus reduced scope forreforms. Moreover, it is quite difficult toestimate the scope for permanent reforms forseveral years ahead since it is difficult todistinguish between structural and cyclicalchanges in net lending. This is particularly

difficult with sharp cyclical swings like those inthe latest financial and economic crisis.Sustainable scope for reform arises only if thereis a structural improvement in net lending. Inaddition to this uncertainty, there areexpenditure risks such as those in the sicknessinsurance system; for example, the number ofsickness absences may develop differently thanexpected.

Under these circumstances, the Governmentconsiders it essential to have a safety marginrelative to the surplus target up to 2014, giventhe current estimate of what constitutes an

appropriate scope for reform during the currentterm of office. The Government is also of theopinion that any future scope for reform shouldnot be committed in advance. Instead it shouldbe checked regularly prior to each new fiscalyear. It is more responsible to reduce too high a

sustainable net lending by implementingimportant structural and welfare reforms when asustainable scope for reform is assured than tobe forced to make cuts.

The measures proposed and announced in thisBudget Bill, which mainly refer to 2011, amountto almost SEK 13 billion. This amount is deemedto be well calibrated, considering both that fiscalpolicy in the short run should not be too tight ina situation in which resource utilisationcontinues to be weak and that fiscal surpluses

should be ensured relatively rapidly. Thepreliminary estimate of the scope for reform forthe remainder of this term of office is aboutSEK 40 billion. The estimate is based on theneed to maintain a safety margin relative to thesurplus target of at least 1 per cent in 2014. Thescope for reform may later prove to be less ormore.

The substantive measures proposed in thisBudget Bill consist mainly of proposals forchanges in appropriations and changes in taxrules for 2011, but also to some extent of

announcements of certain expenditure reformswhich enter into force after 2011 and which arethus included in the proposal for preliminaryexpenditure limits for the years after 2011.Furthermore, the Government discusses anumber of reform ambitions for the years after2011, which do not affect revenue andexpenditure forecasts in this Budget Bill. Thechances of implementing these proposals,however, are strictly conditional on not puttingthe public finances at risk.

The Governments measures in this Budget

Bill

In the 2011 Budget Bill, the Government willgive priority to reforms with the followingobjectives:

Full employment and reduced exclusion. Increased knowledge. Safeguarding and developing welfare and

reducing the negative effects of the crisis. Improving the environment and climate.

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Table 1.2 Reforms in the 2011 Budget Bill

SEK billion

2010 2011 2012 2013 2014

Full employment and

reduced exclusion.

Labour market policypackage

-Strengthening labour

market initiatives

-Indirect effects of

strengthened initiatives

1.4

2.1

-0.7

0.6

1.2

-0.6

0.3

0.7

-0.3

0.1

0.1

0

Integration 0.1 0.1 0.1 0.1

Entrepreneurship and

sustainable

development 2.01.2 0.4 0.4 0.4 0.4

Increased standard

deduction for housing

sublets 0.1 0.1 0.1 0.1

Increased knowledge 0.51 1.2 1.9 2.2 1.9

Safeguarding and

developing welfare,

reducing the negative

effects of the crisis

Local government 3.0

Pensioners 2.5 2.5 2.5 2.5

Health and medical care 0.5 1.5 1.5 1.5

Elderly policy 0.2 0.2 0.2 0.2

Family policy 0.9 0.9 0.9

Gender equality 0.2 0.2 0.2 0.2

Culture and sports 0.5 0.6 0.6 0.6

Improving the

environment and

climate 0.7 1.1 0.7 0.7

Other expenditure and

revenue 1.11 2.0 1.4 1.1 0.6

Decline in net lending

as a result of the

proposals in the 2011

Budget Bill 1.61 12.8 11.4 10.7 9.7

Note: Amounts are rounded.

1 Amounts refer to proposals submitted in the 2010 autumn supplementary

budget.2 The amount does not affect net lending.

Full employment and reduced exclusionThe Governments most important goal is toincrease sustainable employment and reduceexclusion. One important current task is to takethe measures needed so that unemployment willnot become persistent. Measures should becarried out both to increase the labour supplyand increase the demand for labour. This isaimed particularly at groups having a weakfoothold in the labour market. The Government

presents measures in this Budget Bill targetingthe short-term unemployed, young people andthe long-term unemployed. There are proposalsfor strengthened resources for work experienceplacement and coaching, increased incentives foryoung people lacking a compulsory or upper

secondary education to complete their studies,more places in adult vocational training and animproved special recruitment incentive in 2011and 2012. Labour market programme volumeswill subsequently return to their levels beforethe crisis. To continue fighting the exclusion ofthose born abroad, the Governments educationinitiative includes proposals for improving thecompetence of teachers of Swedish toimmigrants (SFI) within the framework for theskills enhancement initiative for teachers,

strengthening step-in jobs and increasedresources for schools in exposed areas.1What is critical is to ensure that jobs increase

early in the recovery and that bottlenecks do nothamper a rapid and robust growth inemployment. To facilitate labour marketmobility, there will be a stimulus to the housingsupply in the form of an increased standarddeduction for private housing sublets.

A dynamic business sector with new andgrowing companies increases employment andhelps finance our common welfare. The

Government therefore proposes further reformsto improve the conditions for entrepreneurs. Toimprove the climate for innovation, proposalsinclude an initiative to strengthen ALMIscapacity to provide advice and mentoring, thefinancing of innovations throughInnovationsbron and additional initiatives foradministrative simplification for businesses. Aspecial initiative of SEK 2 billion began in 2010to improve development capacity in the interiorof northern Sweden through the

Inlandsinnovation initiative.

Increased knowledgeEducation will be made the focus of theGovernments continued reform efforts. A well-functioning education system is crucial forincreased sustainable employment and reducedexclusion and strengthens Swedenscompetitiveness. In the same way, research,

1 (Sfi = Swedish for immigrants.)

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development and innovation are central parts ofgrowth policy. The most important feature ofthe education initiatives is in the compulsoryschool. Both the quantity and quality ofeducation will increase. In the education area,the Government proposes initiatives that include

further professional training for teachers, moreteaching hours in mathematics in compulsoryschool, an expanded apprenticeship system inthe upper secondary school and in the adulteducation system and the introduction of gradesbeginning in year 6. Study support will be raisedbeginning in the autumn term of 2011. TheGovernment also proposes strengtheningstudent health in the school and the quality ofhigher education.

Safeguarding and developing welfare and reducingthe negative effects of the crisisThe economic crisis has severely affected manypeople. Many have lost their job and are stillunemployed. Others have been compelled tomake difficult adjustments in order to earn aliving for themselves and their families. Forcertain groups, incomes have grown weakly orfallen on account of the crisis andunemployment. The Government thereforecontinues to make reducing the negative effectsof the crisis a priority. The income tax for

pensioners will be lowered by raising therecently increased basic allowance. Tostrengthen the financial situation of singleparents in particular, there is a proposal forraising the child element in the housingallowance.

This Budget Bill gives high priority to corewelfare activities and measures to reduce thenegative effects of the crisis. Good public healthcounteracts disparities in society, reduces therisks of people leaving working life prematurely,

provides a better quality of life and adds morehealthy years to a longer life. Improved healthamong children and young people increases theirchances of getting established in the labourmarket and having a better life. In health andmedical care, there are proposals for initiativesaimed at better patient safety and a third step inthe dental care reform. As to the policy onelderly care, proposals include performance-based central government grants tomunicipalities and county councils to strengthenthe holistic approach in health care and socialservices for older people. To safeguard welfare

and jobs, it is proposed that the localgovernment sector be temporarily allocated anextra central government grant of SEK 3 billionin 2011, in addition to the SEK 5 billion alreadyallocated for 2011 and onwards that wasannounced earlier.

Improving the environment and climateClimate change is the greatest challenge of ourtime and requires global solutions. Furtherinitiatives are needed to reduce greenhouse gasemissions in a cost-effective way. Beginning 1

January 2011, an increase in the tax exempt low-level addition of biofuels to petrol and diesel willbe made possible. There are also proposals forcreating a demonstration programme for electriccars and hybrids and the introduction of a

cutting-edge premium for cars with lowemissions. There are also proposals for initiativesconcerning the marine environment,environmental technology and energy research.An action plan to identify, limit and phase outdangerous chemicals will be drawn up.

The Governments reform ambitions for the

coming period

The Governments policy will also in future

focus on structurally warranted reforms thatfurther improve the way in which the economyfunctions. The Governments reform ambitionsfor this term of office will be carried out as thesurplus can be secured.

The main aim of the policy is still tostrengthen the work-first principle. Everyonewho is able to participate in working life will begiven the opportunity to do so. This reducessocial disparities and thus the welfare systemscan be sustainably financed. When employment

increases and unemployment falls, it is essentialto ensure that labour markets function well sothat the upturn is not prematurely interrupted.Providing a stimulus to the labour supply,continuing to strengthen the incentives to workand for occupational and geographical mobility,and creating better conditions for hiring and forstarting firms is crucial for a fair distribution andthe development of welfare.

To reduce exclusion, increase sustainableemployment and make it more attractive to startand run a business, the Government wants tofurther strengthen the in-work tax credit. When

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individuals and families get to keep more moneyin their wallets after tax, their independence andtheir opportunities to shape their own livesincrease. The Government thinks that adifference in the taxation of income betweenwage-earners and pensioners has no intrinsic

value. Its ambition is therefore to graduallyreduce the difference in income taxes. Anenhanced in-work tax credit should therefore becombined with lower taxes for pensioners. It isalso the Governments ambition to raise thelower threshold in the state income tax with theaim that fewer people with ordinary incomes willpay state income tax. The Government alsointends to lower the value-added tax forrestaurant and catering services while the tax onalcohol and tobacco will be raised.

The Swedish labour market model is a goodbasis for a well-functioning labour market.However, some groups such as young peopleand the foreign born have difficulty gettingestablished in the labour market, thusnecessitating minor adjustments to existing rulesand other measures.

The Government wants to introduce a generalincome insurance in the event of unemployment.How such insurance will be designed withouthaving negative effects on the functioning of thelabour market is, however, complicated and the

matter is being examined by the cross-partyinquiry into reforming social insurance.

Research and infrastructure are two mainareas where Sweden must be well equipped forthe future. Both were high priorities during theGovernments previous term of office and itintends to carry out new initiatives in theseareas.

The Government intends to review thetaxation of savings in shares and other securitieswith a view to simplifying the rules and making

the administration more efficient. Corporatetaxation will also be reviewed with the aim ofcreating a robust system which will lead to moreinvestment and increased welfare. It is theGovernments ambition to introduce adeduction for gifts to charities.

The temporary reduction in the taxablebenefit for some green cars is important inadvancing the newest and best technology forenvironmentally sound vehicles. A reformambition of the Government is hence to extendthe temporary reduction for cars equipped withthe latest and best technology for operating with

electricity or a gas other than LPG. TheGovernment intends to come back with adetailed proposal in 2011 on what cars thereduction will include. There is still considerablestrain on the judicial system. For people to feelsafe, not only a functioning police service is

needed, but also measures for crime preventionand a judicial system where all parts can workeffectively.

Effects of the Governments policy

Since 2006, the Government has implemented anumber of reforms that have made it moreworthwhile to work and simpler and less costlyto hire employees, while improving matching in

the labour market. Labour supply and demandhave been stimulated. The structural reformsmade thus far, including those reforms proposedin this Budget Bill, are estimated to increasesustainable employment by about 140 000people in the long run.

The reforms, however, do not just affectemployment. They also reduce the number ofabsences due to illness and contribute toincreasing the number of hours worked by thosewho are already employed. In total, the measurestaken thus far and the reforms proposed and

announced in this Budget Bill are estimated tolead to a sustainable increase in the number ofhours worked of 5.0 per cent in the long run,which is equivalent to about 200 000 annualwork units. The in-work tax credit is expected toaccount for about half of this increase.

To combat the crisis, the Government hasalso strengthened and temporarily supplementedmeasures taken earlier aimed at preventingpersistently lower employment, for example,through measures that maintain job search

activities and through an expansion of labourmarket and education programmes. Thesemeasures are expected to reduce the effects ofthe crisis on sustainable employment by 25 000people.

The Governments policy in the period 20062011 is expected to increase household adjusteddisposable income by an average of 6.9 per cent.In the long run, those with the lowest incomeswill benefit the most.

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1.2 Overall objectives of economicpolicy

The main task of economic policy is to createthe highest possible sustainable welfare bymeans of high sustainable growth, high

sustainable employment, welfare that benefitseveryone and economic stability.

The policy will contribute to growth and

employment

To improve the conditions for good economicgrowth, measures that help increaseemployment, investment and productivity arecrucial. Economic growth must in addition be

compatible with a good environment and health;that is, it must be sustainable.To achieve a sustainably high level of

employment, it has to be worthwhile to work.For those not currently in the labour market, itmust pay to take a job and for those who have ajob it must pay to work more or take a job withgreater responsibility.

Good business conditions are crucial foreconomic growth. To achieve a high level ofprivate investment, Sweden must have a goodbusiness climate. The policy should also

contribute to high productivity growth bycreating good conditions for competition,research, innovation and learning.

The policy will contribute to everyone

benefiting from welfare

The public financing of services targetingindividuals according to need, irrespective ofincome and background, is one important means

whereby welfare can benefit everyone. A policyfor safeguarding core welfare services istherefore essential. With publicly financededucation, health care and social services, thepolicy makes peoples living conditions moreequitable.

For everyone to benefit from welfare,economic resources are also redistributed viapublic transfers. The aim of most publictransfers, however, is not primarily toredistribute income between individuals but toredistribute economic resources over the lifecycle. During low income periods in life,

individuals receive various types of transferpayments and subsidies and during higherincome periods in life, they instead pay more intaxes. Pensions, study support; and childallowances are examples of such transfers.

The policy will contribute to economic

stability

Economic downturns result in increasedunemployment and affect the individual and riskleading to social exclusion. Large cyclical swingsmay also lead to a lower level of productivity inthe long run and thus to lower welfare.

Primary responsibility for stabilisation policyrests with the Riksbank via monetary policy.

Fiscal policy indirectly helps dampen cyclicalswings via the automatic stabilisers. In addition,there are special situations when for stabilisationpolicy reasons, fiscal policy needs to supplementmonetary policy with direct measures. Thishappens primarily when there is a clear conflictof monetary policy objectives betweenstabilising inflation and stabilising employment(in connection with supply disruptions). It alsohappens in the event of large demand shockswhen monetary policy measures are insufficientto mitigate the fall in demand. Unlike monetary

policy, fiscal policy also has a role to play inimplementing targeted measures in connectionwith large cyclical swings. Fiscal policy can alsohelp equalise financial positions by means ofspecially targeted measures.

Return to a surplus in public finances

Achieving the targets for growth, incomedistribution and stability requires long-term

fiscal sustainability. The fiscal framework will berespected; general government net lending is toshow a surplus of 1 per cent of GDP over abusiness cycle and the established expenditureceiling will be observed. Strong public financesin line with established fiscal targets ensureSwedens ability to meet future economicdownturns from a position of strength. It alsoprovides the basis for carrying out urgentreforms. Ensuring future surpluses in the publicfinances therefore has top priority.

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1.3 The Swedish economyThe Swedish economy is still in an economicslowdown with low resource utilisation and highunemployment. The recovery is neverthelesstaking place on a broad front and is happening

more rapidly than forecast in the 2010 SpringFiscal Policy Bill. Both output and employmenthave increased at a good pace during the firsthalf of 2010. Behind the change are an expansiveeconomic policy and a rapid turnaround in theinternational demand for Swedish exports. Thesedevelopments have helped make households andbusinesses increasingly optimistic andconsumption and investment have picked upspeed. This year and in the coming years, theSwedish economy will continue its recovery

owing to strong domestic demand, improvementin the international economic situation, theGovernments reforms and the continuation ofan expansive monetary policy. Resourceutilisation in the Swedish economy is expectedto return to a balanced level at the end of 2014.

At the same time, there is a significant risk ofa worse outcome caused by the situation ofgovernment finances in other countries. Weakergrowth in countries where there are substantialproblems with government finances risksresulting in a slower economic recovery in

Sweden and in the worst case, to a seconddownturn.

1.3.1 The global recovery continuesdespite problems with government

finances

The world economy continues to recover afterthe deepest recession since the 1930s. One factorcontributing to the recovery is the economic

policy measures that have been taken bygovernments and central banks around theworld. The expansive fiscal policy has, however,helped worsen often already strainedgovernment finances in many OECD countries.

The most likely development over the nextfew years is that the global economic recoverywill continue and that world trade will increase.The international recovery, however, is nowentering a calmer phase. Government finances inmost countries in the EU and in the UnitedStates require the governments there toimplement major fiscal consolidations to reduce

budget deficits. The consolidations are expectedto reduce GDP growth in these countries in thenext few years, something which in turn willrestrain export growth and hence the economicrecovery in Sweden.

Figure 1.3 Swedish GDPPercentage change SEK billion

-6

-4

-2

0

2

4

6

8

10

70 75 80 85 90 95 00 05 10

200

300

400

500

600

700

800

900

1 000

Percentage change (left axis)

SEK billion per quarter (right axis)

Note: GDP in fixed prices, reference year 2009. Quarterly values are seasonally adjusted.

Sources: Statistics Sweden, National Institute of Economic Research and Ministry of

Finance calculations.

1.3.2 Strong GDP growth in 2010 and2011

The Swedish economy has grown strongly inrecent times and forward-looking indicatorspoint to the continuation of a strong and broadrecovery during autumn 2010. Both domestic

demand and exports are important in driving therecovery forward. Despite the strong recovery in2010, however, resource utilisation in theeconomy is low.

The prospects for a continued strong andbroad recovery are also good in the comingperiod. A continuation of the expansivemonetary policy combined with theGovernments reforms, for example, the in-worktax credit, the increased central governmentgrants to local government and the reduced taxes

for pensioners, helps increase household realdisposable income. An increase in employmentalso has a positive effect on consumption andinvestment. At the same time, the severeeconomic slowdown has led households toincrease their savings as a precaution, which hasresulted in an historically high savings ratio. Inthe coming period, precautionary savings areexpected to decline as the labour marketimproves, which will contribute to a relativelystrong increase in consumption in the next fewyears.

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The growth in world trade will contribute to anincreased demand for Swedish exports. At thesame time, investment will increase in line withrising capacity utilisation. In total, GDP isexpected to rise by 4.8 per cent in 2010 and by3.7 per cent in 2011 (see Table 1.3).

The recovery will continue in 20122014 andresource utilisation will come close to being inbalance at the end of 2014. Because the recoveryis progressing much more rapidly than predictedearlier, the permanent effects of the crisis areexpected to be less than previously anticipated.As a result, GDP may grow more rapidly andreach a higher level without resource utilisationbecoming strained.

Table 1.3 Key indicators

Percentage change, unless otherwise stated

Outcome 2009, forecast 20102014

2009 2010 2011 2012 2013 2014

GDP - 5.1 4 .8 3.7 3 .4 3.3 2.8

Productivity1.2 -2.6 2.8 2.5 2.3 1.8 1.6

Hours worked2 -2.6 1.9 1.1 1.4 1.5 1.3

Employed3 -2.1 1.0 1.1 1.2 1.3 1.2

Unemployment4 8.3 8.4 8.0 7.4 6.7 6.0

GDP gap5 -5.7 -3.3 -2.5 -1.6 -1.1 -0.5

Wages 3.4 2.5 2.6 3.1 3.3 3.4

CPI6 -0.3 1.2 1.5 1.9 2.4 2.61

In the economy as a whole.2 Calendar adjusted.3 Aged 15-74.4 Percentage of the labour force aged 15-74.5 Percent of potential GDP.6 Annual average.

Sources: Statistics Sweden, National Mediation Office and Ministry of Finance.

1.3.3 Clear labour market recoveryThe strong increase in output and the growingoptimism in the business sector contribute torising employment and increasingly positive

recruitment plans. Employment in the servicesector had already turned upwards in autumn2009 and has continued to increase in 2010. Inmanufacturing, both output and employmentbegan to rise early in 2010. Forward-lookingindicators such as recruitment plans and newlyregistered job vacancies point to a continuingrise in employment in the autumn.

As demand and output rise in the comingyears, employment and the number of hoursworked will continue to increase, particularly in

the service sector. In total, the number of peopleemployed is expected to rise by about 220 000

from 2010 to 2014 as a result of the economicrecovery, the Governments policy and anincrease in the working-age population.

Unemployment will thus go down. Thedecline will, however, be moderate in the nextfew years because the labour force will continue

to grow for the same reasons that employment isrising. Unemployment is expected to total8.4 per cent in 2010 and thereafter fall to 6.0 percent by 2014 (see Figure 1.4).

As a result of the low resource utilisation,both prices and wages are expected to rise slowlyin the next few years.


Per cent of the labour force

0

2

4

6

8

10

12

89 91 93 95 97 99 01 03 05 07 09 11 13



1.3.4 A more stable financial marketBecause of the extensive extraordinary measurestaken by governments and central banks inautumn 2008, a financial meltdown could beaverted. Subsequently, the functioning of themarkets has improved step by step, butsignificant risks remain. In spring 2010,uncertainty increased again on account of theproblems in government finances in several

countries. The measures taken in connectionwith the crisis in government finances and theEU stress test of European banks have, however,helped reduce the uncertainty about theEuropean banking system.

The European banks liquidity situation haseased compared with the situation in late spring,but it is still not normal. Banks are now moreable to fund themselves in the market withoutthe support of government guarantees, but at ahigher cost than before the crisis. But thefinancial market conditions just before thefinancial crisis broke out were abnormally

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favourable. Risk premiums had been pusheddown to levels that were unsustainable in thelong run. There are, however, still risksassociated with the funding of European banksand businesses, which are linked to largegovernment financing requirements in the

future, particularly in countries with largebudget deficits.

The financial market situation is now on thewhole more stable, but there are reasons forcontinued vigilance.

1.3.5 Risks for a weaker developmentIn spite of the recent positive developments,there is still great uncertainty about the future

course of the business cycle. It is also too earlyto say how the crisis has affected the functioningof the economy and thus how high long-termsustainable growth will be. The risks for aweaker development than in the base scenarioare higher than the probability of a morefavourable development.

There is a substantial risk that the problems ingovernment finances in other countries will slowdown the international recovery more thanexpected in the base scenario. The problems ingovernment finances with large budget deficits

in many countries may make households andcompanies in these countries more cautiousbecause they know that large fiscalconsolidations lie ahead. Such a developmentwould result in lower economic growth and aweaker labour market internationally. It couldalso slow down Swedens recovery, for examplethrough lower export growth. (See the box

Effects of a high government indebtedness below).In the worst case, the problems in

government finances will create renewed

financial market turmoil leading todevelopments similar to those in autumn 2008.In such a situation, it would be substantiallymore expensive and difficult for households andcompanies to borrow and for highly indebtedcountries to roll over their loans. This wouldlead to significantly weaker growthinternationally, particularly in Europe, includingSweden.

But it is also conceivable that the recovery willbe faster than foreseen in the base scenario.Forward-looking indicators for both householdsand companies are very positive and if these

expectations are realised, the recovery could bestronger in autumn 2010. In such a scenario,there is a risk that labour shortages will occur insome sectors in the next few years.

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Effects of a high governmentindebtedness

High levels of indebtedness and a substantialdeterioration in the public finances in manycountries will contribute to a protracted global

economic recovery and will slow down long-term growth. This will also have an impact onSwedens economic growth.

Rapidly growing debts in many countries

In the wake of the financial crisis, the publicdebt has grown rapidly in most of the developedcountries. According to OECD estimates, thedebt ratio will increase between 2007 and 2011

from 62 to 95 per cent of GDP in the UnitedStates, from 167 to 205 per cent of GDP inJapan and from 71 to 97 per cent of GDP in theeuro area.

There are several reasons for the high debtlevels. Debt levels in many countries werealready high before the crisis. This was a result ofthe substantial increase in debt during economicdownturns from the 1970s onwards and thesubsequent failure to return to earlier levels ingood times. Sweden has diverged from thispattern since the mid-1990s and even the recent

financial crisis has led to only a marginally higherdebt in Sweden while in many other countriesthe financial crisis has been accompanied by adramatic increase in the debt ratio. The reasonwas that in good times, Sweden maintainedsufficient margins in the public finances toenable it to face the crisis without a steepincrease in the public debt ratio.

Relatively little of the increase in the debt inmany other countries in connection with thefinancial crisis is due to the fiscal stimulus

measures and support to the financial sector.Each of these factors account only for about atenth of the debt increase.2 The primary reasonshave instead been falling GDP growth, relativelylow general government net lending before thecrisis and permanent reductions in tax revenueon account of reduced tax bases.

2 IMF (2010), Fiscal Monitor, May 2010.

Figure 1.5 Unconsolidated general government gross debt,

per cent of GDP, 19702011

0

50

100

150

200

250

1970 1973 1976 1979 1982 1985 1988 1991 1994 1997 2000 2003 2006 2009

EMU Sweden

USA Japan

Source: OECD.

A high public debt ratio is a threat to long-term

growth

Both the high rate of increase and the levels ofpublic debt hamper the global recovery.According to economic theory, public debt islikely to affect long-term growth primarilythrough two channels:

1. The displacement of private investment via rising interest rates. When the publicsector borrowing requirement increases,

it becomes more difficult and costly forthe private sector to borrow on accountof higher interest rates on risk-freeinvestments and other factors.Furthermore, in the event of uncertaintyabout whether the debt can be serviced,the public sector risk premium will rise.If the interest rate for the public sectorrises, the rate for businesses andhouseholds generally also rises, furtherreducing private investment. Then risingpublic interest expenditure displacesother public expenditures.

2. The negative growth effect of the highertaxes required to finance higher interest

payments.

Most research in this area in recent years shows asignificant correlation between debtaccumulation and interest rates in individual

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countries.3 Many studies show that debt has anon-linear effect on interest rates in the sensethat the effect of an increase in the debt isgreater for countries with relatively high debtburdens. New research shows a strongcorrelation between high debt levels (over 90 per

cent of GDP) and lower economic growth. Onestudy shows that there is a difference of about 2percentage points in GDP growth betweencountries with low debt burdens (under 30 percent) and countries with high debt burdens(over 90 per cent).4 It is therefore a cause forconcern that many countries are expected toreach the latter level in the coming years.According to the IMF, the aggregate potentialgrowth rate in developed countries may decreaseby more than half a percentage point if the debt

burden does not fall back to pre-crisis levels.5

There is also research showing that the level ofwelfare may decrease on account of a high publicdebt ratio because a high public debt ratio isconnected to a weakening of the exchange rate.

Research in this area thus shows that the debtlevels which many countries are expected toreach in the next few years risk reducing long-term growth. With high debt levels, the risk of anegative debt dynamic also increases, possiblyleading to an uncontrollable debt spiral. In thatcase, the debt grows uncontrollably because

there is insufficient revenue to pay the interestand new loans are taken out to pay the interestexpenditure, which in turn leads to the need foradditional borrowing with a spiralling interestrate. The higher the debt and the interest rateare, the higher primary net lending (net lendingexcluding interest) has to be for the debt to bestabilised or to decline. For those countrieswhere a consolidation is needed, it is essential topresent a credible account of how they intend todo this. Otherwise interest rates for these

countries will rise and they will thus have greaterdifficulties keeping their debt under control.

3 For an overview, see for example, Haugh, D., P. Ollivaud and D.

Turner (2009), What drives sovereign risk premiums? An analysis of

recent evidence from the euro area, Economics Department Working

Papers, No. 718, OECD.4 Reinhart, C. and K. Rogoff (2010), Growth in a Time of Debt,

American Economic Review, vol. 100(2), pp. 573-78.5 IMF (2010), Fiscal Monitor, May 2010.

Reducing debt may reduce growth in the short run

The large deficits and the high debt levels requiresubstantial consolidations of public finances.The IMF estimates that there is a need for asustainable consolidation averaging 8.7 per cent

of GDP in developed countries in order for thedebt to be under 60 per cent by 2030 and 6.5 percent for the public debt ratio to return to its pre-crisis level. EU Commission estimates indicatethat with the consolidations that have thus farbeen presented in EMU countries, the debtburden is expected to keep on increasing until2020. Swedens gross debt is instead expected todecline sharply, to under 30 per cent of GDP by2020.

Figure 1.6 Development of the consolidated gross debt

including budget improvements announced thus far,

Sweden and the EMU countries,

Per cent of GDP

0

10

20

30

40

50

60

70

80

90

100

1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020

EMU Sweden

Note: The projection is based on planned budget improvements in accordance

with the 2010 Convergence Programme. The expected increased costs of an

ageing population have been taken into account. The impact of the debt on

growth has not been taken into account. Tax revenue has been assumed to return

to 2007 levels.

Source: European Commission (2010), Public Finances in the EMU - 2010.

While a substantial consolidation is necessary toreduce debt levels and avoid an accelerating debt,this may in the short run have a restraining effect

on growth. This is particularly likely if theinterest rate is already low to start with and thuscannot be cut in order to compensate for a tightfiscal policy. It is likely that the type ofconsolidation required will have a short-termnegative effect on growth in the countriesconcerned. For countries with large debts, aconsolidation may, however, have reverseeffects; that is, economic activity will increase onaccount of increased general government net

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lending.6 The effect on growth in the countriesthat need to make substantial consolidations istherefore uncertain and may vary from countryto country. Even the way in which theconsolidation is carried out will haveconsiderable importance for the effect on

growth. Economic research has shown thatconsolidations that primarily consist of reducedexpenditures lead to higher economic growthand improved public finances compared withconsolidations that focus on raising taxes. Thusit is important that consolidation programmesare credible in order for the negative effect ongrowth to be as small as possible.

6 Alesina, A. (2010), Fiscal adjustments: lessons from recent history,

Paper prepared for the Ecofin meeting in Madrid April 15, 2010.

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1.4 The situation in the publicfinances

1.4.1 Net lending is improving rapidlyThe Swedish economys rapid recovery alsosignifies a strong recovery in the public finances.Net lending is estimated at -1.3 per cent of GDPin 2010 and -0.4 per cent of GDP in 2011. Theimprovement in net lending is primarily due tofalling expenditures, such as fewer unemployedand fewer people on sick-leave and on earlyretirement, which together with strong GDPgrowth contribute to a decrease in publicexpenditure as a percentage of GDP through2014. At the same time, the tax level will be

about 45 per cent of GDP during the forecastperiod. Net lending will come to 1.0 per cent ofGDP in 2012 and increase to 2.9 per cent ofGDP by 2014. Improvements in net lending willtake place primarily in the central governmentsector. The public old age pension system ismoving towards a deficit in 2014 when pensionpayments rise. The local government sectorreports slightly negative net lending for everyyear except 2010. One explanation for this isthat local government allocations for pensioncommitments now affect net lending.

As a result of the brighter labour marketsituation and the rise in new orders received bythe Swedish export industry, public finances areexpected to grow more strongly than estimatedin the 2010 Spring Fiscal Policy Bill. Therecovery in manufacturing will lead to higherincome from corporate tax. As a result of thehigher employment, lower interest rates and theproposal for reduced income taxes forpensioners, household disposable income willincrease more. This makes higher private

consumption and thus higher revenue from thevalue-added tax possible.Compared with the forecast in the 2010 Spring

Fiscal Policy Bill, savings in the localgovernment sector will have worsened by aboutSEK 5 billion during the forecast period. This islargely due to changes in the reporting in thenational accounts of municipalities and countycouncils pension costs (see Section 10.2.3).

Table 1.4 Consolidated general government finances

SEK billion

2009 2010 2011 2012 2013 2014

Revenue 1607 1651 1704 1 788 1874 1960Percentage of GDP 51.7 50.2 49.4 49.6 49.6 49.7

Taxes and charges 1435 1488 1531 1607 1686 1764

Percentage of GDP 46.2 45.2 44.4 44.6 44.7 44.7

Other income 172 163 173 181 188 196

Expenditure 1643 1692 1718 1750 1 798 1845Percentage of GDP 52.9 51.4 49.8 48.6 47.6 46.8

Net lending -37 -41 -14 38 77 115

Percentage o f GDP -1.2 -1.3 -0.4 1.0 2.0 2.9

Consolidated gross debt 41.7 39.1 37.1 34.5 30.7 26.2

The consolidated gross debt is estimated toreach 39.1 per cent of GDP in 2010 and fall to

26.2 per cent in 2014. The debt level has beenrevised downwards compared with the estimatein the 2010 Spring Fiscal Policy Bill.

There is considerable uncertainty in theestimate of the public finances. In the short run,revenue from capital taxes may deviate bothupwards and downwards. Looking a little furtherahead, labour market developments are thegreatest source of uncertainty as around 60 percent of total tax revenue consists of taxes onearned income. A worse development in thelabour market would also entail increased

expenditures. If the forecasted decline in ill-health, particularly in sickness and activitycompensation, does not occur, this would alsoentail higher expenditures. The cumulativeassessment is that the risks of a worse outcomethan that in the base scenario predominate.

Because of its healthy public finances,Sweden, unlike most other EU countries, is notsubject to an excessive deficit procedure withinthe framework of the EU Stability and GrowthPact. Sweden has respected this framework and

met the targets every year since it wasintroduced and is also expected to do so thecoming years.

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1.5 Scope for reform and the returnto a surplus in public finances

1.5.1 Importance of a rapid return to asurplus in public finances

Public finances are improving rapidly as theeconomy strengthens. It appears that Swedenwill be able to return to a surplus in publicfinances in line with the surplus target when theeconomic situation returns to normal withouthaving to take a decision on further budgetconsolidation. Compared with many othercountries, the way back to a surplus willtherefore be less dramatic.

Returning to a surplus in the public finances is

important for several reasons. As the mostrecent crisis illustrated, public finances in goodorder are essential in order to be able to handlethe challenges confronting fiscal policy in such asituation. It is important to be able to face futuredownturns with strong public finances.Returning to a surplus within a reasonable timehorizon is also essential in order to meetbudgetary targets and maintain confidence infiscal policy, which is ultimately necessary toensure sustainable public finances in the longrun. In determining at which pace a surplus

should again be achieved , it is at the same timeimportant, in the current situation whereresource utilisation continues to be weak andunemployment high, that fiscal policy is not tootight.

As a result of the deep economic downturn,public finances have been weakenedsubstantially, even though from an internationalperspective, the deficits have been limited. TheSwedish deficits are primarily the result of theautomatic stabilisers having worked fully, which

has been crucial in maintaining demand in theeconomy. Moreover, the Government with itsstimulus measures has actively helped dampenthe fall in employment and prevent employmentfrom becoming persistent at a high level.

When the economy recovers, public financeswill strengthen again. It is important to find abalance for fiscal policy between the need toshore up the recovery and the requirement to re-establish a surplus in public finances. Netlending will show a surplus in line with thesurplus target when the economy and resourceutilisation are at normal levels. It is the

Governments opinion that the economy will beclose to a balanced resource utilisation in 2014.According to the forecast, net lending will reach1 per cent of GDP as early as 2012, even thoughresource utilisation remains weak that year (seeFigure 1.7). In 2014 net lending will be almost

3 per cent of GDP in the absence of newmeasures in addition to the substantive measuresproposed and announced in this Budget Bill.

Figure 1.7 Net lending and GDP gap

-6

-5

-4

-3

-2

-1

0

1

2

3

4

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

-6

-5

-4

-3

-2

-1

0

1

2

3

4

Net lending GDP gap

Sources: Statistics Sweden and Ministry of Finance calculations.

1.5.2 Scope for new measuresStronger public finances may provide some scope

for reform if the improvement is structuralThe current estimate thus indicates that actualgeneral government net lending will amount to1 per cent of GDP as early as 2012 and that inthe absence of new reforms, it is estimated atwell over 1 per cent of GDP (the surplus targetslevel) in subsequent years. Consequently, theremay possibly be some scope for permanentreforms in the future alongside the substantivemeasures proposed and announced in thisBudget Bill. Scope for permanent reforms may,

however, only arise if there is an improvement innet lending in addition to the surplus target that is sustainable, that is, if the improvement isdue to structural factors.

It is important to base an estimate of thescope for reform on the analytical frameworkpresented in the 2008 Spring Fiscal Policy Bill(Govt. Bill 2008/09:100, pp. 141-146). Underthis framework, a reconciliation is made bothwith the budgetary framework and the Swedisheconomy. In addition, the uncertainty in theestimate should be taken into account and the

actual risk picture considered (see also Section4).

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In order to estimate the scope for reform in amore systematic manner taking into account theeconomic situation, the Government uses twoindicators: structural net lending and the seven-year indicator. Structural net lending adjusts netlending directly for the economic situation

measured by the GDP gap. Structural netlending indicates how large net lending would beif the economic situation at a normal phase ofthe business cycle were normal. The seven-yearindicator is a moving average of net lending inthe year specified, the three years immediatelypreceding it and the three subsequent years. Theindicator thus takes the economic situation intoaccount to some extent since it is an average overseveral years. Because these years do notnecessarily consist of equal numbers of upturns

and downturns, a cyclical adjustment of theseven-year indicator made via the average for theGDP gap in the years in question is alsopresented.7 The estimate of the scope forreform, in both the short and the long run, isbased on an estimate of these various indicators,taking the economic situation, uncertainty in theestimate and the current risk situation intoaccount.

Scope for reform in the short runGiven the forecasts for general government net

lending and for the GDP gap, structural netlending will be around 1 per cent of GDP in2011 (see Table 1.5). The seven-year indicator ismarginally under the target. The cyclicallyadjusted seven-year indicator is, however,considerably higher than the target for 2011.Owing to the uncertainty in the measure and therisk of an asymmetric economic growth, someimportance should also be given to theunadjusted seven-year indicator. The estimate inthat case is that net lending should be in line

with or somewhat higher than the surplus target.Looking only at the indicators for 2011, all in allthere is not expected to be any further scope forreform in 2011 beyond the reforms proposed orannounced in this Budget Bill or announcedearlier and adopted with entry into force in 2011.The weakening of net lending as a result of thesubstantive measures proposed or announced inthis Budget Bill, which amount to almost

7 For a more detailed description of these indicators, see Section 4.

SEK 13 billion, are considered well balancedgiven the need to return to a surplus in thepublic finances relatively rapidly and at the sametime to avoid too tight a fiscal policy in asituation in which resource utilisation is stillweak.

Table 1.5 Net lending and indicators for its reconciliation

with the surplus target

Per cent of GDP and potential GDP

2009 2010 2011 2012 2013 2014

Net lending -1.2 -1.3 -0.4 1.0 2.0 2.9

Seven-year indicator 0.8 0.8 0.7

cyclically adjusted 1 1.5 1.7 1.9

Structural net lending 2.1 0.6 1.0 2.0 2.7 3.2

GDP gap -5. 7 -3. 3 -2. 5 -1.6 -1. 1 -0. 5

Seven-year average -1.2 -1.6 -2.01 The cyclical adjustment is made by decreasing the indicators value by the GDP

gap for the corresponding period multiplied by an assumed budget elasticity of

0.55.

Note: Figures for 2009 are outcome data. The table includes proposals in this

Budget Bill.

Sources: Statistics Sweden and Ministry of Finance.

Scope for reform over this term of officeLooking only at the seven-year indicator for2011 (which also includes net lending for 2012-2014), it is, as also noted above, not obvious thatthere will be any future scope for reform. Theestimate of structural net lending indicates,however, an increase in the scope for reform

over time. An estimate like this is, however,uncertain. The risk situation suggests that thescope for reform towards the end of the forecastperiod may be considerably smaller than whatstructural net lending indicates. The estimates ofstructural net lending are also uncertain. Anuncertain future scope for reform shouldtherefore not be committed in advance. Insteadit should be validated prior to each new budgetyear. It would be more responsible to correcttoo high a permanent net lending afterwards by

taking urgent structural and welfare reformsthan to be forced to make cuts if, for example,the negative risk situation were to be realised.

The substantive measures proposed in thisBudget Bill consist mainly of proposals forchanges in appropriations and changes in taxrules for 2011. But they also consist to someextent of announcements of some expenditurereforms that come into effect after 2011 and arethus included in the proposal for preliminaryexpenditure limits for the years after 2011.Furthermore, the Government discusses a

number of reform ambitions for the years after2011, which do not affect revenue and

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expenditure forecasts in this Budget Bill. Thesereform ambitions, and the timetable for them,are conditional on ensuring a sufficiently largesurplus in the public finances and a sustainablescope for reform actually emerging. In order tobe able to outline these reform ambitions and

specify priorities for this term of office, theGovernment has nevertheless made apreliminary estimate of the scope for reform forits entire term of office in which the uncertaintyin the estimate has been taken into account byestimating the scope for reform with a safetymargin related to the surplus target.

In total, the Government estimates that it isreasonable in the current situation to maintain asafety margin of at least 1 per cent of GDP instructural net lending in 2014, if the negative risk

situation, a normally asymmetric business cyclegiven the methods used, and the uncertainty inthe estimate of structural net lending are takeninto account. Taking into consideration the needfor such a safety margin, the scope for reformover the current term of office, in addition to thesubstantive reforms proposed or announced inthis Budget Bill or previously announced oradopted, is estimated preliminarily to come toabout SEK 40 billion (see also Section 4). Thisscope may later prove to be less or more.

Budget consolidation may be required in order toincrease the scope for urgent structural reformsThe need for budget consolidation measurescannot be ruled out on the revenue and/orexpenditure side. Such measures may be neededto make scope for urgent structural reformsduring the current term of office. Consolidationmeasures may also be necessary if, for example,social insurance expenditures rise again. Animportant starting point is for public resourcesto be used in a more effective and efficient way.

The potential for greater efficiency must beused. Another important starting point is thateconomically efficient tax increases can be usedto finance a reduction in economically harmfultaxes, but that tax increases are not normally tobe used to finance increased expenditure.

The expenditure ceiling an important toolThe expenditure ceiling proposed by theGovernment is based on an overall assessment ofthe fiscal framework and on the forecast for thepublic finances. It is also based on setting the

expenditure ceiling at a level that is consistentwith the surplus target and a long-term

sustainable fiscal policy. The Governmentsestimate in the 2010 Spring Fiscal Policy Bill wasthat the expenditure ceiling should increase bySEK 10 billion a year in 2013 and 2014. TheGovernment considers this to be a balancedestimate. The level chosen for the expenditure

ceiling signals a return to expenditure ceilingsthat are more consistent with the surplus target.But as a result, the budget margin for 2013 and2014 will decline compared with the relativelylarge margin in 2012. Consequently, theexpenditure ceiling will determine expendituregrowth even more.

Table 1.6 Central government expenditure ceiling, 2010

2014

SEK billion, unless otherwise stated

2010 2011 2012 2013 2014

Governments proposed

expenditure ceiling 1024 1063 1083 1093 1103Expenditures subject to

the ceiling 989 1006 1009 1022 1043Budget margin 35 57 74 71 60

Budget margin,

percentage of

expenditures subject to

the ceiling 3.6 5.7 7.3 6.9 5.8

Source:Ministry of Finance calculations.

The budget margin will allow reforms if the surplus

target doesIt is important to point out that the budgetmargin indicates the maximum scope for reformon the expenditure side in view of a number ofother restrictions. The scope for reform on theexpenditure side is primarily limited by thesurplus target. The tax policy during the currentterm of office will also limit the scope for reformon the expenditure side since a tax cut uses someof the potential scope for reform. Lastly, thescope for reform on the expenditure side is

limited by the need for a safety margin under theexpenditure ceiling. If all the above conditionsare met, some of the budget margin can be usedfor reforms.

The level of the expenditure ceiling in 2013and 2014 will lead to a decrease in the budgetmargin compared with 2012. But the margin in2014 will be greater than the Governmentsguidelines for its minimum level for this timehorizon. At the same time, there is substantialuncertainty in the expenditure forecast. Theguidelines for the size of the budget margin first

take into consideration the uncertainty aboutmacroeconomic developments and thus the

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impact of the automatic stabilisers onexpenditure growth. The sharp drop in thevolumes in the transfer systems that theexpenditure forecast is based on may, however,indicate a need for a somewhat greater safetymargin than what is normally justified.

1.6 Challenges for the Swedisheconomy

1.6.1 Challenges for the stabilisationpolicy

Swedens growth prospects have brightened and

the signs of a recovery have become moreevident compared with the assessment in the2010 Spring Fiscal Policy Bill. The recovery issupported by the continuation of an expansivemonetary policy, automatic stabilisers that areworking fully and a number of fiscal policymeasures. It is the Governments opinion thatno further large stabilisation policy measuresneed to be taken in the current economicsituation.

Preparedness for worse economic developments

Despite clear signs of a recovery in the Swedisheconomy, there are significant risks thatdevelopments could be worse than described inthe base scenario. Many countries have largedebts and public finances that have to beconsolidated while interest rates are expected torise over time. If turmoil in the financial marketsspreads again, the risk of a weaker economicupturn or even a second economic downturnwill increase. It is therefore important to remainwell prepared for both renewed financial turmoil

and the need for new stimulus measures.If the Swedish economy turns sharplydownwards, new countermeasures may need tobe considered. Even if the international turmoildoes not lead to a serious global crisis, it riskscausing a delay in Swedens economic recovery.In that case, it would increase the risk thatunemployment will become persistent at apermanently high level. Further measures toprevent such a development may then need to beconsidered.

From an international perspective, Swedenhas a good fiscal position. This will make it

possible to handle any fresh financial turmoil, amore drawn-out recovery or even a neweconomic downturn. Against this background, itis important to rapidly regain a surplus in thepublic finances. An important step in achievingthis is phasing out the temporary stabilisation

policy measures taken in the current slowdownso that they do not become permanent. This willensure that there is room for manoeuvre instabilisation policy without the risk that themarket will demand a risk premium fromSweden that entails higher borrowing costs. Thisis particularly important as the large debts nowbeing accumulated in some parts of the worldmay in future push up global borrowing costs inthe event of a new economic downturn. This isimportant even with a more normal cyclical

development. One challenge for stabilisationpolicy in the current situation is thus to phaseout the temporary measures at an appropriatepace, while taking into account the need toreturn to a surplus and underpin the economicrecovery.

Preparedness to prevent bottlenecks and tendenciestowards overheating when the economy picks upAs resource utilisation increases, the policy mustalso gradually be adjusted to prevent bottlenecksand tendencies for the economy to overheat.

This can be done by modifying active labourmarket programmes and by shifting theemphasis from demand-stimulus measures tosupply side measures.

Ensuring the financial markets keep functioningAn important part of stabilisation policy isensuring financial stability and a well-functioning credit market. Even though thesituation has stabilised, developments in thefinancial markets must continue to be carefully

monitored. Financial stability and the provisionof credit to business and households must beensured. Phasing out support programmestherefore has to be carried out in a responsiblemanner and the need for new measurespromptly considered in the event of possiblefresh financial turmoil.

1.6.2 Challenges for structural policyTo create the highest possible standard of

welfare via high economic growth, structuralmeasures have to be taken over time. The

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Governments work has focused, and will in thecoming period focus in particular on increasedsustainable employment, education andenhanced knowledge, welfare funding, theclimate challenge, and globalisation andcompetitiveness. The European Union has also

agreed a strategy for sustainable growth and fullemployment, the Europe 2020 strategy. Thestrategy consists largely of the structural policychallenges mentioned above. Under the strategy,Member States are to establish targets in thedifferent areas included in the strategy. TheEurope 2020 strategy is described in a box at theend of this section.

1.6.2.1 Increased sustainable employmentStructural and stabilisation policy challenges inthe labour market should be seen in the samecontext, as cyclical problems risk leading toprotracted structural problems. There is, forexample, a risk that unemployment will becomepersistent at a high level for a long time or thatpeople who lose their job will leave the labourmarket. Effects of the crisis like these lead tolower employment and production capacity inthe economy for a long time to come.

There are now clear indications that the

labour market has begun to recover during 2010.Both the labour force and employment haveincreased during the first half of 2010 andunemployment has started to fall (see Figures1.8 and 1.9). The incipient upturn inemployment in 2010 indicates that there is littlerisk of jobless growth in this economic upturn.

Figure 1.8 The labour force and the employed aged 1574

Thousands of persons

3900

4100

4300

4500

4700

4900

5100

89 91 93 95 97 99 01 03 05 07 09 11 13

Employed persons

Labour force



The labour force did not decrease during thecrisis and it has now begun to increase again,which is a positive sign. In the long run, it is thelabour supply that determines employment andthus also the production capacity in theeconomy. It is therefore very important tomaintain labour force participation even ineconomic slowdowns even though thiscontributes to higher unemployment, as thelikelihood of returning to work has proved to begreater for someone who is unemployed than fora person who has left the labour force. Duringthe first half of 2010, the employment upturnhas been so strong that unemployment hasbegun to fall even though the labour force isincreasing.


The unemployed as a percentage of the labour force

0

2

4

6

8

10

12

89 91 93 95 97 99 01 03 05 07 09 11 13


Finance calculations. Another positive sign is that the number of jobvacancies is increasing. Statistics from both theSwedish Public Employment Service andStatistics Sweden show this. There are nowmany job vacancies, particularly in the privatesector, but also in the public sector (see Figure1.10). Firms recruitment plans are also positive(see Figure 1.11). These forward-looking

indicators suggest that employment willcontinue to increase during autumn 2010.

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Figure 1.10 Job vacancies per quarter

Thousands

0

10

20

30

40

50

60

70

80

90

01 02 03 04 05 06 07 08 09 10

Total Private sector

Public sector

Note: Seasonally adjusted data.

Source: Statistics Sweden.

Figure 1.11 Recruitment plans and employment

-1,5

-1,0

-0,5

0,0

0,5

1,0

1,5

2,0

96 97 98 99 00 01 02 03 04 05 06 07 08 09 10

-40

-30

-20

-10

0

10

20

30

Employment according to the national accounts (left axis)

Recruitment plans (right axis)

Note: Seasonally adjusted data. Recruitment plans are shown with a one-quarter lead.

Source: Statistics Sweden.

Correlation 0.8

Long-term unemployment is a serious problemnot only for the individual, but also for societyas the probability of finding a job decreases asthe duration of unemployment increases. Anincrease in long-term unemployment thus risksreducing production capacity in the economy.During the crisis, long-term unemployment hasrisen sharply. Now, however, there are signs thatit is increasing more slowly.

The risk of long-term unemployment differsfrom group to group as shown in Figure 1.12.People born outside Europe, older workers andpeople with no more than a pre-upper secondaryeducation are more likely to be long-termunemployed compared with other groups.

Figure 1.12 The unemployed and programme participants

registered for more than two years

Per cent of the population

0,0

0,5

1,0

1,5

2,0

2,5

3,0

3,5

00 01 02 03 04 05 06 07 08 09 10

age 15-24

age 55-64

Born outside Europe

With a pre-upper secondary education onlyTotal registered

Note: Seasonally adjusted data.

Sources: Swedish Public Employment Service and Statistics Sweden.

All in all, there are thus clear indications that therecovery in the labour market is picking upspeed in 2010. Employment is expected toincrease and unemployment to decrease up to2014 (see Section 1.3). The relatively high labourforce participation indicates that productioncapacity in the economy is comparatively highand that the potential exists to increasesustainable employment. One serious problem,however, is that unemployment spells have beenprotracted on account of the crisis and thus riskslowing down the upturn in sustainable

employment.

Employment policy challenges in the next few yearsThe measures to alleviate the impact of the crisison the labour market should be graduallyadjusted in light of the new labour marketsituation. In the acute stage of the crisis, policyfocused on lessening the fall in employment andon measures to ensure that the unemployedstayed motivated and employable. Now themeasures should to an increasing extent be

aimed at facilitating the economic upturn. When the demand for labour picks up, it isimportant that the unemployed look for work inorder for the increasing demand to rapidly leadto employment without the emergence ofoverheating and bottlenecks. It is also importantthat the unemployed are available foremployment. It is therefore appropriate toreduce levels in labour market programmesdirected at the short-term unemployed as thedemand for labour grows and thus reduce therisks of locking-in effects. Moreover, it isimportant to monitor the labour market

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carefully so that shortages do not arise in certainoccupations or regions. There must be areadiness to rapidly implement measurescounteracting any such development.

One important policy challenge is to ensurethat the long-term unemployed also benefit

from the economic upturn. It is thereforeimportant that the long-term unemployed alsolook for the jobs that are being created. Toincrease their competitiveness in the labourmarket, wage subsidised employment alsocontinues to be an important instrument Thelong-term unemployed with limited educationmay also be in need of further education in orderto be competitive in the labour market.

As a result of the economic crisis, theGovernments measures have largely focused on

reducing the impact of the crisis on the labourmarket. When the labour market situationnormalises, the focus should once more be onthe long-term work to increase sustainableemployment by reducing social exclusion.There are some groups that have a relativelyweak foothold in the labour market and forwhom the labour market still does not functionsatisfactorily. Young people, the foreign born,people with disabilities that reduce their capacityto work, people with no more than pre-uppersecondary education and older people are groups

that have a considerably worse labour marketsituation than the working-age population as awhole.

Young people, particularly those who havenot completed an upper secondary schoolleaving certificate, are more often unemployedthan the population as a whole. People withrelatively little education are also among those atrisk of persistent long-term unemployment.Therefore, education policy is of majorimportance for labour market development and

among the aims of the upper secondary schoolreform are improving the throughput andreducing the number of school drop outs. Toimprove throughput and results in schools, theGovernment in its previous term of officeconcentrated on measures to improve qualitysuch as a skills enhancement initiative forteachers (lrarlyft), new teacher training, a neweducation act and a reformed upper secondaryschool. In this Budget Bill, the Governmentproposes to continue its education initiatives,including continuation of the skills enhancementinitiative for teachers, more time for teaching

mathematics, an extensive apprenticeshipprogramme and a student health initiative. TheGovernment also proposes that unemployedyoung people aged 2024 who have notcompleted their compulsory or upper secondaryeducation be temporarily eligible for the higher

study support benefit level on the condition thatthey quit their studies before mid-year 2010.

Older people who lose their jobs face adifficult labour market situation and are at riskof ending up in long-term unemployment orleaving the labour force. In addition, manyvoluntarily leave the labour force relatively early,for example, via supplementary pensionschemes. It is important to encourage longerlabour market participation, not least tosafeguard the financing of the public sector. The

most important measure for stimulating thelabour supply among older people is the higherin-work tax credit for people who have turned65. To increase the demand for older workers inthe labour force, the special employerscontribution on wages and the tax on incomefrom active business activities have beenabolished for people over 65. People aged 5564can also get new start jobs for a maximum of tenyears, which is twice as long as people aged 2654 get. In addition, the qualifying time for a newstart job has been temporarily shortened from

twelve to six months for people who have turned55 in order to improve older unemployedpeoples chances of remaining in the labourmarket.

The foreign born have a substantially loweremployment rate (the share of employed peoplein the population) and higher unemploymentthan people born in Sweden, even thoughconsiderable variation exists. It is essential toincrease the labour supply among people bornabroad and improve the integration of newly

arrived immigrants so that they can quickly findwork. More rapid establishment in the labourmarket of the foreign born is even moreimportant when the share of foreign born in theworking-age population grows. TheGovernment will therefore introduce a newsystem to enable newly arrived refugees tobecome established in the labour market morerapidly. The reformed system includesintroducing a state benefit that strengthens theindividuals incentives both to participate inactivities and to work while getting established.The Public Employment Service has also been

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given a clearer role and a coordinatingresponsibility for speeding up the establishmentof newly arrived people. There are step-in jobsand new start jobs for the foreign born withresidence permits during their first few years inSweden. The Government has also taken

measures to improve the validation of foreigneducation and other vocational skills.

Everyone should have the opportunity toparticipate in working life based on their abilitiesand circumstances but many people withdisabilities are very detached from the labourmarket. Their chances of being able to find, getand keep a job must therefore be improved. TheGovernment intends to strengthen the PublicEmployment Services administrationappropriation by SEK 200 million in 2011 in

order to give priority to this task. The work toidentify and remove obstacles currently existingin the labour market must continue and bereinforced. The Government will also continuethe work to improve the possibilities for youngpeople with disabilities to find jobs andparticipate in the community. Before 2011, theGovernment intends to develop a five-yearstrategy for the work with the overall disabilitypolicy objectives with sub-objectives that can befollowed up and clear roles for theimplementation.

1.6.2.2 Education for a higher standard ofwelfare

Education is essential both for the individual andfor society in general. A good school makes upfor differences in students living conditions andopportunities and lays the basis for peoplesfuture prospects. Education improves peoplesknowledge and abilities. Higher productivity

increases the chances of getting a job and alsoyields a return in the form of higher wages. Thusconsumption possibilities and the potential forcharting ones own life increase.

Society also has much to gain from education.Higher productivity and employment improvethe conditions for economic growth, increasethe common good and contribute to a moreequitable distribution of income. Studies showthat countries with a better educated labourforce have higher growth. An unequaldistribution of knowledge contributes to anunequal distribution of income. A well-

functioning education system can reduce someof these income differences.

Because education in particular improvesweak groups labour market position,employment may increase on account ofreduced exclusion. A well-functioning education

system that equips young people with the rightskills is probably the most effective way ofimproving young peoples labour marketsituation, and thus counteracting high youthunemployment. The foreign born and newlyarrived immigrants chances of succeeding in thelabour market increase considerably if they canbe effectively integrated into the educationsystem.

New and increased knowledge througheducation are also required to maintain and

increase international competitiveness. Onechallenge is therefore gradually to adapt theeducation system to supply the business sectorwith a well-educated labour force and tofacilitate structural change. Swedish companiescan best compete on the basis of knowledge andquality because it leads to higher economicwelfare.

Even though Sweden has a well-educatedlabour force, there have been serious deficienciesin the education system that the Governmentduring its previous term of office worked

intensively to remedy. The proposals presentedin this Budget Bill are aimed at coming to gripswith the deficiencies in the education system sothat the availability of a well-qualified labourforce ca

budget sweden 2011

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