Fiscal Sustainability Report 2017

Fiscal Sustainability Report 2017

This report presents an assessment of the sustainability of Sweden’s public finances. It is based on the NIER’s December 2016 fiscal and economic projections and Statistics Sweden’s October 2016 population forecast. The aim of sustainability assessments of this kind is to identify potential future imbalances in public finances at an early stage.

Government expenditure is projected on the assumption that the public sector commitment to welfare is unchanged at current levels. The public sector commitment is defined narrowly here, with the focus on the expenditure side of the budget. Other aspects of this commitment, such as market efficiency and income distribution, are disregarded. The assumption of an unchanged public sector commitment means that personnel density in the provision of welfare services is maintained at current levels. Government revenue is projected on the basis of current tax rules.

The projection horizon generally extends to 2040, but the report also contains projections of government revenue and expenditure through to 2100. The calculations show that both revenue and expenditure increase as a share of GDP through to 2040 if the assumptions made in the calculations are borne out. It is particularly spending on welfare services that rises, due mainly to a higher share of elderly people relative to the population of working age. The major influx of refugees in 2015 means rapid growth in government consumption in the near term. However, as output is also expected to grow strongly, government consumption as a share of GDP hardly increases at all. Revenue rises partly as a result of household consumption growing slightly more
quickly than GDP.

All in all, the projections in the report’s base scenario indicate a continued primary deficit. The deficit is also of a sufficient size that general government net wealth declines from 20 per cent of GDP today to 14 per cent in 2040.

Current tax rules not sufficient to fund future expenditure

Public finances can be considered sustainable if net financial wealth stabilises as a share of GDP in the long term. A stricter sustainability criterion is for net wealth to be more or less unchanged at current levels. Based on these criteria, government finances cannot be considered fully sustainable through to 2040 in the report’s base scenario. Sustainability based on the stricter criterion would require taxes to be raised or spending reduced. However, only limited tightening is required in the base scenario. If this is done by raising taxes, the tax-to-GDP ratio would need to be an average of 0.4 percentage points higher through to 2040.

Based on the European Commission’s S2 sustainability indicator, on the other hand, public finances are sustainable indefinitely. This is because net wealth stabilises in the very long run. However, it stabilises at a negative level – in other words, the government sector has net debt.

Sustainable public finances depend on the population working ever longer and being ever healthier

The base scenario in this report is based on the assumption that, as average life expectancy increases, people work longer and longer (the retirement age increases) and the elderly are more and more healthy (their need for welfare services decreases).

In an alternative scenario, both the retirement age and demand for health and social care among the elderly at a given age are the same as today. In this scenario, government spending increases more as a share of GDP, due to both a higher rate of growth in government consumption and a lower rate of growth in GDP when there is no increase in working life. In this scenario, the tax-to-GDP ratio needs to be raised by an average of 1 percentage point through to 2040 for public finances to be sustainable.

In another alternative scenario, personnel density in the provision of welfare services gradually decreases. This results in a smaller increase in the standard of welfare services than in the base scenario, with the result that government spending falls instead as a share of GDP. Relative to the base scenario, there is a strengthening of the government budget. The tax-to-GDP ratio could then be lowered by an average of 0.4 percentage points through to 2040 while keeping public finances sustainable.

Sustainability improved from last year's report

Compared with the assessment made in Fiscal Sustainability Report 2016, the long-term sustainability of Sweden’s public finances has improved considerably.

This is due partly to lower primary expenditure because of changes to the population forecast, but chiefly to lower direct spending on refugee reception. A better primary net lending leads in turn to a more favourable path for general government gross debt than in last year’s report. The difference in net lending therefore increases the further into the future the projections extend. This illustrates how short-term changes in public finances can have a major impact on long-term projections, underlining the need for caution when interpreting the results.