Avsnittsnummer infogas vid samling. Guideline for economic and budget policy

Transcription

1 1 Avsnittsnummer infogas vid samling. Guideline for economic and budget policy

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3 1 Guideline for economic and budget policy A Sweden that keeps together Sweden must be a role model in the world. A country distinguished by the equal value of all women and men, self-confidence, solidarity and the belief that the future can be changed. A country where we invest jointly in people and the environment, in knowledge and competitiveness, in security for the present and hope for the future. A country where we bridge gaps and where all girls and boys, women and men, have the opportunity to realise their full potential. Sweden should be a leading and inspirational force in the world. Higher environmental ambitions create innovative capacity and bring new jobs. However, as a result of developments in recent years, we face several major challenges. Unemployment has become entrenched at high levels and Sweden is losing competitiveness. School performance is falling. Many people are uncertain whether welfare and social security systems will be there for them. Meanwhile, income gaps between people are widening and inequality between women and men persists. Because of an inadequate ability to take political action, Sweden is likely to miss 14 of the 16 environmental quality objectives for which a broad political consensus has declared its support. These trends must be reversed during this electoral period. Unemployment must go down, school performance must be turned around, the transition to a more sustainable society must accelerate and welfare must be strengthened. Sweden must be a country that keeps together. Keeping public finances in good order is the foundation of more jobs and sustainable welfare. At the beginning of the financial crisis the general government sector had a considerable surplus. At that time, an expansionary fiscal policy was justified. In the past few years, however, extensive unfunded reforms, mainly tax cuts, continued to be implemented. These, combined with the drawn-out economic recovery, have contributed to considerable general government deficits. Last year the general government sector had a deficit of SEK 74 billion. This is not sustainable. Returning public finances to a sustainable path therefore requires increases in revenue in the next few years. The deficits will gradually be reduced. The Government s assessment is that the Swedish economy will gradually recover in the coming years. The economic situation in the world around us appears to be improving, even if all the indications are that the recovery will be slow, particularly in the euro area. The risks of weaker growth are significant, with poorer economic development in the euro area considered the largest single risk. Work creates a sense of community and belonging the power to shape your life and future. It is crucial for cohesion in Sweden and to secure our prosperity that more women and men find jobs. One of the Government s most important tasks during this electoral period is to reduce unemployment and increase employment. Economic policy must be steered by a clear employment target. The number of people in work and the number of hours worked in the economy must increase to such an extent that 3

4 Sweden s unemployment rate is the lowest in the EU by This means creating new and better jobs. We can never be satisfied as a society as long as people s knowledge, ambition and dignity are lost in destructive unemployment. Action will be taken to reinforce a good physical and psychological work environment and good conditions. An active industrial policy, increased exports and proactive investments in the future will increase the demand for labour and secure growth. To make Sweden strong and meet increased international competition, we need to create good conditions for creativity, entrepreneurship and innovation. Small and medium-sized enterprises must be given better opportunities to grow and to make their way into the global market. Cooperation is needed between the business sector, the public sector and higher education to make better use of our potential. While more than people are unemployed, the number of vacancies stands at a historically high level. In addition, investments are needed, including investments in the welfare system, where many jobs could be created. Furthermore, many employers have difficulty finding people with the right skills. If labour market matching is to work, public employment services must be strengthened and people must have the skills required. Sweden needs a knowledge boost. More young people must start and complete upper secondary education and more adults must be given the opportunity to engage in retraining and further education in the adult education system, higher education and folk high school. To improve geographical matching, increased housing construction is needed, together with better commuting opportunities so that people can move or commute to where the jobs are. Good conditions for developing job opportunities in rural areas are also essential. Unemployment in Sweden is unevenly distributed. Young people, people with relatively little education, people born abroad and people with disabilities may be particularly vulnerable. No young person should start their adult life in long-term unemployment. The Government s objective is therefore that no young person should need to go without a job for more than 90 days. Very few participants in the employment phase of the job and development guarantee (phase 3) go on to work or studies. The employment phase will be phased out. The Government therefore considers that long-term unemployed people should be given greater opportunities for education or subsidised work in the welfare sector. The capacity of those who come to Sweden as refugees from war or persecution must be used in a much better way. Their introduction to the labour market must be accelerated. Swedish language instruction must be able to start more quickly. The possibilities of validation must be improved. People with disabilities must have good opportunities in working life. Barriers to participation in the labour market must be torn down. In recent years, increasing numbers of young people have been leaving compulsory school without sufficient knowledge to take with them into upper secondary school. This trend causes concern about our children s future and poses a threat to Sweden s development and competitiveness. International studies show that school learning outcomes have fallen more rapidly in Sweden than in any other OECD country. At the same time, schools have become less equal. The level of knowledge in Swedish schools must be raised and the quality of the teaching situation must be improved. Everyone has the right to succeed and develop at school and schools must become more equal. Teachers must be able to give pupils the support they need so that the pupils can develop in accordance with their own situation and abilities. The Government therefore proposes extensive initiatives for more employees in school so that teachers have more time for their work and classes can become smaller, support in the form of more special instruction for all pupils who risk falling behind, and clear measures to make the teaching profession more attractive. The Government s objective is for all schools to be good schools. This is the only way we can build a world-class school system in Sweden. Society must develop in a socially and ecologically sustainable way and growth must be distributed fairly. These are the crucial issues of our time, but also issues where Sweden has good opportunities to be at the forefront. Sweden s ambitions in the climate area the ultimate condition for good living standards over the long term have been held back in recent years. Support to protect biodiversity will be substantially strengthened. It must become 4

5 more worthwhile to choose climate-friendly solutions, both as a producer and as a consumer, and more difficult and more expensive to make choices that destroy our shared environment. Climate investments must be supported, both locally and globally. Public climate-related investments must increase. Decisive steps must be taken towards achieving the environmental quality objectives. Sweden has drifted apart. Far too many people have fallen behind and not shared in the growing prosperity. Widening gaps lead to fewer shared experiences and common points of contact. This undermines an understanding of other people s living situations. Growing income disparities reduce women s and men s freedom. People s opportunities to move where they want and take part in social contexts on equal terms deteriorate when disparities grow. It makes it more difficult for Sweden as a nation to create insight into the great challenges of the future and to tackle them together. Economic policy should be used to increase economic equality. An equal Sweden is a successful Sweden. An equal Sweden is impossible without a genderequal Sweden. The Government s policies aim to reduce the gaps between women and men. The Government intends to monitor developments in the area of gender and social equality closely. The present differences between the playing fields for women and men are unacceptable. A feminist philosophy will therefore shape economic policy. Women and men must be given the same opportunities in school and other education and training, and in the labour market. To improve conditions for women, income disparities between men and women must be reduced and welfare must be strengthened. Society must increase its support to people with limited economic resources. Sickness and activity compensation, maintenance support and the housing supplement for pensioners will be raised. To increase security and adjustment capacity, unemployment insurance funds will be strengthened. Far too many people, primarily women, have reduced their working hours or completely stopped working in order to look after a family member. Better elderly care is therefore not only a question of security in old age, it is also a matter of people s opportunity to work. Well-functioning, high-quality public welfare is a prerequisite for improving women s living conditions. This bill sets out the direction of the Government s economic policy. The reforms proposed in the Government bill Spring Amending Budget for 2015 will gradually take effect in the second half of In some other cases, reforms or revenue enhancements are announced that will only take effect after This bill and the Spring Amending Budget for 2015 are based on an agreement between the government parties and the Left Party. A policy for more jobs and better schools and for social and ecological sustainability will bring increased cohesion and is vital for Sweden s development. Sweden must be a country that keeps together. 5

6 Table 1.1 Reforms and financing Impact on general government net lending SEK billion More jobs and greater competitiveness Competitive business policy 0,63 0,66 0,68 0,70 0,70 Railway maintenance 0,62 1,24 1,24 1,24 Higher education, adult education and folk high school 0,61 1,21 1,43 1,79 1,61 Education contracts 0,38 0,79 0,78 0,78 0,80 Trainee jobs 0,06 0,68 1,17 1,19 1,20 Extra jobs 0,01 0,56 1,66 2,43 2,63 Additional funds to Swedish public employment service 0,16 0,26 0,24 0,14 0,14 A modern working life 0,04 0,09 0,10 0,10 0,08 Knowledge-based education in equal schools with time for each pupil Early action 0,03 0,55 0,58 0,58 0,58 More attractive teaching profession 0,11 0,46 0,46 0,46 0,44 All schools must be good schools 0,33 1,55 1,62 1,62 1,28 A sustainable future Climate investments 0,13 0,60 0,60 0,60 biodiversity and nature conservation 0,41 1,18 1,18 1,18 1,18 More resources for environmental agencies 0,02 0,11 0,11 0,11 0,11 Other environmental initiatives 0,01 0,12 0,12 0,12 0,12 Increased welfare and security Better maternity care 0,20 0,40 0,40 0,40 0,40 More staff in elderly care 1,00 2,00 2,00 2,00 Higher ceiling and minimum level of unemployment compensation (incl. coordination with sickness benefit) 0,88 2,83 2,78 2,71 2,81 Higher maintenance support 0,21 0,62 0,63 0,63 0,63 Higher housing supplement for pensioners 0,13 0,40 0,40 0,40 0,40 Higher sickness and activity compensation Other reforms 0,06 0,24 0,24 0,24 0,24 Swifter introduction of new arrivals 0,32 0,16 0,16 0,16 0,16 Increased support for women s shelters 0,03 0,10 0,10 0,10 0,10 Increased support for culture 0,04 0,09 0,10 0,09 0,02 Extra funds for municipalities 0,86 2,56 3,02 3,02 3,02 Other reforms 0,74 0,52 0,62 0,30 0,20 Reforms, total 8,00 19,97 22,41 23,07 18,83 6

7 Table 1.1 Reforms and financing (cont.) Impact on general government net lending SEK billion Financing Revenue increases Decreased or abolished reduction of social security contributions for young people 5,49 15,76 18,34 18,10 17,98 Higher environmental taxes 0,01 0,03 0,03 0,03 0,03 Abolition of tax credit for help with homework and other schoolwork Higher tax on thermal output at nuclear power reactors Financing fee, unemployment insurance funds 0,02 0,05 0,05 0,05 0,05 0,10 0,25 0,25 0,25 0,25 0,12 0,40 0,41 0,42 0,43 Other budget top-ups 2,32 3,93 6,16 7,13 5,29 Financing, total 8,06 20,41 25,24 25,97 24,02 Impact on public finances 0,06 0,44 2,83 2,90 5,19 Technical transfers to households 0,44 2,83 2,90 5,19 Note: The amounts refer to reforms and financing proposed in the Spring Amending Budget for 2015 (Govt Bill 2014/15:99) or announced in this Government Bill. 7

8 1.1 Outlook for the Swedish economy A gradual recovery is expected in the Swedish economy in the coming years. The economic situation in the world around us appears to be improving, even if all the indications are that the recovery will be slow, particularly in the euro area. Stronger international developments will increase the demand for Swedish export goods and services, which in turn is expected to contribute to increased business investments, lower unemployment and rising resource utilisation. The situation in the labour market appears, however, to be improving relatively slowly. Consequently, measures are needed during the electoral period to contribute to a more tangible fall in unemployment. The forecast is, however, uncertain and there is a substantial risk of a weaker outlook. Poorer economic developments in the euro area are the single largest risk factor. At the same time, there may be stronger development if the recovery in the euro area progresses more rapidly than assumed in the forecast. and strong confidence in the economy among companies stimulates investment growth. The Chinese economy is experiencing a transition, from growth largely dependent on investment to growth driven to a greater extent by consumption. This will lead to more balanced GDP growth in the coming years. On an overall assessment, the international economy will grow stronger in the coming years. However, all the indications are that the recovery will make slow progress in the euro area, which is Sweden's most important export market. Gradual recovery in the Swedish economy The slow recovery in the rest of the world has meant subdued growth in Swedish exports particularly exports of goods. Instead growth has been mainly driven by household consumption and housing investment. Investments in machinery, however, showed weaker growth, which is due to the weak export trend. Slow recovery in the rest of the world Recovery in the world economy was generally slow in 2014, but economic developments varied between different countries and regions. While the economic trend in the USA and the UK was relatively strong, growth in the euro area was comparatively weak. In many emerging economies, including China, growth slowed down in A lower oil price, lower interest rates and a more expansive monetary policy in other respects are expected to contribute to a somewhat stronger economic trend in the euro area in Economic activity is held back by companies, households and the public sector retaining a high level of savings to reduce their debt. In addition a high unemployment rate in many economies is contributing to dampen demand. The trend in the US economy is expected to be strong in the coming years. Continued high employment growth, together with low interest rates and a low oil price, creates scope for strong growth in household consumption. High profits 8

9 Table 1.2 Macroeconomic key indicators Percentage change unless otherwise indicated. Outcome 2014, forecast GDP 1,2 2,3 2,4 2,5 2,7 2,5 2,0 GDP gap 3-1,9-1,4-0,8-0,1 0,1 0,0 Employed 4 1,4 1,4 1,3 1,2 0,9 0,5 Employment rate 4 66,2 66,6 66,7 66,8 66,9 66,9 Hours worked 2 1,8 1,3 1,3 1,4 0,9 0,4 Productivity 2,5 0,4 1,2 1,2 1,4 1,6 1,7 Unemployment 6 7,9 7,5 7,1 6,7 6,4 6,4 Hourly wages 7 2,8 2,9 3,2 3,3 3,4 3,5 CPI 8-0,2 0,0 0,9 1,7 2,7 3,2 CPIF 8 0,5 0,8 1,4 1,6 1,8 2,0 1 Constant prices, reference year Calendar adjusted. 3 Difference between actual and potential GDP in per cent of potential GDP. Potential GDP cannot be observed and thus no outcome is recorded. 4 Aged Value added to base price per hour worked. 6 As a percentage of the labour force aged Measured by short-term wage statistics. 8 Annual average. Sources: Statistics Sweden, National Mediation Office and own calculations. As recovery in the rest of the world continues, growth in Swedish exports is also expected to increase. Growth in household consumption is also expected to increase in 2015 and 2016, supported by low interest rates and a gradual improvement in the labour market situation. Housing investments and growing investment in the service industries are also expected to make a considerable positive contribution to GDP growth in 2015 and 2016, which is expected to be somewhat higher than Since 2011 unemployment has been about 8 per cent. In the same period employment has risen, but not sufficiently to reduce unemployment, since the number of people in the labour force has also increased. The upturn in employment in 2014 was driven above all by the service-producing industries. Unemployment is expected to decline as the economic recovery increases the demand for labour. The Government considers that active measures will also be necessary to reduce unemployment. As a result of the recovery in the Swedish economy, resource utilisation will increase in the years ahead. Overall, approximately people are expected to be unemployed in 2016 and a large proportion of them are likely to be individuals with a weak position in the labour market. Inflation has been low and below the Riksbank s target level for a long period. It has been kept down by low import prices and low resource utilisation. Among other things, a lower oil price contributed to low inflation in 2014 as well. Future inflation expectations have also fallen. Expected inflation two years ahead was 1.1 per cent in the first quarter of 2015, according to a questionnaire-based measure (see figure 1.1). To support a rise in inflation the Riksbank has cut the repo rate in the past year from 0.75 per cent in January 2014 to per cent in March In addition the Riksbank has started a programme for purchasing government bonds. Figure 1.1 Repo rate, inflation and inflation expectations Per cent (repo rate) and annual percentage change Reporänta rate -1 KPI-inflation CPI Inflation Inflationsförväntningar, expectation, 2 year 2 år Sources: The Riksbank, Statistics. Public finance deficit The public finances, which have gradually deteriorated since 2010, weakened further in 2014 compared with 2013 and the public sector showed a deficit of SEK 74 billion, or 1.9 per cent of GDP. The deterioration is due partly to the relatively weak economic recovery and partly to unfunded measures, particularly unfunded tax cuts, implemented by the previous Government. The deficit in public finances is estimated to decline from 2015 onwards as a result of the economic recovery and the responsible conduct of economic policy. Net lending is estimated to 9

10 be -1.4 per cent of GDP in 2015 and is expected to be in balance in The central and local government sectors are estimated to show deficits in 2015, while the oldage pension system is expected to be in balance. The strengthening of net lending that is expected to occur from 2015 and forward will be concentrated to the central government sector. Net lending in the old-age pension system is expected to gradually weaken throughout the forecast period. The local government sector is expected to show weakly negative, but stable, net lending, while the sector's financial results will be positive and in line with good financial management throughout the forecast period ( ). As a consequence of the deficits in the public sector, gross debt in 2015 is expected to increase slightly as a percentage of GDP. Gross debt as a percentage of GDP is expected subsequently to decline slightly during the forecast period. Table 1.3 Consolidated general government finances SEK billion. Outcome 2014, forecast Income Per cent of GDP 48,5 48,7 49,1 49,4 49,6 49,6 Taxes and charges Per cent of GDP 42,6 42,8 43,3 43,6 43,8 43,8 Other income Expenditure Per cent of GDP 50,4 50,1 49,8 49,8 49,6 49,2 Net lending Per cent of GDP -1,9-1,4-0,7-0,4 0,0 0,4 Central govt. -1,4-1,2-0,5-0,1 0,4 0,9 Old-age pension system 0,1 0,2 0,0-0,1-0,2-0,3 Local government sector -0,5-0,4-0,2-0,1-0,2-0,2 Structural net lending per cent of GDP -1,1-0,5-0,4-0,3-0,1 0,4 Consolidated gross debt Per cent of GDP 43,9 44,2 42,8 41,5 40,0 38,0 Sources: Statistics Sweden and own calculations. Uncertain economic trend After strong growth in 2010, in connection with the major fall in GDP in 2009, the economic trend in Sweden weakened in The weak trend surprised many experts and there was a general revision of growth forecasts during the period. Growth improved in 2014 compared with 2013 and a recovery started. Prospects of a stronger recovery going forward, both in the rest of the world and in Sweden, are assessed to be good. However, in light of recent years developments, with downward adjustment of forecasts, it is reasonable to be cautious in assessing economic trends. The risks of weaker growth are still considerable. Poorer economic developments in the euro area are considered to constitute the single largest risk. The long-term high unemployment and increased poverty in Europe is a serious problem and also risks hampering economic development. Another considerable risk is linked to the uncertain geopolitical situation. Armed conflicts are currently in progress in Ukraine and the Middle East. It is difficult to predict how the conflicts will develop and what their macroeconomic consequences may be. There is also a possibility that the upturn in the economy in the rest of the world will be stronger than forecast. Political uncertainty in the euro area has increased since the turn of the year 2014/15, above all as a result of the strained negotiation situation that has arisen between the new Government in Greece and its lenders. Stranded negotiations may have major negative effects on the financial markets and on the real economy. Another risk is linked to low inflation noted in the euro area that risks bringing even lower inflation expectations in its wake. This is particularly troubling as monetary policy in the euro area is restricted by interest rates already being low. For the real economy the risk is that this will lead to a situation in which low or negative inflation for a longer period will hold back demand. The European Central Bank has launched a programme of large-scale purchases of financial assets for the purpose of supporting a rise in inflation. All the indications are that the measures have had major effects on financial markets, the euro has weakened and stock market prices have been driven up. The effects are to a large extent as expected, but unconventional monetary policy measures of this type are relatively untested and there is a risk that they will contribute to destabilising parts of the financial markets. Sweden has a large financial sector with closely linked banks that to a large extent are dependent on market financing. The

11 financial crisis has shown that such a system can constitute a risk to financial stability. The responsible authorities make the assessment, however, that resilience in the Swedish financial system is good. The high level of household indebtedness is not assessed to be a threat to financial stability as the risk of households causing the banks significant credit losses is deemed to be small. The rapid rise in housing prices means, however, that the risk of a sudden price correction is increasing. A large fall in housing prices combined with high household indebtedness risks having negative consequences for consumption, growth and unemployment. A number of measures to strengthen resilience in the financial system and restrict household indebtedness have been taken in recent years. Finansinspektionen (the Swedish Financial Supervisory Authority) recently referred a proposal for regulations on amortisation requirements for new mortgages that are planned to come into force on 1 August The Government and responsible agencies are closely following developments to see if further measures may become necessary. It is now important to evaluate the measures already taken and the measures planned to be in place shortly, as well as how they interact. An important reason for the failure of the economy to pick up as expected after the financial crisis is that households and companies in many countries, including Sweden, have been careful in consuming and investing. However, recently confidence seems to have increased among households and companies in many countries, not least the euro area. The macroeconomic forecast assumes that recovery in the rest of the world will strengthen in 2015 and Monetary policy has been conducted more expansively in the euro area and the oil price has fallen. The greater scope for consumption and, for many companies, the lower costs this contributes to, could be expressed in terms of even greater confidence among households and companies in the rest of the world, particularly the euro area. Demand for Swedish exports may then rise at a faster pace than is assumed in the forecast and the Swedish economy would then be able to recover faster. 11

12 GDP per capita has not increased since 2007 The most common measure of economic growth is GDP growth. The growth of GDP over time is not, however, any guarantee of a higher living standard for the country's inhabitants. GDP growth also needs to be related to population growth. GDP per capita shows output divided by the number of inhabitants 1 and can thus be used as a measure of economic living standard. Growth in GDP per capita has stagnated Real GDP per capita rose on average about 1 per cent per year from 1980 to In connection with the start of the financial crisis, when GDP growth fell substantially, GDP per capita was also weakened (see figure 1.2). Despite some recovery, GDP per capita was no higher in 2014 than in 2007, even though GDP had then increased by just over 6 per cent. Measured in this way the average living standard has not improved over this period. Figure 1.2 GDP and GDP per capita Index (2000=100) GDP per capita GDP Note: Fixed prices, not calendar adjusted. Sources: Statistics Sweden and own calculations Productivity is important for increasing GDP per capita In the long term productivity development is decisive for GDP growth and thus also for growth in GDP per capita. 2 Productivity is then for the most part determined by technological progress, such as digitalisation. Technological development is driven as a rule by investment, both tangible and intangible. Political decisions can affect the long-term productivity level, such as via the tax system, education system, research and patent legislation. Growth in GDP per capita over time tends to develop in the same way as productivity (see figure 1.3). The weak trend in GDP per capita since 2007 is thus due to weak development in productivity while population growth has been strong. However, the increase in number of hours worked did not correspond with the population increase. 1 GDP per capita is a rough measure of welfare. When income distribution is very uneven GDP per capita may increase without an average inhabitant becoming better off. Moreover GDP describes a country s output and not the incomes of the country s inhabitants. In comparisons between countries real GNI (gross national income) per capital is therefore sometimes used to give a fairer view. In the short term, however, all per capita measurements vary more or less with the actual GDP trend. See Konjunkturläget August 2005 (National Institute of Economic Research). 2 Here is meant labour productivity, in other words output volume per hour worked. 12

13 Figure 1.3 Productivity and GDP per capita Annual percentage change GDP BNP per capita Population Befolkning Produktivitet, Productivity, trend Note: Fixed prices, not calendar adjusted. In GDP per capita above the population aged is used to agree with the calculation of productivity. Productivity growth is smoothed since actual data are very volatile. Sources: Statistics Sweden and own calculations. In general productivity is lower in more labourintensive industries. In recent years output has mainly increased in the service producing industries in the business sector, while development in the goods producing industries was weaker. Thus a greater proportion of resources are found in industries with lower productivity. A closer analysis of productivity growth shows, however, that changes in composition between industries can only explain a small part of the decrease in productivity growth. The weak productivity growth seems to be primarily due to a general deterioration in productivity growth in the industries. The effects of changed labour force composition are also deemed to be small, for example based on studies of how composition changes have affected wage growth. 3 In Sweden productivity growth has been particularly low in the part of the economy most affected by international demand, i.e. the export industry. 4 This has not only led to weak actual productivity growth but also had negative effects on the trend productivity growth rate. A possible explanation for poorer productivity growth may be that uncertainty about the economy has made companies hold off on their productivity enhancing investments. Another possible explanation is that the low interest rate level after the financial crisis could have reduced the pressure on companies with weak profitability, thus preventing effective reallocation of resources. This may have happened in that companies with a relatively lower productivity have not been eliminated to the same extent as in previous recessions. 5 Factors of a more structural nature, such as lower productivity growth in the information and communication technology sector (ICT) in relation to the early 2000s, may also have affected total productivity growth. Digitalisation may, however, have had effects on productivity growth outside the ICT sector that are difficult to measure. All factors are considered not only to have led to weak actual productivity growth but also to have had negative effects on the trend productivity growth rate. At the same time as actual productivity growth has been weak there are indications that firms' capacity utilisation has been relatively close to the average level in recent years. This indicates a weakening of trend productivity growth. Broader measure of welfare GDP measures the production of goods and services in the economy and is sometimes supplemented by other measures that unlike GDP include state of health, gender equality or resource utilisation. Examples of other measures of economic growth and welfare are The OECD s Better Life Index and the UN s Inclusive Wealth Index. 3 Wage is often used as an approximation of individual productivity. The National Institute of Economic Research (Konjunkturläget March 2015) shows that during the period a changed composition in terms of level of education, age, occupation and form of employment had a limited effect on aggregated wage growth. 4 This is supported for example by statistics from the Business Tendency Survey, which show that the percentage of firms that consider insufficient demand to constitute the main obstacle to higher output has been considerably higher in industry than in the construction industry or service industries, for example. 5 An analysis of developments in the United Kingdom shows that creative destruction has been less extensive since the financial crisis. This means that firms with lower productivity than their competitors have not been eliminated, thus reducing average productivity growth. Tightening of credit terms also seems to have had a negative effect on entry into various product markets, despite low interest rates. See The UK productivity puzzle, Quarterly Bulletin Q2, Bank of England,

14 During the electoral period new measures of societal development will be developed that, apart from GDP will also take environmental impact, quality of life and social factors into account. At present an inquiry is tasked with mapping and proposing measurements of life quality development in Sweden (ToR 2014:68). The result of the inquiry will form an important part of that work. 14

15 Income differentials have increased in Sweden It is not only growth that is important for a country s prosperity, but also how the increased prosperity is distributed among the population. In recent decades, Sweden has become a richer country, but a country with wider income gaps. Between 1995 and 2013 the real economic standard for the median household increased by 59 per cent, which is equivalent to an average of 2.6 per cent per year (see figure 1.4). The income increase has not, however, been evenly distributed. Income inequality has increased since those with higher incomes have enjoyed stronger growth than those in the middle of the scale, who in turn have done better than those with lower incomes. Income for the tenth in the lowest income bracket has been more or less unchanged since Figure 1.4 Household disposable income in various parts of income distribution Income in 2015 prices, SEK Income group 10 Income group 8 Median income Income group 3 Income group Note: All individuals in the population have been ranked by household disposable income adjusted for dependency ratio and then split into ten groups of equal size. The income level refers to the average equivalised disposable income for the respective income group. Sources: Statistics Sweden and own calculations. There are several explanations for the general phenomenon of increased income inequality. Increased income from capital combined with lower income-equalising taxes are the most important factors behind income differentials being greater in 2013 than in In the 2000s the total tax take decreased and thus also the equalising effect of taxes. During the period a tax reduction for the national pension contribution was introduced for example and an in-work tax credit. Further real estate tax and wealth tax were abolished. The role played by pay differentials in income inequality was about the same in 2013 as in Pay differentials increased in the 1990s, but wages have not contributed to increased income inequality in the 2000s. The fact that the lowest incomes have increased so slowly can be explained by transfers constituting a larger proportion of incomes there than in the higher income brackets. Transfers are normally linked to the price trend, or set in fixed amounts. The price trend has been weaker than wage growth. The percentage of people with a low economic standard has increased since The main part of the increase has taken place since 2006(see figure 1.5). This is in part due to the introduction of the in-work tax credit, which has meant a relatively strong boost to incomes in the middle of the spread. In addition fewer are covered by income insurance for unemployment and sickness. The benefit levels of these insurance schemes have also been reduced. Life opportunities are affected by how high an individual s income is, not only in absolute terms, but also in relation to others. A relatively low income is of great importance for example when buying a home. Increased income gaps risk leading to increased segregation. Figure 1.5 Proportion of individuals with a low economic standard Per cent Note: Low income is counted as 60 per cent of the median income for the year in question. Sources: Statistics Sweden and own calculations. In general women have lower disposable incomes than men. In 2013 women of working age had on average 82 per cent of men s disposable annual income. The difference is equivalent to SEK in 2015 prices. The income differential between the sexes has not decreased appreciably in the past 20 years (see figure 1.6). 15

16 Figure 1.6 Individual disposable income for women and men aged 20-64, Median income in 2015 prices, SEK Women/Men (right axis) Women Men Note: Individual disposable income is made up of individual income and shared household income divided between the adults in the household. Sources: Statistics Sweden and own calculations. Per cent Women s lower incomes can be explained in part by gender segregation in the labour market. Women and men work largely in different occupations, sectors and positions, where women are overrepresented in occupations and sectors with lower wages (see table 1.4). The largest occupational group among women; assistant nurses, have a monthly salary of about SEK , compared with the largest occupational group among men, commercial sales representatives, who have a monthly salary of SEK Table 1.4 Average monthly salary in the largest occupational groups for women and men 2013 Total number of employees, percentage of women and monthly salary Number Percentage of women Monthly salary Women Men W/ M Women Assistant nurses, nursing auxiliaries etc Care assistants, personal assistants etc Child-care workers etc Pre-school teachers and recreation instructors Sales representatives, specialist retail trade Men Commercial sales representatives Systems engineers and programmers Heavy truck and lorry drivers Carpenters and joiners etc Stock clerks etc Note: Refers to monthly salaries Sources: National Mediation Office and Statistics of Sweden. Women s lower disposable incomes can also be explained by women working part time to a greater extent than men and having more time off due to parental leave and ill health. Women s working conditions are also more insecure than men s, with more temporary employment contracts, and many women work less than they would like. One explanation for women s shorter working hours is that they perform a greater part of the unpaid work in the home than men; on average five and a half hours per week. It is also considerably more common for women to work part time to take care of relatives, children and older people. On top of this, the work and working hours in many femaledominated sectors are organised in such a way that there are few full-time positions. 1.2 The direction of fiscal policy No scope for unfunded reforms At the beginning of the financial crisis the general government sector had a considerable 16

17 surplus. In this situation expansive fiscal policy was justified to dampen the negative effects of the financial crisis on growth and unemployment. However, in addition the previous Government implemented extensive unfunded reforms, mainly tax cuts, even in recent years despite improvement in the economy. Extensive unfunded measures, combined with the drawn-out economic recovery, have thus contributed to considerable general government deficits. The public sector reported a deficit in 2014 of almost 2 per cent of GDP, which was the largest deficit since the crisis of the 1990s. Net lending is far below the target level of public sector net lending amounting to 1 per cent of GDP on average over a business cycle. A clear indicator of this is that structural net lending 6 has deteriorated considerably in recent years and in 2014 was about 2 percentage points below the target level. The Government s overall assessment is that net lending has clearly fallen short of the target in recent years. Net lending therefore needs to be strengthened going forward. The pace at which a return to the target level should take place is based on an aggregate assessment with reference to stabilisation policy, distribution policy and structural policy premises. The Government considers that a gradual recovery will take place in the Swedish economy in 2015 and However, unemployment continues to be high and the protracted recession risks leading to unemployment becoming entrenched at high levels. From this perspective it is desirable that fiscal policy supports economic recovery, for example through increased public investment that will help to push down unemployment. In 2015 the Riksbank decided on a negative policy rate. If the low interest rates do not lead to increased real investment there is a risk of a build-up of imbalances. Consequently it is important that fiscal policy takes an active role in widening the bottlenecks that harm the investment climate, thus creating conditions for new investments. 6 The term structural net lending refers to the level of net lending unaffected by the business cycles in the economy. The risks of weaker growth than in the forecast are significant, where poor economic prospects in the euro area are considered to constitute the single largest risk. Therefore it is important that there are margins for meeting a severe deterioration in the economy. The Government's overall assessment is that the reforms proposed in the Spring Amending Budget Bill for 2015 must be fully financed. This fiscal policy focus is reasonable, both as regards creating margins to manage a deep recession and avoiding putting the ongoing economic recovery at risk. Given the current forecasts the starting point is that all reforms in the Budget Bill for 2016 should also be fully funded. Review of target level for net lending The fiscal policy framework has served Sweden well since it was established in the mid-1990s. An important part of the fiscal policy framework is that a target is set for net lending. When the target for net lending of 1 per cent of GDP on average over a business cycle was established in the mid-1990s three main reasons were given. The first was to restore confidence in the public finances and reduce the need for foreign borrowing. The second was to provide scope for stabilisation policy and the third was to help the public sector meet the demographic challenges ahead. The intention was not that the public sector should run a surplus of 1 per cent for ever, but that the level of the target could be reviewed in the future. Confidence in public finances has been considerably strengthened and the need for foreign borrowing has decreased substantially since the target was introduced. The fiscal policy framework contributed to a high degree in enabling a rapid restoration of confidence in the Swedish State s ability to meet its commitments to both lenders and citizens. Public sector gross debt has decreased from about 70 per cent of GDP when the surplus target was introduced, to just over 40 per cent today. At the same time the borrowing costs of Swedish central government have decreased considerably since 1997 and the public sector now has substantial net assets. Arguments for a policy target for public sector net lending are that it helps to strengthen control over long-term public finances and 17

18 clarify the need for tax funding of public expenditure. The target for net lending also clarifies the need to make priorities between different expenditure areas. In addition fiscal policy must be able to contribute to stimulating the economy in downturns and slowing it down in upturns. Consequently in good times net lending needs to provide scope for weakened net lending when times are harder. This is possible in that the target for net lending is formulated as an average over a business cycle. A lower target level should also provide sufficient margins to deal with future downturns. Sweden s low central government debt and large net wealth means that Sweden has good resilience to manage future financial and economic crises without jeopardising confidence in public finances. The demographic pressure on public finances predicted when the surplus target was established is now here. The percentage of the population that is retired in relation to the working population has been increasing since the middle of the first decade of the 2000s. In a few years the percentage of people aged 80 and over will start to rise sharply, which means that the need for elderly care and medical care will increase. Demographic pressure affects public sector income when a smaller percentage of the population is in gainful employment. One consequence of the ageing population is a decline in savings in the old-age pension system. From having an average surplus of 0.7 per cent of GDP between 2000 and 2015 savings in the old age pension system are expected to be markedly lower in the coming 15 years. This is a consequence of fewer people paying into the system and more receiving pension income. Since savings in the old age pension system are included in total net lending in the public sector a retained target level of 1 per cent of GDP requires central government to increase net lending to compensate for the lower saving in the old age pension system. As the old age pension system is constructed to be stable over time in terms of government finances it is difficult to justify such compensation. At the same time the Government sees it as a strength that the target for net lending continues to include the entire public sector, as does the regulatory framework of the EU Stability and Growth Pact. Given the weak state of the economy it may be a good time to change the target level. Reducing the target level in an upturn would stimulate the economy at the wrong time and give an undesirable jerkiness to fiscal policy. All in all the Government therefore considers it appropriate to analyse the consequences of reducing the level now. In light of this the Government has instructed the National Institute of Economic Research to analyse the consequences of changing the target level for net lending from 1 per cent of GDP on average over a business cycle to 0 per cent of GDP on average over a business cycle (ref no Fi2015/1488). The analysis will cover the short and long-term effects on public finances, sustainability of fiscal policy and the possibilities in the future to meet major disruptions to the economy with fiscal policy measures. Moreover any effects on employment, unemployment and level of output in the short and long term are to be assessed. A reference group consisting of relevant academic expertise will be linked to the assignment. The inquiry report is to be submitted to the Government no later than 14 August It is important to note that any change in target level would not entail creating any fiscal space in the near future. In the longer term, however, space will be made available for important public investment in welfare, infrastructure, housing, climate adaptation, research and education. Increase in established expenditure ceiling levels The expenditure ceiling constitutes an upper limit for the central government budget expenditure level. The expenditure ceiling enables the Riksdag and Government to control and direct expenditure. The Riksdag s decision on the expenditure ceiling is one of the tools for giving the budget process its central mediumterm perspective. A multi-year expenditure ceiling means that the decision on total expenditure to a greater extent than would otherwise be the case is based on the long-term production capacity of the economy and what is considered to be a reasonable tax take. A medium-term oriented budget process with a multi-year expenditure ceiling clarifies the effects of political decisions for several years 18

19 after the current budget year and creates a binding long-term perspective in budget decisions. The Riksdag has decided on an expenditure ceiling up to and including After the level of the expenditure ceiling is determined by the Riksdag it is not normally changed. However, the fiscal policy framework allows space for a new Government to propose new expenditure ceiling levels for years already determined. Without such a mechanism a new Government s ability to make changes in fiscal policy would be severely restricted (see Government Communication 2010/11:79 and Committee Report 1995/96:FiU10 p. 69). The change in fiscal policy focus the Government intends to implement during the electoral period assumes an increase in the levels of the expenditure ceiling determined for Consequently in the Budget Bill for 2015 the Government proposed fiscal policy based increases in the expenditure ceiling levels determined by the Riksdag for these years (Govt. Bill. 2014/15:1 Proposed central government budget, budget statement etc., sections and 5.4.2). The Government s proposal was rejected when the Riksdag voted for another Budget Bill (Committee Report 2014/15:FiU1, Riksdag Communication 2014/15:29). The levels determined for the expenditure ceiling by the Riksdag thus do not reflect the Government's view of how the level of central government expenditure should be restricted. The focus of policy in the Budget Bill for 2015 remains and the Government will therefore return to the Riksdag in the Spring Amending Budget Bill for 2015 proposing that the already established expenditure ceiling levels for be increased for reasons justified by fiscal policy. It is proposed to increase the expenditure ceiling levels for 2015, 2016 and 2017 by SEK and 52 billion respectively. The reasons for the Government s proposals are the same as the Government described in the Budget Bill for 2015 and the increases now proposed are, apart from certain technical adjustments, the same as in the Budget Bill. For 2018 and 2019 the Government only submits an assessed level for the expenditure ceiling. The assessment for 2019 is that the level of the expenditure ceiling should be SEK billion, which is equivalent to 28.6 per cent of potential GDP. The expenditure ceiling then allows an increase in expenditure during the electoral period that enables the Government to implement priority reforms in both the Spring Amending Budget Bill for 2015 and coming Budget Bills during the electoral period. The implementation of reforms on the expenditure side can take place after reconciliation with the target level for net lending and the increased tax take that the reforms may require. Table 1.5 Expenditure ceilings SEK billion unless otherwise stated Expenditure ceiling determined by the Riksdag Government s proposed expenditure ceiling Government s proposed expenditure ceiling, per cent of potential GDP 28,1 28,2 28,4 28,5 28,6 Ceiling-restricted expenditure Budgeting margin Budgeting margin, per cent of ceiling restricted expenditure 3,7 3,3 4,0 5,6 8,1 Budgeting margin, per cent of GDP 1,0 0,9 1,1 1,5 2,1 Net lending in the public sector, per cent of GDP -1,4-0,7-0,4 0,0 0,4 1 The Government s assessment of the expenditure ceiling levels for 2018 and 2019 in this Government Bill. Source: Own calculations. Proposed Spring Amending Budget for 2015 The Government s Spring Amending Budget Bill for 2015 contains proposals that have budget effects beyond 2015 on both the expenditure side and the revenue side of the central government budget. The Bill is based on an agreement between the government parties and the Left Party. The premise for the proposals submitted is the economic policy presented by the Government in the Budget Bill for The Government s political priorities of that Budget Bill remain in place. The remaining proposals not presented in the Spring Amending Budget Bill for 2015 will be implemented at a later date. In the Spring Amending Budget Bill for 2015 there is a further proposal that, due to the short period available for a new Government after a Riksdag election, was not possible to prepare in 19