Public finances remain strong in light of demographic developments

Public finances are assessed to be sustainable in the long term. Tax revenues are expected to increase in the near term as household consumption picks up during the economic recovery and will continue to grow, slightly faster than GDP. Sweden’s population is projected to grow at a relatively slow pace in the coming years, characterised by increasing life expectancy and, compared to recent decades, lower birth rates and reduced net migration. Rising life expectancy leads to more elderly individuals postponing their retirement. This development, and fewer children in schools and preschools compared to previous years, result in a decline in public expenditure as a share of GDP over the next decade. However, in the longer term, an ageing population will lead to higher costs for healthcare and elderly care, causing public expenditure to rise. The surplus accumulated when expenditure initially declines contributes to an increase in the public sector’s net financial assets, leading to gradually higher capital income. This, in turn, helps to strengthen public finances even as expenditures rise in the long run.

According to Statistics Sweden’s latest population projections, fewer children will be born, and fewer people will immigrate to Sweden compared to the previous projection. This report contains an analysis of the impact of these revised projec-tions on the sustainability of public finances. Up to 2060, Statistics Sweden’s latest projections indicate that public finances will strengthen compared to previous projection. The calculations show that fewer children and young people in schools and pre-schools will result in savings, particularly over the next two decades. In the longer term, however, lower birth rates contribute to a growing proportion of elderly people. The initial savings lead to increased net financial assets and thus higher net capital income, which offsets the rising costs associated with an ageing population in the long run. The downward revision of population growth suggests that public finances will remain strong even when developments up to 2100 are considered.

The calculations indicate that demographic changes take a long time to impact public finances. At the same time, it is important to acknowledge that these projections are subject to uncertainty, and that the level of uncertainty increases over time.