Prop. 2006/07:1 Bilaga 2

PROP. 2006/07:1 BILAGA 2

Appendix 2 Sweden’s Economy

PROP. 2006/07:1 BILAGA 2

Appendix 2

Sweden’s Economy

Contents

Foreword ...... 9

Summary...... 9

1 International developments ...... 11 1.1 United States...... 12 1.2 The euro area...... 17 1.3 Asia ...... 20 1.4 Outlook for Swedish exports...... 23 1.5 Oil prices ...... 25

2 Financial markets...... 27 2.1 Developments outside Sweden ...... 27 2.2 Developments in Sweden ...... 29

3 Swedish demand and output...... 32 3.1 Exports ...... 33 3.2 Investment...... 36 3.3 Stockbuilding ...... 40 3.4 Household consumption expenditure...... 41 3.5 General government consumption ...... 45 3.6 Imports ...... 46 3.7 Output ...... 47 3.8 Current account and gross lending...... 50 3.9 GNI...... 50

4 Labour market, wages, inflation and resource utilisation ...... 52 4.1 Labour market...... 54 4.2 Wages...... 60 4.3 Inflation ...... 63

5 General government sector...... 70 5.1 General government finances...... 70 5.2 Fiscal policy targets...... 74 5.3 Fiscal policy...... 76 5.4 Central government...... 77 5.5 Old-age pension system ...... 78

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5.6 Local government ...... 79

6 Alternative scenarios...... 83 6.1 Base scenario ...... 83 6.2 High-growth scenario ...... 83 6.3 Low-growth scenario...... 84

7 Sustainability of public finances...... 86

8 Comparison of forecasts ...... 92 8.1 Comparison with the previous forecast for 2006...... 92 8.2 Comparison with the previous forecast for 2007...... 93

Tables Appendix ...... 95 Tables Chapter 1 International developments ...... 95 Tables Chapter 2 Financial Markets ...... 96 Tables Chapter 3 Swedish demand and output...... 97 Tables Chapter 4 Labour market, wages, inflation and resource utilisation ...101 Tables Chapter 5 General government sector...... 103

Explanatory boxes Could the slowdown in the property market lead to a hard landing in the United States?……………………………………………………………...……15 Strong Asian growth despite US slowdown…………………………..…...…..22 Wallet version of household disposable income………………………………43 Different statistical sources provide a varying picture of labour market developments…………………………………………………………………….59 2007 wage round…………………………………………………………...……62 Why is inflation lower in Sweden than in the euro area?…………...…………68 Medium-term tax forecasts……………………………………………………..82

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Tables

Selected statistics ...... 10 Table 1.1 GDP growth, CPI, unemployment and world market demand ...... 12 Table 1.2 Sweden’s largest export markets and their share of global GDP...... 23 Table 1.3 Exports of goods by type ...... 25 Table 2.1 Interest and exchange rate assumptions...... 31 Table 3.1 Demand and output...... 32 Table 3.2 Exports of goods and services as well as change in export prices...... 34 Table 3.3 Investment...... 38 Table 3.4 Household disposable income ...... 41 Table 3.5 Household financial wealth...... 42 Table 3.6 Imports of goods and services as well as change in import prices...... 47 Table 3.7 Business sector output...... 48 Table 3.8 Current account balance...... 50 Table 3.9 Components of saving...... 50 Table 3.10 Gross national income...... 51 Table 4.1 Selected statistics ...... 52 Table 4.2 Participants in cyclical labour market policy programmes...... 56 Table 4.3 Nominal wages...... 61 Table 4.4 Consumer prices...... 67 Table 5.1 General government finances...... 70 Table 5.2 The general governments revenues and expenditures ...... 71 Table 5.3 Taxes and charges...... 72 Table 5.4 General government expenditures...... 74 Table 5.5 Indicators for the surplus target: Structural balance and average of net lending...... 76 Table 5.6 Expenditure ceiling and government expenditure...... 76 Table 5.7 Fiscal impulse and fiscal stance ...... 77 Table 5.8 Central government finances ...... 77 Table 5.9 Central government net leading and budget balance...... 78 Table 5.10 Budget balance and central government debt ...... 78 Table 5.11 The old pension system...... 79 Table 5.12 Taxes and grants ...... 80 Table 5.13 Central government grants according to National Accounts...... 80 Table 5.14 Local government sector’s finances...... 81 Table 6.1 Selected statistics, base alternative...... 83 Table 6.2 Selected statistics, high growth scenario ...... 84 Table 6.3 Selected statistics, low growth scenario ...... 85 Table 7.1 Macroeconomic assumptions...... 88 Table 7.2 Public finances ...... 89 Table 8.1 The Ministry of Finance’s forecasts for 2006 in the 2006 Spring Fiscal Policy Bill and the 2007 Budget Bill ...... 92 Table 8.2 The Ministry of Finance’s forecasts for 2007 in the 2006 Spring Fiscal Policy Bill and the 2007 Budget Bill ...... 93

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Diagrams

1.1 GDP growth in key countries/regions ...... 11 1.2 Investment in key countries/regions ...... 11 1.3 Employment in the construction industry ...... 13 1.4 Housing investment and housing starts ...... 13 1.5 House prices slowing more and more...... 13 1.6 General government sector net lending and the current account deficit ...... 14 1.7 Core inflation too high for comfort ...... 14 1.8 Household saving ratio and Fed Funds ...... 14 1.9 Productivity growth slowing in the United States...... 17 1.10 Exports and investment in the euro area ...... 18 1.11 Housing investment in Germany and Spain...... 18 1.12 Industrial production in selected countries...... 18 1.13 European Commission’s confidence indicator...... 19 1.14 Employment growth in Germany, Spain and the euro area as a whole...... 19 1.15 Change in number of full-time and all employed ...... 21 1.16 Global GDP and World market demand, WMD...... 24 1.17 Price of Brent crude ...... 25 2.1 Ten-year bond yields in Germany, the United States and Sweden...... 27 2.2 Key interest rates in the euro area, Sweden and the United States ...... 28 2.3 US dollar against yen and euro...... 29 2.4 Stock market performance in the euro area, the United States and Sweden...... 29 2.5 Spread between ten-year bond yields in Sweden and Germany ...... 29 2.6 TCW index ...... 30 3.1 GDP ...... 32 3.2 World Market Demand (WMD) and Swedish export growth...... 34 3.3 Manufacturing industry's unit labour cost in Sweden compared with 11 OECD countries ...... 34 3.4 Competitive situation for Swedish industry...... 35 3.5 Exports of goods and "other services"...... 36 3.6 Investment ...... 36 3.7 Investment share of GDP...... 37 3.8 Capacity utilisation in industry ...... 37 3.9 New building starts ...... 39 3.10 Building permits and building starts ...... 39 3.11 Household consumption expenditure ...... 41 3.12 Household disposable income and consumption expenditure...... 42 3.13 Household liabilities ...... 44 3.14 Interest expenditure ...... 44 3.15 Household expectations about the economy 12 months ahead...... 44 3.16 Household own savings ...... 45 3.17 Industrial output and export of goods...... 48 3.18 Labour shortage in construction ...... 48 3.19 Demand for private services ...... 49 4.1 Gaps for different variabels ...... 53 4.2 Employment and labour supply ...... 54 4.3 Newly reported vacancies and employment...... 55 4.4 Hiring plans of firms...... 55 4.5 Employment and labour force...... 56

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4.6 Absence and employment ...... 57 4.7 Labour force participation in different age groups...... 58 4.8 Open and total unemployment...... 60 4.9 Employment gap and wage growth ...... 61 4.10 Consumer prices...... 63 4.11 Effects on CPI inflation of prices for various goods and services ...... 64 4.12 Exchange rate and imported inflation ...... 64 4.13 Inflation and labour shortage in wholesale and retail trade ...... 65 4.14 Employment gap and inflation ...... 65 4.15 Electricity prices ...... 66 5.1 Consolidated gross debt...... 70 5.2 Taxes and charges...... 71 5.3 Expenditure...... 73 5.4 Number of people in social insurance system ...... 73 5.5 Local government finances ...... 81 7.1 The population of Sweden ...... 86 7.2 Demographic dependency ratios ...... 86 7.3 Population aged 20–64...... 87 7.4 Central government debt ...... 90

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Foreword sectors of the economy. The growth rate this year is expected to be the highest since the be- This appendix to the Government Budget Bill ginning of the decade, and the economy will for 2007 presents the Ministry of Finance’s fore- continue to grow at a good rate in 2007. Bur- cast of global and Swedish economic develop- geoning international demand and Swedish ments in 2006 and 2007. It also contains an esti- firms’ good competitiveness spell rapid growth mate of developments in 2008 and 2009 based on in total exports, especially this year. This strong assessments of the resource situation and the export growth means that industrial output will economy’s potential growth rate. also increase at a good rate. The forecast is based on data from Statistics Low interest rates, high capacity utilisation in Sweden (SCB), the European Commission and industry, and strong demand for housing have the National Institute of Economic Research led to investment growing very quickly in recent (NIER), among others. The Ministry of Finance years. However, these high levels of investment is wholly responsible for the assessments pre- mean that production capacity in the economy sented here. Henrik Braconier, director at the has increased rapidly. Growth in investment is Ministry of Finance, is responsible for the cal- therefore expected to slow. Housing investment culations. This appendix is based on information is forecast to stagnate over the next few years, available on 6 October 2006. due partly to a growing labour shortage in the construction sector. Household consumption is expected to grow at a good rate. The value of total household Summary wealth has increased sharply in the last three years. Furthermore, disposable household income is set to grow, due largely to the tax cuts The global economy has grown rapidly in recent for households presented in this Bill. Continued years. The high growth rate has been fuelled by low interest rates and increased employment are an expansionary monetary policy in the OECD also contributing to the good growth in income. area over a number of years, together with his- There is a certain chance of employment and torically low long-term interest rates. Although consumption growing even faster than assumed monetary policy has gradually been tightened, in this forecast, which could lead to a situation low interest rates in the global economy as a similar to that in 1998–2000, when consumption whole are still stimulating demand this year and grew very strongly. General government con- will, to some extent, continue to do so in 2007, sumption will also rise considerably in 2006 and which means that growth is expected to remain 2007, due partly to local government finances good both this year and next. being better than for a long time. Over the last three years the strong growth in As a result of this strong demand growth and demand in the US economy has accounted for a a stronger krona, imports are expected to grow substantial share of the growth in the global substantially during the forecast period. All in economy. This has led to a risk of a slowdown in all, GDP is forecast to grow by 4.0 per cent this the US economy having tangible consequences year and 3.3 per cent in 2007. Calendar-adjusted for the global economy, and has also contributed GDP growth, which takes account of the num- to a US current account deficit, which is proba- ber of working days during the year, is forecast bly unsustainable in the longer term. This risk to be 4.4 per cent this year and 3.4 per cent in may be diminishing now, as the Asian econo- 2007. GDP growth is projected to be 3.1 per mies are continuing to grow quickly and the cent in 2008 and 2.7 per cent in 2009. euro area is recovering, which will partially com- Last year brought a turnaround in the labour pensate for weaker growth in the United States. market when employment began to recover However, if the slowdown in the US economy is during the second half of the year. Employment unexpectedly sharp, growth in the global econ- has continued to grow in 2006, and continued omy could slow more than assumed in this fore- strong growth in demand in the Swedish econ- cast. omy will pave the way for further increases in The Swedish economy began to recover in employment in 2007 and 2008. The improved 2004 as a result of a strong upswing in exports, situation in the labour market has meant that la- and growth has since spread gradually to other

9 PROP. 2006/07:1 BILAGA 2 bour supply increased in 2005 and has continued general government sector will fall sharply as a to do so in 2006. The measures to stimulate sup- percentage of GDP during the forecast period. ply announced in this Bill mean that labour sup- General government net lending is expected to ply is expected to continue to grow at a good amount to 2.3 per cent of GDP in 2007, before rate. Growing labour supply is essential for a rising gradually in 2008 and 2009. These financial lasting increase in regular employment. The surpluses, together with the planned sales of forecast increase in labour supply means that no state shareholdings, mean that the general gov- general labour shortages are anticipated in the ernment sector’s consolidated gross debt is fore- next few years even if employment grows rapidly cast to fall sharply from 50.3 per cent of GDP in during the forecast period. As a result, both 2005 to 33.0 per cent in 2009. wage growth and inflation are expected to rise only slowly. Low inflation means in turn that Selected statistics only a moderate increase in Swedish interest Percentage change, unless otherwise stated rates is expected over the next few years. 2005 2006 2007 2008 2009 However, estimating resource utilisation is GDP 2.7 4.0 3.3 3.1 2.7 complex, and the associated uncertainty is un- GDP, calendar adjusted 2.7 4.4 3.4 3.0 2.7 usually high at present. Not only is it difficult to Number of employed 0.8 1.7 1.5 1.0 0.6 gauge the degree to which the government’s Regular employment rate1 77.4 77.7 79.0 79.8 80.2 policies will stimulate labour supply, but there is Open unemployment2 6.0 5.6 5.8 5.0 4.3 considerable uncertainty as to when these meas- 2,3 ures will take effect. Section 6 of this appendix Total unemployment 8.7 8.7 7.7 6.3 5.8 analyses how the level of available resources in Labour market policy programmes4 123 143 91 64 70 the labour market will impact on economic developments. UND1X (yearly average) 0.8 1.3 1.9 1.5 1.8 Although employment is growing strongly CPI (yearly average) 0.5 1.6 2.5 2.0 1.9 this year, increasing labour supply means that General government net 5 open unemployment will fall appreciably less lending 2.8 2.8 2.3 2.6 3.1 than employment rises. In 2007 open unem- Taxes and charges,5, 6 51.1 50.5 48.1 47.8 47.6 ployment is expected to be virtually unchanged, General government 53.5 52.8 51.3 50.5 49.8 5 due to continued labour supply growth, partly as expenditure a result of cutbacks in labour market policy pro- Consolidated gross debt5 50.3 46.5 41.5 37.4 33.0 grammes. However, total unemployment, which 1 Number of employed in the age group 20-64, excluding employed in labour market policy programmes, as per cent of population in that age group. also includes participants in labour market policy 2 Per cent of labour force. 3 Number of unemployed in open unemployment and people in labour market programmes, will fall in 2007. Unemployment is policy programmes. expected to fall at a good rate in 2008 and 2009 4 Number of people in labour market policy programmes, thousands. 5 Per cent of GDP. as a result of continued good employment 6 Including taxes to EU. growth and slower labour supply growth. All in Sources: Statistics Sweden, National Labour Market Board and Ministry of Finance. all, total unemployment is forecast to be 8.7 per cent this year and fall to 5.8 per cent in 2009. The regular employment rate is expected to rise during the forecast period to an estimated 80.2 per cent in 2009. General government finances have strengthened in recent years, and general government net lending is expected to be equivalent to 2.8 per cent of GDP this year. The tax cuts and other reforms now being proposed are estimated to be equivalent, after financing, to 0.2 per cent of GDP in 2007, rising to around 0.4 per cent of GDP in 2008 and 2009. Together with previously adopted measures, the reforms entering into force in 2007 are equivalent to 0.6 per cent of GDP. Both income and expenditure in the

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1 International developments Diagram 1.2 Investment in key countries/regions Percentage change Favourable growth in the global economy 15

Global growth is expected to remain strong both 10 this year and next. As available resources are 5 taken into use and the monetary policy stimulus ebbs, global GDP is forecast to grow more 0 slowly. Global growth is expected to be driven -5 less by brisk industrial activity and more by an Unites States Japan -10 upswing in consumption. Euro area After several years of strong growth, the US economy has slowed. Growth in the euro area -15 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 stagnated last year but recovered significantly in Sources: National sources, Eurostat and Ministry of Finance. the first half of 2006. Growth in Japan has strengthened gradually over the last three years. Next year the US economy is expected to More growth drivers in the global economy weaken, while growth in the euro area and Japan should remain favourable (see Diagram 1.1). Strong consumption growth in the United Global GDP growth is forecast to be 5.0 per States has created favourable conditions for cent this year and 4.6 per cent next year. Global growth in the rest of the world in recent years. GDP is then projected to increase by 4.2 per Now that the US economy is slowing, it is ex- cent in 2008 and 4.0 per cent in 2009, which is in pected that, alongside China, the euro area and line with its average rate of growth over the last Japan will play more important roles as growth decade. drivers. As household consumption has strengthened, Diagram 1.1 GDP growth in key countries/regions the euro area and Japan have become better Annual percentage change equipped to ride out a slowdown in US demand. 5 At the same time, economic activity in other re-

4 gions, primarily the growth economies of Asia and Latin America, is expected to continue to 3 grow rapidly next year. Thus the impact on the 2 global economy of a slowdown in the US econ-

1 omy can be mitigated and is predicted to be relatively limited. 0 Unites States Japan -1 Euro area Monetary policy stimulus ebbs -2 1996 1998 2000 2002 2004 2006 2008 Despite rising energy prices and dwindling avail- Sources: National sources, Eurostat and Ministry of Finance. able resources, underlying inflation in the In recent years the global economy has been fu- OECD area has been low in recent years. Several elled primarily by a strong upswing in invest- factors have helped to curb inflation, thus giving ment. Business sector investment has been the central banks scope to pursue clearly expan- stimulated by robust global demand coupled sionary monetary policy. Increased globalisation with good profit margins and low interest rates. has meant that competition has become stiffer, However, investment activity in the global productivity has improved, and wage growth has economy’s most important regions is expected slowed. The central banks’ credibility in terms of to peak this year and slow significantly next year promoting price stability has also grown gradu- (see Diagram 1.2). ally over the last decade. Several leading central banks have recently tightened their monetary policy in the light of rising inflation expectations and higher inflation. In reaching their monetary policy decisions,

11 PROP. 2006/07:1 BILAGA 2 many central banks have increasingly been con- had a limited impact on developments in the real sidering not only their efforts to meet inflation economy, further growth in oil prices could re- targets but also the risks associated with rapid sult in rising inflation expectations and higher credit expansion and soaring house prices. inflation. This would lead in turn to higher interest rates, which could slow the economy further Table 1.1 GDP growth, CPI, unemployment and world in a situation where demand is already faltering. market demand Percentage change unless otherwise stated

2005 2006 2007 2008 2009

GDP-growth 1.1 United States World 4.7 5.0 4.6 4.2 4.0 United States 3.2 3.3 2.5 2.8 3.0 Soft landing Japan 2.6 3.0 2.5 2.0 1.7 After three years of strong growth, the US Euro area 1.4 2.3 1.9 1.9 1.9 economy is showing clear signs of slowing. GDP Germany 0.9 2.0 1.5 1.4 1.4 grew by a modest 0.6 per cent from the first to Nordic countr. excl. Sweden 2.8 3.2 2.4 2.4 2.5 the second quarter, which can be compared with Norway 2.3 2.5 2.5 2.7 2.7 growth of 1.4 per cent in the first quarter. Lower Denmark 3.2 2.9 2.1 2.0 2.1 growth in house prices, combined with rising Finland 2.9 4.3 2.8 2.6 2.6 gasoline prices and slightly more subdued em- CPI1 ployment growth, held back household con- United States 3.4 3.5 2.7 2.5 2.4 sumption. Housing investment fell sharply, and Euro area 2.1 2.3 2.2 2.0 1.9 business sector investment was down from the Japan -0.3 0.6 1.3 1.9 2.0 first quarter. Unemployment, percentage There is much to suggest that GDP growth is of labour force2 set to fall even further. The tightening of mone- United States 5.1 4.7 5.1 5.2 5.2 tary policy has yet to impact fully on growth. Euro area 8.6 7.9 7.8 7.7 7.7 Although oil and gasoline prices have dropped Japan 4.4 4.1 3.9 3.7 3.7 back in recent months, they remain high. The 3 slowdown in the property market has also wors- World market demand 7.5 9.2 6.5 6.5 6.6 ened, which will further undermine growth both 1 HICP for the euro area and CPI for the United States and Japan. 2 Eurostat definition for euro area and national definition for the United States and this year and next. Japan. 3 World market demand is an estimate of import demand in all countries to which Swe- den exports. Sources: National sources, Eurostat and Ministry of Finance. Property market to undermine growth next year

The property market may have been the most Global risk picture important driver in the US economy during the economic upswing. It is estimated that up to one While a mild slowdown in the global economy is third of employment growth over the last three the main scenario in the present forecast, there years has been due to developments in the prop- are a number of downside risks. The slowdown erty market. The decrease in employment in the US economy due to the cooling of the growth in the construction industry is one im- housing market may have been underestimated. portant reason that employment growth in the A sharp drop in growth in the United States economy as a whole has fallen in the last six could have appreciable effects on the global months (see Diagram 1.3). economy. The slowdown of activity in the property Even with weaker growth in household con- market now appears to be accelerating. Confi- sumption in the United States and a slightly dence in the construction sector has dropped to weaker dollar, the risk remains of an abrupt cor- its lowest level for 15 years, and it is taking rection of global savings imbalances. longer and longer for houses to sell. Applica- There is also a risk of oil prices surging as a re- tions for building permits and housing starts sult of geopolitical unrest. Although the in- have both fallen and are now down at 2002 and creases in oil prices over the last two years have 2003 levels respectively. Housing investment fell

12 PROP. 2006/07:1 BILAGA 2 in the second quarter, and the decline is expected to fall. Higher mortgage interest rates have to accelerate for several more quarters (see Dia- eroded demand for housing, and mortgage appli- gram 1.4). Lower housing investment is ex- cations have dropped sharply in the last six pected to reduce GDP growth by just over half a months. Due to more subdued growth in house percentage point next year. Over the last three prices, expectations are that household con- years, housing investment’s contribution to sumption will be determined increasingly by growth has averaged 0.4 percentage points per growth in income. Household consumption is year. Thus weaker housing investment has major forecast to grow by an average of 2.3 per cent in implications for GDP growth. 2007 and 2008, compared with an average of 3.5 per cent over the last three years. Diagram 1.3 Employment in the construction industry Number of people Diagram 1.5 House prices slowing more and more 100 000 Percentage change Construction industry, monthly changes 80 000 20

60 000 Construction industry, 6 month moving average 15 House prices according to the monthly statistics 40 000

20 000 10 House prices according to OFHEO

0 5 -20 000

-40 000 0

-60 000 -5 2000 2001 2002 2003 2004 2005 2006 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 Source: Bureau of Labor Statistics.

Sources: National Association of Realtors and Office for Federal Housing Enterprise Oversight (OFHEO). Diagram 1.4 Housing investment and housing starts Annual percentage change

20 Gradual deceleration in investment activity 15 10 Business sector investment has grown rapidly in 5 recent years. There are good prospects of con-

0 tinued healthy industrial investment activity. Business confidence is high. Capacity utilisation -5 in industry has risen and is at levels which have Housing starts -10 historically been associated with high rates of in- Residential investment -15 vestment growth. International demand has 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 spread to more and more regions, and firms’ fi- Note: 1 year moving average for housing starts. Source: US Department of Commerce. nances are healthy, accompanied by good earnings growth. However, as exports account for just 11 per Can consumers spend any more? cent of GDP, developments in the household sector will be the deciding factor for investment Household consumption has grown faster than growth in the coming years. Since household household income in recent years. Rising house consumption is expected to grow more slowly, prices, together with healthy growth in income investment growth should also decelerate during and employment, have stimulated consumption. the forecast period. In addition, one of the big- As house prices have risen, many households gest US carmakers has announced major cut- have taken out new mortgage loans. That has backs in production, especially in the fourth given them greater scope for consumption, and quarter. That may have significant negative ef- saving has fallen. fects, as suppliers and dealers will also be af- In nominal terms, house prices are rising much fected. Other US carmakers are also battling more slowly than a year ago (see Diagram 1.5). with profitability problems and expensive pen- In real terms, house prices have actually started sion obligations. Thus, the possibility that fur-

13 PROP. 2006/07:1 BILAGA 2 ther measures will be announced in this sector, Diagram 1.7 Core inflation too high for comfort whose production accounts for around 3 per Annual percentage change cent of GDP, cannot be ruled out. 3.0

2.5

Positive contribution from foreign trade 2.0

A weaker dollar, a small, gradual increase in ex- 1.5 change rate flexibility in Asia, and continued ro- 1.0 bust growth in the rest of the world suggest that Core Inflation according to the PCE deflator 0.5 relatively good export growth can be expected. Core Inflation according to CPI Also, imports will slow thanks to weaker domes- 0.0 tic demand and increased private saving. Thus 2000 2001 2002 2003 2004 2005 2006 Sources: Bureau of Economic Analysis and Bureau of Labor Statistics. the shortfall in domestic demand is expected to be offset to some extent by a positive contribution from foreign trade. Thus, no further dete- As a result, the monetary policy stimulus has rioration in the current account deficit, now gradually been scaled back since June 2004. running at 6.4 per cent of GDP, is anticipated However, at its last two monetary policy meet- during the forecast period. ings, the Federal Reserve left its key rate un- The strong economic growth of recent years changed at 5.25 per cent. A further decrease in has led to a rapid increase in tax revenue. That growth – partly a delayed effect of interest rate has markedly improved net lending, which is hikes in recent years – is expected to lead to a currently showing a deficit of 0.8 per cent of less strained resource situation. Inflationary GDP (see Diagram 1.6). pressure will therefore subside during the course of 2007, and the Federal Reserve is expected to Diagram 1.6 General government sector net lending and the be able to lower interest rates again next year current account deficit (see Section 2.1). Percentage of GDP 4 Diagram 1.8 Household saving ratio and Fed Funds Net government saving Percentage of disposable income, per cent 2 Current account balance 20

0 Household saving ratio 15 -2 FED funds

-4 10

-6 5 -8 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 0 Source: US Department of Commerce. -5 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 Sources: Federal Open Market Committee and Federal Reserve. Resources tight Less favourable developments in real wealth One consequence of the economy’s favourable should mean that household saving gradually performance in recent years is that the resource rises from today’s negative levels. Given that situation has grown increasingly tight. Capacity household consumption expenditure accounts utilisation is high, and actual unemployment is for 70 per cent of GDP, that will serve to reduce probably lower than equilibrium unemployment. GDP growth during the forecast period. GDP is Unit labour costs and wages have risen more forecast to grow by 3.3 per cent this year and 2.5 quickly, and inflationary pressure has grown (see per cent next year, after which it is projected to Diagram 1.7). Core inflation (which excludes grow by 2.8 per cent in 2008 and 3.0 per cent in food and energy) is above the Federal Reserve’s 2009. target interval of 1- 2 per cent.

14 PROP. 2006/07:1 BILAGA 2

Could the slowdown in the property market within a year is currently 43 per cent. Thus the lead to a hard landing in the United States? most likely outcome is still that there will not be a recession. Less favourable financial conditions The US property market is slowing. That is ex- have nevertheless increased the risk of a reces- pected to cause housing investment to fall, house sion in the economy. prices to stagnate, household consumption to It is also conceivable that structural factors decelerate, the economy to make a soft landing, explain the low level of long-term yields (see and the dollar to weaken. Section 2.1). They are not captured by this However, the strength of the slowdown may model. The real risk of recession may therefore have been underestimated. Given that house be lower than suggested by historical relation- prices are probably overvalued at present, an ac- ships. tual drop cannot be ruled out. According to some analysts, that could trigger a recession in Developments in the property market crucial the next year. However, recessions are relatively uncommon in the US economy. According to More restrictive monetary policy is one under- economic data from the National Bureau of lying cause of the slowdown in the property Economic Research (NBER), ten recessions market. Higher interest costs are eating up a have hit the United States since the Second growing share of household disposable income, World War. thereby putting a damper on demand for housing and, consequently, house prices. Growing possibility of a recession within a year However, if the slowdown in house prices Probability turns into an actual drop, the impact could be 1.0 significantly greater than assumed in the present 0.9 0.8 forecast. Precautionary saving could rise sharply, 0.7 thus reducing the scope for consumption. Con- 0.6 0.5 sumer confidence and the propensity to con- 0.4 sume would probably be eroded. In this sce- 0.3 nario, household consumption – the principal 0.2 0.1 driver behind the US economy – would probably 0.0 slow markedly. 65 70 75 80 85 90 95 00 05 Note: The probability of a recession within a year is calculated using the slope of the Below-trend growth and rising unemployment represent a yield curve (10 year -3 months) and the Fed funds level. Shaded areas are recessions dangerous combination for the US economy according to NBER dating. Sources: NBER, Federal Reserve and Ministry of Finance. Per cent

11 So just how great is the risk of a recession in the 10 US economy? Historically speaking, the yield 9 curve has been a very good recession indicator. 8 A negative slope in the curve suggests that a 7 sharp slowdown is imminent, especially if 6 5 monetary policy has also been restrictive (see 4 Section 2.1 for a more detailed discussion of the 3 yield curve). Long-term yields have fallen during 2 the autumn and are now below yields on instru- 50 55 60 65 70 75 80 85 90 95 00 05 Note: Shaded areas are recessions according to NBER dating. Unemployment is ments with shorter maturities. Based on a simple meassured as a three months moving average. model using the yield curve and the level of the Sources: Bureau of Labor Statistics and NBER. Fed Funds rate, the probability of a recession 1 has risen sharply in recent months.F F According As residential construction declines and demand to this model, the probability of a recession for housing-related services cools, unemployment will probably rise in these sectors. Unem- ployment will also rise at an aggregate level, as the economy is expected to grow at below the trend rate over the next few years. Historically 1 The model is based on the paper “The Yield Curve and Predicting speaking, the US economy has been vulnerable Recessions” by Jonathan Wright of the Federal Reserve Board.

15 PROP. 2006/07:1 BILAGA 2 when GDP growth falls below the trend rate and tively affected by the slowdown in the United unemployment rises. Since 1948 the economy States. has gone into recession every time that unem- Although the effects on GDP are consider- ployment measured as a three-month rolling av- able, they are not sufficient to push the US erage has risen by 0.3 percentage points or more. economy into recession. After four years, GDP 3 That is probably because income is negatively is 5.3 per cent lower than in the base scenario.F F affected whenever a slowdown is sufficiently GDP then gradually returns towards the level in sharp for unemployment to rise. That leads to a the base scenario. The impact on GDP is less- negative spiral of lower consumption expendi- ened by the Federal Reserve attempting to ture and falling revenue in the business sector, counter the slacker demand growth with sub- resulting in further job losses. Thus, an unem- stantial interest rate cuts. Its key rate is quickly ployment rise of a few tenths of a percentage lowered to just over 2 per cent. Even so, GDP point due to the slowdown in the property mar- growth is 2.5 percentage points lower in 2007 ket could be enough in itself to spark off a reces- than in the base scenario. sion. Household consumption is directly affected The weakening of the property market may by falling house prices. Due partly to a surge in also make the economy vulnerable in other ways. household saving, the impact on household con- Rising house prices are one reason that growing sumption is considerably greater than on GDP. oil and gasoline prices in recent years have had That contributes in turn to the US net lending relatively minor effects on the real economy. deficit improving more quickly than in the base However, if house prices start to fall, real house- scenario. hold wealth will deteriorate. Any further oil The reduced domestic demand, combined price shocks would probably have a greater im- with the dollar depreciating by just over 3 per pact on the economy at that point than earlier in cent in effective terms, means that imports fall the economic upswing. sharply. After weakening initially, exports strengthen due to the weaker dollar. Foreign Will falling US house prices impact GDP growth? trade therefore helps to soften the fall in GDP growth. Sooner or later, the price of an overvalued asset Developments in the real economy elsewhere tends to return to a reasonable level. This return in the world are also affected by the slowdown in to equilibrium can happen in a number of ways. the United States. World trade drops by a total The forecast assumes that nominal US house of 5 per cent over a five-year period relative to prices will stagnate over a long period. As prices the base scenario. After five years, Chinese GDP in general rise, real house prices will then gradu- is almost 2 per cent lower than in the base sce- ally return to more reasonable levels. nario. In both Japan and the rest of Asia, the im- The return to equilibrium could also take the pact is approximately half that of China, which form of US house prices actually falling for a may reflect the fact that these countries export limited period. How household consumption fewer consumer goods than China. expenditure would be affected by such a correc- GDP in the euro area after five years is almost tion is, of course, uncertain and difficult to 1.5 per cent lower than in the base scenario. gauge. This box quantifies the effects on the ba- GDP then gradually returns to the level in the 2 sis of the NiGEM simulation model.F F base scenario. As a result of the slowdown in the These simulations assume that house prices United States, the euro appreciates by just over will fall by 15 per cent during the coming year, 10 per cent in effective terms, which undermines rather than stagnating over a long period as as- the euro area’s export growth. sumed in the forecast. These simulations suggest All in all, falling US house prices would that the impact on both household consumption therefore have appreciable but still relatively and GDP would be significant. According to the limited effects on the real economy outside the model, the rest of the world would also be nega- United States, based on these simulations.

2 3 The National Institute Global Econometric Model, developed by the The base scenario referred to in the text is NIESR’s latest forecast, National Institute of Economic and Social Research (NIESR) in London. published in July.

16 PROP. 2006/07:1 BILAGA 2

Diagram 1.9 Productivity growth slowing in the United market is not expected to have quite this effect States in the main scenario. The box presents a scenario Percentage change from two years earlier where the slowdown in the property market has 10 a greater impact on the real economy. 9 Labour productivity growth 8 Trend productivity growth 7 6 5 1.2 The euro area 4 3 Upswing in the German economy boosts euro area 2 1 Despite very strong global GDP growth in re- 0 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 cent years, growth in the euro area has been modest. However, growth has recovered signifi- Note: Productivity growth relative to two years earlier. cantly since the middle of last year. Growth ac- Source: Bureau of Labor Statistics. celerated in the second quarter of this year, and The relatively subdued GDP growth in the GDP was 0.9 per cent higher than in the first coming years also reflects the downward revi- quarter and 2.6 per cent higher than in the sec- sion of the potential growth rate. According to ond quarter last year. That was the highest rate the Bureau of Labor Statistics, productivity has of growth in a single quarter for five years. grown slightly less rapidly in the last three years This recovery in the euro area can be attrib- than previously believed (Diagram 1.9 shows uted largely to the upswing in the German econ- productivity growth relative to two years ear- omy. In the second quarter of this year, German lier). Actual GDP growth has also been revised GDP was 0.9 per cent higher than in the first downward by an average of 0.3 percentage quarter. That is the first time since 2001 that the points per year for 2003-2005. Thus GDP grew German economy has grown as quickly as the by an average of 3.2 per cent per year in 2003- euro area as a whole. Growth in France also ac- 2005. During the same period, unemployment celerated in the second quarter, with GDP no fell from 6.3 per cent (June 2003) to 4.7 per cent less than 1.1 per cent higher than in the first (January 2006). The long-term sustainable quarter. However, the Italian economy, which growth rate is therefore believed to be just under has been lagging well behind in terms of growth, 3 per cent. remained in the doldrums, with GDP growing by a moderate 0.5 per cent from the first to the second quarter. Increased risk of lower growth

The present forecast assumes that the US econ- Euro area growing under its own steam omy will make a soft landing and that more resources will become available. That is expected The short-lived economic recovery, which began to lead to lower wage claims and unit labour in the latter part of 2003 was fuelled primarily by costs, which have accelerated over the last year. strong export growth (see Diagram 1.10). When Core inflation, of which unit labour costs are the the upswing in world trade faltered in mid-2004, largest determinant, is expected to fall. However, the recovery in the euro area ran out of steam if core inflation does not fall quickly enough, the and GDP growth fell back to just over 1 per Federal Reserve may need to tighten its mone- cent. tary policy further. This would increase the risk The current economic recovery was driven of a larger drop-off in growth. initially by an upswing in foreign trade but has The impact on the real economy of the on- been accompanied by an increase in domestic going cooling of the property market may have demand. The recovery has therefore spread to been underestimated. International experience more sectors, and is being driven more by shows that when house prices stagnate after a household consumption and less by exports. period of double-digit growth, GDP growth can This has made the euro area more resistant than be reduced by up to two percentage points before to an international economic downturn. within a year. The cooling of the US property

17 PROP. 2006/07:1 BILAGA 2

GDP growth is forecast to be 2.3 per cent in then slow next year as a result of the gradual 2006. However, the growth outlook becomes weakening of global demand. less bright as global demand and industrial activity weaken. Tighter monetary policy is also pre- Diagram 1.11 Housing investment in Germany and Spain dicted, with the European Central Bank’s past Percentage change and anticipated future interest rate hikes being 20 Germany expected to have an increasingly restrictive effect 15 on growth next year. GDP is forecast to grow Spain by 1.9 per cent per year in 2007-2009. 10

Diagram 1.10 Exports and investment in the euro area 5 Percentage change 0 16 8 14 Exports (left scale) -5 6 12 Investment (right scale) -10 10 4 94 95 96 97 98 99 00 01 02 03 04 05 06 8 Source: Eurostat. 6 2 4 0 2 Weaker industrial activity next year 0 -2 -2 Developments in exports and industrial output -4 -4 97 98 99 00 01 02 03 04 05 06 in recent months (see Diagram 1.12) suggest Source: Eurostat. that industrial activity will deteriorate next year

in line with weaker international demand. The German export industry has performed better Investment activity still strong than that in France and, in particular, Italy. The composition of German exports, characterised The upswing in investment which began in mid- by a high proportion of investment goods, has 2002 has yet to show signs of weakening. Strong been favoured by the global upswing in invest- global demand, combined with low interest rates ment. and good corporate earnings growth, has created favourable conditions for increased investment. Diagram 1.12 Industrial production in selected countries Since the middle of last year, investment in Percentage change machinery and equipment has shown the great- 8 Germany est increase, while housing investment has 6 France grown weakly. With the exception of a few 4 Italy countries such as Spain, housing investment has been subdued in the euro area in recent years. 2

Ten years after the collapse of the German con- 0 struction boom, no tangible recovery in the German property market has yet to be seen. -2 However, it appears that the years of decline in -4 construction investment have come to an end. In -6 the second quarter of this year, construction in- 2000 2001 2002 2003 2004 2005 2006 vestment grew strongly in Germany, which can Source: Eurostat. partially be explained by the cold weather at the Export growth has slowed appreciably in recent beginning of the year (see Diagram 1.11). months, and the strengthening of the euro dur- All in all, continued brisk global demand, ing the forecast period is expected to further un- combined with rising capacity utilisation, sug- dermine the outlook for exports. This weaker gests continued good investment activity during export outlook has also had a clear impact on in- the rest of this year. Growth in investment is ex- dustrial output. The upswing in industrial output pected to peak in the latter part of the year and that began in mid-2005 has levelled off, and or-

18 PROP. 2006/07:1 BILAGA 2 ders have slowed. This weakening of the up- rising house prices. Italian and, in particular, swing in industrial activity is reflected in the German households have shown much more re- business sector’s expectations. According to sev- straint. In general, the real rate of wage growth eral national indicators, business confidence has in the euro countries has been low in recent deteriorated in recent months. years. Combined with a neutral fiscal policy, that has led to a relatively modest increase in disposable income. Optimism has begun to falter in the business sector Employment growth in the euro area has been stable at just under 1 per cent per year since 2002 Business confidence soared at the beginning of (see Diagram 1.14). Weak employment growth 2006 to almost bewilderingly high levels. That in Germany has dragged down the overall figure led to a gap between actual developments and for the euro area in recent years. During the firms’ expectations that was somewhat difficult same period, employment in Spain has increased to interpret. That was particularly evident in substantially. This differential can partially be Germany. During the spring, actual develop- explained by the differing performances of the ments partly caught up and their gap with the construction sector. However, fuelled mainly by confidence indicators narrowed. Business confi- a brighter situation in the German labour mar- dence has also deteriorated somewhat in recent ket, employment growth in the euro area picked months. up at the end of last year. In the short term, this widespread optimism in the business sector, both in the national sta- Diagram 1.14 Employment growth in Germany, Spain and tistics and in the euro area as a whole, suggests the euro area as a whole Percentage change continued expansion in 2006. However, the 6 downturn in business confidence in recent Germany 5 months, which can be attributed almost entirely Spain to a less positive view of the future, points to a 4 Euro area slowdown in activity next year (see Diagram 3

1.13). 2

Diagram 1.13 European Commission’s confidence indicator 1 Index 0

120 -1 Italy 115 France -2 110 Germany 96 97 98 99 00 01 02 03 04 05 06 Source: Eurostat. 105 100 The improvement in the labour market is even 95 clearer from the unemployment statistics. Un-

90 employment has dropped in virtually all countries and hit its lowest levels since 2000 during 85 the summer. Unemployment is expected to fall a 80 2001 2002 2003 2004 2005 2006 little further during the course of 2006 before stabilising around 7.8 per cent next year. Source: Eurostat. The improved labour market has had a major impact on consumer confidence. The confidence Households somewhat less pessimistic indicator for the household sector has gained considerably in 2006, which suggests stronger While business confidence has been unexpect- consumption in the coming year. However, the edly buoyant, households have been more cau- upswing in consumption is expected to be mod- tious, as reflected in weak consumption growth. erate. The tightening of fiscal policy next year, However, here too there are major variations especially in Germany and Italy, is expected to among countries. In Spain and France, house- put a damper on consumption. hold consumption has been stimulated by rising The increase in the rate of value-added tax employment and the accumulation of wealth via (VAT) in Germany next year is expected to

19 PROP. 2006/07:1 BILAGA 2 stimulate consumption this year but primarily 7.2 per cent in 2005, marginally down from 7.4 inhibit consumption next year. The VAT hike is per cent the previous year. creating uncertainty about developments in the Asia has been the fastest-growing region in euro area. As Germany accounts for almost 30 the world in recent years. GDP growth in 2001- per cent of consumption in the euro area, a sub- 2005 averaged 6.2 per cent. A good deal of that is stantial drop-off in consumption in Germany attributable to China and India, which have been would have consequences for growth in the euro the two main growth drivers for many years. area as a whole. However, the effects of the The prospects of further strong growth in Asia German VAT hike are difficult to gauge and are are believed to be good. GDP growth is ex- largely dependent on the extent to which Ger- pected to remain rapid in both China and India, man firms choose to pass on the cost of the hike and the Japanese economy seems stronger than to consumers. Given that consumption demand for many years. in Germany is already at a low level, the retail trade is expected to shoulder a relatively large share of the increased costs. The effects on con- Strong domestic demand in Japan sumer prices and the European Central Bank’s response to a temporary surge in inflation are After many problematic years of weak growth further sources of uncertainty. If the VAT hike and deflation, the Japanese economy was jump- itself prompts the European Central Bank to started in 2002 by exports. Increased demand tighten its monetary policy, another barrier to from Asia – and not least China – was partly re- growth will emerge. sponsible for that. This increase in demand in the export market was followed by higher industrial output, fewer bankruptcies, rising earn- Inflation in check ings, and greater investment in machinery and equipment. Growth has gradually become more As in the rest of the world, inflation has risen in balanced and robust. the euro area recently. Energy prices have been In the last two years, domestic demand – and the primary source of higher consumer prices, above all investment – has grown strongly. That while core inflation (which excludes energy and led to GDP growth of 2.6 per cent in 2005, and unprocessed food) has been relatively stable at the Japanese economy was driven by the same just over 1.5 per cent. As previous increases in growth pattern in the first half of this year. oil prices drop out of the 12-month compari- The outlook for continued strong growth, sons, inflation is expected to dampen. driven primarily by domestic demand, is bright. Inflation is expected to exceed the European One of the main reasons is business sector in- Central Bank’s inflation target for the seventh vestment in machinery, which is expected to consecutive year in 2006. Next year the German grow at a good rate during the year. Despite very VAT hike is expected to push up consumer strong growth in investment in machinery and prices in the euro area as a whole. The expected equipment last year and in the first half of this drop in oil prices and slowdown in economic ac- year, capacity utilisation in industry is high. Ma- tivity are assumed to pull in the other direction. chinery orders have also grown at a good rate Inflation is forecast to be 2.3 per cent this year during the third quarter of this year. However, and 2.2 per cent next year. Inflation is then pro- investment growth is expected to slow some- jected to fall to 2.0 per cent in 2008 and 1.9 per what next year. The strong investment activity is cent in 2009. gradually strengthening production capacity, and lower global growth next year should also put a damper on machinery orders and earnings. In addition there are expectations of slightly tighter 1.3 Asia monetary policy, which may decrease the propensity to invest at the margin. Continued strong growth There is also the prospect of good consumption growth. The labour market has gradually The strong growth in Asia in 2005 made a major improved since the beginning of 2003. Employ- contribution to the historically high rate of ment has risen, and unemployment has fallen. global growth. GDP growth for the region was Since the beginning of 2005, the number of full-

20 PROP. 2006/07:1 BILAGA 2 time jobs has also begun to increase (see Dia- of Japan’s liquidity injections ceased in March gram 1.15), which is good news for both house- this year, and the bank raised its key rate to 0.25 hold income and consumer confidence. Con- per cent in mid-July after having been zero since sumer confidence fell slightly during the sum- the beginning of 2001. Although there is much mer but is still historically high. However, a high to suggest that the period of deflation is over, household saving ratio, more restrained real uncertainty about price movements has in- wage growth, and slightly tighter monetary pol- creased. A new measure of core inflation has icy will serve to curb consumption growth both been introduced that includes different weights this year and next. in the basket of goods, which indicates that inflation in August was 0.3 per cent. At the same Diagram 1.15 Change in number of full-time and all time, inflation expectations remain low. The de- employed sign of monetary policy will be one of the great- Annual percentage change est challenges facing the Bank of Japan in the 3 coming years. It will be a difficult balancing act Full-time employed 2 to raise interest rates without triggering a return

All employed to deflation and all its negative effects on 1 growth. 0 All in all, Japanese GDP growth is forecast to be 3.0 per cent in 2006 before slowing to 2.5 per -1 cent in 2007. GDP is then projected to grow by -2 2.0 per cent in 2008 and 1.7 per cent in 2009.

-3 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 China growing extremely fast Source: Ministry of Health, Labour and Welfare, Japan.

Chinese GDP grew by 9.9 per cent in 2005, and Exports are also expected to perform well. Busi- high rates of growth continued to be reported in ness confidence is at historically very high levels, the first half of this year. This strong growth in and expectations are optimistic. The cooling of China has been fuelled by both brisk domestic demand from the United States and the expected demand and very robust export growth. Due to slight appreciation of the yen are likely to put a slightly slower growth in the United States, ex- damper on exports, but that should be offset by port growth is expected to fall slightly next year. strong demand from Asia and other fast-grow- However, export growth is expected to remain ing regions of the world. However, the contri- strong due to the relatively bright growth out- bution to GDP growth from net exports will be look in the euro area, Japan and the rest of Asia. marginal, as imports are expected to continue to There have also been no signals from the Chi- grow at a good rate as a result of the strong nese authorities to suggest that the yuan will be growth in domestic demand. allowed to appreciate more rapidly than before The general government sector’s contribution and thereby markedly undermine firms’ com- to growth is expected to be low on account of petitiveness. tight government finances. Despite increased tax China’s growth has also been driven by very revenue and reduced expenditure, there was a strong growth in private investment. That has budget deficit of 5.4 per cent of GDP in 2005. increased the risk of overinvestment and a higher Government debt is also up around 188 per cent percentage of bad loans. Monetary policy has of GDP, so that fiscal policy needs to remain therefore been tightened, and various adminis- tight. trative measures have been introduced to curb lending. Although these measures will probably have a certain restrictive effect on investment Greater uncertainty about inflation growth, investment is still expected to grow at a very good rate both this year and next. The pro- After seven years of deflation, both inflation and pensity to invest is determined to a great extent core inflation have been positive so far this year. by industrial firms’ earnings, which were 25 per A number of steps have therefore been taken cent higher in the first five months of this year towards normalising monetary policy. The Bank than in the same period of last year.

21 PROP. 2006/07:1 BILAGA 2

Strong Asian growth despite US slowdown with exports. However, reduced imports of consumer goods into the United States will have a Although demand from the United States is set relatively limited impact on Chinese exports. to slow as a result of weaker consumption China’s exports to the United States have growth, global growth is expected to continue to grown, but products (machinery and cars) with grow strongly. The main reason is that more and higher levels of value-added have grown in im- more regions and countries of the world are portance relative to products (clothing and growing strongly at the moment. That applies shoes) with low value-added. Furthermore, the above all to many Asian nations, China and In- rest of Asia is China’s most important export dia in particular having contributed for a long market. Around 45 per cent of exports head to time. Average annual growth in Asia (excluding the rest of Asia, while the United States ac- Japan) in 2001-2005 was 7.3 per cent. However, counts for around 20 per cent. Consumption in there has also been good growth in Latin Amer- the United States fell sharply in 2000-2001, but ica and Africa in recent years. the slowdown in consumption growth coincided The strong growth in Asia has meant that the with a global investment crash in all of the main aggregate global output of goods and services regions when the IT bubble burst. Nevertheless, has been redistributed. An increasing share of Chinese GDP growth averaged 7.8 per cent production takes place in Asia, while the euro during the period. area in particular has seen its share of global Another reason for China’s importance is its GDP (measured in PPP-adjusted terms) fall. strong domestic demand, which has contributed Asia’s share of global GDP increased from 20 the most to the country’s growth. Growth in per cent in 1980 to just over 36 per cent in 2005, both investment and consumption has been while the euro area’s share fell from 20 per cent strong, contributing to domestic demand ac- to 15 per cent. The United States’ share was counting for an average of almost 90 per cent of relatively stable during the period and stood at GDP growth in 1993-2003. Although net ex- around 20 per cent in 2005, compared with 21 ports have contributed more to growth in the per cent in 1980. One important reason for last two years, domestic demand still makes the Asia’s progress is China, which has long been a single biggest contribution. Imports to meet major driver behind economic growth in Asia. domestic demand have also gradually grown in China’s share of global GDP grew from 3 per importance relative to imports for the assembly cent in 1980 to around 15 per cent in 2005. India industry. too has achieved greater importance due to a However, the role of Japan and India should high rate of growth. not be underestimated. Largely as a result of This redistribution of output has taken place very good investment growth, but also due to at the same time as an increasing share of global favourable consumption growth, domestic de- demand is coming from Asia. At the beginning mand is growing strongly in Japan. Furthermore, of the 1980s, Asia accounted for around 9 per imports have increased as a share of GDP over cent of global import demand. The equivalent the last decade. In India, domestic demand and, figure today is just over 20 per cent. Simply the in particular, private consumption have been the fact that an increasing share of global demand is drivers behind growth. That has pulled up im- coming from Asia means that global growth is ports, which now account for around 20 per cent not as sensitive to changes in demand in other of GDP. regions. All in all, brisk domestic demand in China, China holds the primary key to how well Asia Japan and India is paving the way for continued performs and the extent to which the region can strong import growth in these countries. That shoulder part of the drop-off in global demand favours primarily the rest of Asia, but other from the United States. China has become the countries for which Asia is an important export most important export market for many Asian region may also stand to benefit. nations. China imports input goods from other Asian countries for various products, such as IT equipment and home electronics, which are as- sembled in China for subsequent transportation to countries outside Asia. Historically, China’s imports have therefore been closely correlated

22 PROP. 2006/07:1 BILAGA 2

Private consumption growth has been much World market demand higher in China than in many other countries, but due to the high level of saving, it has been Stronger global growth is normally associated unable to hit the heights that it otherwise could. with greater demand for Swedish export goods. According to some commentators, the saving However, growth in Swedish exports may devi- ratio is around 25-30 per cent, which is largely ate from global import growth. If import growth because China lacks a functional welfare system. is fastest in regions which are relatively large im- Furthermore, around 10 per cent of the popula- porters of Swedish goods, Swedish exports can tion still lives in extreme poverty. One of the be expected to grow faster than aggregate global aims of the latest five-year plan, covering 2006- import demand. 10, is therefore more balanced growth. Private To assess the outlook for Swedish exports, a consumption is set to grow more quickly in the forecast has been made of Swedish world market future and replace investment as the most im- demand – the trade-weighted import demand for portant component of demand. All in all, growth goods and services encountered by Swedish ex- is expected to remain high both this year and porters. next. Table 1.2 Sweden’s largest export markets and their share of global GDP

India growing rapidly too Region/Country Share of Share of global export market GDP India’s GDP grew by 8.5 per cent in 2005. Pri- Euro area 39.1 15.2 vate consumption and fixed investment have Nordic countries excl. Sweden 20.2 0.9 been the principal growth drivers in India over United States 11.6 20.3 the past five years. This growth pattern is ex- UK 7.9 3.1 pected to persist throughout the forecast period. Japan 2.2 6.6 In line with the previous pattern, net exports are Asia, excl. Japan 9.4 29.4 predicted to make a negative contribution to Note: Share of global GDP is in PPP-adjusted terms. growth. Exports, which grew by 18 per cent in Sources: Statistics Sweden and IMF. 2005, are expected to continue to grow at a good rate, but the strong growth in consumption and The euro area is Sweden’s most important ex- investment will push up imports in the same way port region, accounting for almost 40 per cent of as in previous years. exports of goods (see Table 1.2). The other All in all, growth is expected to be largely on a Nordic countries account for just over 20 per par with 2005 both this year and next. Growth cent, and the United States for almost 12 per may slow slightly as a result of somewhat tighter cent. However, the significance of the euro area monetary policy. Inflation picked up at the be- and the other Nordic countries in terms of ginning of 2006, as a result of which interest global GDP is far lower. Despite Asia’s relatively rates were raised to their highest level for four large share of the global economy, only around years in June. India’s big challenges include ex- 10 per cent of Swedish goods exports head to panding its infrastructure and ensuring a func- the region. tional and efficient energy supply. From a historical perspective, the percentage of exports heading to countries such as India, China, Russia, Poland and the United States has risen, while the percentage heading to countries 1.4 Outlook for Swedish exports such as Germany and the United Kingdom has fallen. The percentage of exports heading to the The outlook for Swedish exports is determined other Nordic countries has been relatively con- by the strength of the global economy and, stant over the last decade. above all, demand in Sweden’s most important export regions. The outlook for Swedish exports of goods is also determined by the composition of global demand.

23 PROP. 2006/07:1 BILAGA 2

Growth in world market demand rapid this year and Strong investment activity has boosted Swedish slowing next year exports

The global economy slowed temporarily in the Because Swedish exports of goods are largely second half of 2004 and the first half of 2005. dominated by investment and input goods, they Since the second half of 2005, both global are particularly favoured by a strong global up- growth and demand for Swedish exports have swing in investment (see Table 1.3). recovered. Global GDP growth is forecast to be Investment goods tend to have a larger service 5.0 per cent this year, while growth in Swedish element than input and consumer goods. For ex- world market demand is expected to be 9.2 per ample, demand for IT services grows when de- cent. Thus the rate of growth in Swedish world mand for telecommunications products in- market demand will rise further than the rate of creases. An international upswing in investment growth in global GDP (see Diagram 1.16). That will therefore also boost demand for Swedish is primarily due to strong growth in the euro exports of services. area (see Section 1.2) and continued very strong The global investment-driven growth has growth in the other Nordic countries. GDP contributed to strong world market demand in growth in the other Nordic countries is forecast recent years. The upswing in investment has also to be no less than 3.2 per cent this year. Both coincided in a number of Sweden’s most impor- brisk domestic demand and export growth tant export regions. buoyed by the strong global economy are driving growth in the other Nordic countries. Next year global GDP growth is forecast to Investment activity is expected to slow in the euro slow slightly to 4.6 per cent, while Swedish area and Nordic countries in 2007 world market demand is expected to grow by 6.5 per cent, which is a clear decrease from this year. Swedish exports depend primarily on import Thus the rate of growth in Swedish world mar- demand in the euro area and the other Nordic ket demand will fall further than the rate of countries. Fluctuations in investment activity growth in global GDP (see Diagram 1.16). also have a major impact on import demand for Global GDP growth will be propped up by Swedish exports. strong growth in countries outside the OECD. As mentioned in Section 1.2, continued high Import demand in Sweden’s most important ex- levels of investment activity are expected in the port regions, such as the euro area and the other euro area for the rest of this year. However, both Nordic countries, is expected to be weaker in investment activity and industrial activity in the 2007 than in 2006. GDP growth in the other euro area are expected to peak this year. A less Nordic countries is set to slow significantly next favourable export outlook and less expansionary year to 2.4 per cent. monetary policy are expected to curb demand for investment and intermediate goods in the Diagram 1.16 Global GDP and World market demand, WMD euro area in 2007. Percentage change Demand for investment and input goods has 6 10 also been very strong in the other Nordic coun- Global GDP 9 tries this year. Improved industrial activity and 5 8 investment activity in Denmark and Finland WMD, right axis 7 4 have resulted in strong import demand for in- 6 vestment and input goods. In Norway, the high 3 5 price of oil has led to very rapid investment 4 2 growth in sectors related to oil production, trig- 3 gering strong import demand for both invest- 2 1 ment and intermediate goods. Import demand 1 for investment and intermediate goods in 0 0 2001 2002 2003 2004 2005 2006 2007 Denmark and Finland is expected to slow in the Sources: IMF, OECD and Ministry of Finance. light of weaker global demand growth and less expansionary monetary policy. Growth in imports of these goods is forecast to slow fairly

24 PROP. 2006/07:1 BILAGA 2 sharply in 2007 relative to the high growth rates Contributing factors include the stabilisation of seen in 2006. the situation in the Middle East, a quiet hurri- cane season in the United States, signs of weaker Table 1.3 Exports of goods by type demand growth, and large stocks of crude oil Percentage of total exports of goods in 2005 and petroleum products. SEK billion Share, % Looking back a little further, oil prices have risen markedly since 2004. There are several Investment goods 395 40.6 factors underlying this sharp increase. Intermediate goods 392 40.3 Production capacity has grown relatively slowly of which energy goods 53 5.4 since 2000, while demand for oil has grown Consumption goods 171 17.6 strongly in recent years. Lead times in the oil Other goods 15 1.5 industry are long: permanently higher oil prices Total 974 100 take some 5-7 years to result in the completion Source: Statistics Sweden. of investments in new oil production. The strong global economy of recent years Due largely to weak growth in investment re- has contributed to increased demand for oil. lated to the oil industry, investment growth is China and India have emerged as major net con- also forecast to slow significantly in Norway sumers of oil, which has led to reserve capacity – next year. the difference between potential supply and ac- This weaker investment growth in the euro tual demand – falling. Oil prices have therefore area and the other Nordic countries will put a become more sensitive to supply disturbances damper on import demand for Swedish invest- and uncertainty in oil-producing regions. ment and intermediate goods in 2007. The inability of refineries to turn crudes of lower quality into cleaner petroleum products has also contributed to the surge in oil prices. However, refinery capacity is expected to be 1.5 Oil prices modernised and expanded, especially after 2009 when a great deal of new capacity will be taken Oil prices hit new record highs during the sum- into use in the OPEC countries and Asia. mer (see Diagram 1.17). Factors contributing to There is much to suggest that global reserve the rise included increased tension between Iran capacity in the oil market is set to increase. The and the West and the conflict in Lebanon. Pro- growth in oil prices of recent years has boosted duction disturbances in Nigeria, Iraq and Alaska investment in both new and more mature oil- also helped to push up oil prices. Brent crude fields. Factors such as increased exploration ac- was trading at close to USD 80 per barrel at its tivity and technological advances have helped to peak at the beginning of August 2006. Oil prices make new sources of oil available and improve have since fallen back sharply. recovery rates in both new and more mature

Diagram 1.17 Price of Brent crude fields. On the demand side, the high price of oil, USD/bbl SEK/bbl together with a slightly weaker global economy, 80 700 is expected to put a damper on demand for oil. The supply of crude is therefore expected to 70 600 Price in USD Price in SEK grow more quickly than demand over the next 60 500 few years, which would mean that reserve ca- 50 400 pacity will increase. As reserve capacity grows, 40 the risk premium – and thus the price of oil – 300 30 will be pulled downward. However, the price 200 20 decrease is likely to be limited by continued geopolitical unrest, the risk of future production 10 100 disturbances, and the increased cost of oil pro- 0 0 duction. Oil prices are assumed to be USD 60 2000 2001 2002 2003 2004 2005 2006 Source: Reuters. per barrel in December 2006, USD 55 per barrel in December 2007, and USD 50 per barrel in December 2008 and 2009.

25 PROP. 2006/07:1 BILAGA 2

A growing share of oil production is in politi- cally unstable countries, and an assessment of oil prices is still associated with considerable uncertainty. Changes in global growth, unexpected production disturbances, and geopolitical ten- sions have the potential to impact significantly on oil prices.

26 PROP. 2006/07:1 BILAGA 2

2 Financial markets Diagram 2.1 Ten-year bond yields in Germany, the United States and Sweden Recent developments in the financial markets Per cent 5.5 have been dogged by uncertainty about the US economy. Signs of a slowdown in the United 5.0 States have contributed to a downturn in global 4.5 bond yields. In the light of weaker economic growth, the Federal Reserve is expected to stop 4.0 tightening its monetary policy and to cut its key 3.5 rate in 2007. The Riksbank in Sweden and the Germany European Central Bank are expected to keep on 3.0 United States tightening their monetary policy. The Bank of Sweden 2.5 Japan is also predicted to continue raising its key 2003 2004 2005 2006 rate, albeit slowly. Source: Reuters. In the foreign exchange market, expectations of future interest rate differentials among countries have dominated. Due partly to higher inter- Flatter yield curves est rates than elsewhere in the world and large inflows of capital, the US dollar strengthened Short-term yields have risen further than long- 4 sharply in 2005. In 2006 expectations of reduced term yields, and thus the yield curveF F has grown interest rate differentials have helped to weaken flatter. In the United States, the ten-year bond the dollar, while the Swedish krona has strength- yield is now lower than short-term yields, which ened. As the interest rate differential between means that the yield curve has a negative slope. Sweden and the rest of the world narrows, the Historically speaking, that has often signalled an krona is expected to appreciate further. impending recession. Higher interest rates and a stronger krona However, it is uncertain whether this histori- spell tighter monetary conditions in Sweden. cal relationship still applies today, as there are a However, the change is from an expansionary number of structural explanations for the low level and interest rates will remain low. All in all, bond yields. One explanation is new rules for that means continued relatively expansionary pension companies which have led to increased monetary conditions for the Swedish economy. demand for long-term bonds. Increased confidence in the inflation targets of central banks have probably also contributed to a drop in the term premium – in other words, investors are 2.1 Developments outside Sweden demanding less compensation for holding long- term bonds as they believe that inflation is now Bond yields still low less volatile. The low bond yields can also be explained by capital flows, mainly from oil-pro- Global bond yields are higher than a year ago. ducing countries and the Asian central banks. Factors contributing to the rise include a strong High oil prices have led to substantial income global economy, increased global inflationary into the oil-producing countries which has to a pressure, and, as a result, expectations of tighter great extent been invested in the global bond monetary policy. market. Increased global net saving has probably However, growing uncertainty about the US also contributed to lower bond yields. Saving has economy has prompted a downturn in bond risen particularly in the newly industrialised yields since mid-summer. That has wiped out a Asian nations and other fast-growing econo- substantial chunk of the upswing, and bond mies. yields are still relatively low historically speaking, considering the strong global economy.

4 The yield curve describes the relationship between the yields on treasury bills and bonds of various maturities.

27 PROP. 2006/07:1 BILAGA 2

Recently the central banks have raised short- turn to higher wage growth. Due partly to term interest rates, which also explains the flat strong growth in lending to households, money shape of the yield curve. supply is also continuing to grow rapidly. European and Japanese bond yields are ex- Meanwhile, the European economy has pected to rise due to strong economic growth, strengthened recently, which would suggest increased resource utilisation, rising inflation, continued hikes in the ECB’s key rate. The ECB and higher short-term interest rates. Several has recently signalled that it plans to raise its key factors suggest generally higher global interest rate toward more neutral levels. The forecast as- rates in the longer term. Globalisation has led to sumes that the key rate will be 3.5 per cent at the an increased supply of labour in the global econ- end of 2006 and remain there to the end of 2007. omy. This labour will require increased invest- The Bank of Japan raised its key rate by 25 ba- ment, which is expected to push up interest sis points during the summer, ending a five-year rates. The high level of saving in Asian countries period with a zero interest rate. The main reason is also expected to subside as incomes rise and for the hike was that the period of deflation was social security safety nets are built up. believed to be over, as core inflation had been The present forecast assumes that the ten-year positive for six months. Furthermore, the real US bond yield will be 4.80 per cent in December economy had been growing relatively strongly 2006 and 4.80 per cent at the end of 2007, and for some time. Although the Bank of Japan has that the equivalent German yield will be 3.85 per raised its key rate, the real rate of interest is still cent in December 2006 and 4.15 per cent at the slightly negative as a result of the end of defla- end of 2007. tion. Lending by banks is also growing again after almost a decade of decline. The present forecast assumes that the Bank of Japan will ECB continuing to tighten – Fed finished continue to raise its key rate, albeit slowly.

The Federal Reserve raised its key rate by 25 ba- Diagram 2.2 Key interest rates in the euro area, Sweden sis points at every meeting between June 2004 and the United States and June 2006. Until mid-summer, most ana- Per cent lysts were convinced that the Federal Reserve 7 would continue to tighten its monetary policy. 6 Euro zone However, a clear slowdown in US growth has 5 Sweden prompted it to leave interest rates unchanged at United States its last meetings. The Federal Reserve faces a di- 4 lemma: while there are several signs of the real 3 economy slowing, inflationary pressure is still high. The present forecast assumes that the signs 2 of weaker economic growth will tip the balance 1 in the Federal Reserve’s response. Its key rate is 0 assumed to remain at 5.25 per cent for the rest of 2000 2001 2002 2003 2004 2005 2006 this year and fall to 4.50 per cent at the end of Source: Reuters. 2007. In December 2005 the European Central Bank (ECB) decided to begin tightening its Dollar expected to weaken further monetary policy. Its key rate has since been raised by a total of 125 basis points to 3.25 per The US dollar has weakened gradually since last cent. The reason for this tighter monetary policy winter. The foreign exchange market is con- is that the two pillars of the ECB’s monetary tinuing to focus on actual and anticipated inter- policy strategy – inflation and money supply est rate differentials among currency areas. The growth – have been above the target level. The depreciation of the dollar began in connection ECB expects inflation to continue to exceed the with the ECB’s first interest rate hike in Decem- target in 2007. Given persistently high inflation, ber 2005, which helped to shift the market’s fo- there is a risk that the inflation expectations of cus. Until then, a wider spread between central households will rise and confidence in the infla- bank rates in the United States and the euro area tion target will be eroded, which could lead in had helped to strengthen the dollar.

28 PROP. 2006/07:1 BILAGA 2

The forecast assumes that the dollar will setback in the US economy (see box on page weaken further. As the growth and interest rate 15). differentials narrow, underlying factors such as the United States’s major current account deficit Diagram 2.4 Stock market performance in the euro area, will come increasingly to the fore. The forecast the United States and Sweden Index, 01/01/2002=100 assumes that the dollar will drop to 1.30 against the euro and 115 against the yen at the end of 170 Sweden, OMXS 2006, and finish 2007 at 1.35 against the euro and 150 110 against the yen. United States, S&P 500 130 Euro zone, Euro STOXX Diagram 2.3 US dollar against yen and euro 110 USD/JPY EUR/USD

130 1.00 90 125 1.05 USD/JPY EUR/USD 70 120 1.10

115 1.15 50 2002 2003 2004 2005 2006 110 1.20 Source: Reuters. 105 1.25

100 1.30 95 1.35 2.2 Developments in Sweden 90 1.40 2003 2004 2005 2006 The Swedish ten-year bond yield has risen by Source: Reuters. around 0.7 percentage points since bottoming out around a year ago. This growth is in line with global bond yields. Nevertheless, consid- Strong stock market performance ering the strong economic climate, bond yields The big international stock market indices have are still low. continued to gain, having now climbed for al- Diagram 2.5 Spread between ten-year bond yields in Swe- most four years. There was increased uncertainty den and Germany at the beginning of the summer, when equity Basis points prices dropped sharply. The main contributing 80 factor was concern that the Federal Reserve 70 would continue to tighten its monetary policy. 60 However, fears of higher interest rates abated 50 late in the summer, and corporate earnings 40 30 growth has remained favourable. That has meant 20 that the stock markets have begun to rise again. 10 This year’s second-quarter reports were gen- 0 erally slightly better than analysts had antici- -10 pated. The consensus is that corporate earnings -20 will continue to grow at a strong but slowing -30 2003 2004 2005 2006 rate. Given the relatively bright outlook for the Source: Reuters. real economy, the valuation of the stock market is reasonable. P/E ratios, which relate share price Since May 2005 the Swedish ten-year bond yield to the firm’s earnings per share, are relatively low has been lower than its German equivalent. in both the United States and Europe, and the Historically speaking, that is unusual. It can be stock markets are still undervalued relative to the explained primarily by the Riksbank’s key inter- bond market. However, there is a risk of persis- est rate having been below the ECB’s rate during tently high commodity and energy prices, along the period. But part of the explanation also with rising interest and labour costs, squeezing stems from the new rules for pension funds, the margins of firms in the longer term. There is which have led to increased demand for long- also a slightly increased risk of a more marked

29 PROP. 2006/07:1 BILAGA 2 term Swedish bonds. At the same time, Swedish more neutral level, which it believes to be be- government debt has been falling and is rela- tween 3.5 and 5 per cent. tively small, which means that the supply of The present forecast assumes that the Riks- long-term government bonds is limited. bank will gradually raise its repo rate during the The forecast assumes that Swedish bond remainder of 2006 and in 2007. Continued em- yields will rise both this year and next as avail- ployment growth is expected to contribute to able resources in the economy decline and higher wage growth and increased resource utili- monetary policy becomes less and less expan- sation. Faster growth in rents is also set to con- sionary. Swedish bond yields are expected to rise tribute to rising inflation. The forecast for the slightly further than their German equivalents as repo rate is 3.00 per cent in December 2006 and the spread between central bank rates in Sweden 3.75 per cent in December 2007. It is then pro- and the euro area gradually narrows. The bond jected to be 3.75 per cent at the end of 2008 and yield differential relative to Germany is expected 4.00 per cent at the end of 2009. to be positive in 2007. The forecast for the Swedish ten-year bond yield is 3.80 per cent in December 2006 and 4.20 per cent in December Krona continues to strengthen 2007. It is then projected to be 4.35 per cent at the end of 2009. The krona has strengthened against both the dollar and the euro in 2006. The main reason for this performance has been expectations of Riksbank upholds inflation target tighter monetary policy in Sweden. The expected interest rate differential to the rest of the The Riksbank has begun to tighten its monetary world has narrowed, helping the krona to policy this year. Its key rate has been raised from strengthen. 1.5 per cent to 2.5 per cent, and further hikes are The Riksbank is believed to be one of the expected. The Swedish economy is showing clear central banks that will be raising their key rates strength, and growth has been well above the the furthest between now and December 2007. potential growth rate recently. At the same time, During the course of next year, the Swedish repo the central bank rate has fallen somewhat since rate is likely to overtake the ECB’s key rate, the beginning of 2006 in real terms despite the which means that underlying factors are ex- Riksbank’s hikes, because inflation has risen pected to come to the fore. The Swedish current further than short-term interest rates. However, account surplus is considerable, central govern- inflation is still below the Riksbank’s target. Un- ment finances are stable, and economic growth is derlying inflationary pressure is also expected to favourable. The forecast for the trade-weighted remain low (see Section 4.3 on inflation). exchange rate – the TCW index – is 126 in De- However, members of the Riksbank’s execu- cember 2006 and 123 in December 2007. It is tive board have recently expressed concern that then projected to be 122 at the end of both 2008 the bank’s forecasting models for inflation are and 2009. not picking up the consequences of the strong growth in the real economy. They have also Diagram 2.6 TCW index broadened their analytical framework. Under 145 certain circumstances, the forecast horizon for 140 inflation can be extended beyond the normal pe- 135 riod of two years. The general interpretation of the Riksbank’s communications is also that the 130 board is now attaching greater importance than 125 before to asset prices and household debt. The 120 Riksbank has recently expressed growing con- 115 cern about strong credit growth and rising house prices. According to some members of the 110 board, this trend runs a longer-term risk of cre- 2000 2001 2002 2003 2004 2005 2006 Source: Reuters. ating instability while impacting on the real economy and inflation. The Riksbank is also sig- nalling that its key rate should be raised toward a

30 PROP. 2006/07:1 BILAGA 2

Continued upswing on Stockholm Stock Exchange Table 2.1 Interest and exchange rate assumptions Value at the end of each year After a temporary setback at the beginning of 2005 2006 2007 2008 2009 the summer, the Stockholm Stock Exchange has Repo rate 1.50 3.00 3.75 3.75 4.00 continued to gain (see Section 2.1 under “Strong 6-mth interest rate 1.93 3.20 3.80 3.95 4.05 stock market performance”). The main reason 5-year interest rate 3.16 3.70 4.10 4.20 4.25 for this bull market is rapidly growing corporate 10-year interest rate 3.38 3.80 4.20 4.30 4.35 earnings. Second-quarter reports were somewhat Spread Swe-Ger 10yr 0.02 -0.05 0.05 0.10 0.15 stronger than expected, and earnings were up by 6-mth. EURIBOR 2.60 3.65 3.65 3.80 3.80 around 20 per cent. Primary industries – for- TCW index 131 126 123 122 122 estry, steel and minerals – posted the strongest EUR/SEK 9.44 9.20 9.00 8.90 8.90 earnings growth, followed by engineering com- USD/SEK 7.95 7.08 6.67 6.59 6.59 panies. The only sector to report lower earnings EUR/USD 1.19 1.30 1.35 1.35 1.35 was IT, which includes Ericsson. The general Sources: Ministry of Finance and Reuters. view among analysts is that earnings will continue to grow but at a decreasing rate. The consensus forecast for earnings growth at companies on the Stockholm Stock Exchange is around 15 per cent this year, 9 per cent next year and 7 5 per cent in 2008F F. Generally speaking, a slowdown in earnings growth indicates that a period of weaker investment growth can be expected (see Section 3.2 on investment).

Outlook for the Swedish economy

Developments in the financial markets impact on the Swedish economy through the effects of factors such as interest and exchange rates on behaviour in the household and business sectors. Rising asset prices, such as share and house prices, also affect household consumption. A bullish stock market also has a positive impact on firms’ supply of capital, which can lead to increased investment. The conclusion is that fiscal conditions will tighten but remain relatively expansionary during the rest of 2006 and in 2007. Real interest rates are low, and the exchange rate is still believed to be relatively weak. Growth in both household borrowing and money supply is historically high. That is partially a result of monetary policy still being expansionary and is contributing to strong demand growth in the Swedish economy.

5 Source: JCF.

31 PROP. 2006/07:1 BILAGA 2

3 Swedish demand and output This trend has helped exports to grow at a good pace in 2006. The high demand for Swedish In 2006 Swedish GDP growth has so far been goods abroad constitutes a primary driving force very strong (see Diagram 3.1). According to data for domestic industrial output, as well as for in- from Statistics Sweden, GDP rose a full 4.5 per dustry-related corporate services, which are cent during the first half of this year from the therefore expected to grow quickly this year. Exports of services, which are growing rapidly corresponding period in 2005. The reason for and assuming increasing importance for Sweden, this trend is growth in demand in the Swedish are also contributing to strong growth in the economy across a broad front. After relatively output of corporate services in 2006. The ex- weak growth during the first half of 2005, expected weakening of the global economy next ports have recovered considerably, the invest- year is likely to result in slower growth in ex- ment climate has continued to hold up, and ports of both goods and services. household consumption has risen at a good pace. Table 3.1 Demand and output Diagram 3.1 GDP

Annual percentage change SEK billion Percentage change in volume 6 2005 2005 2006 2007 2008 2009 Household 5 consumption 1 283 2.4 3.6 4.2 3.6 3.1

4 General government consumption 728 0.7 1.4 1.5 1.0 0.6 3 Central govt. 201 -1.5 0.5 0.0 0.1 0.4

2 Local govt. 527 1.6 1.7 2.0 1.3 0.7 Investment 455 8.5 7.2 3.3 3.6 3.6 1 Change in stocks1 2 -0.2 -0.2 0.1 0.1 0.0 0 Exports 1 299 6.4 8.3 6.4 6.1 5.9 96 97 98 99 00 01 02 03 04 05 06 Imports 1 093 7.3 7.6 7.1 6.4 6.1 Source: Statistics Sweden.

GDP 2 673 2.7 4.0 3.3 3.1 2.7 GDP, calendar High GDP growth expected during forecast period adjusted – 2.7 4.4 3.4 2.9 2.7 1 Volume change, per cent of last year’s GDP. Although GDP growth is set to slow down in Sources: Statistics Sweden and Ministry of Finance. the future, it should remain high from a his- The declining growth rate in investment and torical perspective. Many factors underlie this exports is expected to be offset to some extent trend, which will not become truly apparent by stronger growth in Swedish household con- until next year, including an expected slow- sumption. Fiscal policy is likely to be weakly down in investment. Total investment has in- expansionary in 2006 and neutral in 2007. Al- creased since 2003, and the growth rate has at though monetary policy is expected to be less times been extremely strong in highly influen- expansionary in the future, continued low in- tial industries, such as manufacturing, corpo- terest rates are anticipated. Employment is ex- rate services and housing. Driving forces be- pected to increase rapidly, which will contrib- hind this upswing include high capacity utili- ute to high growth in household disposable sation and favourable financial conditions in income. In addition, the current wealth posi- firms. These driving forces remain, suggesting tion of the households is high. Overall, these a continued high level of investment. How- factors suggest that household consumption ever, as this new production capacity is taken will continue to grow even faster during the into use, investment growth in products such forecast period. Partly as a result of the in- as industrial machinery is expected to decline. come tax reductions proposed in this Budget The projected drop in GDP growth in 2007 will also be due to a likely weakening of export Bill, household consumption is expected to growth. Meanwhile, demand for Swedish prod- grow substantially in 2007 in particular. Gen- ucts abroad is growing more strongly this year, eral government consumption is set to rise in part due to the recovery in the euro area, mainly in the local government sector during which is crucial for the Swedish export industry.

32 PROP. 2006/07:1 BILAGA 2 the forecast period and benefit primarily from could be stronger than expected, in part because strong local government finances. of an increasingly serious labour shortage in the construction industry and in part because the total level of machinery investment in manu- GDP is expected to continue rising at a good facturing is currently very high. However, the pace even after 2007 as the economy moves strong demand for housing, very high capacity toward full resource utilisation utilisation and continued relatively low interest rates suggest that this risk will not materialise. No forecast for the economic development Should capacity utilisation in industry unexpect- will be made for the years after 2007. The edly continue to be very high, machinery in- projections for GDP growth are based on es- vestment might also grow more strongly than timates of the size of potential supply, meas- forecast. ured as potential GDP. Calculation on poten- Risk is also associated with household con- tial GDP is based on potential productivity sumption trends. If the anticipated interest rate and the potential supply of labour. hikes have an unexpectedly large impact on Although GDP is expected to rise rapidly in prices in the property market, growth of house- 2006 and 2007, the economy will have available hold consumption during the forecast period resources in 2007. That can also be expressed by could be restrained. Household consumption saying that the GDP gap is negative. The fact could also become greater than expected, mainly that the GDP gap is still expected to be negative in the long term, if households choose to save in 2007 means that actual GDP may increase less of their disposable income. The current as- faster than potential GDP even after 2007. sessment of household consumption is based on Overall, GDP is expected to rise 0.1 percentage the assumption that, as in recent years, house- point more than potential growth in 2008 and holds will continue to save a relatively large por- 2009. The potential growth rate is expected to tion of their disposable income. increase as a result of the economic policy which Certain risks are also associated with long- is being presented in this Budget Bill. term developments. It is complicated to assess Due to a gradually declining growth in world how quickly and to what extent the measures market demand, as well as a strengthening of the currently being taken will have an impact on krona in 2006–2009, export growth should potential production capacity. Effects on the la- continue to weaken in 2008 and 2009. Lower bour supply, employment and GDP could be- export growth is also set to lead to a gradual come greater than what is currently expected. It slowing of growth in imports. is also difficult to determine how large current Domestic demand continues to rise at a good resource utilisation is and how much potential pace. Both household consumption and invest- GDP will increase in the future. To illustrate the ments are expected to increase somewhat faster uncertainty of the assessments, Chapter 6 pre- in 2008 and 2009 than in 2007. However, general sents two alternative scenarios in which Sweden's government consumption is calculated to show economy develops differently than in the base weak growth. scenario.

Risk outlook 3.1 Exports Any of the global risks, such as oil prices, which are rising once again and are set to re- During the end of 2004 and the beginning of last main extremely high for a long time to come, year, the global economy experienced a slow- continued large saving imbalances, and an un- down. Later in 2005, however, the economy expected abrupt slowdown in the US econ- gained momentum, which also strengthened omy, could dampen the global economy and demand for Swedish exports. This year exports thus developments in the Swedish economy as showed strong growth during the first quarter, well. while slowing somewhat during the second The Swedish investment trend is difficult to quarter. Overall, however, exports have exhib- assess. There is a risk that the downturn in resi- ited strong growth during the first six months of dential and industrial machinery investment this year.

33 PROP. 2006/07:1 BILAGA 2

Although exports are likely to grow more WMD is expected to be high in 2006 and slowly in the near future, good global growth is somewhat lower in 2007, suggesting a dampen- expected to lead to relatively high export ing of the strong increase in exports during the growth. Exports of services in particular are ex- first half of this year. pected to increase strongly during the forecast Good competitiveness is another important period. Total exports are expected to grow 8.3 prerequisite of the export industry's ability to in- per cent in 2006 and 6.4 per cent in 2007. Ex- crease sales. One measure of competitiveness in ports are projected to grow by 6.1 per cent in industry is the relative unit labour cost (see Dia- 2008 and 5.9 per cent in 2009. (see Table 3.2). gram 3.3).

Table 3.2 Exports of goods and services as well as change Diagram 3.3 Manufacturing industry's unit labour cost in in export prices Sweden compared with 11 OECD countries

160 SEK billion Percentage change in volume 2005 2005 2006 2007 2008 2009 140 Exports of goods 974 4.9 6.8 5.8 – – 120 1 Processed goods 811 4.4 6.7 6.6 – – 100

Exports of services 325 11.1 12.6 7.9 – – 80

Total exports 1 299 6.4 8.3 6.4 6.1 5.9 60

Export prices – 3.3 3.0 -1.3 -0.3 0.8 40 National currency

1 Classification according to SNI. 20 Common currency, SEK Sources: Statistics Sweden and Ministry of Finance. 0 80 82 84 86 88 90 92 94 96 98 00 02 04 Sources: NIER, Statistics Swedenska and Ministry of Finance. Conditions for Swedish exports Manufacturing industry's relative unit labour 6 Sweden exports goods primarily to the EU cost in national currencyF F increased substantially countries. Most important are the countries in during the 1980s. Since the early 1990s, however, the euro area, which receive about 40 per cent of the relative unit labour cost in national currency the exports. Other important export regions are has gradually fallen, mainly due to higher pro- the Nordic countries and North America. ductivity growth in Sweden than in the countries Export growth is largely dependent on how with which it competes. Owing to the gradual import demand develops in the countries to weakening of the krona since the early 1980s, the 7 which Swedish exports are sent. One indicator relative unit labour cost in common currencyF F for estimating this factor is world market de- has fallen even more. Declining unit labour costs mand (WMD) (see Section 1.4). Historically have helped to strengthen the competitive posi- speaking, exports have closely followed WMD tion of Swedish firms. (see Diagram 3.2). A more short-term indicator of competitiveness can be found in NIER's Business Tendency Diagram 3.2 World Market Demand (WMD) and Swedish Survey (see Diagram 3.4), which shows that export growth firms perceive the competitive situation for the 16 Swedish manufacturing industry as having been 14 WMD Exports 12 predominantly positive since the second quarter 10 of 2005. The competitive situation appears 8 strongest in the crucial EU market. 6 4 2 0 -2 6 -4 Relative unit labour cost in national currency refers to the labour cost 99 00 01 02 03 04 05 06 07 of producing one unit of a good in Sweden relative to competing Sources: Statistics Sweden and Ministry of Finance. countries, without taking account of exchange rate changes. 7 Relative unit labour cost in common currency refers to the labour cost of producing one unit of a good in Sweden relative to competing countries, taking account of exchange rate changes.

34 PROP. 2006/07:1 BILAGA 2

Diagram 3.4 Competitive situation for Swedish industry prices, export goods prices are expected to fall in 25 2007. More favourable trends for export goods 20 prices are expected in 2008 and 2009. 15 10 5 High demand result in strong exports of goods 0 -5 Global industrial activity picked up during 2005, -10 leading to a good increase in exports of goods. -15 Home market The trend continued during the beginning of -20 EU 2006, but activity slowed down during the sec- -25 Outside the EU ond quarter. Overall, exports of goods demon- -30 97 98 99 00 01 02 03 04 05 06 strated strong growth during the first six Note: Net figures are defined as the difference between the share of companies stating months of the year. Industries that enjoyed a that the competitive situation has improved and the share of companies stating that it has deteriorated. strong increase in exports included petroleum Source: NIER. products and pharmaceuticals. At the same time, exports of telecommunication equipment increased at a slower rate than previously. The Weakening export prices slowdown in exports of goods during the second quarter occurred in most industries. After having fallen for several years, the prices of Exports of goods are expected to increase export goods rose relatively strongly in 2005. more slowly during the rest of the year as global During 2006 the prices of petroleum and other growth slows down somewhat. Overall, exports commodities have continued to increase sub- of goods in 2006 are still expected to show good stantially, though prices of processed goods have growth. Exports of machinery and transport not shown as strong growth. equipment are expected to increase at a good NIER's Business Tendency Survey indicates pace, while exports of petroleum products, etc., that the percentage of firms in the manufactur- are set to exhibit very strong growth this year. ing industry that experience declining export Overall, exports of goods are expected to grow prices is now greater than previously. The NIER by 6.8 per cent in 2006. Next year exports of survey also shows a decline in expectations of goods are expected to increase at a somewhat future increases in export prices. slower pace because of diminishing global de- The high price of crude oil has led to an in- mand for Swedish export goods. In addition the crease in investments within the industry, at the effects of the expected appreciation of the krona same time as high oil prices and expectations of a are likely to slow exports of goods, to a greater weaker global economy are contributing to de- extent, next year than this year. Exports of clining demand growth. As a result, oil prices, goods are expected to increase 5.8 per cent in and thus the prices of petroleum products as 2007. well, are expected to drop in the future (see also section 1.5). The relatively low expectations in the manu- Exports of services increasingly important facturing industry for export price trends, together with falling oil prices and the appreciation Services have accounted for a greater share (now of the krona, suggest a weaker development in about one quarter) of Swedish exports in recent export prices during the rest of the year. Nev- years. Given the increased service content in the ertheless, the strong growth earlier in the year exports of Swedish firms and increased travel to means that total export goods prices are ex- Sweden, the significance of exports of services is pected to increase an average of 3.7 per cent expected to continue growing in the future. during 2006. Thus, the increase in export goods Exports of services from Sweden demon- prices this year is expected to be the highest strated strong growth during 2005, increasing since 1995. 11.1 per cent. They also increased substantially The expected appreciation of the krona means in the first six months of 2006. a decrease in the potential for future price hikes. The expenditures of foreign visitors in Swe- Together with continued declining petroleum den are referred to as exports of travel and are

35 PROP. 2006/07:1 BILAGA 2 included in exports of services. Travel to Sweden still mean that overall exports of services are ex- has increased sharply in recent years, and exports pected to rise sharply (an increase of 12.6 per of travel increased substantially in 2005. Good cent) in 2006. In the wake of an anticipated economic growth in the rest of the world, as the slowdown in the global economy and lower result of increased household consumption, is growth in exports of goods, exports of services expected to lead to strong growth in travel to are expected to grow 7.9 per cent in 2007. Sweden this year as well. As economic growth becomes milder, travel to Sweden is expected to grow at a slower pace next year. Transport services account for about one 3.2 Investment quarter of exports of services. Those services include shipment of Swedish goods from the 2005 and 2006 – two strong years for investment Swedish border to foreign customers, freight carried by Swedish shipping firms between for- Gross fixed capital formation has risen at an in- eign ports, and passenger traffic. Exports of creasingly rapid rate since 2003 (see Diagram transport services consequently follow interna- 3.6), and the favourable investment activity has tional trade trends and are therefore expected to spread to an ever-increasing area of the econ- rise this year, while growth is set to be somewhat omy. Investment rose 8.5 per cent in 2005 and lower next year. continued to increase substantially during the Over half of exports of services involve other first half of 2006, by 9.7 per cent compared with categories, such as professional services, licenses, the same period last year, suggesting that 2006 patents and banking. These services also include will be yet another strong year for Swedish in- 8 vestment. "merchanting".F F Exports of other services largely follow the same trend as exports of goods (see Diagram 3.6 Investment Diagram 3.5). Exports of other services are ex- Annual percentage change pected to continue showing strong growth as a 15 result of solid growth of exports of goods combined with a likely increase in the service content 10 of exports by firms in the future. 5

0 Diagram 3.5 Exports of goods and "other services"

25 -5 Goods -10 20 Other services

15 -15

10 -20 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 5 Sources: Statistics Sweden and Ministry of Finance. 0

-5 Slowdown in investment growth ahead 1996 1998 2000 2002 2004 2006 Note: "Other services" consist of services such as consultancy services, licences, patent and banking services. Continued high capacity utilisation and favour- Sources: Statistics Sweden and Ministry of Finance. able financial conditions for firms are driving investment growth in 2006. During the upcoming Given expected weaker demand during the rest year, however, more and more firms are ex- of the year, total exports of services are likely to pected to expand their production capacity at grow at a slower pace than during the first six the same time that global demand weakens. As a months. The strong beginning of the year will result, investment growth is expected to drop in 2007. Overall, total investment in the Swedish economy is expected to increase by 7.2 per cent this year and 3.3 per cent next year (see Table 8 Merchanting refers to the trade margin that arises when Swedish parent 3.3). In 2008 and 2009, investment is expected to companies handle invoicing of sales from foreign subsidiaries to a third increase by 3.6 per cent annually, in part as a country.

36 PROP. 2006/07:1 BILAGA 2 consequence of the measures proposed and an- export market. Consequently, the need for in- nounced in this Budget Bill. These measures are vestment in machinery is also expected to de- expected to lead to a lasting higher level of em- crease. For example, a growing number of firms ployment, which will increase the need for firms in manufacturing believe that production capac- to make capital investment. Investment as a per- ity is now more than adequate for the next three centage of GDP is expected to reach 17.4 per months. Machinery investment by the manu- cent toward the end of 2009 (see Diagram 3.7). facturing industry is therefore expected to slow down in 2006 and decrease in 2007. Diagram 3.7 Investment share of GDP Per cent Diagram 3.8 Capacity utilisation in industry 24 Per cent 23 22 92 21 90 20 19 88 18 86 17 16 84

15 82 14 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 80 Sources: Statistics Sweden and Ministry of Finance. 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 Source: Statistics Sweden.

The manufacturing industry’s investment in Mild slowdown for goods producers buildings and facilities has been cut in half since 2000. During the first six months of this year, Investment by goods producers, especially in- however, the manufacturing industry substan- vestment in machinery for the manufacturing tially increased its investment in buildings. Due industry, was the single biggest engine for the to the need for modernisation and refurbish- investment upturn in 2005. The upswing in ex- ment having been neglected, along with good ports which began in 2003 resulted in the use of profitability, these investments are expected to a growing percentage of production capacity grow at a good pace over the next few years. (see Diagram 3.8), creating a need for increased Statistics Sweden's investment survey also investment, especially in machinery. As a result suggests a calmer and broader investment cli- of persistently strong foreign demand and mate in the manufacturing industry for 2006. growing domestic demand, capacity utilisation is According to the questionnaire, the manufac- now at its highest level since measurements be- turing industry is increasing its investment in gan in 1980 – despite the high investment levels both machinery and buildings to some extent. of recent years. The inflow of orders to the Most industries are planning for increased in- manufacturing industry remains high, while both vestment, while the strongest upswing is ex- foreign and domestic demand are strong. To- pected in the mining and quarrying industry. gether with relatively low interest rates and However, investment is decreasing sharply strong profit growth, that should imply a con- within the pulp and paper industry, which in- tinued upswing in investment. During the sec- vested heavily last year. ond quarter this year, however, the manufactur- All factors considered, investment growth in ing industry cut back on investment in machin- the manufacturing industry is expected to ery for the first time since spring 2004. Mean- weaken in 2006, while industrial investment is while, the global economy is weakening and projected to decrease in 2007. growth among Sweden’s trading partners is set Investment in the energy sector has shown to enter a calmer phase next year (see Section 1). extremely strong growth during the first six That implies somewhat weakening demand for months of 2006, and this trend is expected to Swedish-made goods, as has already been re- continue in the future. Energy companies are flected in the manufacturing industry's lowered making major investments in increased electric- expectations for the inflow of orders from the

37 PROP. 2006/07:1 BILAGA 2 ity generation and an improved electricity sup- furnishings. Investment in household services is ply. also forecast to grow at a sound rate. According to NIER’s Business Tendency After a three-year decline, investment in Survey, expectations in the construction indus- property management (excluding housing) in- try have dampened somewhat in recent times. creased once again in 2005 and gained further Although both the inflow of orders and con- momentum during the first six months of 2006. struction are expected to continue to rise, only a Vacancy figures (the percentage of collective of- dwindling number of firms anticipate an in- fice space that is not leased) were high between crease. In addition, fewer firms expect to see an 2003 and 2005, but have begun to decrease at an improvement in the construction market over increasingly rapid pace. Now that office space is the next twelve months. The number of new once again being filled, there is also scope for housing starts is now at a high level, but this construction of new premises. Building permits forecast projects a slight decrease next year. for office premises, measured in square metres, However, construction in industry, property have in recent times increased substantially after management and general government has gained having decreased sharply between 2001 and momentum. Because of good orders and a 2004. New construction and expansion of shop- broader-based upswing in construction, invest- ping centres is also growing. As a result, a strong ment by the construction industry is therefore increase in investment in property management expected to increase somewhat in 2006 and 2007. is expected this year. However, due in part to In summary, investment by goods producers higher interest rates, growth is projected to is estimated to rise by 6.6 per cent this year and weaken somewhat in 2007. by 1.7 per cent next year. After weak growth over the past two years in transports, investment activity increased Table 3.3 Investment strongly during the first six months of the year. Percentage change in volume Investment in aircraft was a major contributor to 2005 2006 2007 2008 2009 this strong development. Investment by haulage Business sector1 8.9 7.4 3.0 – – contractors in new vehicles, along with large in- Producers of goods 14.4 6.6 1.7 – – vestment in ships, is also deemed to be contrib- Producers of services1 5.1 7.9 3.9 – – uting to a strong increase in investment in the Housing 16.9 8.7 2.9 – – transport business in 2006. A weaker global General government -0.5 5.0 5.0 – – economy will cause some slackening in invest- Central government -6.0 8.0 7.0 – – ment in 2007. Overall, investment by service producers is Local government 6.1 1.8 2.6 – – estimated to rise by 7.9 per cent this year and 3.9 Total 8.5 7.2 3.3 3.6 3.6 per cent next year. 1Excluding housing. Sources: Statistics Sweden and Ministry of Finance.

General government investment accelerates once Favourable development for service producers again

Investment in the service sector rose considera- After a decrease in 2005, central government in- bly during the first half of the year. The increase vestment increased sharply during the first half was strong in all sub-sectors, but especially in of 2006. Major infrastructure initiatives by the financial services, property management and National Rail Administration and the National post and telecommunications. Road Administration over the next few years Investment in wholesale and retail trade in- imply that a strong increase in central govern- creased at a healthy pace during the first six ment investment is predicted for both 2006 and months of the year. The anticipated strong con- 2007. sumption growth is expected to contribute to Investment by municipalities increased continued investment at a healthy pace in whole- sharply during the second half of 2005, in part sale and retail trade. For example, new depart- due to the solid financial situation. Investment ment stores are opening in several market seg- also increased at a sound rate during the first half ments, including building supplies and home of 2006, though growth is expected to slow somewhat during the second half.

38 PROP. 2006/07:1 BILAGA 2

In summary, general government investment assumed to attract labour from other parts of the is expected to increase 5.0 per cent both this year country. and next year. Strong demand has driven up house prices. For example, the prices of single-family dwellings rose by over 12 per cent in the first six Slowdown for residential investment months of 2006. Prices on owner-occupied flats also increased sharply over the past year. Largely as a consequence of a marked increase in housing construction, construction activity has Diagram 3.10 Building permits and building starts developed strongly in recent years. The number Thousands of housing starts increased by an average of 18 9 per cent annually between 2002 and 2005, 8 Building permits granted, lagged two quarters 7 though it is still lower than during the 1980s (see Building starts Diagram 3.9). 6 5 Diagram 3.9 New building starts 4 Thousands 3 120 2 1 100 Single family dwellings 0 97 98 99 00 01 02 03 04 05 06 80 Multi family dwellings Note: 12 month moving average. Sources: Statistics Sweden and Ministry of Finance. 60 The high prices and relatively speaking lower 40 level of costs are making it profitable to build. Tobin’s q measures the relationship between the 20 price of a used single-family dwelling and the 0 production cost of a new single-family dwelling 70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 of a similar standard. A Tobin’s q greater than 1 Sources: Statistics Sweden and Ministry of Finance. indicates that it is profitable to build a new As was mentioned previously, construction ac- home. According to information from the In- tivity expectations have dampened somewhat in stitute for Housing and Urban Research, the recent months according to NIER's Business national average for the Tobin’s q was 1.02 dur- Tendency Survey. For instance, fewer firms ex- ing the first half of 2006. However, this value pect to see an improvement in the construction was much higher in the urban regions. For ex- market over the next year. ample, it was 1.43 in Stockholm County. One indicator of the future development of Despite strong demand and good profitabil- housing construction is the number of building ity, however, rising interest rates and costs are permits granted (see Diagram 3.10). During the expected to have a somewhat dampening effect first half of 2006, building permits equivalent to on growth in housing construction in the future. 16,550 dwellings were granted, which is an in- Interest rates are expected to increase in 2006 crease of 4.6 per cent from the first half of 2005. and 2007, which is assumed to reduce household Demand for housing remains strong. Ac- demand for owner-occupied flats and single- cording to the National Board of Housing, family homes. A pivotal factor, however, is the Building and Planning's housing market ques- production costs of construction firms. Between tionnaire for 2006, a full 41 per cent of the 2000 and 2005, production costs for blocks of Swedish municipalities state that there is a flats increased by just over 3.1 per cent annually. housing shortage, as opposed to 11 per cent at However, price hikes gradually increased during the end of the 1990s. During the first six months the spring, and production costs rose a full 6.1 of 2006, the total net influx to these per cent in August from the same month last municipalities was over 19,000 people, and the year. The cost of construction materials in par- total increase in population was about 29,000. ticular has grown sharply. Although payroll ex- The majority of the municipalities are located in penses have increased at a calm pace to date, they counties where unemployment is lower than the are expected to rise more sharply during the national average and which therefore can be

39 PROP. 2006/07:1 BILAGA 2 forecast period due to a growing labour shortage a growing number of firms felt that stocks were in the construction industry. The percentage of too small. During the first six months of this construction workers who are openly unem- year, industrial output accelerated once again ployed has decreased substantially over the past and finished stocks increased. The rebuilding year, implying that firms are finding it more that has begun is expected to continue for the difficult to hire skilled personnel. Prior to the rest of the year. Stocks are expected to be built third quarter, over 60 per cent of firms consid- up in 2007 as well, but at a slower rate. ered the labour shortage to be the leading obsta- Since 2002, the manufacturing industry has cle to housing construction. The result could be reduced inventories of intermediate goods. To delays and postponed construction projects. Ul- some extent this can be attributed to the trend timately the situation will also boost payroll and towards smaller stocks of intermediate goods ac- production costs, which would dampen growth cording to the just-in-time principle. Recently, in housing construction. however, the delivery times of suppliers have in- Overall, the number of new housing starts is creased and imports of raw materials have devel- estimated at around 33,000 dwellings in 2006 and oped more weakly than expected. This trend, to- 32,000 in 2007. gether with strong export demand and increased Investment in refurbishing increased substan- industrial output, has resulted in decreased tially during the first six months of the year. A stocks. According to the firms, stocks of inter- large underlying need for refurbishment means mediate goods are currently at a very low level. that the upswing is expected to continue during Because of solid export demand, stocks of in- the forecast period. The Million Homes Pro- termediate goods are also expected to decrease gramme, which accounts for almost one quarter over the second half of this year. In 2007, how- of the Swedish housing stock, has reached an age ever, export growth is expected to cool off and at which housing generally needs renovation. the manufacturing industry will be able to re- That will require major investment in refurbish- build its inventories of intermediate goods. ment and extension, as well as infrastructure. In summary, increased new construction and refurbishment mean that total housing invest- Retail trade empties stocks ment is estimated to increase by 8.7 per cent this year and 2.9 per cent next year. Wholesale and retail trade has increased stocks in recent years. However, during the first six months of this year, stocks decreased substantially, especially in wholesale trade with 3.3 Stockbuilding commodities such as agricultural goods and building materials. Assessments of stocks within Substantial inventory adjustments during the first wholesale and retail trade are now at a low level, half of the year suggesting that the sector wishes to increase stocks. Given expectations of strong domestic Total stockbuilding declined substantially in demand in the future, withdrawal of stocks is 2006 and reduced GDP growth by over 0.6 per- forecast to continue during 2006. Stocks are also centage points. A large withdrawal from whole- expected to decrease in 2007, but at a somewhat sale and retail trade's stocks was the main factor lower rate. behind the reduction, while the manufacturing industry increased stocks of finished goods and products in progress. However, the manufac- Stocks pull down GDP growth in 2006 turing industry reduced its stocks of intermediate goods. In 2006, large inventory adjustments, particularly in wholesale and retail trade, are expected to reduce GDP by 0.2 percentage points. In 2007 a The manufacturing industry will fill stocks in 2007 positive contribution is anticipated from both trade and industry, which would have an impact When foreign demand for Swedish goods recov- on GDP growth of 0.1 percentage point. The ered during the latter portion of 2005, industries build-up of stocks is also predicted to have a substantially reduced finished stocks. As a result, positive impact on GDP growth of 0.1 percent-

40 PROP. 2006/07:1 BILAGA 2 age point in 2008, while inventory adjustments during 2005. The low increase can be explained in 2009 are not expected to influence GDP by the fact that household capital gains and, con- growth. sequently, capital gains taxes are estimated to have increased substantially (see explanatory box on page 43), as well as by weak development in the number of hours worked. 3.4 Household consumption expenditure This year the number of hours worked is expected to develop more strongly, and the wage Consumption accelerated in 2005 bill is therefore projected to increase by 5.0 per cent. Moreover, higher dividend income and Between 2002 and 2004 household consumption public transfer payments are contributing posi- expenditure increased modestly even though tively to the development of household dispos- disposable income rose at a good rate and real able income. Even though income tax was low- and financial assets of households increased in ered, household taxes and charges appears to be value. The weak growth in the labour market increasing, which can be explained by the fact during that period may have led to increased that households are expected to have earned caution in households, which chose to save a lar- large capital gains during this year and therefore ger share of their income than during the years have paid higher capital gains tax. Nominal dis- around 2000. posable income is expected to increase 4.3 per Household consumption expenditure in- cent in 2006, while real income is predicted to creased 2.4 per cent in 2005 (see Diagram 3.11). increase 3.0 per cent. Diagram 3.12 presents The somewhat stronger increase in consumption household disposable income and consumption was mainly due to a brighter situation in the la- expenditure. bour market. In addition, both disposable income and the value of real and financial assets Table 3.4 Household disposable income continued to rise. Percentage change, current prices

SEK billion Diagram 3.11 Household consumption expenditure 2005 2005 2006 2007 2008 2009 Annual percentage change Wage bill1 1 082 4.1 5.0 5.3 4.9 4.6

6 Number of hours worked 684 0.5 1.6 1.4 0.9 0.5 5 Wages2 – 3.6 3.4 3.8 4.0 4.1 4 General government transfers 487 1.2 2.4 0.3 2.6 4.0 3 2 Other income 298 3.0 5.5 3.9 4.3 4.1 1 Taxes and charges -530 4.1 4.7 -2.7 4.5 4.7 0 Nominal disposable income 1 338 2.8 4.3 6.4 4.2 4.2 -1 -2 Price index – 1.0 1.2 2.1 1.7 1.9 -3 Real disposable income 1 338 1.8 3.0 4.2 2.4 2.3 -4 1 The wage bill is defined as the number of hours worked multiplied by the hourly 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 wages. Sources: Statistics Sweden and Ministry of Finance. 2 According to the National Accounts definition. Sources: Statistics Sweden and Ministry of Finance.

During the first six months of 2006, the rate of In 2007, the wage bill is estimated to increase by increase was even higher. The increase in con- 5.3 per cent. Between 2007 and 2009, higher in- sumption was 3.2 per cent from the same period terest rates combined with increased liabilities of 2005 according to the National Accounts. It are expected to generate an increase in house- is mainly consumption of goods that was strong, hold interest expenditure, which would affect consumption of both durable and non-durable disposable income negatively (see Diagram goods having shown surprisingly rapid growth. 3.14). Pensions account for almost half of household income from public transfer payments. Favourable conditions for strong consumption

Despite lower tax on income, household real disposable income increased only 1.8 per cent

41 PROP. 2006/07:1 BILAGA 2

9 Between 2007 and 2009 the Income IndexF F is well as eliminating the tax cut for trade union expected to increase somewhat faster than dues and contributions to the unemployment prices, which combined with a growing number benefit fund. All factors considered, the pro- of pensioners suggests that transfers will posed tax and charge changes suggest that increase. households will pay about SEK 30 billion lower Illness-related transfers are set to decrease in taxes and charges (see Chapter 6, Volume 1) and 2007, in part because the number of people with that household taxes and charges will be reduced 10 sickness and activity benefitsF F is expected to de- by 2.7 per cent in 2007. crease between 2007 and 2009 after having in- Inflation is expected to increase in 2007, creased for many years. For 2008 and 2009 a which means that the increase in nominal computational projection is being made, ac- disposable income of a full 6.4 per cent will cording to which the number of sickness allow- become a real increase in income of 4.2 per cent. ance days for 2008 and 2009 is assumed to be at In 2008 and 2009, nominal disposable income is the same level as 2007. expected to increase by over 4 per cent annually, Income from unemployment-related transfer while real disposable income is projected to payments is expected to decrease for all years, increase by 2.4 per cent in 2008 and 2.3 per cent mainly because of changed rules in the compen- in 2009. sation system, but also because of continuing Apart from financial assets, households also improvement in the labour market situation. hold assets in the form of single-family dwellings and tenant-owned flats. At a rough estimate, the Diagram 3.12 Household disposable income and value of these housing assets rose to approxi- consumption expenditure mately SEK 3,700 billion during the first half of SEK billion, constant prices reference year 2005 2006, up 12 per cent from the same period the 1 600 previous year. The prices of single-family dwell- Household consumption expenditure 1 400 ings have risen continuously for more than a Disposable income decade. The value of households’ tenant-owned 1 200 flats has also increased over the past ten years, 1 000 with the exception of a couple of years after

800 2000. As yet, the recent interest rate increases do not appear to have had any noteworthy damp- 600 ening effect on the rising price of housing. 400 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 Table 3.5 Household financial wealth Note: From 2000 the Church of Sweden is included in the household sector. Value at the end of each period, SEK billion, current prices Sources: Statistics Sweden and Ministry of Finance. 2003 2004 2005 2006kv2

1 Other income, such as entrepreneurial income Financial assets 2 091 2 195 2 490 2 570 and income from owner-occupied dwellings, is deposits in banks 531 548 596 666 set to contribute positively to income growth. shares and mutual funds 715 836 1 049 1 054 This Budget Bill announces several tax meas- individual insurance 632 600 619 626 ures that affect household disposable income. other2 212 210 226 214 These measures include a proposed tax reduc- Financial liabilities 1 451 1 590 1 767 1 857 tion of about SEK 40 billion on wage earnings. Financial net wealth 640 605 723 713 The government also proposes halving the Note: Excluding non-profit institutions serving households. wealth tax and imposing a freeze on property 1 Excluding collective insurance technical reserves and tenant ownership rights. 2 Currency, National debt savings, National savings accounts, bonds, loans to the tax. However, these tax cuts will be somewhat financial sector and other accounts receivable. offset by measures such as raising self-financing Sources: Statistics Sweden and The Swedish Financial Supervisory Authority (Savings barometer). of the unemployment benefit fund and imple- menting a tax on motor insurance premiums, as Household debt has increased for over a decade. During the first six months of this year, liabilities increased more than financial assets, which dampened financial net wealth, i.e., financial as- 9 The Income Index, which governs pensions, is based on the historical sets less liabilities (see Table 3.5). wage and price trends. 10 Previously known as disability pensions.

42 PROP. 2006/07:1 BILAGA 2

Wallet version of household disposable income Real disposable income according to the National Accounts compared to the Wallet version According to the National Accounts, household Real percentage change disposable income is calculated as the total of all 7 6 Real disposable income income, less taxes and charges. The income and 5 Wallet version tax described in the National Accounts calcula- 4 tions differ from those reported by the Swedish 3 Tax Agency in its annual assessment of taxes and 2 can also differ from the income perceived by 1 households. The calculation of disposable in- 0 come in the National Accounts does not include -1 capital gains as part of income, even though -2 capital gains tax is included in taxes. That means 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 Note: Real disposable income according to the National Accounts definition. that the higher the capital gains, the lower the Sources: Statistics Sweden and Ministry of Finance. disposable income. In the National Accounts, capital gains affect wealth only – not household In 1999 and 2000, capital gains were very high, income. However, the tax on capital gains is in- which reduced household disposable income cluded because of the EU regulations in force according to the National Accounts. However, for calculation of household disposable income. the tax on capital gains was SEK 17 billion less in Income also includes an imputed income from 2001 than in 2000, while the increase according owner-occupied dwellings equal to the return for to National Accounts was higher, even though an owned home, as well as interest for individual the wage bill increased at a slower rate in 2001 insurance policies – both of which are income than in 2000. The difference is mainly due to that households do not see in their wallets. If the capital gains in 2004 and 2005 as well. In addition income from owner-occupied dwellings in- to the fact that different measures of income are creases substantially from one year to the other, involved in the two calculation methods, the disposable income also increases, even though difference is also due to the fact that disposable households do not have a higher income for income have been deflated with the implicit price consumption or saving. In addition to tax on index for private consumption, while the wallet salaries and capital income, including capital version was deflated with the Riksbank's gains, taxes and charges also include the yield tax underlying inflation measurement (UND1X), which insurance companies pay on the pension since the wallet version excludes income from provisions made to secure future pensions. dwellings. That explains in part the difference in To better reflect the change in household pur- 2007, where the wallet version yields a lower chasing power – what is seen in the wallet – a income than the measure of income in the measure should exclude this imputed income National Accounts. from owner-occupied dwellings, as well as interest on individual insurance and the yield tax. Capital gains can be handled in two ways. One alternative is to include capital gains in the calculation of disposable income. However, that entails disadvantages since a large portion of capital gains is reinvested. It can also be assumed that households pay a large portion of the capital gains tax with part of their capital gains. Thus, a better picture of underlying income growth would be obtained if the calculation of household disposable income excluded the tax on capital gains. The diagram shows a clear difference between the two calculation methods. The differences are particularly large for periods when households earned large or small capital gains.

43 PROP. 2006/07:1 BILAGA 2

Diagram 3.13 Household liabilities Indicators suggest continued strong increase in Per cent consumption

150 50 Share of disposable income (left axis) Statistics Sweden and the Swedish Research 140 45 Share of real and financial assets (right axis) Institute for Trade retail sales index shows very 130 40 high growth over the past few months. Sales 120 have increased most in durable goods trade. Sales 35 110 have also risen (more than expected) in the non- 30 durable goods trade, pointing to continued 100 strong consumption of goods in the third quar- 90 25 ter of 2006. 80 20 80 82 84 86 88 90 92 94 96 98 00 02 04 06 Diagram 3.15 Household expectations about the economy Note: Year 2006 contains information until the second quarter. 12 months ahead Sources: Statistics Sweden and Ministry of Finance. Net balance (better–worse), per cent

Relating household debt to real and financial 80 assets of households shows that debt is at a rela- 60 tively low level (see Diagram 3.13). However, 40 despite relatively strong income growth, house- 20 hold debt has risen substantially as a proportion 0 of disposable income over the past few years and -20 is currently as high as the levels of the late 1980s -40 Unemployment Swedish economy -60 and early 1990s. Own finances Households are currently benefiting from -80 93 94 95 96 97 98 99 00 01 02 03 04 05 06 total interest expenditure being kept down by Note: Net balances shows the share of households responding better less the share low, albeit rising, interest rates (see Diagram of households responding worse for each question. Net balances before 2002 have been level adjusted. 3.14). The increased indebtedness, which oc- Sources: NIER and Ministry of Finance. curred in recent years, means that households would be more sensitive to interest rates In NIER's most recent Business Tendency Sur- changes. Interest rates and therefore interest vey, firms in wholesale and retail sales report a expenditure are assumed to rise during the continued increase in sales, albeit not quite as forecast period but nevertheless remain at a strong as the immediately preceding months. relatively low level. NIER's Consumer Survey shows that households have high expectations for their own fi- Diagram 3.14 Interest expenditure nances at the same time that their view of the Per cent of disposable income Swedish economy and the labour market have 9 become increasingly optimistic in recent times (see Diagram 3.15). 8

7 Tax cuts expected to lead to high consumption 6 growth during the forecast period

5 Higher consumption growth is expected in 2006 4 and 2007 than the immediately preceding years.

3 A relatively strong increase in household dispos- 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 able income is expected during the forecast pe- Sources: Statistics Sweden and Ministry of Finance. riod, establishing good conditions for house-

holds to increase their consumption. The tax breaks proposed in this Budget Bill are expected to lead to a potent increase in household disposable income and therefore in consumption in 2007. In addition, consumption should benefit

44 PROP. 2006/07:1 BILAGA 2 because the baseline wealth position of house- Net savings in supplementary pension schemes holds is good, both housing and financial assets are estimated at just over SEK 55 billion, having risen in value for several years. Available resulting in a total savings ratio of 7.3 per cent. indicators, such as retail trade sales and house- The expected strong income growth in 2007 hold purchasing plans, also suggest continued would cause households’ own savings to increase strong consumption growth in the near future. to 3.7 per cent of disposable income. After that, Labour market developments are also impor- however, household savings are expected to tant for the magnitude of the increase in con- decrease, falling to 1.9 per cent of disposable sumption over the next few years. Apart from income in 2009 (see Diagram 3.16). The total rising employment affecting household income, savings ratio in 2009 will be 5.7 per cent. it is also of great importance for household confidence in the future and consequently the propensity of households to consume rather than save. During the second half of 2005, employ- 3.5 General government consumption ment began to increase and household consumption accelerated. Employment is expected During the period 1998 to 2002, local govern- to continue to rise throughout the forecast pe- ment consumption rose by an average of about riod and therefore contribute to higher con- 2 per cent annually. Large deficits in the sector sumption. forced municipalities and county councils into a In summary, household consumption expen- more restrained development of expenditure in diture is estimated to rise by 3.6 per cent in 2006 2003 and 2004. That strategy led to an improve- and 4.2 per cent in 2007. ment in the local government sector's financial In the slightly longer term, the conditions for result in 2005 to SEK 13 billion, an increase of high consumption growth are also expected to SEK 11 billion from 2004, at the same time that be favourable due to a continued high increase in consumption increased by 1.6 per cent. Because income and a strong wealth position. According of the good finances in the local government to the medium-term estimates for 2008 and sector, as well as the previously approved labour 2009, household consumption expenditure is market policy programme volume, consumption expected to increase 3.6 per cent and 3.1 per is expected to increase by 1.7 per cent in 2006. cent, respectively. The outcome for the first half of this year shows an increase in volume of 1.7 per cent from the same period in 2005. Household saving This Budget Bill proposes a reduction in labour market policy programmes during 2007. For this year, households' own savings are esti- Bonus job initiative, sabbatical year initiative and mated at SEK 49 billion, which is equivalent to education initiative will be discontinued as soon 3.6 per cent of household disposable income. as possible. Programmes already in progress will be phased out as participants conclude them. In Diagram 3.16 Household own savings addition, employment support will be reduced. Per cent of disposable income However the local government sector's strong 12 finances are expected to lead to a strong 10 underlying development of local government 8 6 consumption, which is expected to increase by 4 2 per cent next year. 2 The continued gradual reduction of the labour 0 market policy programmes will contribute to a -2 weaker increase in consumption in 2008 and -4 -6 2009 than in 2007. In order for the local govern- -8 ment sector to meet the requirement for a bal- 80 85 90 95 00 05 anced budget, given a weaker development of Note: Own savings is household net savings excluding savings in supplementary pension schemes. income in 2008 and 2009 (see section 5.6), the Sources: Statistics Sweden and Ministry of Finance. potential for an increase in consumption volume is limited. Local government consumption ex-

45 PROP. 2006/07:1 BILAGA 2 penditures are expected to increase 1.3 per cent Imports of goods somewhat weaker during first half in 2008 and 0.7 per cent in 2009. of 2006 Central government consumption, including the social insurance sector, decreased 1.5 per Despite the vitality of the Swedish economy cent in 2005. The number of hours worked and during the first half of 2006, imports of goods consumption within the armed forces in parti- weakened. This weakening occurred mainly cular contributed to the negative trend. How- during the second quarter, in part because im- ever, consumption accelerated during the fourth ports of textiles, clothing and footwear did not quarter of 2005, and this trend continued during increase as much as they had in the past. the first six months of 2006. That favourable de- The strong growth seen during the first half velopment is expected to continue and lead to an of the year in investment, exports of goods and increase of consumption by 0.5 per cent this household consumption — all consisting of a year. Consumption of inputs in particular has significant percentage of imported goods — had a positive effect on consumption during the suggested that imports should have been current year. stronger, but firms made large withdrawals from The underlying trend for 2007 to 2009 is ex- stocks instead (see Section 3.3). Meanwhile, pected to be slightly negative. Through the in- these stocks are now deemed to be relatively itiatives announced in this Budget Bill for due small. process, international operations, research, etc., which all stimulate central government consumption, consumption is still expect to remain Falling import prices in 2007 unchanged in 2007. The initiatives mentioned above, combined Import prices of processed goods fell between with the announced dental care reform, will lead 2002 and 2004, but this trend was reversed with to a positive trend for 2008 to 2009, when con- the weakening of the krona last year. Meanwhile sumption is expected to increase by 0.1 per cent the price of imported goods rose more slowly and 0.4 per cent, respectively. than domestically produced goods, which means In summary, the volume of general govern- that despite the depreciating krona, imports be- ment consumption is expected to increase by came more advantageous. The broad-based price 1.4 per cent this year and 1.5 per cent next year. upswing in 2005 included both raw materials and The consumption volume is expected to increase processed goods. Raw material prices climbed 1.0 per cent in 2008 and 0.6 per cent in 2009. sharply in 2005 due to rising oil prices, strong international demand for some raw materials and disruptions in supply from some producers. To date, the price of imported goods has risen 3.6 Imports more than domestically produced goods, mainly due to the sharp rise in prices of imported crude Strong imports in 2006 oil, petroleum products, steel and metal during the first half of the year. Meanwhile, prices of Swedish imports have grown at a rapid pace imported processed goods declined more than since 2003. The high rate of growth was further domestically produced goods. strengthened in late 2005 and early 2006. Im- The krona is expected to appreciate and the ports grew a full 7.9 per cent during the first half global market price of oil to decline during the of 2006, which, from a historical perspective, is remainder of 2006 and 2007, which should con- very rapid. Imports of services have exhibited tribute to falling prices of raw materials both this particularly strong growth, while the trend for year and next. The strengthening of the krona is imports of goods has been somewhat weaker. also expected to contribute to a further decline Growth in imports is likely to rise sharply in in import prices of processed goods for both 2006, followed by a slowdown during the up- years. coming years (see Table 3.6).

46 PROP. 2006/07:1 BILAGA 2

Table 3.6 Imports of goods and services as well as change about half of imports of services. The solid in import prices growth forecast for imports of goods is also

expected to contribute to stronger demand for SEK billion Percentage change in volume 2005 2005 2006 2007 2008 2009 imports of these services. As a consequence of Imports of goods 827 7.9 6.7 7.4 – – strong imports of goods, imports of transport 1 services are also expected to increase. Processed goods 620 9.7 7.8 8.6 – – Expenditure by Swedes travelling abroad ac- Imports of services 265 5.2 10.4 6.3 – – counts for almost one third of imports of ser- Total imports 1 093 7.3 7.6 7.1 6.4 6.1 vices. Given strong domestic consumption Import prices – 4.7 3.5 -3.0 -0.3 0.8 growth and the appreciating krona, travel and 1 Classification according to SNI. associated expenditures abroad are also likely Sources: Statistics Sweden and Ministry of Finance. to increase at a good pace in the future. Taken together, increased imports of goods and strong domestic consumption growth are Imports of goods demonstrate strong growth during likely to result in a robust increase in imports forecast period of services this year, and a solid increase next year. Imports of services are estimated to rise Industrial output is set to pick up at a good pace by 10.4 per cent in 2006 and 6.3 per cent in during the second half of 2006, while household 2007. consumption is likely to gain additional momentum. However, because stocks are considered low, firms have limited potential to use them to expand production, suggesting a 3.7 Output stronger import trend in the future. Import prices are also likely to contribute to Industrial output gains new momentum this trend. The price of imported goods is expected to grow more slowly than the price of Swedish industrial output had an off year in domestically produced goods, causing imports 2005, mainly due to a strong slowdown in ex- to become relatively less expensive. Conse- ports during the winter of 2004/2005, which quently, consumption is more likely to consist resulted in very slack production in the first of imported goods than in the past. The antici- quarter of 2005. In addition, domestic demand pated decline in the price of raw materials is also for Swedish-made industrial products was likely to contribute to an increase in imports of relatively weak, while stock withdrawals in the these goods over the next few years. manufacturing industry were large. Mean- Growth in investments is likely to weaken in while, multiple signs of a recovery appeared in 2007, which should have a somewhat dampening late 2005, and industrial output gained mo- effect on growth in imports. Meanwhile, strong mentum in early 2006. The recovery of de- consumption growth and the stock build-up of mand for Swedish goods abroad is the main intermediate goods in the manufacturing indus- factor underlying the upswing. In addition, try are likely to contribute to continued strong demand from the home market also recovered growth in imports next year. considerably. Improved demand, combined Overall, imports of goods are estimated to with an inventory build-up, resulted in an in- rise by 6.7 per cent this year and 7.4 per cent crease in output by the manufacturing indus- next year. Imports of goods are likely to dampen try of 5.5 per cent during the first half of 2006. somewhat in 2008 and 2009. Conditions are favourable for continued expansion of industrial output in the future. The major investment in recent years—including in

Strong imports of services mining and the pulp, paper and paper products industries—has entailed an expansion in pro- So far this year, imports of services have duction capacity (see Section 3.2). Moreover, shown very strong growth. As is the case for low relative unit labour costs indicate that the exports of services, banking, patents, licenses, competitive position of Swedish industrial and consultancy comprise the biggest item in firms is good. NIER's Business Tendency Sur- imports of services. These services account for vey also suggests a favourable competitive

47 PROP. 2006/07:1 BILAGA 2 situation. The survey shows that the competi- Construction output strong despite resource tive situation in the EU market (which is very shortage important for Swedish industrial firms) has further improved over the past quarter (see Construction output rose 7.3 per cent in 2005, Section 3.1). which was the highest growth in over 15 years. The increased output of construction firms Diagram 3.17 Industrial output and export of goods was mainly due to the substantial increase in Annual percentage change housing construction. 15 NIER's Business Tendency Survey suggests that construction output is likely to continue 10 to demonstrate robust growth, while construction activity is about to enter a calmer 5 phase. The survey also indicates a substantial labour shortage in the construction industry 0 (see Diagram 3.18). Export of goods -5 Diagram 3.18 Labour shortage in construction Industrial output Per cent -10 80 99 00 01 02 03 04 05 06 07 Sources: Statistics Sweden and Ministry of Finance. 70 60

Demand for Swedish goods abroad is expected 50 to be strong during the forecast period but be- 40 come somewhat dampened in the future as the 30 global economy weakens. Since the Swedish manufacturing industry is heavily export-ori- 20 ented, exports of goods and industrial output are 10 likely to follow a similar pattern (see Diagram 0 3.17). As a result, industrial output is therefore 98 99 00 01 02 03 04 05 06 Note: The graph shows the share of firms reporting that shortage of labour is the main likely to grow at a good, albeit somewhat de- factor currently limiting further building activities. clining, pace this year. The NIER survey sup- Source: NIER. ports this assessment. Both orders and produc- For now, however, it appears that the lack of re- tion volumes have been high lately, but sources has not had any significant impact, and expectations for the future are less optimistic. housing construction continues to demonstrate In summary, industrial output is estimated to strong growth (see Section 3.2). Moreover, the increase by 5.3 per cent in 2006 (see Table 3.7). investment boom for construction has broad- As export demand weakens next year, industrial ened in 2006, reflected by a rapid increase in output is expected to grow 4.6 per cent. construction investment in areas such as the

Table 3.7 Business sector output manufacturing industry and commercial premises. This trend is expected to contribute to even

SEK billion Percentage change in volume stronger growth in construction investment than 2005 2005 2006 2007 2008 2009 last year. As the level of residential investment Producers of goods 685 2.6 4.9 3.7 – – rises, interest rates climb and the lack of re- of which: Industry 485 2.6 5.3 4.6 – – sources in the construction industry becomes Construction 109 7.3 7.5 2.5 – – increasingly serious, investment growth in con- Producers of struction is forecast to weaken in 2007. services 1 124 3.7 4.7 3.6 – – All factors considered, 2006 is set to be yet Total business sector 1 809 3.3 4.8 3.6 3.7 3.2 another strong year for the construction in- Note: Output refers to value added, i.e. gross output minus input goods. dustry, and construction output is anticipated to Sources: Statistics Sweden and Ministry of Finance. grow 7.5 per cent. Next year production growth is expected to weaken to 2.5 per cent due to the slowdown in investment in construction.

48 PROP. 2006/07:1 BILAGA 2

Service sector output continues to show good demand is likely to weaken and service produc- growth tion to grow 3.6 per cent. In summary, given the overall trend for de- Service sector output grew at a good pace in mand in the Swedish economy, business sector 2005, and this trend continued to strengthen output is set to grow at a good pace throughout in early 2006. Corporate service output con- the forecast period, and growth is likely to be tinued to demonstrate the strongest growth, relatively balanced between producers of goods while other industries such as financial services and services. Business sector output is expected contributed to the positive trend for the sector to increase 4.8 per cent in 2006 and 3.6 per cent as a whole. in 2007. In the long-term projections, business Growth in demand in the economy means sector output is forecast to increase by 3.7 per that the favourable trend for service output is cent in 2008 and 3.2 per cent in 2009. likely to persist throughout the forecast period. Corporate services, which are anticipated to provide the strongest increase in output, are General government output being driven by domestic demand from the manufacturing, construction and contracting General government output refers to the industries, as well as by strong demand for amount of goods and services produced by the Swedish services abroad. Increasing household general government sector, which is the same as consumption are benefiting retail trade output, the contribution to GDP. The trend can largely as well as output in other industries, such as be attributed to employment, measured as the household services, hotels and restaurants. number of hours worked. Output of welfare services, such as health Diagram 3.19 Demand for private services care, education and social welfare, is primarily Seasonally adjusted values under the auspices of local government, but 60 since the early 1990s municipalities and county 50 councils have increasingly contracted out activi- 40 ties, hired agency staff and privatised or corpo- 30 ratised day nurseries, hospitals etc. This change 20 allows consumption to grow more rapidly than 10 output. Last year local government output rose

0 by 0.4 per cent and consumption by 1.6 per cent.

-10 The increase in local government consumption

-20 was driven by intermediate consumption, as well

-30 as social benefits in kind (medications, dental 02 03 04 05 06 care, private day nurseries, etc.). Output is fore- Note: The graph shows the difference between the percentage of firms reporting increased cast to rise to 1.4 per cent this year, 1.8 per cent and decreased demand. Source: NIER. next year, 1.2 per cent in 2008 and 0.6 per cent in 2009. Central government output declined by The NIER Business Tendency Survey also sug- 0.6 per cent in 2005. This year it is anticipated to gests that the positive trend in many parts of the decline by 0.2 per cent. The increased appropria- service sector will continue this year. The survey tions announced in this Budget Bill for purposes indicates that demand is high in the private ser- such as due process, international operations and vice industries (see Diagram 3.19). Many indus- research should have a positive impact on central tries, including transport and other business ser- government output. In 2007, output is therefore vices, are very optimistic. In retail trade, where forecast to rise by 0.6 per cent. The pace of de- the situation has long been very strong, expecta- velopment is estimated to amount to 0.2 per tions have cooled off slightly from earlier this cent in 2008 and 0.4 per cent in 2009. year. Nevertheless, the confidence indicator for Overall, general government sector output is retail trade remains above the historical average. forecast to rise by an average of approximately Given the good demand for services, output 0.9 per cent per year between 2006 and 2009. growth for the service sector as a whole is expected to reach 4.7 per cent in 2006. Next year,

49 PROP. 2006/07:1 BILAGA 2

3.8 Current account and gross lending balance, which is dominated by fixed capital formation, equals gross lending. Total gross Current account surplus likely to increase in the lending amounted to 23.6 per cent of GDP in future 2005 (see Table 3.9). Net lending accounted for around one quarter of gross lending, while the The current account surplus totalled 6.4 per cent real balance accounted for around three quarters. of GDP in 2005. That represented a decline from the previous year due to a lower surplus in the Table 3.9 Components of saving trade balance, which was partially offset by a SEK, billion Percentage of GDP, current prices substantial increase in net services. 2005 2005 2006 2007 2008 2009 Strong growth of exports of goods this year is Real balance 456 17.1 17.4 17.4 17.5 17.6 helping to strengthen the trade balance. The sur- Fixed capital plus in the current account balance is also larger formation 455 17.0 17.6 17.4 17.4 17.4 owing to the strongly positive services balance. Stockbuilding 2 0.1 -0.1 0.0 0.2 0.1 However, prices of imports are rising faster than Net lending1 173 6.5 6.1 7.5 7.4 7.5 prices of exports, causing the terms of trade to General government 74 2.8 2.8 2.3 2.6 3.1 weaken the 2006 current account balance. Own savings 85 3.2 2.9 2.8 2.3 2.0 The surplus from both goods and trade in ser- Business sector 15 0.5 0.4 2.4 2.5 2.5 vices is forecast to further increase in 2007. This strengthening in 2007 can also be explained by Gross balance 630 23.6 23.5 24.9 25.0 25.1 export prices likely to fall less than import 1 According to Riksbank definition. prices. Sources: Statistics Sweden, Riksbanken and Ministry of Finance.

The surplus in the current account balance is Households account for the majority of net estimated at 6.8 per cent of GDP this year and lending. Last year household net lending was 3.2 7.7 per cent in 2007. The current account surplus per cent of GDP. Household net lending is fore- is projected to remain high in 2008 and 2009 (see cast to decline, mainly because household con- Table 3.8). sumption is expected to rise more than dispos-

Table 3.8 Current account balance able income. Household net lending calculated SEK billion, current prices, unless otherwise stated as a percentage of GDP is expected to be 2.9 per

2005 2006 2007 2008 2009 cent this year and gradually decline to 2.0 per cent in 2009. Trade balance 144 156 170 177 187 Strong public finances are expected to lead to per cent of GDP 5.4 5.5 5.7 5.6 5.6 net lending exceeding 2 per cent throughout the Service balance 62 75 86 90 95 forecast period (see Chapter 5). Factor income 0 -5 5 7 9 Net lending and real lending are both forecast Current transfers -35 -33 -30 -33 -36 to increase in the future. Overall, gross lending is Current account 171 193 230 240 254 therefore expected to increase gradually to 25.1 per cent of GDP 6.4 6.8 7.7 7.6 7.7 per cent of GDP in 2009. Capital transfers1 2 -21 -4 -5 -5 Net lending 174 173 226 236 249

per cent of GDP 6.5 6.1 7.5 7.4 7.5 3.9 GNI Note: The current account and capital transfers are reported in accordance with Riksbank data and not according to the national accounts. 1 The great deficit in the balance of capital transfers 2006 is due to a great out- Gross national income (GNI) is obtained by flow of capital transfers in the first quarter of 2006. A Swedish firm acquiring intellectual property rights from a foreign enterprise could cause this. Because of adding Swedish income from abroad to GDP this the difference between the current account and net lending is unusually large. and subtracting the income of non-residents in Sources: Statistics Sweden, Riksbank and Ministry of Finance. Sweden, measured in current prices. GNI is used for purposes such as calculating assistance to de- veloping countries and Sweden's contribution to Increased saving the EU. Net primary income from abroad is forecast The surplus in the current account balance, ad- to be negative in 2006, mainly because net capital justed for capital transfers, is equal to net lend- income from abroad is anticipated to be weak ing in the economy. Net lending plus the real

50 PROP. 2006/07:1 BILAGA 2 this year. Sweden's GNI is forecast to be greater than GDP between 2007 and 2009 as its net financial position strengthens in relation to the rest of the world (see Table 3.10).

Table 3.10 Gross national income SEK billion, current prices

2005 2006 2007 2008 2009 GDP 2 673 2 830 3007 3 163 3 320 Primary income1 -7 -5 7 8 10 GNI 2 666 2 825 3014 3 172 3 330 1 Investment income, wages, subsidies and taxes, net to the rest of the world. Sources: Statistics Sweden and Ministry of Finance.

51 PROP. 2006/07:1 BILAGA 2

4 Labour market, wages, inflation Subdued rate of wage increase and low inflation and resource utilisation The rate of wage increase has gradually slowed The situation in the labour market has improved over the past few years. The current low rate of over the past year. Employment and the number wage increase is probably due to available labour of hours worked have risen, while open unem- in the economy competing for jobs, as a result of ployment has fallen. However, the level of both which it is relatively easy for employers to re- open and total unemployment is still high. cruit suitable staff. As employment rises in the future, the rate of wage increase is anticipated to rise somewhat. A growing labour supply, com- Developments in labour market expected to remain bined with changes in unemployment benefit favourable rules, may reduce the risk of a further accelera- tion in the rate of wage increase. The conditions for continued strong develop- Inflation has been low over the past few years. ments in the labour market are favourable. GDP The moderate rate of wage increase, combined growth is high, and the indicators point to with strong productivity growth, is keeping the strong employment growth in the immediate labour costs of firms down, contributing to sub- future. Increasing employment does not yet dued domestic inflation. However, higher en- appear to have led to any general recruitment ergy prices and increasing import prices have problems for firms. caused the consumer price index (CPI) to rise Employment and the labour supply are also somewhat recently. As the rate of wage increase affected by changes in the number of labour rises in the future at the same time as productiv- market policy programmes between the years. ity growth slows, domestic inflationary pressure The number of participants in these programmes is forecast to grow somewhat. However, a who are regarded as employed will rise relatively stronger krona and falling energy prices are ex- strongly this year, contributing to an increase in pected to dampen inflation in the future. employment. As a result, regular employment, which excludes participants in labour market Table 4.1 Selected statistics policy programmes, will rise more slowly than Percentage change unless otherwise stated total employment. As of 2007, however, these 2005 2006 2007 2008 2009 programmes will be cut back and the tendency GDP 2.7 4.0 3.3 3.1 2.7 will consequently be the reverse. The number of Productivity 2.0 2.8 2.0 1.9 2.2 programme participants defined as if they are Number of hours worked 0.5 1.1 1.2 1.2 0.5 outside the labour force will also decline Average hours worked -0.3 -0.6 -0.4 0.3 -0.2 between 2006 and 2009. Combined with the re- Employment 0.8 1.7 1.5 1.0 0.6 forms to stimulate labour supply proposed in the Regular employment Government Budget Bill, these cutbacks will rate, age group 20–641 77.4 77.7 79.0 79.8 80.2 help to increase the labour supply, as well as em- Labour force 0.8 1.3 1.8 0.1 0.0 ployment in the medium term perspective. Open unemployment2 6.0 5.6 5.8 5.0 4.3 The labour supply is anticipated to increase Labour market policy relatively rapidly this year. It is set to increase programmes2,3 2.7 3.1 1.9 1.4 1.5 considerably more than population growth 2 Total unemployment 8.7 8.7 7.7 6.3 5.8 would suggest, since the increasing demand for Hourly wages 3.1 3.2 3.7 3.7 3.8 labour means that more people are entering the 4 labour market. Next year, the labour supply is CPI 0.5 1.6 2.5 2.0 1.9 4 projected to increase, largely as a result of the UND1X 0.8 1.3 1.9 1.5 1.8 Note: The figures in the table refer to non-calendar-adjusted data. A more de- above cutback in labour market policy pro- tailed table is to be found in Tables Appendix. grammes outside the labour force. The labour 1 The number of employed in the 20–64 age group, excluding those employed in labour market policy programmes, as a percentage of the population in this age supply is then forecast to increase more than group. 2 Percentage of labour force. employment, resulting in a rise in open unem- 3 Participants in labour market programmes. ployment. In subsequent years, however, em- 4 Annual average. Sources: Statistics Sweden, National Labour Market Board, National Mediation ployment is forecast to rise more rapidly than Office, NIER and Ministry of Finance. the labour supply and open unemployment is expected to fall.

52 PROP. 2006/07:1 BILAGA 2

Current resource utilisation deemed to be low unchanged despite a relatively large rise in employment. That would be due to the narrowing The combination of relatively high unemploy- of the negative employment gap being offset by ment, a generally low proportion of firms re- an overall narrowing of the positive productivity porting a labour shortage, moderate wage in- gap and average hours worked gap. creases and weak domestic inflationary pressure indicates that there are currently plenty of available resources in the labour market. As a result, Economy moving towards full resource utilisation in considerably more people could be employed 2009 without wages and prices starting to rise at too high a rate. In other words, the employment gap The estimates of GDP growth, developments in is negative, i.e., actual employment is less than the labour market and inflation etc. for 2008 and potential employment. 2009 are based on assessments of the resource The employment gap is forecast to gradually situation in 2007 and on the potential growth narrow in the future as a result of actual em- rate. The reason that no economic forecast is ployment rising more rapidly than potential em- being made for these years is that it becomes in- ployment. creasingly difficult to make an economic assess- Actual average hours worked are estimated to ment the further ahead the estimates extend. be greater than potential average hours worked, Potential GDP is estimated to rise by 3.2 per i.e., higher than normal. In the future, this posi- cent in 2008 and 2.5 per cent in 2009. Potential tive gap is expected to narrow in connection employment is estimated to rise by 0.7 per cent with an anticipated increase in absence as em- in 2008 and 0.5 per cent in 2009, which is lower ployment rises. than for 2005–2007. That is mainly due to ex- Productivity rose rapidly in 2003 and 2004. pectations of weaker population growth in 2008 The productivity level consequently deviated and 2009 than in the previous years. from the trend. Thus, the productivity gap is es- Potential productivity growth is estimated at timated to have turned positive. Last year, pro- approximately 2.2 per cent per year. Partly as a ductivity developed relatively weakly, and there result of the proposals announced in this Budget was a return to a more long-term sustainable Bill, average hours worked are forecast to in- level. This year, however, productivity is rising crease in 2008. However, they are forecast to fall unexpectedly rapidly, and the positive gap is in 2009, mainly as a result of older and younger therefore widening once again. However, the age groups, whose average hours worked are gap is forecast to narrow gradually as of next lower than the average, increasing as a propor- year. tion of the total population. The proposals announced in the Budget Bill Diagram 4.1 Gaps for different variabels are forecast to have significant positive effects on Per cent the potential labour supply, employment, unem- 3.0 ployment, average hours worked and GDP. GDP gap 2.5 Since the economy is still expected to have 2.0 Productivity gap 1.5 Average hours work gap available resources in 2007, actual employment Employment gap 1.0 and GDP can rise more than potential employ- 0.5 ment and GDP in both 2008 and 2009 without 0.0 the emergence of labour market shortages that -0.5 push up wages and prices. The gaps are forecast -1.0 -1.5 to narrow gradually and close completely in -2.0 2009. The regular employment rate in the 20–64 00 01 02 03 04 05 06 07 08 09 age group is estimated at 80.2 per cent and total Note: A gap is calculated as the difference between actual and potential level, in per cent of respective potential level. unemployment at 5.8 per cent in 2009. Source: Ministry of Finance. In 2008 and 2009, wages are forecast to increase slightly less than is consistent with a bal- The GDP gap, which is the total of the above anced economy, since the wage trend is likely to three gaps, is set to be slightly negative this year. take some time to adjust to full resource utilisa- Next year, the GDP gap is forecast to remain tion. The underlying inflation rate is forecast to

53 PROP. 2006/07:1 BILAGA 2 rise gradually, ending up just below the previously regarded as students and conse- 12 Riksbank’s inflation target in 2009. quently outside the labour force.F F

Diagram 4.2 Employment and labour supply Risks mainly associated with assessments of effects Annual percentage change of new proposals and resource situation 4 Employment The risks concerning labour market forecasts are 3 Labour supply mainly associated with uncertainty about as- 2 sessments of how large the effects of the gov- 1 ernment’s policy will be and how rapidly they 0 will materialise. The effects may be larger than -1 the present assessment anticipates. Uncertainty is also considerable with respect to how high re- -2 source utilisation is in the economy. The current -3 assessment is that resource utilisation in the la- -4 bour market is relatively low. Although the la- 94 95 96 97 98 99 00 01 02 03 04 05 06 Source: Statistics Sweden (LFS) and Ministry of Finance. bour shortage is generally low, firms report that it has increased recently, particularly in certain sectors. If the shortage rapidly becomes more Developments in various sub-sectors of the widespread, bottlenecks may arise in the econ- business sector vary. Employment has continu- omy, causing wages and inflation to rise more ously risen at a very rapid rate in the construc- quickly than expected. Employment may conse- tion sector for the last two years, while it has quently be lower and unemployment higher than fallen slightly in manufacturing industry. In the expected towards the end of the forecast period. private service sector, which is by far the largest Chapter 6 presents two alternative scenarios in in employment terms, employment has risen at a which the Swedish economy develops differently satisfactory rate for the past six quarters. All than described in Chapters 1–5. major sub-sectors have experienced positive growth. The increase in the private service sector, however, is being driven to a relatively large extent by the substantial increase in corporate 4.1 Labour market services. In the local government sector, employment Strong development since second half of 2005 rose in the first six months of 2006 after having fallen slightly in 2005. However, the increase is Following four years of weak development, em- largely explained by an increased number of ployment turned upward in the second half of people in bonus job initiative and not by rising 2005. This positive employment growth has regular employment. In the central government continued during 2006. However, since the la- sector, employment has fallen marginally over bour supply has also increased rapidly, open un- the past few years. employment has not fallen to the same extent as employment has risen (see Diagram 4.2). Mean- 11 while, total unemploymentF F has remained Indicators have strengthened over past year largely unchanged. Due to an interruption in the statistics in The number of vacancies newly reported to the connection with their remodelling in 2005, it is Labour Market Board has increased continu- difficult to comment with certainty as to which ously since the spring of 2005. The level is cur- groups have found work during the past year. It rently higher than it was around 2000, when em- is probable that they largely comprise people

12 The Swedish Labour Force Survey was remodelled to improve harmonisation with those of other EU countries. See Government Bill 2005/06:1, Appendix 2, p. 43, for a more detailed description of the 11 Open unemployment and participants in labour market policy remodelling of statistics. Statistics Sweden is expected to publish linked programmes as a proportion of the labour force. series later this year.

54 PROP. 2006/07:1 BILAGA 2 ployment rose at a very high rate. Historically Diagram 4.4 Hiring plans of firms speaking, there has been a relatively strong cor- Net balance relation between employment and newly re- 40 ported vacancies, with a time lag of two quarters 30 (see Diagram 4.3). 20 10 0 Diagram 4.3 Newly reported vacancies and employment -10 Annual percentage change -20 60 6 -30 -40 40 4 Construction industry -50 Manufacturing industry Private service sector 20 2 -60 95 96 97 98 99 00 01 02 03 04 05 06 0 0 Note: Seasonally adjusted quarterly data. Source: NIER. -20 -2

-40 Vacancies (left axis) Employment (right axis) -4 According to NIER’s latest Business Tendency Survey, the hiring plans of firms continue to be -60 -6 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 optimistic in the construction sector and large Note: Three months moving average. areas of the private service sector, as opposed to Sources: National Labour Market Board, Statistics Sweden (LFS). K pessimistic in the manufacturing industry (see 14 Diagram 4.4).F F The change in the net figures for However, the substantial increase over the past the hiring plans of firms shows a good covari- year should be interpreted with some caution, ance with employment growth according to the since it has emerged that the National Labour National Accounts in the corresponding sector. Market Board has had problems with double Despite an increased number of vacancies in counting of some newly reported vacancies. The manufacturing industry as well, there is there- substantial increase in the number of vacancies fore reason to think that the divergent trend is, however, supported by Statistics Sweden’s between sectors will continue in the future. firm-based statistics, which indicate an increase in the private sector of nearly 30 per cent from 13 the previous year.F F Fewer participants in labour market policy The number of newly reported vacancies has programmes risen substantially in the private service sector, manufacturing industry and the construction The number of participants in labour market sector. The increase in the private service sector policy programmes averaged 123,000 in 2005. has been broadly based. During 2006, the number of places has gradually The number of vacancies has risen at a satis- risen to an estimated annual average of 143,000. factory rate in metropolitan areas and in other This Budget Bill proposes a substantial reduc- areas of southern and central Sweden, while the tion in the number of programmes over the next trend has been less favourable in the forest two years (see Table 4.2). Bonus job initiative, counties. The increase in the number of skilled general employment subsidies, the sabbatical and non-skilled vacancies has been approxi- year initiative, apprenticeships, education initia- mately equal. Similarly, permanent and tempo- tive and graduate internships are to be abolished. rary vacancies have risen to around the same ex- New approval of bonus job initiative, the sab- tent. batical year initiative and education initiative will be discontinued as soon as possible. The other programmes that are to be discontinued will be newly approved up to 31 December 2006.

14 The diagram extends up to the end of the second quarter of 2006. According to the monthly Business Tendency Survey published at the 13 Due to remodelling of the statistics, the figures for the general end of September, hiring plans in manufacturing industry are once again government sector are not comparable over time. negative.

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Table 4.2 Participants in labour market policy programmes Employment continues upward Thousands, annual average 2005 2006 2007 2008 2009 Over the past year, employment, the number of Employed 40 58 37 17 14 hours worked and forward indicators have de- Employment support 25 28 14 8 8 veloped positively. Economic growth was strong Bonus jobs 0 10 15 6 2 during the first half of 2006 and is expected to be Sabbatical year initiative 10 13 3 0 0 favourable in the future. According to NIER’s Education initiative 0 1 0 0 0 Business Tendency Survey, the labour shortage has increased in most sectors, but the levels are Business start-up grant 6 6 4 3 4 still relatively low. The ratio between residual In education and training 83 85 54 47 56 and newly reported vacancies, which is a measure Preparing activities 25 25 18 14 18 of how well matching is working, has not Labour market training 21 24 12 10 12 changed appreciably in any sectors or regions. Work experience 13 13 11 10 13 The conditions for employment to continue Other1 24 23 13 12 13 rising are consequently favourable. Total 123 143 91 64 70 Thanks to favourable demand, employment is 1 Municipal youth programme, development guarantee for young persons, voca- expected to develop well despite the reduction in tional rehabilitation, computer centres, apprenticeships, etc. Sources: National Labour Market Board and Ministry of Finance. the programme volume in the future. The proposed changes in income tax and unemployment The places already approved will be phased out insurance are expected to contribute to increased as the participants complete the programmes. In employment in the future. addition to the discontinued programmes, there In the current economic situation, the labour will be a further general reduction in the pro- market policy programmes are estimated to lead gramme volume. A total programme volume of to a considerable inhibition of regular employ- 91,000 places is planned for 2007. After that the ment. Consequently, the net effect on employ- volume is to be further reduced. ment of the reduction in the programmes will be The government is announcing the introduc- smaller than it would have been in a weaker eco- tion of “new start jobs” in this Budget Bill. New nomic situation. start jobs reduce the labour cost through a credit Employment is estimated to rise by 1.7 per to the employer’s tax account. In this respect cent this year and 1.5 per cent next year. That is they resemble employment subsidies. New start equivalent to an increase of approximately jobs are intended to make it easier for people 140,000. The increase in regular employment is with weak labour market links to enter the mar- estimated to be somewhat larger (see Diagram ket. They target people who have received un- 4.5). As the employment gap closes, employ- employment benefit, sickness allowance, dis- ment growth falls. The gap is expected to close ability pension or social assistance for more than in 2009. The regular employment rate for the 20- a year. The tax credit is to apply for the same pe- 64 age group is estimated at 80.2 per cent in riod as the individual has been absent from 2009. working life, up to a maximum of five years. For people over 55, a double period applies up to a Diagram 4.5 Employment and labour force maximum of ten years. Young people who have Thousands been unemployed for more than six months are 4 800 Labour supply 4 700 covered by the reduction up to a maximum of Employment 4 600 one year. New start jobs are also intended to in- Regular employment clude recently arrived refugees and immigrating 4 500 relatives during the first three years after a resi- 4 400 4 300 dence permit has been granted. New start jobs, 4 200 which will be available only to private sector and 4 100 general government employers carrying on busi- 4 000 ness activities, will initially be handled by the 3 900 Swedish Labour Market Administration. 3 800 87 89 91 93 95 97 99 01 03 05 07 09 Source: Statistics Sweden (LFS), National Labour Market Board and Ministry of Finance.

56 PROP. 2006/07:1 BILAGA 2

Around 80 per cent of employment growth in 2007. The phasing out of bonus job initiative, 2006-2007 is expected to be in the business the sabbatical year initiative and education ini- sector. The service and construction sectors are tiatives will, however, have a restraining effect on expected to contribute to increased employ- general government employment in the future. ment, while employment is expected to continue falling slightly in manufacturing industry. During the past year, employment has risen in Average hours worked falling somewhat the private service sector, and the hiring plans of firms continue on the whole to be positive. Average hours worked per employed person de- However, employment growth is expected to be clined in 2000-2003. The decrease is partly ex- negative in a few sectors. There are currently no plained by increased sickness absence, but also general recruitment problems in the private ser- by falling average hours worked per person in vice sector. Nevertheless, a greater number of work as the result of a weaker economic situa- firms in other business services are reporting a tion. Average hours worked have remained rela- labour shortage. The government’s announce- tively unchanged over the past year. ment of a tax allowance for household services is During the forecast period, absence is ex- expected to have a positive effect on employ- pected to increase somewhat, since it usually ment in the private service sector. The private varies with employment (see Diagram 4.6). That 15 service sector is estimated to account for just applies to absence for both sicknessF F and other under 80 per cent of total employment growth reasons. in 2006 and 2007. Construction activity has continued to Diagram 4.6 Absence and employment Thousands strengthen, and the order situation is satisfac- 850 4 600 tory. Firms remain optimistic about the future, 4 500 anticipating that both construction activity and 800 Employed (right axis) Absence (left axis) 4 400 employment will rise. However, hiring plans are 750 4 300 not currently as optimistic as six months ago. 700 The shortage of construction workers is a prob- 4 200 650 lem that has continuously deteriorated. The dif- 4 100 600 ficulties are largest among firms specialising in 4 000 residential construction. Considering the high 550 3 900 shortages in the construction sector, employ- 500 3 800 ment has developed surprisingly well recently. 87 89 91 93 95 97 99 01 03 05 The high shortages have not had any visible Note: Absence refers to those who have been absent the whole reference week. negative effect on employment growth. That Source: Statistics Sweden (LFS). could indicate that there is a shortage in only certain occupational categories so far. However, Demographic developments also have a negative the labour shortage is expected to limit employ- effect on average hours worked. The proportion ment growth in the future. of the population in age groups with lower than Employment in manufacturing industry has average hours worked is increasing in relation to shown a downward trend for several decades, the proportion of the population in age groups rising only in years when industrial activity has with higher average hours worked. been very strong. Output growth is estimated to However, the lower ceiling for health insur- increase this year but not to be sufficiently high ance is expected to have an offsetting effect, re- to result in increased employment. sulting in a positive impact on average hours Strong local government sector finances are forecast to contribute to employment rising by just over 20,000 in the local government sector 15 during 2006 and 2007. Employment in the cen- In the Labour Force Survey (LFS), sickness absence is reported as tral government sector is estimated to rise by either “sickness absence the whole reference week” or “sickness absence part of the reference week”. LFS statistics are not directly comparable around 5,000. The general government sector is with Social Insurance Office (SIO) statistics on the number of people on consequently set to account for around 20 per sick leave. That is due partly to the SIO’s statistics only including those who have been on sick leave for more than 14 days and partly to cent of total employment growth in 2006 and unemployed persons and students on sick leave being included in the SIO’s statistics but not in LFS statistics.

57 PROP. 2006/07:1 BILAGA 2 worked. The effect of the new earned income tax nities increase during a boom. Consequently, credit on average hours worked is difficult to as- rising employment among young people need 16 sess. On the one hand, the allowance will con- not mean that they study to a lesser extent.F F tribute to increasing average hours worked, since Older people’s participation in the labour force it will be more profitable, particularly for low- is also affected more than average by the eco- income earners, to increase their working hours. nomic situation. They choose to remain longer On the other hand, some of the people previ- in employment when the labour market is fa- ously not employed but now employed as a re- vourable. A weaker labour market can result in sult of the proposal are expected to work part older people retiring earlier than they would time. Taking into account differences in the otherwise have done. number of annual working days, average hours The labour supply is also affected by demo- worked are forecast to fall marginally in the graphic developments. A larger population coming years. means that there are more people who can work. The structure of population growth has an impact as well (see Diagram 4.7). From a labour Productivity growth falling force perspective, demographic developments in the coming years are forecast to be relatively Productivity growth fell in 2005. This was due unfavourable. Age groups with low labour force partly to the temporary slowdown in activity in participation rate will grow strongly. This applies manufacturing industry and partly to the re- particularly to the 16-19 and 60-64 age groups, duced contribution from merchanting. Produc- but also to the 20-24 age group with a relatively tivity growth in the private service sector, which low participation rate. The 45-54 and 55-59 age had been high for several years, also fell. When groups, which have a high labour force economic growth picked up in early 2006, pro- participation rate, will decline or remain largely ductivity growth was very high in both the unchanged. goods and service sectors. Productivity growth is forecast to fall in the future, as economic growth Diagram 4.7 Labour force participation in different age slows somewhat and the economy moves to- groups wards higher resource utilisation. Consequently, Per cent of population in each age group the productivity gap, which was initially esti- 100 mated to be positive, is expected to close. 90 80 16-19 years 70 20-59 years 60-64 years Labour supply continues rising 60

Following several years of weak development, 40 the labour supply turned upward last year. 30

During the autumn and winter, the supply 20 largely rose in pace with employment, and the 80 82 84 86 88 90 92 94 96 98 00 02 04 Note: No linked values for 2005 are available due to the harmonisation of statistics. trend has continued. Source: Statistics Sweden. The economic situation influences the development of the labour supply. Increased demand for labour means that more people, particularly However, labour force participation has shown a youth, enter the labour market. Young people strong upward trend in the 60-64 age group for a do not tend to join the labour force to any sig- number of years. An upward, albeit weaker, nificant extent until they find a job. As a result, trend can also be identified in the 55-59 age their labour force participation fluctuates more group. This trend is mainly due to the fact that over the economic cycle. When the labour mar- older people are choosing to remain longer in ket is weak, young people also tend to begin studying to a greater extent than others. More- over their summer and temporary job opportu-

16 If a person works one or more hours during the reference week, he/she is regarded as employed in the LFS (irrespective of whether he/she is a full-time student or not).

58 PROP. 2006/07:1 BILAGA 2

20 Different statistical sources provide a varying between the first and second quarter. F F Mean- picture of labour market developments while, the NA showed an increase of 0.5 per cent and the SES of 0.7 per cent in the second quar- Since the remodelling of Statistics Sweden’s La- ter. The cumulative assessment of the different bour Force Survey (LFS) in April 2005, the use sources is that employment developed favoura- of other statistical sources to describe and ana- bly in the second quarter. Over a longer period, lyse developments in the labour market has in- the different sources tend to provide a more creased. The reason is that uncertainty concern- consistent picture of employment growth. ing the interpretation of LFS outcomes has increased due to the emergence of new seasonal patterns and retrospective comparability prob- Unemployment 17 lems.F F Apart from the LFS, the National Labour Mar- ket Board (NLMB) also publishes unemploy- Employment ment statistics. There are a number of important differences in definition between the surveys: Statistics Sweden regularly carries out and re- • Unemployment criteria: In the LFS, a ports three principal surveys that measure em- 18 person is regarded as unemployed if he/she ploymentF F: could have both worked and looked for • Labour Force Survey (LFS) 21 : Interview work.F F The NLMB measures the number survey comprising just over 20,000 people of registered job-seekers. each month. The LFS is optimised for • Sample: The LFS comprises people quarterly reporting but is also reported aged 16 to 64. The NLMB comprises monthly. people aged 18 to 64. The LFS is a sample • Short-term employment statistics (SES): survey, while the NLMB is a total survey Questionnaire survey sent to firms, meas- comprising people registered with the uring the number of employees broken Employment Service. down by sector and industry. In contrast to • Reference period: The LFS refers to the other two surveys, the self-employed the monthly average. The NLMB reports are not included. Reported quarterly. the number of people registered at the end • National Accounts (NA): Measures eco- of the calendar month. nomic activity. Contains an employment Over a longer period, the LFS and NLMB pro- measure that is largely based on the LFS vide a similar picture of the unemployment and SES, but also other sources. Reported 19 trend, even though the number of unemployed quarterly.F F people differs. In the short term, however, dif- The differences among the various surveys ferences in the trend may appear relatively large. mainly arise in the short term. A case in point is These differences are mainly a result of varying employment growth in the second quarter of seasonal patterns and the fact that the LFS is a 2006. According to the LFS, employment rose sample survey. by only 0.1 per cent in seasonally adjusted terms LFS is the only survey providing an overall picture of the labour market and constitutes Sweden’s official labour market statistics.

17 See Government Bill 2005/06:1, Appendix 2, p. 43, for a more detailed description of the remodelling of the statistics. 18 20 In addition, Statistics Sweden annually publishes register-based Seasonal adjustment carried out by the National Institute of Economic employment statistics. Research. 19 21 The NA are largely based on the LFS with regard to total employment. A person is regarded as unemployed if he/she was without work Differences between the LFS and the NA may arise due to the fact that during the reference week but has looked for work during the past four (i) foreign workers resident in Sweden are excluded from the NA, (ii) the weeks and could work during the reference week or start within 14 days NA refer to exact calendar quarters, (iii) the NA also consider other of the end of the reference week. The unemployed also include people sources in their assessment, (iv) the NA include conscripts, as well as who have found a job that starts within three months, provided that they people under 16 and over 64, and (v) there are varying seasonal could have worked during the reference week or started within 14 days of adjustments. the end of the reference week.

59 PROP. 2006/07:1 BILAGA 2

22 the labour market to a larger extent than pre- Total unemploymentF F is estimated to remain vious generations. Those currently comprising largely unchanged this year from 2005. After the two oldest age groups are mainly those born that, it is estimated to fall continuously to in the 1940s. On average, they are healthier than 5.8 per cent in 2009. previous generations. They also have a strong foothold in the labour market. During the crisis Diagram 4.8 Open and total unemployment of the 1990s, they were not as much affected as Per cent of labour force those who then comprised the older groups in 14 the labour market. The pension reform may also 12 have affected labour force participation among 10 older people. There is much to indicate that the upward trend in the labour force participation 8 rate among older people will continue in the 6 coming years. In 2006, labour force participation 4 Open unemployment and people in is expected to rise somewhat in most age groups, labour market programmes 2 Open unemployment but above all in the younger and older ones. The government’s proposed changes in 0 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 income tax, unemployment insurance and the Sources: Statistics Sweden (LFS), National Labour Market Board and Ministry of number of participants in labour market policy Finance. programmes, together with the reduction in employer contributions, are forecast to have a strong positive effect on the labour supply in both the short and long terms. The labour sup- 4.2 Wages ply is expected to grow strongly both this year and next. The rate of increase is then forecast to Wages have increased at a moderate rate over the decline in 2008 and 2009. past few years. In 2005, the wage growth rate fell for the fourth consecutive year to 3.1 per cent. According to the National Mediation Office’s Total unemployment falling preliminary statistics, wage growth continued to be subdued during the first half of 2006. The Employment has risen over the past year. How- average wage growth rate in the business sector ever, open unemployment has not fallen to the was 3.0 per cent. In the general government same extent, since the labour supply has also in- sector, wage growth was lower than in the creased. During the summer months, open un- private sector, but that may be partly due to time employment was lower than might have been lags in the statistics. expected on the basis of last year’s seasonal pattern. This is probably mainly due to the considerably larger number of summer jobs this year Stronger labour market results in rising wage growth than last. Strong demand for labour during the rest of The main explanation for the low wage increases the year is estimated to lead to open unemploy- of the past few years is that resource utilisation ment falling towards the end of 2006. Open un- in the labour market has been low. Since 2005, employment is estimated at 5.6 per cent this however, the number of hours worked and em- year, measured as an annual average. As a result ployment have shown a positive development, of a large reduction in labour market policy pro- resulting in increased resource utilisation. In gramme volume next year, open unemployment 2007, positive developments in the labour mar- is forecast to rise during the course of the year. ket are expected to have a larger impact on wage However, the introduction of new start jobs is increases in connection with rising resource expected to have an offsetting, but smaller, ef- utilisation (see Diagram 4.9). fect.

22 Open unemployment and participants in cyclical labour market policy programmes as a percentage of the labour force.

60 PROP. 2006/07:1 BILAGA 2

Diagram 4.9 Employment gap and wage growth Wages are expected to rise most rapidly in the Per cent construction sector. The strong demand for 1.5 4.5 construction workers led to more rapidly in- 1.0 Employment gap (left) creasing wages in 2005. Somewhat surprisingly, Wage growth (right) however, wage growth slowed during the first 0.5 4.0 half of 2006 despite many firms reporting a 0.0 labour shortage. Possible explanations for the

-0.5 subdued wage trend may be that the influx of 3.5 foreign labour has a restraining effect on wage -1.0 formation or that so far there is a shortage of -1.5 only certain specialists, whose wages are not able

-2.0 3.0 to affect the average in the sector. However, the 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 high proportion of firms reporting a labour Sources: Statistics Sweden and Ministry of Finance. shortage is still expected to contribute to a relatively rapid upturn in the rate of wage The 2007 wage round will take place in a more increase during the forecast period. favourable situation for employees than the last In the service sector, the upturn in the rate of major wage round in 2004. The agreements are wage increase that began in 2005 is expected to therefore expected to reach a higher level this continue as a result of relatively substantial time. As a result of low resource utilisation, growth in demand for labour. however, the negotiated wage increases are ex- The wage trend in industry is expected to be pected to be moderate. The risk of negotiated somewhat weaker than in the above sectors as a wage increases being substantially higher than result of less demand for labour. estimated is considered relatively small (see ex- The lower wage growth rate in the local planatory box entitled “2007 wage round” on government sector in 2005 than the immediately page 62). preceding years is expected to continue to some extent during the forecast period. One reason is that municipalities are expected to act more Wages rising more rapidly in business sector than cautiously than previously. general government sector In the central government sector, weak employment growth, together with a slight upward For the economy as a whole, wages are esti- adjustment of the appropriations for 2007, is ex- mated to rise by 3.2 per cent in 2006 and 3.7 per pected to lead to subdued wage growth in the cent in 2007. Wage growth is expected to be coming years. more rapid in all sectors as the demand for labour grows. Wages are estimated to rise more rapidly in the business sector than in the general government sector (see Table 4.3).

Table 4.3 Nominal wages Percentage change

2005 2006 2007 2008 2009 Private service sector 3.3 3.4 3.8 – – Industry 3.1 3.1 3.6 – – Construction 3.2 3.6 4.3 – – Business sector 3.2 3.3 3.8 – – Local government 2.9 3.0 3.6 – – Central government 3.1 3.2 3.4 – – Total 3.1 3.2 3.7 3.7 3.8 Note: The figures for 2005 are a forecast. Wages refer to hourly wages according to the short-term wage statistics (KL). According to the National Accounts, whose definition differs from KL, wages are estimated to rise by 3.4 per cent in 2006, 3.8 per cent in 2007, 4.0 per cent in 2008 and 4.1 per cent in 2009. Sources: National Mediation Office and Ministry of Finance.

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2007 wage round Salaried employees are the main group covered by agreement structures in which wages are If no agreements are terminated early, 80 per determined through local wage formation. cent of all employees will be covered by negotiations in 2007. In terms of size, the wage round Result of latest wage rounds will be comparable with those of 2001 and 2004. All sectors apart from transport and banking will 23 In the latest major wage round in 2004, which renegotiate their agreements during 2007.F F The covered nearly the whole private sector and the majority of agreements in the private sector ex- whole central government sector, almost all pire on 31 March. The agreements expire in June agreements were equivalent to the 7.3 per cent in the local government sector and September in over three years established in industry’s nego- the central government sector. 24 tiations.F F A large majority of the agreements in the private sector, and all in the central govern- Industry Agreement sets standard ment sector, were for three years. Just under half of the agreements in the private sector contained Following several decades of poorly functioning an option to terminate the agreement during the wage formation, the conditions were changed third year. That option has not been exercised. during the 1990s with the establishment of the Business sector agreements are 0.4 percentage Riksbank’s inflation target and the 1997 Indus- points lower per year than the previous agree- try Agreement. Negotiations within the frame- ment period of 2001/03. The main reason is that work of the Industry Agreement assume that the agreed-upon reduction in working hours is the wage scope should be determined on the now lower than previously. In the central gov- basis of the view of future economic activity pre- ernment sector, the agreements are 0.3 percent- sented by the Economic Council for Industry age points lower per year than 2001-2003. The and that the export industry, which is exposed to agreements did not include any initiative to re- competition, should function as a guideline for duce working hours. other industries and sectors. During the latest The 2005 wage round was not as comprehen- wage rounds, there has been a broad consensus sive as 2004, mainly covering the local govern- that the Industry Agreement should set the ment sector. The central agreements in this sec- standard for subsequent agreements. tor are largely similar, providing in most cases 2 per cent a year. The agreement for the Swedish Wage formation increasingly decentralised Municipal Workers’ Union, which is by far the largest trade union, was higher than for the Since the 1990s, wage formation has become in- others and is estimated to provide 2.9 per cent creasingly decentralised. Many agreements pro- per year. Overall, the average negotiated rate of vide an opportunity for the local parties to agree wage increase in the local government sector is on both the size of the wage scope and its allo- estimated at 2.4 per cent. The Swedish Municipal cation at an individual level. However, the rules Workers’ Union agreement was 0.8 percentage are often linked to procedures that come into points lower than the agreement signed in 2001 effect if the parties cannot reach an agreement at and 0.3 percentage points lower than the one- the local level. year agreement signed in 2003. In the central government sector, all employees are covered by agreements that are based on Agreement levels in relation to actual wage growth some form of local wage formation. The proportion is 30 per cent in the private sector and 5 The average agreement level for the whole econ- per cent in the local government sector. omy in 2004-2006 was 2.0 per cent. During the same period, the actual rate of wage increase was 3.4 per cent. The agreements were 0.4 percentage

23 24 The two sectors outside the wage round will instead renegotiate their The agreement level refers to agreements including the value of agreements in 2008. reductions in working hours.

62 PROP. 2006/07:1 BILAGA 2 points lower than the previous period, while the 4.3 Inflation actual rate of wage increase was 0.6 percentage points lower. The probable reason for this dis- Import and energy prices have increased inflation crepancy is that weak resource utilisation in the labour market slowed wage drift. During 2005 and 2006, inflation has risen somewhat after having been very low since the autumn of 2003 (see Diagram 4.10). Inflation, Resource utilisation compared with previous wage measured as the percentage change in the rounds consumer price index (CPI) over a 12-month period, averaged 0.4 per cent in 2004 and 2005. Resource utilisation in the labour market is cur- During the second and third quarters of this year rently estimated to be low. Although employ- (up to and including August), inflation averaged ment is forecast to rise at a satisfactory rate 1.6 per cent. Average underlying inflation for the during the second half of 2006, the actual em- same period, measured by the Riksbank’s ployment level is expected to be lower than the 25 UND1XF F, was 1.4 per cent. Although inflation potential level. has risen, it was still below the Riksbank’s 2 per The employment gap prior to next year’s cent target during the summer of 2006. wage round is consequently estimated to be at around the same level as prior to the 2004 wage Diagram 4.10 Consumer prices round. However, one important difference is Annual percentage change that employment had fallen over the 18 months 4.0 prior to the 2004 round, while the reverse is the 3.5 case this time. 3.0 The employment gap is estimated to have 2.5 been positive prior to the 2001 wage round. Em- 2.0 ployment had risen by nearly 200,000 during the 1.5 previous two years, and open unemployment 1.0 CPI had fallen by around 2 percentage points to 4.4 0.5 UND1X per cent. 0.0 -0.5 -1.0 Agreements expected to be higher than last time 2001 2002 2003 2004 2005 2006 2007 2008 2009 Sources: Statistics Sweden and Ministry of Finance. The comparison of the resource situation at the time of the latest wage rounds indicates that the Several different types of goods and services agreement level in the 2007 wage round will be have contributed to the rise in inflation. Diagram higher than in 2004 but lower than in 2001. 4.11 shows how large a positive or negative The risk of negotiated wage increases being effect, in percentage points, the price trend for substantially higher than estimated is considered various groups of goods and services has had on 26 relatively small. Since the first Industry Agree- total CPI inflation.F F The diagram demonstrates ment was signed, the nominal rate of increase that the contribution of energy prices to has been lower and the real rate of wage increase inflation began rising in 2005. has been higher than for many years. It is espe- During a large part of 2005, the energy-related cially worth noting that the 2001 wage round rise in inflation was offset by the deflationary was considerably lower than the high agreements signed in 1997, although resource utilisation was much higher in 2001.

The decentralisation of wage formation has 25 UND1X excludes interest expenses for owner-occupied dwellings and made it more difficult to forecast the future ac- direct effects on consumer prices of changes in indirect taxes and subsidies. tual wage trend on the basis of the central 26 The inflation effect (or inflation contribution) from a certain group of agreements. However, the moderate agreements goods or services is estimated by multiplying the group’s price change that are forecast are expected to result in the ac- over the past 12-month period by the group’s share of the total consumption basket that forms the basis of the CPI. Groups whose tual rate of wage increase in the future being prices have risen over the past 12 months thus contribute positively to compatible with the development of productiv- total inflation, while groups whose prices have fallen over the past 12- month period may be said to make a negative contribution. The total of ity and inflation in the long term. the effects of all goods and services is equal to total CPI inflation.

63 PROP. 2006/07:1 BILAGA 2 effect of lower prices year on year of import TCW index, as well as imported inflation (ex- goods (excluding oil and petrol). But during the cluding energy goods), measured by the latter part of 2005 and in 2006, import goods Riksbank’s UNDIMPX. have begun to have an inflationary effect. Diagram 4.12 Exchange rate and imported inflation Diagram 4.11 Effects on CPI inflation of prices for various Annual percentage change goods and services 4 15 Percentage points 3 2.5 10 Imported goods excl. energy 2 Domestically produced goods excl. energy 2.0 5 Domestically produced services excl. housing 1 Housing (incl. taxes and interest) 1.5 Energy 0 0

1.0 -1 -5 0.5 -2 -10 UNDIMPX excl. energy (left) 0.0 -3 Exchange rate, TCW index, two quarter lag (right) -4 -15 -0.5 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 -1.0 Sources: National Institute of Economic Research, Riksbank and Ministry of Finance. 2001 2002 2003 2004 2005 2006 Sources: Statistics Sweden and Ministry of Finance. The impact of the exchange rate on consumer prices is often both delayed (see Diagram 4.11) The prices of domestic goods (excluding elec- and incomplete. One of the reasons that tricity) have also contributed to some extent to exchange rate fluctuations are not wholly passed the rise in inflation over the past few months. on to the consumer in the short term is that However, the inflation contribution from do- importers and distributors may choose to let mestic services (excluding housing) has short-term exchange rate fluctuations affect continued falling. their own trade margins rather than consumer Housing costs are now boosting CPI prices. Another explanation is that firms hedge inflation. That is mainly due to mortgage rates their purchases to a varying extent. rising as of July 2006 and contributing to higher But the consumer prices of import goods are inflation, after having kept inflation down ever also affected by factors other than the exchange since March 2003. rate. One such factor is the world market price To summarise, the increased inflation over the of import goods. Home electronics products are past year has mainly been a consequence of the an example of a group of goods for which falling rising prices of electricity, oil products and producer prices have contributed to a continued import goods. The price trend for components sharp decline in consumer prices despite the of mainly domestic origin is still subdued, krona depreciation. Increased global trade and although the prices of certain goods have risen competition have probably contributed to somewhat more of late. pushing international producer prices down. This trend may be expected to continue keeping import prices down during the forecast period. Stronger krona expected to lead to falling import Moreover Swedish trade margins may affect prices in the future the consumer prices of import goods. Overall, the exchange rate trend and increased Largely due to last year’s weakening of the global competition are expected to lead to Swedish krona, import goods have moved from negative inflation on import goods (excluding having a deflationary to an inflationary effect. energy) again in the future and to these prices The krona has strengthened again during keeping inflation down as of the end of 2006. 2006, and the trend is expected to continue during the forecast period (see Section 2.2). That indicates that inflation on import goods will Oil price set to reduce inflation as of 2007 decline again in the future. Diagram 4.12 shows the annual percentage The price of oil is expected to fall from the very change in the exchange rate, measured by the high levels recorded during 2006 (see Section

64 PROP. 2006/07:1 BILAGA 2

1.5). Next year, home heating oil and petrol reporting a labour shortage in the NIER’s prices are likely therefore to begin contributing Business Tendency Survey), but that should not to lower inflation. Those prices are estimated to be interpreted as a sign that inflationary pressure reduce inflation by approximately 0.2 percentage is set to rise rapidly. That is illustrated in points by the end of 2007. Indirect effects of the Diagram 4.13, which shows the labour shortages high price of oil, i.e. firms with transport cost in the wholesale and retail trade, with a time lag increases pass on part of them to consumers, are of six quarters, and the Riksbank’s measure of expected, however, to continue contributing mainly domestically generated inflation. somewhat to higher inflation in 2007 and 2008. Employment is forecast to continue rising at a However, there is considerable uncertainty satisfactory rate in 2006 and 2007. The available regarding the oil price trend. resources in the labour market are consequently expected to be gradually utilised. The employment gap (the difference between actual and Domestic inflationary pressure low but gradually potential employment – see Diagram 4.14) is ex- increasing pected to narrow during the forecast period. The rate of wage increase is then expected to rise The low inflation contributions from domesti- gradually (see Section 4.2). Meanwhile, produc- cally produced goods and services in Diagram tivity growth in the service sector is expected to 4.11 may to some extent be related to reduced be somewhat lower than the average for the past trade margins. But the weak inflationary few years. pressure in the Swedish economy is largely due to the low resource utilisation in the labour mar- Diagram 4.14 Employment gap and inflation ket. Employment began rising in 2005 after Per cent, annual average having fallen in 2003 and 2004. Meanwhile, 2 4 wages have risen at a moderate rate, and productivity growth has been rapid. 1 3

0 2 Diagram 4.13 Inflation and labour shortage in wholesale and retail trade -1 1 Per cent, quarterly average Net balance, quarter 5 35 -2 0 UNDINHX excl. energy (left) Labour shortage, six quarter lag (right) 30 -3 Employment gap (left) -1 4 Underlying inflation (UND1X; right) 25 -4 -2 3 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 20 Sources: Statistics Sweden and Ministry of Finance. 15 2 10 Domestic cost pressure is consequently forecast 1 to increase and, with a certain time lag, lead to 5 higher consumer prices. However, the measures 0 0 proposed and announced in this Budget Bill are 97 98 99 00 01 02 03 04 05 06 07 expected to boost the labour supply and restrain Note: Labour shortage refers to net balance for NIER’s Business Tendency Survey questions on labour shortage in durable goods trade, non-durable goods trade and wholesale trade, the rate of wage increase, thereby contributing weighted by employment in each sector. UNDINHX is the Riksbank’s measure of mainly to only a slow rise in domestic inflationary pres- domestically generated underlying inflation. Sources: NIER, Statistics Sweden and Ministry of Finance. sure in 2008 and 2009. Demand-related domestic inflationary As previously mentioned in this chapter, there pressure is also expected to increase somewhat are, in general, still plenty of available resources during the forecast period. Over the past few in the labour market. The sectors (primarily years, greater competition in the wholesale and construction) with significant recruitment retail trade is deemed to have restrained the problems have only an indirect impact on consumer price trend (see also the explanatory consumer prices. There are certainly more box “Why is inflation lower in Sweden than in consumer-related sectors showing growing the euro area?” on page 68). This tendency is shortages (i.e., an increasing proportion of firms expected to continue during the forecast period,

65 PROP. 2006/07:1 BILAGA 2 but favourable demand growth in the future may the electricity exchange, and electricity make it somewhat easier for firms to increase consumers have many different types of their margins. agreements and fixed periods. Overall, the consumer electricity price is, however, expected to remain high in 2006 and fall somewhat in Low rent increases this year 2007. The electricity price is estimated to reduce CPI inflation by approximately 0.1 percentage Rents are one of the major items in the CPI that points in late 2007. are contributing to inflation remaining relatively low this year. Rents are estimated to rise by only 0.7 per cent during 2006. By comparison, annual Rising mortgage rates increase CPI rent increases over the past four years have been between 2.4 per cent and 3.0 per cent. Next year, The interest rate forecast presented in Section higher interest rates and energy costs are 2.2 indicates that interest expenses for owner- forecast to contribute to rent increases of occupied dwellings will continue to boost CPI approximately 1.7 per cent. inflation throughout the forecast period. CPI inflation will consequently be higher than underlying inflation as measured by UND1X Higher electricity prices in 2006–2007 (see Diagram 4.10 and Table 4.4). Next year, interest rates are estimated to boost CPI Electricity accounts for a large part of housing inflation by an average of 0.7 percentage points. costs. The consumer electricity price has risen The effect is then set to decrease, but interest substantially during 2006. The spot price of rates are estimated to still contribute 0.4 per- electricity for immediate delivery on Nord Pool centage points to CPI inflation in late 2009. (the Nordic electricity exchange) fell somewhat in March and April but has since risen again (see Diagram 4.15). During the summer, the future Tax and subsidy changes affect inflation measures prices of electricity for delivery during the in 2007 second half of 2006 and the first quarter of 2007 rose very sharply. In 2007, increased taxes on tobacco and the change in traffic insurance will contribute to Diagram 4.15 Electricity prices increasing CPI inflation. Meanwhile reduced Öre/kWh, quarterly Index, 1980=100, employer contributions, property and payroll average quarterly average taxes, as well as a tax allowance for household 60 600 services, will contribute to lowering CPI

50 500 inflation. Overall, changes in taxes and subsidies are estimated to contribute to increasing CPI 40 400 inflation by approximately 0.3 percentage points

30 300 in 2007.

20 200 Inflation approaching target 10 Spot price, Nord Pool (left) 100 CPI for electricity (right) 0 0 To summarise, underlying inflationary pressure 96 97 98 99 00 01 02 03 04 05 06 is forecast to remain low in 2006 and a large part Sources: Statistics Sweden and Nord Pool. of 2007. The krona is expected to strengthen and low resource utilisation to result in moderate The assessment of the electricity price is wage increases. However, the inflation trend associated with considerable uncertainty. This is during this period will be affected to a large ex- due to the fact that it is difficult to forecast the tent by energy prices boosting inflation in 2006 longer-term producer price trend, prices on the and early 2007. electricity exchange show large short-term During 2007, underlying inflationary pressure variations, a relatively large part of electricity is expected to begin to rise somewhat, as production is sold in other ways than through resource utilisation increases and the rate of

66 PROP. 2006/07:1 BILAGA 2 wage increase rises. However, the rise in inflation is expected to be moderated by falling energy prices and continued krona appreciation. In 2008 and 2009, the stronger labour market is expected to have a larger impact on inflation, but import prices will continue to moderate the rise in inflation. The total effect of the measures proposed and announced in this Budget Bill is also expected to contribute to restraining domestic inflationary pressure during these years. Underlying inflation, measured by UND1X, is estimated at approximately 1.5 per cent in late 2008, rising to approximately 1.9 per cent in late 2009 (see Table 4.4).

Table 4.4 Consumer prices Annual percentage change

2005 2006 2007 2008 2009 CPI, December 0.9 2.6 2.3 1.7 2.1 CPI, year-on-year 0.5 1.6 2.5 2.0 1.9 UND1X, December 1.2 1.8 1.7 1.5 1.9 UND1X, year-on-year 0.8 1.3 1.9 1.5 1.8 Sources: Statistics Sweden and Ministry of Finance.

Uncertainty about energy prices and domestic inflationary pressure

The assessment of domestic inflationary pressure is a considerable source of uncertainty in the inflation forecast, particularly during the latter part of the forecast period. On the one hand, domestic inflationary pressure has often been overestimated during the past few years, and it is possible that continued favourable productivity growth and increasing competition will result in consumer prices rising less than anticipated in this forecast. On the other hand, prices may rise more rapidly than expected in 2007–09 if favourable employment growth and strong domestic demand growth lead to general or sector labour shortages driving up wages. In addition, there is uncertainty about the stimulating effects on supply of the government’s policy. If these effects are larger than expected, they will contribute to moderating inflation – and vice versa. Oil and electricity prices entail a risk of higher or lower than forecast inflation throughout the forecast period.

67 PROP. 2006/07:1 BILAGA 2

Why is inflation lower in Sweden than in the So far this year, the difference has decreased as a euro area? result of a rise in inflation in Sweden. However, inflation has remained lower in Sweden, despite Inflation has fallen in most regions last year’s krona depreciation.

Since the 1970s, inflation in both Sweden and Exchange rate and difference in inflation between Sweden the euro area has slowed considerably, a trend and euro area that has also been evident in the OECD area as a HICP, annual percentage change Per cent whole. The trend of slowing inflation may be 1.5 15 explained by several interacting factors. In the 1.0 10 wake of globalisation, competition in product 0.5 5 markets in particular has become stiffer, which, combined with stronger productivity growth, 0.0 0 has slowed the price trend for several types of -0.5 -5 goods. That has been particularly evident in the -1.0 -10 case of clothing, shoes and electronics. Moreover the credibility of monetary policy has -1.5 Inflation difference Sweden–euro area (left) -15 Exchange rate EUR/SEK, annual percentage change (right) increased as a number of countries have -2.0 -20 introduced clear inflation targets. 95 96 97 98 99 00 01 02 03 04 05 06 Sources: Eurostat and Ministry of Finance.

Inflation in Sweden, euro area and OECD Consumer price index, annual percentage change 16 Differences in growth and productivity

14 Euro area OECD 12 GDP growth has been considerably higher in Sweden 10 Sweden than in the euro area over the past few

8 years. Average GDP growth in 1999–2005 was 2.9 per cent in Sweden and 2.0 per cent in the 6 euro area. 4 The situation is different with regard to 2 employment. In the euro area, employment 0 growth slowed following the high-growth years -2 around 2000. However, despite very weak GDP 71 73 75 77 79 81 83 85 87 89 91 93 95 97 99 01 03 05 growth in recent years, employment has Sources: Statistics Sweden and OECD. continued rising. In Sweden, employment fell somewhat, however, in the early 2000s. Differences in inflation Despite weaker developments in the labour market, Sweden has experienced higher GDP Although the long-term trend has been similar, growth due to considerably stronger there have been differences between Sweden and productivity growth than in most of the euro the euro area over the past ten years. During the area. Consequently, the unit labour cost has greater part of that period, inflation has been developed more slowly in Sweden, explaining lower in Sweden than in the euro area as a whole. part of the difference in inflation. A further Between the 1999 introduction of the euro and reason for the differences in growth is that 2005, average inflation, as measured by Euro- potential growth has declined in the euro area stat’s harmonised consumer price index over the past ten years while increasing in (HICP), was 2.0 per cent in the euro area and Sweden. 1.5 per cent in Sweden. That was the case despite the fact that the difference between the Riksbank’s and the European Central Bank’s Composition of inflation differs inflation targets suggests that inflation in the euro area should be lower in the long term. Last More sector-specific and product-specific cir- year, inflation in the euro area rose somewhat, cumstances also help to explain the differences while inflation slowed considerably in Sweden. in inflation. The diagrams below show the

68 PROP. 2006/07:1 BILAGA 2 effects of the prices for various main types of Some of the differences may be due to goods and services on inflation in the euro area increased competition in the Swedish retail trade 27 and Sweden.F F having led to a downward adjustment of high margins and consumer price levels. The Effects on euro area HICP inflation of prices for various difference in inflation for food is probably partly goods and services due to that. Deregulation and increased compe- Percentage points tition have presumably had an impact on tele- 4 Industrial goods Food communication products and services as well. Services Energy 3 Total HICP Differences between Sweden and euro area in price developments for certain goods and services 2 HICP, annual percentage change, difference, percentage points

1 10 8 Telecom Food 0 6 Home electronics Services -1 4 1999 20 00 20 01 20 02 20 03 20 04 20 05 20 06 2 Note: 3rd quarter values for 2006 refer to the July–August average. Sources: Eurostat and Ministry of Finance. 0

Services have made a smaller contribution to -2 inflation in Sweden than in the euro area over -4 the past few years. Industrial goods have had a -6 deflationary effect in Sweden, while they have 1999 20 00 20 01 20 02 20 03 20 04 20 05 20 06 Source: Eurostat. had an inflationary effect in the euro area.

Effects on Swedish HICP inflation of prices for various Increased competition may also have had an goods and services impact on home electronics products, but it is Percentage points doubtful whether that explains the whole 4 Industrial goods Food difference. This type of goods accounts for a Services Energy 3 Total HICP large part of the substantial negative effect of industrial goods in the above diagram. In 2 Sweden, home electronics prices have fallen by 10–15 per cent annually over the past few years, 1 while the decline has been more limited in the euro area. However, it should also be noted that 0 statistical adjustment for quality is probably

-1 particularly difficult for these goods, i.e., it is 1999 20 00 20 01 20 02 20 03 20 04 20 05 20 06 hard to guarantee that the measured price trend Note: 3rd quarter values for 2006 refer to the July–August average. Sources: Eurostat and Ministry of Finance. is not due to changes in quality. To summarise, the statistics indicate that the differences between inflation in Sweden and the In addition, food has made a smaller euro area may be due to both cyclical and contribution to inflation in Sweden than in the structural differences. These differences are ex- euro area during a large part of the period. Since pected to gradually disappear, reducing the mid-2004, food has contributed during most differences between inflation in Sweden and the months to lowering inflation in Sweden. euro area. As productivity slows and employment rises more rapidly, domestic cost pressure is expected to increase. Structural price

level reductions will also probably cease in the

long term.

27 The differences in effects are due to differences in the measured price trend. The differences in HICP’s product weights, i.e. differences in consumption patterns between Sweden and the euro area, are generally small and do not contribute appreciably to explaining the differences in inflation.

69 PROP. 2006/07:1 BILAGA 2

5 General government sector strengthen gradually. The financial surpluses should result in a continued strengthening of the Strong general government finances general government sector’s financial position. The consolidated gross debt is estimated to be General government finances have strengthened equivalent to 33 per cent of GDP at the end of over the past few years. This year, general gov- the forecast period (see Table 5.1). ernment net lending is estimated at 2.8 per cent of GDP. Financial assets are exceeding liabilities, and consolidated gross debt is estimated at 46.5 per cent of GDP at the end of 2006 (see 5.1 General government finances Table 5.1 and Diagram 5.1). The economic upturn of the past few years has Table 5.1 General government finances contributed to the deficits in general govern- Per cent of GDP ment net lending in 2002 and 2003 turning into a 2005 2006 2007 2008 2009 surplus equivalent to 2.8 per cent of GDP in Revenue 56.3 55.6 53.6 53.1 52.8 2005. For 2006, the surplus is estimated at Taxes and charges 50.8 50.2 47.9 47.6 47.4 2.8 per cent of GDP or SEK 80 billion. The rela- Expenditure 53.5 52.8 51.3 50.5 49.8 tively large surpluses in 2005 and 2006 are partly Net lending 2.8 2.8 2.3 2.6 3.1 due to temporarily high tax revenues from corporate profits and household capital gains. Apart Net debt -12.4 -15.4 -16.9 -18.7 -20.8 from the charge on central government of one Consolidated gross debt 50.3 46.5 41.5 37.4 33.0 year’s extra transfer of premium pension funds Central government debt 47.2 43.7 38.9 35.0 30.6 to the old-age pension system in 2006, all areas Note: Consolidated gross debt is defined by EU rules (the Maastricht criteria). Sources: Statistics Sweden and Ministry of Finance. of the general government sector are showing a surplus. With net lending this year of 0.7 per

cent of GDP, local government finances are fa- The tax cuts and other reforms now proposed, as vourable. well as their financing, are estimated to reduce At the end of 2005, general government finan- general government net lending by 0.2 per cent cial assets exceeded liabilities by SEK 331 billion, of GDP in 2007 and by 0.4 per cent in 2008. To- or 12.4 per cent of GDP. General government gether with previously agreed-upon measures, capital income in the form of interest and divi- the reforms that come into effect in 2007 dends also exceeded interest expenditure. The amount to 0.6 per cent of GDP. positive net wealth may be seen in the light of

Diagram 5.1 Consolidated gross debt assets in the pension system amounting to just Per cent of GDP over SEK 1,000 billion. The consolidated gross

80 debt was 50.3 per cent of GDP, which was well 75 below the EMU reference value of 60 per cent 70 (see Table 5.2). 65 Next year, general government net lending is 60 estimated at 2.3 per cent of GDP. Mainly due to 55 the tax cuts now being proposed, tax revenues 50 are forecast to fall substantially as a percentage 45 of GDP. Partly as a result of the proposed sav- 40 ings, expenditure is also expected to fall as a per- 35 centage of GDP. 30 In 2008 and 2009, both revenue and expendi- 1994 1996 1998 2000 2002 2004 2006 2008 Sources: Statistics Sweden and Ministry of Finance. ture are expected to continue falling as a percentage of GDP. Between 2006 and 2009, reve-

nue is estimated to fall by 2.8 per cent and ex- General government revenue and expenditure penditure by 3 per cent of GDP while net lend- are both forecast to fall substantially as a per- ing strengthens. centage of GDP. General government net lend- The surplus in general government net lending is estimated at 2.3 per cent of GDP in 2007. ing is expected to result in the net financial posi- In 2008 and 2009, net lending is forecast to tion continuing to strengthen and to contribute

70 PROP. 2006/07:1 BILAGA 2 to consolidated gross debt falling during the Diagram 5.2 Taxes and charges forecast period. In addition, consolidated gross Per cent of GDP debt will be reduced as a result of the planned 55 divestments of state shareholdings. 54 53 Table 5.2 The general governments revenues and 52 expenditures 51 SEK billion unless otherwise stated 50 2005 2006 2007 2008 2009 49 Revenue 1 505 1 573 1 612 1 678 1 754 48 Per cent of GDP 56.3 55.6 53.6 53.1 52.8 47 Taxes and charges 1 357 1 420 1 440 1 505 1 573 46 Per cent of GDP 50.8 50.2 47.9 47.6 47.4 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 Capital income 58 64 68 66 70 Sources: Statistics Sweden and Ministry of Finance.

Other income 89 89 104 108 111 Tax cuts, as well as reduced corporate profits and Expenditure 1 430 1 494 1 542 1 596 1 652 capital gains, contributed to the tax ratio falling Per cent of GDP 53.5 52.8 51.3 50.5 49.8 again in the early 2000s. In 2004 and 2005, the Primary expenditure 1 378 1 441 1 484 1 540 1 596 tax ratio rose, mainly as a result of increased Interest 52 53 57 56 55 corporate profits and capital gains (see Diagram Net lending 74 80 70 82 102 5.2). Per cent of GDP 2.8 2.8 2.3 2.6 3.1 In 2005, the tax ratio was 51.1 per cent, of Central government 10 -19 3 20 47 which 31.8 percentage points, or just over 60 per Old-age pension cent, consisted of tax and charges on wages and system 50 80 52 49 45 transfer payments. Transfer payments are taxed Local government 14 19 15 13 10 in Sweden, making it difficult to compare the tax Financial position ratio with countries in which pensions, sick pay, 28 Net debt -331 -437 -508 -591 -691 etc., are not taxed.F F Tax on transfer payments Per cent of GDP -12.4 -15.4 -16.9 -18.7 -20.8 amounted to approximately 4 per cent of GDP. Consolidated gross Tax on capital was equivalent to 6.4 per cent of debt 1 346 1 315 1 248 1 184 1 095 GDP, which is the highest percentage since the Per cent of GDP 50.3 46.5 41.5 37.4 33.0 7.3 per cent figure in 2000. Value added tax was Note: Consolidated gross debt is defined by EU rules (the Maastricht criteria). equivalent to 9.4 per cent and other taxes to Sources: Statistics Sweden and Ministry of Finance. 3.5 per cent of GDP (see Table 5.3). This year, changes in the rules are expected to result in a reduction in tax of just over SEK Taxes and charges 9 billion, equivalent to 0.3 per cent of GDP. That takes into account the fact that the limit The taxes reported in the National Accounts for now being proposed on the tax levy on the land the general government sector are somewhat value of single-family dwellings is to apply as of lower than total taxes. The part of value added 2006. Tax on wages and transfer payments has tax and customs revenues included in the EU been reduced by approximately SEK 8 billion, as contribution is not reported as tax in the general a result partly of the completion of the gradual government sector, but as tax payable abroad. compensation for the national pension contri- The tax ratio, i.e., total taxes as a percentage of bution that began in 2000 and partly of an in- GDP, declined in the early 1990s as a result of crease in the basic tax allowance. Tax on wages the economic crisis and the underfunding of the and transfer payments is expected to decline as a 1990 tax reform during the first years after it percentage of GDP more than explained by the came into force. tax cuts. That is mainly due to expectations that The tax increases in the consolidation programme in 1995-98 and exceptionally high corporate profits and capital gains in 1999-2000 resulted in a substantial increase in the tax ratio 28 during the second half of the 1990s. A comparison of the impact of transfer payments on the tax ratio of OECD countries is reported in the Budget Bill, Volume 1, Chapter 6.

71 PROP. 2006/07:1 BILAGA 2 the wage bill will increase by just under 5 per The decision to charge interest on the tax al- cent and that GDP in current prices will increase location reserves of firms as of 2005 has resulted by nearly 6 per cent. Overall, the tax ratio is ex- in many of them wholly or partly reversing their pected to decline to 50.5 per cent of GDP. transfers to these reserves for taxation in 2004 and 2005. That is estimated to have resulted in Table 5.3 Taxes and charges temporarily high tax revenues from firms Per cent of GDP amounting to SEK 13 billion in 2004 and SEK 12 2005 2006 2007 2008 2009 billion in 2005. Company reports for the first Taxes on wages and half of 2006 indicate continued strong earnings transfers 31.8 31.0 29.5 29.2 29.1 growth. Moreover, the costs of firms are being Income tax 17.9 17.4 15.9 15.8 15.9 reduced this year by a temporary reduction in Payroll charges 13.9 13.6 13.5 13.4 13.2 pension premiums. The profit share in the busi- Taxes on capital 6.4 6.4 5.7 5.7 5.7 ness sector is increasing this year, and tax on Household 1.0 1.1 0.6 0.6 0.5 corporate profits is consequently increasing in Company profits 3.4 3.4 3.2 3.3 3.4 pace with GDP, despite the loss of the above Property tax 0.9 0.9 0.8 0.8 0.8 temporary revenues. Next year, corporate taxes Other taxes on capital 1.1 1.0 1.0 1.0 1.1 are expected to fall somewhat as a percentage of GDP. Value added tax 9.4 9.4 9.4 9.4 9.4 As of 2007, a freeze on tax assessment values Other taxes 3.5 3.7 3.6 3.5 3.4 on dwellings at their 2006 level is now being Total 51.1 50.5 48.1 47.8 47.6 proposed. As a result, revenues from property of which tax are expected to remain practically unchanged General government 50.8 50.2 47.9 47.6 47.4 during the forecast period and thus decrease as a EU 0.3 0.3 0.2 0.2 0.2 percentage of GDP. Note: Total tax revenues are according to the National Accounts and broken down Value added tax as a percentage of GDP is es- into different categories by the Ministry of Finance. For 2005, the preliminary outcome of the National Accounts is SEK 10 billion lower than the Ministry of timated to remain at its 2005 level of 9.4 per Finance’s assessment. The difference, which is equivalent to 0.3 per cent of GDP, has been added to Other Taxes in the table. cent. Sources: Statistics Sweden and Ministry of Finance. As regards selective purchase tax, an increase in tax on tobacco is being proposed. In order to A substantial cut in household income tax is transfer the sickness allowance and sickness now proposed for 2007. Tax on employment is benefit costs for people injured in traffic acci- to be reduced through a tax reduction on income dents to traffic accident insurance, a tax on traf- from employment, which results in a tax cut of fic insurance premiums is being announced. SEK 40 billion. The tax cut is to be partly fi- Overall, the tax ratio is forecast to decline nanced within income tax through reduced al- sharply in 2007 to 47.9 per cent of GDP. Of the lowances. 2.4 percentage point reduction, 1.3 percentage Reduced employer contributions for both points are due to changes in rules that come into young and elderly people are being proposed force next year. Further changes in rules will with the aim of increasing employment. In addi- come into force or have a full impact in 2008 and tion, reduced employer contributions for certain 2009, contributing to a continued decline in the service industries are being announced. Mean- tax ratio. while the present general reduction in employer contributions is to be halved. Overall, the rule changes result in a reduction in income from Other income employer contributions. Household tax on capital has increased over In addition to taxes, the general government the past two years as a result of increased capital sector receives other income, which amounted gains and share dividends. This trend is expected to SEK 147 billion, or 5.5 per cent of GDP, in to continue, and household tax on capital is es- 2005. Around 40 per cent of this income timated at just over 1 per cent of GDP this year, consists of capital income in the form of interest compared with 1.5 per cent in 2000. Capital and dividends, of which approximately half is the gains are forecast to decline to a more normal yield on pension funds. In 2005, capital income level in 2007, thereby reducing household tax on exceeded interest expenditure, reflecting the capital to 0.6 per cent of GDP. positive financial wealth. As a result of increased

72 PROP. 2006/07:1 BILAGA 2 share dividends, capital income is forecast to in- gram 5.4 shows the number of people, expressed crease relatively strongly this year. as full-year equivalents, receiving benefits from Other income is forecast to increase sharply the most important social insurance systems. by SEK 15 billion in 2007. SEK 10 billion of this Pension payments account for nearly half of amount is due to the increase now being pro- the transfer payments to households, or 16 per posed in individual contributions to unemploy- cent of general government expenditure. Dia- ment insurance. Further, other income consists gram 5.4 shows that the number of old age pen- mainly of imputed pension contributions and sioners has remained relatively unchanged over a the consumption of fixed capital. This income is long period and has only begun increasing over imputed and is matched on the expenditure side the past few years. The rate of increase is ex- by equally large costs, which are included in gen- pected to rise during the forecast period and the eral government consumption expenditure. number of old age pensioners to increase by 117,000 between 2005 and 2009. This increase in volume, as well as the higher pensions of new Expenditure pensioners entering the system, is expected to result in a relatively sharp increase in pension The expenditure ratio, i.e., general government payments at the end of the forecast period. In expenditure as a percentage of GDP, rose sub- addition, an increase in supplementary housing stantially during the economic crisis in the early benefit is now being proposed. 1990s. Economies in the consolidation programme, together with rapid economic growth, Diagram 5.4 Number of people in social insurance system contributed to the expenditure ratio declining Thousands Thousands during the second half of the 1990s. Once confi- 1 200 1 600 dence in the Swedish economy had recovered, interest rates fell, consequently reducing interest 900 Sickness leave and disability pension (left axis) 1 500 expenditure. Reforms in combination with the Unempl. and labour market programmes (left axis) economic downturn resulted in the expenditure Pensioners (right axis) 1 400 ratio increasing in 2002 and 2003. The expendi- 600 ture ratio again declined to 53.5 per cent in 2005. The expenditure ratio is estimated to decline 300 1 300 gradually during the forecast period (see Dia- gram 5.3). 0 1 200 1990 1992 1994 1996 1998 2000 2002 2004 2006 Diagram 5.3 Expenditure Note: Numbers expressed in full-time equivalents Source: The Government Offices. Per cent of GDP 75 The sharp increase in the number of people on

70 sick leave that began in the late 1990s has reversed. The number of sickness allowance days 65 has been falling since 2003, and this trend is expected to continue in 2006-2007. For the 60 following years, only a computational projection 55 is being made, according to which the number of sickness allowance days for 2008-2009 is 50 assumed to be at the same level as 2007. The

45 health insurance ceiling was raised in mid-2006 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 to 10 times the base amount, but a restoration to Sources: Statistics Sweden and Ministry of Finance. 7.5 times the base amount is now being proposed. Transfer payments to households, which ac- However, the reduction in the number of counted for 34 per cent of expenditure in 2005, people on sick leave in recent years does not im- are expected to increase more slowly than GDP ply that total ill health has declined to the same during the forecast period (see Table 5.4). The extent. This is due to the very sharp increase in development of social benefits is determined by the benefit rules and degree of utilisation. Dia-

73 PROP. 2006/07:1 BILAGA 2 the number of people receiving activity and policy programmes are estimated to decrease sickness benefit (previously disability pension). throughout the forecast period. This decline in Table 5.4 General government expenditures volume, together with the reduced level of Percentage change in current prices benefits, is forecast to lead to sharply reduced 20051 2005 2006 2007 2008 2009 expenditure on labour market-related transfer Transfers to payments. households 34.1 1.3 2.4 0.4 2.7 4.1 Transfer payments related to families and Pensions 16.2 0.7 3.0 3.9 5.3 5.4 children are forecast to increase substantially this Ill-health 8.2 3.7 0.8 -1.5 2.7 4.3 year as a result of the parental insurance ceiling Labour market 3.1 -0.3 -3.9 -17.4 -11.3 -0.6 being raised to 10 times the base amount as of Family and mid-2006. The number of people receiving fi- children 3.4 2.8 9.5 2.7 1.5 2.3 nancial assistance (formerly social assistance) is Studies 0.8 -3.1 8.7 -2.3 0.4 1.3 expected to decline during the forecast period. Social assist Transfer payments and subsidies to the business ance etc. 0.8 -2.0 -3.3 -2.5 -3.4 -2.6 sector and abroad increased sharply in 2005 and Other 1.5 -1.4 1.6 2.5 2.0 1.9 are increasing strongly this year as well. Devel- Other transfers 6.3 17.4 10.9 -3.9 2.8 -3.2 opment assistance, which rose by 12 per cent in of which 2005, is expected to rise by 20 per cent this year Abroad 2.9 14.2 11.9 -0.7 11.0 6.2 to SEK 26 billion, or nearly 1 per cent of GDP. Consumption 50.9 3.2 4.4 5.1 4.7 4.4 Sweden’s contribution to the EU budget, in- Investment 5.1 3.1 5.1 6.4 3.1 3.0 cluding the part of taxes payable to the EU, will Interest 3.6 6.2 0.4 11.8 -2.8 -0.3 also amount to approximately 1 per cent of Total 100.0 3.3 4.3 3.3 3.6 3.6 GDP this year. During the forecast period, this GDP 3.9 5.9 6.3 5.2 4.9 EU contribution will be reduced as the result of 1 Share in per cent. a decision to that effect coming into force. Gen- Sources: Statistics Sweden and Ministry of Finance. eral government consumption expenditure was equivalent to 27.3 per cent of GDP in 2005 and That increase is expected to reverse, and the accounted for approximately 51 per cent of number of people receiving activity and sickness expenditure (the development of general benefit is estimated to fall in 2007–09. government consumption expenditure is descri- Expenditure on personal assistant grants, which bed in Section 3.5). During the forecast period, rose from SEK 7 billion in 2000 to SEK general government consumption expenditure in 14 billion in 2005, is estimated to rise at a current prices is expected to rise more slowly somewhat lower rate during the forecast period. than GDP but to increase as a percentage of ex- Overall, transfers related to ill health are penditure. estimated to rise by only 0.8 per cent this year General government investment is forecast to and to fall in 2007. increase relatively strongly both this year and The overall number of unemployed people, next. including those in labour market policy pro- Interest expenditure, which has decreased by grammes, is expected to rise somewhat in 2006. SEK 40 billion since 2000, accounted for 3.6 per Those included in employment programmes cent of expenditure in 2005. The forecast rise in (such as employment subsidies and temporary interest rates is estimated to lead to a substantial tax-funded jobs) receive their compensation in increase in interest expenditure next year. The the form of wages, and the employer receives a planned divestments of state shareholdings will subsidy. Transfer payments to households only contribute to reducing central government debt include benefits to unemployed people and and thereby interest expenditure. those in labour market training programmes. A number of changes in unemployment insurance, which will result in lower expenditure, are now proposed. Labour market policy pro- 5.2 Fiscal policy targets grammes are to be cut back, contributing to a forecast rise in open unemployment next year, Fiscal policy is governed by two medium-term followed by a fall. Overall, open unemployment targets. First, net lending in the general govern- and the number of participants in labour market ment sector is to average 2 per cent of GDP over

74 PROP. 2006/07:1 BILAGA 2 a business cycle. Second, expenditure in the target. That represents an attempt to strike a bal- central government sector and the old-age pen- ance between short-term flexibility and long- sion system combined may not exceed a ceiling term sustainability. This is one reason why the normally set three years in advance. In addition, surplus target is stated as an average over a busi- the local government sector must have balanced ness cycle. budgets. The expenditure ceiling has been in ef- To determine the extent to which net lending fect since 1997, and the surplus target and bal- during an individual year is in line with the tar- anced budget requirement since 2000. get, net lending can be adjusted for cyclical The primary purpose for the surplus target is variations in general government revenue and the need to strengthen the general government expenditure, as well as for other types of tempo- sector’s financial position ahead of future demo- rary effects. This adjusted net lending reflects graphic strains on the public welfare system. At the underlying, or “structural”, level of net the same time, the target creates a buffer to lending. avoid overly large deficits in a recession. The ex- The structural balance in the general govern- penditure ceiling, an important tool in the cen- ment sector should normally be close to 2 per tral government’s budgetary process, prevents cent of GDP. When there is a risk of high un- temporarily higher income from leading to per- employment or overheating in the economy manently higher expenditure. The expenditure with high inflation as a result, fiscal policy may ceiling is also the most important instrument for need to be eased or tightened. In such a situa- achieving the surplus target. tion, the structural balance may be permitted to An evaluation of the extent to which the sur- deviate temporarily from 2 per cent of GDP. A plus target is achieved should be considered in higher or lower structural balance may be neces- light of the fact that the length of a business cy- sary in a particular year if net lending in earlier cle is uncertain and can vary over time. The fol- years has deviated substantially from 2 per cent. lowing discussion looks at two types of indica- A rapid adjustment of public finances toward the tors for evaluating target fulfilment: averages target may have an excessively strong impact on over time periods and structural balances. demand and contribute to instability in the real economy. The cyclical adjustment of net lending is based Average net lending since 2000 on an assessment of the economic situation and its effects on public finances. One way of de- The surplus target is formulated as an average scribing the economic situation is the GDP gap, over a business cycle. During the decades after which constitutes the per cent difference be- the Second World War, the length of a typical tween actual and potential GDP. The Ministry Swedish business cycle was about five years. of Finance’s assessment is that a change in the Since the financial crisis in the early 1990s, GDP gap of 1 percentage point affects net business cycles appear to have lengthened. It is lending in the general government sector by therefore reasonable to measure the average sur- 0.7 per cent of GDP on average. However, it plus over periods somewhat longer than five should be emphasised that structural balance cal- years as an indicator of target fulfilment. culations are uncertain due to uncertainty in the As of 2006, average net lending since 2000 is estimate of the level and composition of poten- estimated at 2.0 per cent of GDP. For 2007–09, tial output in particular. the average is forecast to be above 2 per cent of Since 2000, the structural balance has been GDP (see Table 5.5). both higher and lower than 2 per cent of GDP. In 2006 the structural balance is estimated to be 2.4 per cent of GDP. The size of the GDP gap is Structural balance forecast to be largely unchanged from 2006 to 2007 and be close to zero in both years. The Public finances are affected by variations in tax structural balance is expected to be 2.4 per cent revenue and expenditure over the business cycle. of GDP again in 2007. The structural balance is Because of that and the usual uncertainty per- then projected to grow somewhat in 2008 and taining to the business cycle, the surplus for in- 2009 (see Table 5.5). dividual years can deviate from 2 per cent of

GDP without jeopardizing the medium-term

75 PROP. 2006/07:1 BILAGA 2

Table 5.5 Indicators for the surplus target: Structural 5.3 Fiscal policy balance and average of net lending Per cent of GDP The effects on demand in the private sector of 2005 2006 2007 2008 2009 changes in general government finances are diffi- Net lending 2.8 2.8 2.3 2.6 3.1 cult to assess for several reasons. Tax changes One-offs -0.4 0.0 0.0 0.0 0.0 aimed at households probably have a different Extraordinary capital effect than those aimed at firms. Similarly, gains tax revenue -0.3 -0.4 0.0 0.0 0.0 households with different propensities to con- Adjusted for GDP gap and sume react in different ways to fiscal stimuli. one-offs 0.7 0.1 0.1 0.1 0.0 In addition, general government consumption Structural balance 2.7 2.4 2.4 2.7 3.1 and investment have a direct impact on demand, Net lending, average 1.9 2.0 2.1 2.1 2.2 while changes in net lending due to variations in BNP-gap -1.0 -0.1 -0.1 -0.2 0.0 transfers abroad, such as foreign aid and the EU Note: The one-off effect in 2005 refers to a temporary surge in tax revenue when contribution, have no effect on demand in the firms phased out their tax allocation reserves. Sources: Statistics Sweden and Ministry of Finance. Swedish economy at all. For fiscal policy to have the desired effects, there must be confidence in the long-term sus- Fiscal policy in line with the surplus target tainability of public finances. Households become more cautious and save more if deficits are Overall, the indicators show that fiscal policy is large, since these deficits must be financed in line with the target of a surplus equivalent to sooner or later by increases in taxes or cuts in an average of 2 per cent of GDP over a business expenditure. On the other hand, consumer con- cycle. fidence may be affected positively when public finances show a substantial surplus. For these reasons, the change in general gov- Expenditure ceiling ernment net lending measures the general government sector’s stimulus to private sector de- The expenditure ceiling must normally be set for mand, but it is only a rough indicator of the fis- three years in advance. That is an important cal impact of public finances on demand in the principle to ensure a medium-term approach to economy. public finances. The expenditure ceiling has been The change in general government net lending met every year since it was introduced in 1997. from year to year can be described using two Between 2000 and 2005, however, the budgeting components that affect the balance: the auto- margin was relatively small. The present Budget matic stabilisers and the change in the structural Bill proposes that the expenditure ceiling for balance. 2007 be reduced by SEK 11 billion to SEK The automatic stabilisers make an important 938 billion, and the expenditure ceiling for 2008 contribution to stabilisation policy. Above-trend by SEK 11 billion to SEK 971 billion. SEK GDP growth means stronger public finances and 1,003 billion is believed to be a suitable ceiling slower income growth in the private sector, for relevant expenditure in 2009 (see Table 5.6). which helps to limit domestic demand and re- The government’s proposals for the expenditure duces the risk of overheating. Conversely, be- ceiling are presented in Volume 1, Chapter 4, of low-trend growth means stimulation of the the Government Budget Bill. economy. Therefore the automatic stabilisers help to reduce cyclical fluctuations. Table 5.6 Expenditure ceiling and government expenditure SEK billion unless otherwise stated The change in the structural balance – in other words, the change in net lending which is not 2005 2006 2007 2008 2009 attributable to the automatic stabilisers – serves Expenditure ceiling 870 907 938 971 1 003 as an indicator of the fiscal policy stance. This Per cent of GDP 32.5 32.1 31.2 30.7 30.2 indicator covers not only decisions on reforms Budget margin 5.7 7.8 15.8 17.6 34.9 and savings in the central government budget, Expenditure under the but also other factors that affect the balance ceiling 864 899 922 953 968 other than the business cycle. Such factors might Per cent of GDP 32.3 31.8 30.7 30.1 29.2 include changes in local government net lending Source: Ministry of Finance.

76 PROP. 2006/07:1 BILAGA 2

as well as changes in general government net central government, regardless of type of organi- lending due to structural changes in the econ- sation. Business activities in state-owned enter- omy. prises are included not in the central government The change in general government net lending sector but in the business sector. The central comprises the sum of the changes in the two government budget, on the other hand, covers components above. The change in net lending all transactions that affect the central govern- measures the general government sector’s ment’s borrowing requirement. stimulus to demand.

National Accounts Fiscal stance 2006–2009 Central government net lending was positive in The structural balance has deteriorated some- 2005, after having been negative since 2002. This what from 2005 to 2006, which means that fiscal year another deficit is expected, of SEK policy has changed in a slightly expansionary di- 19 billion, or 0.7 per cent of GDP. rection. The economic upswing is narrowing the GDP gap, and thus the fiscal policy stimulus is Table 5.8 Central government finances being offset by the automatic stabilisers. All in SEK billion unless otherwise stated all, general government net lending is expected 2005 2006 2007 2008 2009 to be unchanged from 2005 to 2006 (see Table Revenue 851 882 892 925 965 5.7). Taxes and charges 774 805 802 837 874 Other income 77 77 91 88 91 Table 5.7 Fiscal impulse and fiscal stance Expenditure 840 901 890 905 917 Change in per cent of GDP Primary expenditure 795 855 839 856 870 2006 2007 2008 2009 Interest 46 47 51 49 48 Net lending 0.0 -0.5 0.3 0.5 Net lending 10 -19 3 20 47 of which Per cent of GDP 0.4 -0.7 0.1 0.6 1.4 Automatic stabilizers 0.7 0.0 0.0 0.1 Sources: Statistics Sweden and Ministry of Finance. On off effects -0.4 0.0 0.0 0.0 Extraordinary capital The projected deficit is due to the fact that the gains tax revenue 0.1 -0.4 0.0 0.0 central government sector will be hit this year by Structural balance -0.3 -0.1 0.4 0.4 a double transfer of premium pension assets GDP gap, percentage points 1.0 0.0 -0.1 0.2 from their temporary management at the Na- Source: Ministry of Finance. tional Debt Office to the funds managed by the Premium Pension Authority. Excluding this From 2006 to 2007, the structural balance is transfer, central government net lending is ex- expected to deteriorate only marginally, which pected to be positive again this year. means that fiscal policy as a whole can be viewed Next year is expected to bring positive net as neutral. However, general government net lending of SEK 3 billion, rising to SEK 20 billion lending is forecast to decrease slightly due to the in 2008 and SEK 47 billion in 2009 (see Table previous extraordinarily high levels of capital 5.8). gains tax revenue being expected to return to normal levels. In 2008 and 2009, both net lending and the Central government budget structural balance are expected to strengthen slightly. Central government net lending shows the change in financial wealth, excluding changes in value. The budget balance shows the central government’s borrowing requirement and 5.4 Central government therefore reflects the change in central government debt. Net lending is not affected by the In the National Accounts, the central govern- central government’s selling or buying financial ment sector encompasses all activities that are assets, such as shares, or increasing lending, such mainly financed by taxes and controlled by the

77 PROP. 2006/07:1 BILAGA 2 as study support, since that does not change the National Accounts, but the cash effect will wealth. However, both the budget balance and not be seen until 2009 (see Table 5.9). central government debt are affected by such financial transactions. Table 5.10 Budget balance and central government debt SEK billion unless otherwise stated Table 5.9 Central government net leading and budget 2005 2006 2007 2008 2009 balance Revenue 746 796 854 867 895 SEK billion Expenditure under the 2005 2006 2007 2008 2009 ceiling 692 720 733 751 752 Net lending 10 -19 3 20 47 Interest expenditure 33 51 43 41 43 Difference between interest Net borrowing etc. 7 34 15 13 10 accrued and paid 8 -9 4 3 -1 Budget balance 14 -8 63 62 90 Effect of timing difference of tax revenue -11 12 9 -5 -11 Per cent of GDP 0.5 -0.3 2.1 2.0 2.7 Sales of shares 7 0 50 50 50 Debt disposals etc. 63 -34 -3 -1 -1 Other financial Central government transactions 0 8 -3 -6 4 debt 1 262 1 236 1 170 1 106 1 015 Budget balance 14 -8 63 62 90 Per cent of GDP 47.2 43.7 38.9 35.0 30.6 Sources: National Debt Office, Statistics Sweden and Ministry of Finance. Sources: National Debt Office, Statistics Sweden and Ministry of Finance.

In addition to this fundamental difference, ac- Consolidated central government debt was SEK counting in the central government budget dif- 1,262 billion, or 47.2 per cent of GDP, at the end fers in several regards from reporting in the Na- of 2005. Despite a budget surplus of SEK tional Accounts. The budget balance is reported 14 billion, central government debt increased by on a cash basis, while the National Accounts ap- SEK 49 billion in 2005 because debt denomi- ply the accrual method of accounting. This dif- nated in foreign currency rose due to the weak- ference mainly affects reporting of taxes and in- ening of the krona, and also because the Na- terest expenditure. tional Debt Office temporarily increased its in- These differences in accounting policies result vestments. This year, these two factors are hav- in differences in the budget balance and net ing the opposite effect on central government lending. There are also major differences in the debt, which is expected to fall by SEK 26 billion reporting of revenue and expenditure between despite a budget deficit. The expected apprecia- the central government budget and the National tion of the krona should help debt to decrease Accounts that do not affect the balance. by slightly more than the budget surplus in 2007 This year a budget deficit of SEK 8 billion is and 2008 as well. Central government debt is forecast, which can be compared with a deficit in projected to fall to 30.6 per cent of GDP in 2009 net lending of SEK 19 billion. The difference of (see Table 5.10). SEK 11 billion is due partly to interest expenditure being SEK 9 billion lower on an accrual basis than on a cash basis. Pulling in the other di- 5.5 Old-age pension system rection, tax revenue for the 2006 year of income is SEK 12 billion lower on an accrual basis than The old-age pension system consists of an in- on a cash basis. The budget balance, but not net come-related component and a pre-funded com- lending, is being boosted this year by extraordi- ponent. During the build-up phase for the re- nary dividends on shares and other financial formed pension system, income is exceeding transactions etc. pensions paid, resulting in net lending for both In 2007–09, sales of shares at a rate of SEK the income-related and the pre-funded compo- 50 billion a year are planned, which will boost nents of the pension system. In the income-re- the budget balance but not net lending. Other lated component, the National Pension Funds financial transactions, such as study loans, have a serve as a buffer. Alongside the income-related negative effect on the budget balance but do not system, an asset base is being built up within a impact on net lending. Furthermore, the reduc- pre-funded section of the pension system. The tion in the EU contribution will be accrued in funds allocated since 1995, which correspond to accrued premium pension rights, are invested

78 PROP. 2006/07:1 BILAGA 2 initially with the National Debt Office and then Table 5.11 The old pension system with the fund managers chosen by the individ- SEK billion unless otherwise stated ual. During this temporary management by the 2005 2006 2007 2008 2009 National Debt Office, provisions in the pre- Revenue 223 260 243 253 262 funded pension system are included in central Contributions 178 186 188 195 202 government net lending, thereby reducing cen- Premium reserve funds 23 49 27 28 29 tral government debt. From 2001 until 2006, Interest and dividends 22 25 27 29 32 funds corresponding to the premium pension Expenditure 173 180 190 203 218 rights were transferred to the Premium Pension Pensions 169 177 187 199 213 Authority (PPM) in the second year after the Other 4 4 4 4 4 year of income. As of 2006, funds are being transferred in the first year after the year of in- Net lending 50 80 52 49 45 come, which means that this year’s transfers in- Per cent of GDP 1.9 2.8 1.7 1.6 1.3 clude two years of accrued pension rights. of which In 2005 net lending in the pension system, i.e., Pension funds1 24 26 19 14 8 the National Pension Funds and PPM, Premium pension authority 26 54 33 35 36 amounted to SEK 50 billion, or 1.9 per cent of 1 The pension funds noted here comprise the distribution part of the old-age pension system. GDP. In addition, investment assets in the pen- Sources: National Debt Office, Statistics Sweden and Ministry of Finance. sion system increased by SEK 140 billion as a result of the rising value of shares, which account for the bulk of assets in both the National Pen- sion Funds and the funds managed by PPM. 5.6 Local government Changes in value do not affect net lending, which includes only direct yield in the form of Local government finances strengthened sub- interest and dividends. stantially from 2004 to 2005. Net lending and The aforementioned double transfer of ac- the financial result were SEK 14 and 13 billion crued pension rights means that temporarily respectively, equivalent to 0.5 per cent of 29 high net lending will be reported for PPM funds, GDP.F F Following a long period with a recurrent and net lending for the pension system as a deficit, the local government sector as a whole whole is estimated to be the equivalent of 2.8 per has now reported a surplus two years in a row. cent of GDP this year. Increased pension pay- Sharply increased central government grants ments mean that the National Pension Funds’ and certain tax increases contributed to the net lending will fall during the forecast period. strengthened finances in 2005. This improve- Despite a slight increase in the premium pension ment coincided with a 1.6 per cent increase in system, net lending in the pension system as a the volume of consumption in the local govern- whole will decrease (see Table 5.11). ment sector. Eurostat decided in 1997 that the entire re- formed Swedish pension system should be as- Continued strong revenue growth signed to the general government sector. The main reasons for the decision were that partici- The local government sector’s revenue consists pation is obligatory and that the state controls mainly of taxes and central government grants. the rules for both fees and benefits. Eurostat has Taken together, they are expected to increase by now revised this decision, with the result that 6.1 per cent this year. Tax revenue in isolation is defined contribution funded pension systems are expected to rise by 5.3 per cent (see Table 5.12). not to be assigned to the general government sector in the National Accounts. Eurostat has granted member states that currently classify such public pension systems as part of the general government sector a transition period until March 2007 to modify their accounts. For Swe- den, that means that general government net lending will be reduced by about 1 per cent of 29 GDP in the National Accounts. In this case, “financial result” refers to earnings before extraordinary items.

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Table 5.12 Taxes and grants jected to rise slightly in 2008 but fall in 2009. Percentage change Revenue growth will therefore be weaker in 2005 2006 2007 2008 2009 these years. Taxes and central government grants excl. VAT 5.7 6.1 4.4 4.0 3.6 Table 5.13 Central government grants according to National Tax regulation changes1 3.5 5.3 4.0 4.6 4.9 Accounts SEK billion of which 2005 2006 2007 2008 2009 Tax base 3.2 5.3 4.0 4.6 4.9 Grants for local government Tax rate changes 0.3 – – – – financial equalisation 55 58 71 75 75 Central government grants Employment support 9 7 excl. regulation changes 16.3 9.3 6.3 1.6 -1.5 1 Bonus jobs and educational Tax revenue and central government grants are adjusted for rule changes which affect the local government tax base. The table shows the change in the tax base initiative replacement – 2 4 1 0 reported in the National Accounts, which differs from the Ministry of Finance’s 1 assessment. Other grants 43 50 48 48 48 Sources: Statistics Sweden and Ministry of Finance. Central government grants excl. VAT 107 117 123 125 123 Central government grants excluding compen- Yearly change 17 10 6 2 -2 sation for value-added tax, as defined in the Na- Regulations -2 0 1 – – tional Accounts, will increase overall by SEK Yearly change, adjusted for 30 10 billion, or just over 8 per cent.F F Increased re- regulations 15 10 7 2 -2 sources in areas such as health care, education, Note: The amounts refer to all grants distributed over a number of expenditure areas, and are those reported in the National Accounts, which differ from the cen- care for the elderly and integration mean that tral government budget. In the National Accounts, grants on the income side of other central government grants will rise by the budget are shown as expenditure, and expenditure is accrued differently. 1 Other grants are almost exclusively special purpose grants. Subsidies for drugs around SEK 7 billion (see Table 5.13). account for almost half of the special purpose grants. The level of central government grants will Source: Ministry of Finance. also rise relatively sharply in 2007. That is partly the result of an increase in the grants to the local Net lending and financial result government sector for labour market policy programmes previously approved by the Riks- Favourable revenue growth means that local dag. There will also be further investments in government finances are expected to strengthen health care and care for the elderly. Grants for further this year despite relatively high expen- local government financial equalisation will diture growth. Net lending is forecast to be SEK grow, primarily as a result of their including em- 19 billion. The final adjustments to the tax base ployment support. Altogether, taxes and central for 2005 should temporarily boost the financial government grants will rise by 4.4 per cent and result this year by SEK 3 billion to an estimated tax revenue by 4.0 per cent. SEK 22 billion. The tax base is expected to strengthen further It is still uncertain how the new pension in 2008 and 2009, and tax revenue is forecast to agreement will impact on local government ex- grow by 4.6 per cent and 4.9 per cent respec- penditure. Due to this uncertainty, no effects of tively. Grants for local government financial this agreement have been taken into account in equalisation are predicted to rise by SEK the calculations. 4 billion relative to 2007. This increase is partly Net lending and the financial result are ex- to compensate for the scaling down of the la- pected to decrease in 2007, but will remain high bour market policy programmes, and partly a re- at around SEK 15 and 13 billion respectively. sult of resources for initiatives in various areas These surpluses are then set to fall gradually in gradually being transferred from other grants. 2008 and 2009 despite the volume of consump- Altogether, central government grants are pro- tion being expected to grow more weakly in those years.

30 In the National Accounts, value-added tax in general government consumption and investment is reported as expenditure. The compensation received by local government for this expenditure is reported as a central government grant, unlike in the central government budget.

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Table 5.14 Local government sector’s finances SEK billion unless otherwise stated

2005 2006 2007 2008 2009 Revenue 627 662 691 720 747 Taxes and central govt. grants excl. VAT 539 571 597 621 643 Per cent of GDP 20,2 20,2 19,8 19,7 19,4 Other revenue 88 90 94 99 103 Expenditure 613 643 676 707 737 Consumption 527 552 584 612 640 Percentage change in volume 1.6 1.7 2.0 1.3 0.7 Other expenditure 86 91 92 94 97 Net lending 14 19 15 13 10 Per cent of GDP 0.5 0.7 0.5 0.4 0.3 Financial result 13 22 13 11 7 Sources: Statistics Sweden and Ministry of Finance.

The local government sector’s financial result during the period 2005–08 is therefore expected to considerably exceed the levels reported in previous years and should be at a level consistent with the Local Government Act’s requirements for good financial management.

Diagram 5.5 Local government finances Percentage change SEK billion 10 25 Revenue (left axis) 9 Expenditure (left axis) 20 8 Net lending (right axis) 15 7 6 10 5 5

4 0 3 -5 2 1 -10 0 -15 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 Note: Church parishes have been excluded throughout the period. Sources: Statistics Sweden and Ministry of Finance.

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Medium-term tax forecasts of firms will almost always show positive growth when GDP is growing. The table below presents The methods used to forecast the general gov- the forecast for taxes on corporate profits both ernment sector’s tax revenue depend to a great in absolute terms, together with the year-on- extent on the time horizon involved. However, year change, and relative to GDP. In 2005 and whatever the time horizon, the foundation of 2006, taxes on profits are equivalent to 3.4 per these tax forecasts will always be a forecast of cent of GDP, which is very high historically macroeconomic developments. speaking. Even though tax revenue is already In the short term, 2006-2007, the forecast of high, it is predicted to keep on growing in the macroeconomic developments is combined with medium term. other information, such as ongoing tax payments. Price movements and trading volumes in Corporate income tax various asset markets, as well as information SEK billion and percentage change from the interim reports of firms, can also be 2005 2006 2007 2008 2009 used to forecast taxes on capital. Corporate income tax 91 95 97 104 112 In the medium term, 2008-2009, the tax fore- Development (%) 27 5 2 7 7 casts are based solely on the macroeconomic Underlying development (%) 35 20 2 7 7 Corporate income tax relative forecast. The macroeconomic projections for to GDP (%) 3.4 3.4 3.2 3.3 3.4 these years are based on the GDP gap closing, Note: The underlying development excludes temporary tax revenue from utilisa- tions of tax allocations reserves 2005 and 2006. after which GDP grows in line with potential Source: Ministry of Finance. GDP. Potential GDP and the GDP gap are dis- cussed in detail in Section 4 of this appendix. When analysing public finances in the medium The calculations of tax revenue in the medium term, it is more appropriate to focus on develop- term are consequential calculations based on ments in total tax revenue than on movements in macroeconomic developments, and no cyclical the individual types of taxes. The table below adjustments are made to the individual taxes. shows developments in the tax ratio, i.e., total Generally speaking, the surpluses from pro- tax revenue as a percentage of GDP, from 2005 duction in the economy accrue either to em- to 2009. ployees, in which case they are taxed through taxes on labour, or to firms, in which case they Total tax revenue relative to GDP are taxed through taxes on corporate profits. Per cent of GDP Developments in aggregate wages form the basis 2005 2006 2007 2008 2009 for the forecast of taxes on labour. In the short Tax ratio 51.5 50.5 48.1 47.8 47.6 term, the forecast of taxes on corporate profits is excl. tax on capital gains 50.2 49.2 47.2 46.9 46.8 based on information about both movements in Source: Ministry of Finance. the operating surplus in the economy, and, above all, the tax payments and interim reports The tax cuts announced in the Government of firms. In the medium term, the forecast of Budget Bill for 2007 mean that the tax ratio is taxes on profits is based exclusively on move- expected to fall between 2006 and 2009. In the ments in the operating surplus. The operating absence of further tax rule changes, it is surplus is the part of output which accrues to the reasonable to expect the tax ratio to be rela- business sector. tively constant from 2008 to 2009. However, Since the medium-term calculations are con- because taxes on consumption move slightly sequential calculations based on macroeconomic more slowly than GDP, the overall tax ratio projections, the forecasts for the various types of may edge down during the period. Another taxes in 2008 and 2009 should be viewed more as possible reason for a falling tax ratio is that tax the unfolding of a scenario based on the assumed revenue between 2004 and 2006 has included a changes in aggregate wages and operating sur- relatively high level of taxes on capital gains. plus than as a forecast of how the individual The tax ratio excluding tax on capital gains types of taxes will develop. This forecasting should, however, be relatively stable, as it is in methodology means that the tax forecast is con- the Ministry of Finance’s forecast. sistent with the forecast of macroeconomic developments. It also means that the income taxes

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6 Alternative scenarios 2007. In 2009 the gap closes, and the regular employment rate for those aged 20–64 is then 80.2 Assessments of future economic developments, per cent, open unemployment 4.3 per cent, and the long-term sustainable rate of growth in the total unemployment 5.8 per cent. economy, and current levels of resource utilisation are associated with considerable uncer- Table 6.1 Selected statistics, base scenario tainty. This uncertainty is unusually high at pre- Percentage change unless otherwise stated sent, partly because it is difficult to estimate pre- 2006 2007 2008 2009 cisely the magnitude of the long-term effects of GDP 4.0 3.3 3.1 2.7 the government’s policies. These effects may GDP gap1 -0.1 -0.1 -0.2 0.0 well be much greater than assumed in the base Regular employment rate, scenario. age 20-642 77.7 79.0 79.8 80.2 The following discussion presents two alter- Open unemployment, level 5.6 5.8 5.0 4.3 native scenarios which illustrate the effects on Total unemployment, level 8.7 7.7 6.3 5.8 the real economy and public finances if future Repo rate, final entry 3.00 3.75 3.75 4.00 developments turn out differently than what is assumed in the base scenario that was presented Hourly wages 3.2 3.7 3.7 3.8 in the previous sections. CPI, annual average 1.6 2.5 2.0 1.9 In the high-growth scenario, the govern- Net lending in general govt., ment’s policies are assumed to have a greater ef- per cent of GDP 2.8 2.3 2.6 3.1 1 Difference in per cent between actual and potential GDP. fect than in the base scenario. The supply of la- 2 The number of employed in the 20–64 age group, excluding those employed in bour grows faster and wage growth is slower. labour market policy programmes, as a percentage of the population in this age group. The Riksbank is therefore assumed to pursue a Sources: Statistics Sweden, National Labour Market Board, NIER, National more expansionary monetary policy. All in all, Mediation Office and Ministry of Finance. that means that GDP and employment grow faster than in the base scenario and that open Public finances are strong, and general govern- unemployment falls further. ment net lending is expected to be 2.8 per cent In the low-growth scenario, it is assumed that of GDP this year. Net lending decreases slightly the labour market and wage formation perform next year, due partly to the tax ratio falling as a less well than in the base scenario and that re- result of the proposed tax cuts. However, the source utilisation is more strained at the outset. expenditure ratio also decreases, and thus net It is also assumed that the government’s policies lending remains high and continues to exceed to stimulate the supply of labour have an impact the surplus target. Net lending then increases in later than in the base scenario. This results in 2008 and 2009, but both revenue and expendi- shortages in the labour market, which push up ture decrease as a percentage of GDP. wage growth. The Riksbank is therefore assumed to pursue a more restrictive monetary policy than in the base scenario in order to ease 6.2 High-growth scenario inflationary pressure, which hampers growth in GDP and employment. In the high-growth scenario, the government’s policies are assumed to have a greater effect than in the base scenario. The supply of labour grows 6.1 Base scenario fasther than in the base scenario and wage growth and inflation are lower. The Riksbank is In the base scenario, resource utilisation in the therefore assumed to be able to pursue a more labour market is assumed to be relatively low at expansionary monetary policy. Employment and present. However, GDP and employment con- GDP rise further than in the base scenario. It is tinue to grow rapidly next year, and so resource assumed that employment and GDP can stay utilisation increases. Resource utilisation is nev- permanently at a level around 1 per cent higher ertheless still expected to be lower than normal in 2009 than in the base scenario. Productivity next year, which means that both employment growth and the change in average hours worked and GDP can continue to grow more quickly are expected to be slightly smaller than in the than the potential growth rate in the years after base scenario, as additions to the labour force are

83 PROP. 2006/07:1 BILAGA 2 not expected to be as productive or work as long Higher economic growth and employment boost hours as the average. public finances The supply of labour will not increase as much as employment, which means that unem- Public finances perform considerably more ployment is lower than in the base scenario. It is strongly in the high-growth scenario than in the assumed that unemployment can be adjusted to base scenario. Growth in hourly wages is lower a lower level without the labour market over- than in the base scenario, but the number of heating – in other words, equilibrium unem- hours worked is higher, which together means ployment is lower. unchanged aggregate wages. Direct taxes from So that labour supply and employment can in- households and social security contributions are crease to the extent assumed in the high-growth therefore on a par with taxes in the base sce- scenario, it is assumed that individuals in several nario. Revenue from value-added tax is higher. groups outside the labour force are able to es- Public finances are also boosted by decreased tablish themselves in the labour market to a expenditure. Lower wage growth means less greater degree. Among such individuals are expenditure on public consumption and on those able and willing to work but not actively transfer payments to households, such as sick seeking work, those on long-term sick leave, and pay, which are linked to growth in hourly wages. those who receive sickness and activity benefit. Public expenditure on unemployment benefit falls partly as a result of the lower growth in Table 6.2 Selected statistics, high growth scenario hourly wages and partly as a result of fewer peo- Percentage change unless otherwise stated ple unemployed. Expenditure which is adjusted 2006 2007 2008 2009 in line with inflation also falls due to the lower GDP 4.0 3.5 3.5 3.1 inflation. All in all, the expenditure ratio falls GDP gap1 -0.1 -0.1 -0.2 0.0 more sharply than the tax ratio, which means Regular employment rate, that public finances are stronger than in the base age group 20-642 77.7 79.1 80.3 81.0 scenario. Open unemployment, level 5.6 5.7 4.6 3.6 Total unemployment, level 8.7 7.6 5.9 5.1 Repo rate, final entry 3.00 3.25 3.25 4.00 6.3 Low-growth scenario Hourly wages 3.2 3.2 3.2 3.2 CPI, annual average 1.6 2.3 1.7 1.6 In the low-growth scenario, it is assumed that Net lending in general govt., the labour market and wage formation perform per cent of GDP 2.8 2.3 2.7 3.5 less well than in the base scenario. Resource 1 Difference in per cent between actual and potential GDP. utilisation is more strained. The effects of the 2 The number of employed in the 20–64 age group, excluding those employed in labour market policy programmes, as a percentage of the population in this age government’s policies on the supply of labour group. Sources: Statistics Sweden, National Labour Market Board, NIER, National and employment are also assumed to be delayed. Mediation Office and Ministry of Finance. In this scenario, the actual level of employment is assumed to be above the potential level from The faster rate of growth is fuelled by stronger 2007 onwards – in other words, employment is domestic demand. Higher employment growth then higher than the long-term sustainable level. and lower inflation lead to real household dis- That leads to shortages in the labour market, posable income growing slightly more than in which push up wage growth and inflation – in the base scenario despite slower wage growth. other words, wage growth is higher than what is Interest rates are also assumed to be lower. compatible with balanced economic Household consumption therefore grows faster. development. GDP and employment are The brisk domestic demand also means that assumed to grow in line with the base scenario in firms step up their investment activity to handle 2006–2007 and aggregate wages grow around 0.5 rapidly growing production. Local government percentage points more than in the base scenario revenue rises as a result of higher activity in the during this period. For 2007–2009 wages grow economy, and thus local government consump- around 1.5 percentage points more than in the tion can grow slightly faster than in the base base scenario. Inflation is also more rapid, but do scenario. not increase as much as wage growth.

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The problems with wage formation and infla- increases in expenditure have several underlying tion mean that the Riksbank is assumed to raise causes. Looking at transfer payments to house- its key rate much more quickly next year, and holds, some types of transfer payment, such as interest rates are also expected to be much the housing supplement for pensioners and the higher in 2008 than assumed in the base sce- child allowance, are expected to rise in line with nario. The key rate is assumed to peak at 4.50 per inflation and are therefore unchanged from year cent. Growth therefore slows in 2008 and is to year in real terms. The higher rate of inflation much lower than in the base scenario in 2009 as in the low-growth scenario is therefore assumed well. Altogether, GDP growth is 1.5 percentage to mean increased expenditure on this type of points lower than in the base scenario. Employ- transfer payment. Expenditure on other transfer ment falls, while open unemployment rises 2009. payments, such as sick pay and unemployment The regular employment rate reaches 79.0 per benefit, increases in the low-growth scenario as a cent in 2009. Wage growth slows in 2009, but result of higher wage growth. Expenditure re- wages are still growing faster than what is lating to unemployment also rises as a result of compatible with balanced economic the increase in unemployment. Moreover, ex- development because they are expected to adjust penditure on public consumption grows sharply after a certain time lag. due to rising wages. The less favourable performance of the labour market and wage formation mean that the level of employment is permanently lower and open unemployment permanently higher than in the base scenario.

Table 6.3 Selected statistics, low growth scenario Percentage change unless otherwise stated

2006 2007 2008 2009 GDP 4.0 3.3 2.5 1.9 GDP gap1 0.9 1.1 0.6 0.0 Regular employment rate, age 20-642 77.7 79.0 79.3 79.0 Open unemployment, level 5.6 5.8 5.4 5.6 Total unemployment, level 8.7 7.7 6.8 7.1 Repo rate, final entry 3.00 4.50 4.50 4.00 Hourly wages 3.2 4.3 4.4 4.4 CPI, annual average 1.6 2.8 2.6 2.5 Net lending in general govt., per cent of GDP 2.8 2.3 2.4 2.5 1 Difference in per cent between actual and potential GDP. 2 The number of employed in the 20–64 age group, excluding those employed in labour market policy programmes, as a percentage of the population in this age group. Sources: Statistics Sweden, National Labour Market Board, NIER, National Mediation Office and Ministry of Finance.

Less favourable economic growth weakens public finances

General government net lending decreases by approximately 0.6 per cent of GDP in 2009 in the low-growth scenario. In nominal terms, government revenue rises as a direct result of growth in hourly wages and the tax base, but this is not enough to offset the erosion of public finances due to increases in expenditure. These

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7 Sustainability of public finances Diagram 7.1 The population of Sweden Change compared with 2006, thousands In Sweden, as in most other western industri- 1000 alised countries, the proportion of older people 65 years and older in the population will rise substantially in the 800 20 - 64 years 0 - 19 years next few decades. The increased number of peo- 600 ple of non-working age in relation to those of working age will put pressure on tax-funded 400 welfare systems. This trend is already placing 200 demands on economic policy. In order to retain well-developed, tax-funded welfare in the future, 0 high net lending is required in the general government sector over the next few years. In addi- -200 2005 2010 2015 2020 2025 2030 2035 2040 2045 2050 tion, efforts must be made to increase the num- Source: Statistics Sweden. ber of persons in employment. A high level of general government net lend- The demographic trend may be summarised in ing is fundamentally motivated by a more even dependency ratios, i.e., the ratio between the distribution of the financial burden of care pro- number of persons of non-working and working vision between generations. A high level of net age. The dependency ratio for older people, lending today can help the large generations, measured as the number of persons aged 65 and who in the future will need medical and health over per 100 persons aged 20 to 64, is estimated care, to contribute to such financing themselves. to rise from approximately 29 in 2006 to around To rely exclusively on tomorrow’s labour force 42 in 2030. The dependency ratio for young financing these services would probably entail people, measured as the number of persons un- changes in the distribution of the financial re- der the age of 20 per 100 persons aged 20-64, is sponsibility for care provision, so that future expected to be more stable and fluctuate around generations would be hit harder than the gen- 39-41 (see Diagram 7.2). erations active today. This section presents a scenario illustrating how demographic trends in Diagram 7.2 Demographic dependency ratios Sweden may impact on public finances. Per cent

44 The demographic trend 42 The population of Sweden is currently just un- 40 der 9.1 million. According to the population 38 36 forecast which was presented by Statistics Swe- Old age ratio den during the spring of 2006, the population 34 Youth ratio will continue to grow to just over 10.5 million by 32 2050. 30 The main increase is projected to be in the 28 number of people aged 65 and over during the 2005 2010 2015 2020 2025 2030 2035 2040 2045 2050 next 30 years. In 2035 there is expected to be Source: Statistics Sweden. just over 2.4 million people in this age group, at least 800,000 more than today. The number of According to Statistics Sweden’s population people between the ages of 20 and 64 is forecast forecast, immigration accounts for the major to grow by just under 90,000 until 2015 and rise part of the population growth. Immigration is of only slightly during the subsequent 20-year pe- particular importance for the number of people riod. In other words, most of the population in- of working age. Without immigration the num- crease is expected to consist of people who are ber of persons in the 20-64 age group would de- not of working age (see Diagram 7.1). After cline (see Diagram 7.3). The vast majority of 2035 the number of people of working age is ex- immigrants are born outside of the EU. The pected to grow again. employment rate of this group is currently far below the average. It is crucial that this group are

86 PROP. 2006/07:1 BILAGA 2 integrated into the labour market. If that does such a trend, the proportion of those employed not happen, the population growth foreseen for among foreign-born people aged 20 to 64 will the 20-64 age group will result in more moderate rise to just over 65 per cent. growth in the number of employed people. That It is also assumed that there will be some ad- kind of development would seriously undermine justment up to and including 2012 due to the la- the possibilities to sustain the quality and scope bour supply stimulating measures proposed in of the welfare systems. the Budget Bill. Employment levels and the number of hours worked grows by 0.35 per cent Diagram 7.3 Population aged 20–64 in 2010 and by 0.25 per cent per year in 2011 and Change compared with 2006, thousands 2012. The majority of this increase, 0.65 per 500 cent, is due to a reduction in unemployment. Born abroad Born in Sweden 400 The remaining 0.2 per cent is due to growth in Total change 300 labour force participation.

200 Altogether, this results in an employment rate that exceeds 80 per cent from 2009 on. 100 GDP growth is also affected by the average 0 working hours per person employed. In the sce- -100 nario, average hours worked are assumed to de- -200 cline somewhat in the long term. Such a decline

-300 may be justified by the probable increase in the 2005 2010 2015 2020 2025 2030 2035 2040 2045 2050 demand for leisure when household income and Source: Statistcs Sweden. consumption opportunities increase in general. However, households mainly choose to increase their consumption of goods and services. Economic development after 2009 Working hours are assumed to decline by only 0.2 per cent per year, which is equivalent to a re- The long-term projection of economic devel- duction in weekly working hours of approxi- opment is based on the estimate for the Swedish mately 3.5 hours by 2050. The number of hours economy up to 2009 described in Sections 1-5. worked will thus remain virtually unchanged Employment growth after 2009 is based on the from 2006 to 2050 despite an approximate 6 per expected population trend and on assumptions cent increase in the 20-64 age group. For com- of how the employment rate and the number of parison purposes, the number of hours worked working hours will develop for different popula- in 2005 was more or less unchanged from 1970, tion groups. while the 20 to 64 age group had grown by some In the short term, changes in the age structure 12.5 per cent. plays a major role. The number of persons aged Productivity in the business sector will rise by 20-29, with a relatively low labour supply, ac- an average of 2.6 per cent per year during the pe- counts for the entire population growth in the riod ending in 2015. That is in line with the past 20-64 age group in the next few years, while the few years of relatively rapid productivity growth number of people of other ages will drop. In the but much higher than the rates of growth seen in slightly longer term, the changes in structure in the 1970s and 1980s. After 2015 productivity terms of origin will be more important. Ac- growth in the business sector is expected to fall cording to the population forecast, the propor- gradually to an average of 2.3 per cent per year. tion of immigrants, particularly those born out- Productivity growth in the general government side the EU in the 20-64 age group, will grow sector is assumed to be zero, in accordance with rapidly. the calculation methods used in the National In the estimate, Swedish-born individuals are Accounts. Overall, this leads to a productivity assumed to work in the same extent in the future increase in the entire economy of approximately as today, while the position of immigrants in the 2.2 per cent per year during the initial period and labour market will strengthen gradually. Up to by 1.9 per cent thereafter. 2020, the difference in employment rate between The expected productivity increase, combined Swedish-born and foreign-born individuals is as- with projected labour force growth, gives rise to sumed to decline by one third. Residual differ- GDP growing on average by 2.0 per cent per ences are assumed to persist beyond 2020. Given

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Table 7.1 Macroeconomic assumptions

Level Index, 2006=100 2006 2010 2015 2020 2030 2040 2050 Population, aged 20-64 5 356 101 102 101 102 103 106 Employed, thousands 4 335 104 105 106 106 108 111 Hours worked, millions 6 943 103 104 104 101 101 102 Business sector productivity 100 111 126 142 179 225 283 GDP productivity 100 108 120 132 156 188 227 GDP per capita, SEK thousands 306 111 122 131 148 174 207 GDP, constant prices 100 112 127 140 163 196 239 GDP deflator 100 110 130 140 180 230 280 CPI 100 109 120 133 162 197 240 Hourly wage 100 117 133 150 183 233 283 Per cent Labour force participation, 20-64 years 77.7 80.5 80.9 81.8 81.3 81.9 81.8 Open unemployment1 5.6 4.1 3.7 3.6 3.7 3.7 3.7

1 National definition. Students looking for work are counted as unemployed in international statistics. Sources: Statistics Sweden and the Ministry of Finance. year in 2006-2050. GDP per capita grows on av- fer payments, which grow when the number of erage by just under 1.7 per cent per year. This pensioners increases. means that GDP will be just over 60 per cent A small proportion of the costs of providing higher in 2030 than 2006 and just under 140 per welfare services are financed through user fees. cent higher in 2050, while GDP per capita is ex- The calculations assume that fees for childcare, pected to be nearly 50 per cent higher in 2030 etc., will rise in pace with production costs. This and more than doubled by 2050. The most im- means that the fee revenues rise at a significantly portant calculation assumptions are summarised faster rate than if today's maximum charges re- in Table 7.1. mains in the long term, but at a slower rate than household disposable income. General government revenue General government expenditure The long-term development of tax revenues depends to a great extent on the employment The change in the population structure has ma- growth. The majority of taxes are direct or indi- jor effects on public finances. The increasing rect taxation of work. The greater part of the in- number of older people in the population affects come tax and social security contributions of expenditure on pensions, medical care and care households are a charge on the wage bill. These of the elderly. The estimate of pension expen- taxes represent more than half of general gov- diture is based on the demographic trend, the ernment revenues. The development in the la- macroeconomic assumptions and current rules bour market is also of great significance in terms and regulations. Pension expenditure as a per- of revenue from tax on household consumption centage of GDP is estimated to increase from expenditure, such as VAT and selective purchase 8.5 per cent in 2006 to nearly 9.5 per cent in taxes. Even if tax rates remain unchanged in re- 2020, remaining unchanged until the middle of lation to the corresponding tax base, the total tax the 2030s, after which it will fall to some extent. ratio, i.e., taxes and charges in relation to GDP, Expenditure on medical care and care of the eld- will change somewhat in the next few decades. erly is estimated to increase from 10.1 per cent The reason is that a number of important tax of GDP in 2006 to 14.0 per cent in 2050. Over- bases may be expected to grow more rapidly all, expenditure on pensions, medical care and than GDP. That applies, for example, to house- care of the elderly will increase as a percentage of hold consumption expenditure and taxed trans- GDP by just under 4 percentage points during the estimate period.

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Table 7.2 Public finances Per cent of GDP

2006 2010 2015 2020 2030 2040 2050 Primary revenue 53.3 49.5 49.2 49.3 49.6 49.3 48.8 Taxes and charges 50.2 46.3 46.2 46.4 46.9 46.9 46.6 Other revenue 3.2 3.3 3.0 2.9 2.7 2.5 2.3 Primary expenditure 50.9 48.0 48.0 48.8 51.3 51.1 50.3 Transfer payments 21.2 19.2 19.8 20.0 20.4 20.2 19.5 Consumption 26.8 26.1 25.8 26.5 28.7 29.0 29.1 Investment 2.9 2.7 2.5 2.3 2.1 1.9 1.7 Primary net lending 2.4 1.5 1.2 0.5 -1.7 -1.9 -1.5 Net capital income 0.4 0.5 0.8 1.1 1.0 0.3 -0.5 Net lending 2.8 2.0 2.0 1.6 -0.7 -1.6 -1.9 Financial position Central government debt 43.7 28.8 19.2 11.6 13.6 29.2 46.5 Consolidated gross debt 46.5 31.2 21.7 14.3 15.1 29.6 45.8 Net debt -15.5 -22.5 -30.0 -35.7 -32.2 -15.0 -1.2 Sources: Statistics Sweden and the Ministry of Finance.

The estimates assume a standard guarantee in employees needs to increase by approximately general government transfer payment systems. an additional 375,000 net between 2020 and 2050 For a large proportion of transfer payments, in order to maintain the standard of welfare and there are rules and regulations which automati- for tax-funded welfare services to be produced as cally increase benefits in line with the wage they are today. The considerable recruitment trend. This applies to pensions, which are ad- needs are likely to contribute to wages being justed upward in line with the earnings index, driven up relative to other areas of the economy. and partly to transfer payments, such as health Age distribution in the local government sector, and parental insurance, which compensate for however, is such that the average age of munici- loss of earnings. pal and county council employees is expected to The estimate assumes that transfer payments, fall more than other sectors as a result of the such as child benefit and study allowance, which large numbers of staff retiring. This will restrain lack this type of automatic standard guarantee, wage growth as younger, newly recruited staff will increase in line with the nominal wage trend. has generally speaking lower wages than retiring Such a standard guarantee offsets the erosion staff. The effect of the recruiting need is consid- which would take place in the longer term if the ered to be of major significance. It is thus as- estimate were based on strictly unchanged regu- sumed that the increase in hourly wages in mu- lations. The standard guarantee therefore as- nicipalities and county councils will be on sumes that certain reforms are implemented in average 0.5 per cent more rapid per year than in pace with economic growth. other areas of the economy during the period up Staff intensity, such as the number of teacher- to 2020. hours per student, may be regarded as a standard Between 2006 and 2020, primary general gov- indicator of general government services output. ernment expenditure, i.e., expenditure excluding In the estimates, it is assumed that these services interest, is estimated to fall slightly as a percent- will be carried out with the same staff density as age of GDP (see Table 7.2). The total demo- today. This means that the number of persons graphic pressure on expenditure is still limited. employed in the general government sector Fewer children and young people of school age needs to increase by approximately 160,000 be- mean that expenditure on their schooling will tween 2005 and 2020 during an expansion in decline as a percentage of GDP, while the de- pace with the demographic needs. Since the av- mand for medical care and care of the elderly erage age of staff in many operations is relatively would rise only slightly. On average, local gov- high today, the recruitment needs will be con- ernment consumption should not need to rise siderably larger. The number of public sector until around 2015 in order for the number of

89 PROP. 2006/07:1 BILAGA 2 services produced to grow in pace with demo- a percentage of GDP is no larger at the end of graphic demand. During the following 15-year the period than at the beginning, fiscal policy period, the demand for tax-funded welfare ser- may be considered sustainable. vices is expected to rise by an average of 1 per Diagram 7.4 illustrates the development of cent annually. This assumes that municipalities central government debt as a percentage of GDP are able to contract operations in areas where up to 2050. In the estimate, it is assumed that tax demand declines. Transfer payments linked to regulations will be adapted so that public fi- persons under the age of 20 will also fall as a per- nances show a surplus of 2 per cent of GDP un- centage of GDP in the next few years. However, til 2015. The calculation results in a debt ratio in pension expenditure is set to increase, which 2050 which is somewhat lower than 2005. Con- leads to total household transfer payments de- sequently, the development of public finances creasing slightly as a percentage of GDP until may be considered sustainable until 2050. At the 2020. same time, the increase in the debt ratio during Between 2020 and 2030, primary expenditure the latter part of the period shows that sustain- is estimated to increase as a percentage of GDP ability problems may arise after 2050. by approximately an additional 2.5 percentage The scenario illustrates the importance of the points. The expenditure ratio is expected to peak surplus target in order to be able to maintain the in the mid-2030s. It is mainly general govern- standard of tax-funded welfare systems. In order ment consumption of medical care and care of to prevent central government debt as a percent- the elderly that increases, but household transfer age of GDP from approaching unsustainable payments in the form of pensions are also ex- levels in the long term and necessitating cut- pected to grow. General government investment backs, the debt ratio must decline rapidly in the expenditure is expected to fall as a percentage of next few years. GDP throughout the period. Local government investment volume is assumed to increase in Diagram 7.4 Central government debt pace with local government consumption vol- Per cent of GDP ume, while investment is expected to increase 50 faster than consumption in the central govern- 45 ment sector. The price of investment goods is 40 assumed to increase more slowly than the aver- 35 age price trend in the economy as a whole, all in 30 all leading to general government investment 25 falling as a proportion of GDP. 20 15 10 Balance target and sustainable public finances 5 0 2005 2010 2015 2020 2025 2030 2035 2040 2045 2050 The sustainability of public finances may be Sources: Statistcs Sweden and Ministry of Finance. defined in various ways. In the strict sense, public finances are sustainable if the present value of The assessment that public finances are sus- all future revenue and expenditure, excluding tainable in the long term depends on the as- interest, is the same as the amount of debt at the sumptions made in the estimates. Of decisive beginning of the period. If this requirement is significance is the requirement that public ex- met, future revenue not only covers future expenditure does not grow more than determined penditure, but is sufficiently large to reduce the by demographic change. That means that ex- debt in the long term. The problem with this pected future growth is not used to any extent definition is that revenue and expenditure must to improve the quality or scope of public ser- be projected over very long time periods with all vices. If households wish to consume more of the uncertainty that entails. the services currently available from the general An alternative sustainability criterion is that government sector, financing would be required. the debt situation should not deteriorate over a Also decisive is the maintenance of high em- more foreseeable period, which is nevertheless ployment levels. If the levels fall, it will be neces- sufficiently long to encompass the demographic sary to increase the tax burden on those in em- structural change. If general government debt as ployment if the general government

90 PROP. 2006/07:1 BILAGA 2 commitment is to be sustained. Higher productivity might be able to compensate for a reduced supply of labour in terms of aggregate production in the economy, but the tax levy would need to be increased. That however carries the risk of a further reduction in labour supply.

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8 Comparison of forecasts the price of imports will rise faster than previously forecast. The forecast for growth in im- 8.1 Comparison with the previous ports during 2006 has been revised downward forecast for 2006 from 8.6 per cent to 7.6 per cent. As a result of a weaker trend than expected in Forecast GDP growth has been revised upward employment growth during the first half of the from 3.6 per cent to 4.0 per cent since the Spring year, a slight downward revision has been made Fiscal Policy Bill. The revision is primarily due in employment. The forecast for open unem- to a weaker trend in imports and to stronger ployment has been revised upward following an growth in gross capital formation than previ- unexpectedly rapid increase in the supply of la- ously foreseen. bour, as well as the number of people in labour The forecast for household consumption in market policy programmes not having grown at 2006 has been revised upward by 0.2 percentage the rate forecast in the Spring Fiscal Policy Bill. points from 3.4 per cent to 3.6 per cent. The re- Total unemployment has been revised upward vision is due primarily to an expected further in- somewhat. The forecast for growth in wages has crease in household disposable income, but also been revised downward by 0.2 percentage points to somewhat stronger growth in employment in the wake of continuing weak outcomes during levels. the first half of the year. The 2006 Spring Fiscal Policy Bill forecast that general government consumption expendi- Table 8.1 The Ministry of Finance’s forecasts for 2006 in ture would increase by 1.8 per cent in 2006. Be- the 2006 Spring Fiscal Policy Bill and the 2007 Budget Bill cause of a weaker trend in central government Percentage change, unless otherwise stated consumption, especially in defence consump- Spring 2006 2007 tion, general government consumption growth has now been revised to 1.4 per cent. Sweden As a result of strong outcomes during the first GDP 3.6 4.0 half of the year, investment volume has been re- Household consumption 3.4 3.6 vised substantially upward. It is primarily in- General government consumption 1.8 1.4 vestment in the construction industry and in the Gross capital formation 5.6 7.2 property management (excluding housing), Investment in stocks1 0.0 -0.2 which have shown stronger growth than ex- Exports 8.2 8.3 pected. Thus, gross capital formation growth is Imports 8.6 7.6 now estimated at 7.2 per cent, as opposed to 5.6 Number employed 1.8 1.7 per cent in the Spring Fiscal Policy Bill. Number of worked hours 1.1 1.1 A large decrease in stocks in wholesale and Open unemployment2 4.9 5.6 retail trade during the first half of the year has 2 meant that the contribution from stocks to Total unemployment 8.5 8.7 GDP growth is expected to be 0.2 percentage Hourly wage 3.4 3.2 3 points less than previously forecast. General government sector net lending 2.0 2.8 The forecast for 2006 exports of 8.3 per cent CPI, annual average 1.4 1.6 represents a marginal upward revision from the Repo rate4 2.50 3.00 earlier forecast of 8.2 per cent. This estimate TCW index5 126 126 however conceals underlying changes in that the United States forecast for export of services has been revised GDP 3.5 3.3 upward while the forecast for export of goods Unemployment 4.7 4.7 has been revised downward. The revisions pri- Euro area marily reflect statistical outcomes and a stronger GDP 2.1 2.3 international economy. Unemployment 8.4 7.9 Growth in imports is now expected to be 1 In per cent of GDP, previous year. weaker in 2006 than forecast in the 2006 Spring 2 In per cent of the labour force. 3 In per cent of GDP. Fiscal Policy Bill. The downward revision stems 4 Repo rate at year-end. partly from a weaker trend than had been ex- 5 TCW index at year-end. pected in the import of goods during the first half of the year and partly from expectations that

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General government net lending has been re- posed in this Budget Bill. The forecast for total vised upward to 2.8 per cent of GDP. The revi- unemployment has accordingly been revised sion is attributable in equal measure to higher tax downward for 2007. The forecast for wage revenues and lower expenditure than forecast in growth has been revised downward. the Spring Fiscal Policy Bill. General government net lending has been re- The inflation forecast has been revised slightly vised upward by 0.1 percentage point. Both upward from the Spring Fiscal Policy Bill. That revenues and expenditure are lower than esti- results from somewhat higher outcomes, as well mated in the Spring Fiscal Policy Bill. as upward revisions of forecasts for energy prices and mortgage rates. Table 8.2 The Ministry of Finance’s forecasts for 2007 in the 2006 Spring Fiscal Policy Bill and the 2007 Budget Stronger real economic and credit growth Bill means that the repo rate is expected to rise more Percentage change, unless otherwise stated than previously estimated. The repo rate is ex- Spring 2006 2007 pected to increase to 3.00 per cent by the end of Sweden the year, as opposed to 2.50 per cent in the Spring Fiscal Budget Bill. Tighter monetary pol- GDP 3.0 3.3 icy is expected to lead to a strengthening of the Household consumption 3.2 4.2 Swedish krona, while the TCW index is forecast General government consumption 1.0 1.5 to go up to 126 at the end of 2006, as was pre- Gross capital formation 4.0 3.3 dicted in the Spring Fiscal Policy Bill. Investment in stocks1 0.1 0.1 The forecast for GDP growth in 2006 in the Exports 6.7 6.4 United States has been revised slightly down- Imports 6.9 7.1 ward due to a weaker trend in the property mar- Number employed 1.0 1.5 ket than projected in the Spring Fiscal Policy Number of worked hours 0.8 1.2 Bill. The forecast for unemployment in the Open unemployment2 4.5 5.8 United States in 2006 is unchanged since the 2 Total unemployment 8.0 7.7 Spring Fiscal Policy Bill. Hourly wage 3.9 3.7 GDP growth in the euro area was unexpect- 3 edly high in the first half of the year. The strong General government sector net lending 2.2 2.3 growth in investment was particularly surprising. CPI, annual average 2.2 2.5 4 The forecast for GDP growth has therefore been Repo rate 3.50 3.75 5 revised upward by 0.2 percentage points to 2.3 TCW index 123 123 per cent. Because unemployment has fallen more United States than previously forecast, it has been revised GNP 2.9 2.5 downward for 2006. Unemployment 5.0 5.1 Euro area GDP 1.9 1.9 8.2 Comparison with the previous forecast for 2007 Unemployment 8.3 7.8 1 In per cent of GDP, previous year. 2 In per cent of the labour force. 3 In per cent of GDP. The forecast for Sweden’s GDP growth in 2007 4 Repo rate at year-end. has been revised upward to 3.3 per cent since the 5 TCW index at year-end. 2006 Spring Fiscal Policy Bill. As a result of lower taxes for households, their consumption is Due primarily to higher energy prices, indirect expected to grow more strongly in 2007 than taxes and fees, the inflation forecast for 2007 has forecast in the Spring Fiscal Policy Bill. been revised upward somewhat. The forecast for employment has been in- The repo rate is expected to be 3.75 per cent creased by 0.5 percentage points as a result of at the end of the year, as opposed to the 3.50 per stronger outcomes in 2006 and stronger demand cent forecast in the Spring Fiscal Policy Bill. The than previously foreseen. The open unemploy- TCW index is estimated to be 123 at the end of ment forecast has been revised upward from the 2007, as forecast in the Spring Fiscal Policy Bill. Spring Fiscal Policy Bill. A large part of the revi- US housing investment, which has strongly sion is due to the reduced number of partici- contributed to GDP growth in recent years, is pants in labour market policy programmes pro- expected to fall faster than previously forecast. A

93 PROP. 2006/07:1 BILAGA 2 significant slowing in house price growth is expected to also have an adverse effect on household consumption. The GDP growth forecast for the United States has therefore been revised downward by 0.4 percentage points to 2.5 per cent, while the unemployment forecast has been revised marginally upward to 5.1 per cent. Several indicators point to a weakening of the economy in the euro area for the remainder of 2006 and next year. GDP growth for 2007 has therefore not been revised despite strong outcomes in the first half of 2006. Unemployment has been revised downward for 2007 due to a lower expected unemployment at the beginning of the year.

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Tables Appendix

Tables Chapter 1 International developments

GDP-growth Percentage change

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 United States 3.7 0.8 1.6 2.5 3.9 3.2 3.3 2.5 2.8 3.0 Japan 2.9 0.4 0.1 1.8 2.3 2.6 3.0 2.5 2.0 1.7 Euro area 3.9 1.9 0.9 0.8 1.9 1.4 2.3 1.9 1.9 1.9 Germany 3.2 1.2 0.0 -0.2 1.2 0.9 2.0 1.5 1.4 1.4 Nordic countries, excl. Sweden 3.7 2.0 1.0 1.2 2.8 2.8 3.2 2.4 2.4 2.5 Norway 2.8 2.7 1.1 1.1 3.1 2.3 2.5 2.5 2.7 2.7 Finland 5.0 2.6 1.6 1.8 3.5 2.9 4.3 2.8 2.6 2.6 Denmark 3.5 0.7 0.5 0.7 1.9 3.2 2.9 2.1 2.0 2.1 Global GDP 4.7 2.6 3.1 3.9 5.2 4.7 5.0 4.6 4.2 4.0 World market demand1 1.0 1.9 2.7 4.3 9.5 7.5 9.2 6.5 6.5 6.6 1 Trade-weighted import demand for goods and services encountered by Swedish exporters. Sources: National sources, Eurostat and Ministry of Finance.

Unemployment Percentage of labour force

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 United States 4.0 4.7 5.8 6.0 5.5 5.1 4.7 5.1 5.2 5.2 Japan 4.7 5.0 5.4 5.2 4.8 4.4 4.1 3.9 3.7 3.7 Euro area 8.2 7.9 8.3 8.7 8.9 8.6 7.9 7.8 7.7 7.7 Note: Eurostat definition for Euro area, national definition for the United States and Japan. Sources: Eurostat, national sources and Ministry of Finance.

Inflation Annual percentage change

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 United States 3.4 2.8 1.6 2.3 2.7 3.4 3.5 2.7 2.5 2.4 Japan -0.7 -0.7 -0.9 -0.3 0.0 -0.3 0.6 1.3 1.9 2.0 Euro area 2.1 2.4 2.3 2.1 2.1 2.1 2.3 2.2 2.0 1.9 Note: HICP for Euro area, CPI for the United States and Japan. Sources: Eurostat, national sources and Ministry of Finance.

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Tables Chapter 2 Financial Markets

Interest and exchange rate assumptions Value at the end of each year

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 Repo rate 4.00 3.75 3.75 2.75 2.00 1.50 3.00 3.75 3.75 4.00 6-mth interest rate 4.22 3.73 3.54 2.70 2.05 1.93 3.20 3.80 3.95 4.05 5-year interest rate 4.47 4.98 4.14 4.30 3.33 3.16 3.70 4.10 4.20 4.25 10-year interest rate 4.86 5.35 4.71 4.86 3.90 3.38 3.80 4.20 4.30 4.35 Spread Swe-Ger 10yr 0.20 0.35 0.52 0.51 0.25 0.02 -0.05 0.05 0.10 0.15 6-mth. EURIBOR 4.73 3.14 2.67 2.14 2.16 2.60 3.65 3.65 3.80 3.80 TCW index 129 137 131 124 121 131 126 123 122 122 EUR/SEK 8.87 9.32 9.12 9.02 8.98 9.44 9.20 9.00 8.90 8.90 USD/SEK 9.41 10.45 8.68 7.36 6.70 7.95 7.08 6.67 6.59 6.59 EUR/USD 0.93 0.89 1.05 1.22 1.34 1.19 1.30 1.35 1.35 1.35 Sources: Riksbank, Ministry of Finance and Reuters.

Interest and exchange rate assumptions Yearly averages

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 6-mth interest rate 4.13 4.05 4.16 3.01 2.17 1.75 2.49 3.53 3.88 4.00 5-year interest rate 5.24 4.70 4.99 4.08 3.76 2.85 3.55 3.92 4.15 4.23 10-year interest rate 5.37 5.11 5.30 4.64 4.42 3.38 3.75 4.02 4.25 4.33 Spread Swe-Ger 10yr 0.11 0.29 0.51 0.54 0.36 0.00 -0.06 0.01 0.07 0.13 6-mth. EURIBOR 4.48 3.64 3.28 2.25 2.09 2.24 3.20 3.65 3.73 3.80 TCW index 125 136 134 128 126 128 128 124 122 122 EUR/SEK 8.45 9.25 9.16 9.12 9.13 9.28 9.27 9.09 8.95 8.90 USD/SEK 9.16 10.33 9.73 8.09 7.35 7.49 7.37 6.85 6.63 6.59 EUR/USD 0.92 0.90 0.94 1.13 1.24 1.24 1.26 1.33 1.35 1.35 Sources: Riksbank, Ministry of Finance and Reuters.

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Tables Chapter 3 Swedish demand and output

Demand and output

SEK billion Percentage change in volume 2005 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 Household consumption 1 283 5.0 0.4 1.5 1.8 1.8 2.4 3.6 4.2 3.6 3.1 expenditure General government consumption 728 -1.2 0.9 2.3 0.7 0.1 0.7 1.4 1.5 1.0 0.6 expenditure Central government 201 -2.8 -1.6 3.0 1.5 -0.9 -1.5 0.5 0.0 0.1 0.4 Local government 527 -0.5 1.9 2.0 0.4 0.5 1.6 1.7 2.0 1.3 0.7 Gross fixed capital formation 455 5.7 -1.0 -2.6 1.1 5.1 8.5 7.2 3.3 3.6 3.6 Change in stocks 2 0.5 -0.5 -0.2 0.3 -0.3 -0.2 -0.2 0.1 0.1 0.0 Exports 1 299 11.5 0.5 1.2 4.5 10.8 6.4 8.3 6.4 6.1 5.9 Imports 1 093 11.4 -2.6 -1.9 5.0 6.4 7.3 7.6 7.1 6.4 6.1 GDP 2 673 4.3 1.1 2.0 1.7 3.7 2.7 4.0 3.3 3.1 2.7 GDP, calendar adjusted – 4.4 1.2 2.0 1.8 3.2 2.7 4.4 3.4 3.0 2.7 Sources: Statistics Sweden and Ministry of Finance.

Contribution to GDP growth Percentage points

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 Household consumption expenditure 2.4 0.2 0.7 0.9 0.9 1.1 1.7 2.0 1.7 1.5 General government consumption expenditure -0.3 0.2 0.6 0.2 0.0 0.2 0.4 0.4 0.3 0.2 Central government -0.2 -0.1 0.2 0.1 -0.1 -0.1 0.0 0.0 0.0 0.0 Local government -0.1 0.4 0.4 0.1 0.1 0.3 0.3 0.4 0.3 0.1 Gross fixed capital formation 1.0 -0.2 -0.5 0.2 0.8 1.4 1.2 0.6 0.6 0.6 Change in stocks 0.5 -0.5 -0.2 0.3 -0.3 -0.2 -0.2 0.1 0.1 0.0 Exports 4.9 0.2 0.5 2.0 4.7 2.9 4.0 3.2 3.2 3.2 Imports -4.1 1.0 0.8 -1.9 -2.4 -2.7 -3.1 -3.0 -2.8 -2.8 GDP 4.3 1.1 2.0 1.7 3.7 2.7 4.0 3.3 3.1 2.7 Sources: Statistics Sweden and Ministry of Finance.

Exports and imports of goods and services as well as change in prices

SEK billion Percentage change in volume 2005 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 Exports Exports of goods 974 12.1 -2.1 2.0 4.8 9.8 4.9 6.8 5.8 – – Processed goods1 811 13.0 -2.9 1.9 4.8 9.7 4.4 6.7 6.6 – – Exports of services 325 9.1 10.1 -1.5 3.6 14.1 11.1 12.6 7.9 – – Total exports 1 299 11.5 0.5 1.2 4.5 10.8 6.4 8.3 6.4 6.1 5.9 Export prices – 2.6 2.5 -1.7 -1.9 -0.2 3.3 3.0 -1.3 -0.3 0.8

Imports Imports of goods 827 11.7 -5.0 -0.2 7.0 7.6 7.9 6.7 7.4 – – Processed goods1 620 14.1 -6.5 -1.4 5.6 9.6 9.7 7.8 8.6 – – Imports of services 265 10.5 4.6 -6.4 -0.4 2.9 5.2 10.4 6.3 – – Total imports 1 093 11.4 -2.6 -1.9 5.0 6.4 7.3 7.6 7.1 6.4 6.1 Import prices – 4.6 4.1 0.1 -2.2 0.7 4.7 3.5 -3.0 -0.3 0.8 1 Classification according to SNI. Sources: Statistics Sweden and Ministry of Finance.

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Gross fixed capital formation

SEK billion Percentage change in volume 2005 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 Business sector1 307 8,2 -2,9 -7,1 1,2 3,9 8,9 7,4 3,0 - - Producers of goods 135 0,6 -0,6 -9,4 3,3 0,8 14,4 6,6 1,7 - - Industry 81 0,1 2,2 -14,2 -1,4 1,5 12,6 4,3 -1,4 - - Electricity, gas and watersupply 25 0,9 -7,5 3,9 11,0 -2,2 23,9 19,3 10,8 - - Producers of services1 172 14,2 -4,4 -5,4 -0,2 6,3 5,1 7,9 3,9 - - Corporate services 39 10,7 -7,6 -1,0 0,5 22,8 6,3 7,0 4,2 - - Wholesale and retail trade 30 6,4 -6,8 -6,3 9,0 8,1 2,7 4,6 6,5 - - Housing 75 10,0 4,2 10,5 5,4 18,2 16,9 8,7 2,9 - - New construction 48 17,3 5,7 13,1 6,3 29,0 20,9 9,1 0,9 - - Refurbishment 27 2,8 2,4 6,9 4,0 2,9 10,0 8,2 6,5 - - General government 73 -7,7 4,5 8,7 -2,7 -0,7 -0,5 5,0 5,0 - - Central government 38 -6,5 1,3 11,1 1,0 5,2 -6,2 8,0 7,0 - - Local government 35 -8,9 7,7 6,5 -6,3 -6,9 6,1 1,8 2,6 - - Total 455 5,7 -1,0 -2,6 1,1 5,1 8,5 7,2 3,3 3,6 3,6

Building and construction 193 4,3 5,9 2,6 -2,1 5,3 7,6 8,1 3,7 - - Machinery 193 5,2 -4,4 -3,6 3,3 4,2 11,3 7,1 2,2 - - Other 68 10,3 -5,7 -11,9 3,1 7,1 3,8 5,1 4,9 - - 1 Excluding housing. Sources: Statistics Sweden and Ministry of Finance.

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Household income and savings

Household income SEK billion Percentage change, current prices 2005 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 Real disposable income1 1 338 4.5 6.3 3.4 1.2 1.3 1.8 3.0 4.2 2.4 2.3 Price index2 - 1.2 2.1 1.7 1.8 1.3 1.0 1.2 2.1 1.7 1.9 Nominal disposable income 1 338 5.7 8.5 5.2 3.0 2.6 2.8 4.3 6.4 4.2 4.2 Wage bill3 1 082 6.8 5.8 3.2 2.4 2.5 4.1 5.0 5.3 4.9 4.6 Other factor income 238 11.1 0.0 5.1 3.7 1.0 6.2 2.4 6.2 4.1 3.8 Interest and dividends, net4 17 -0.9 0.3 -0.4 0.0 0.9 -0.2 0.7 -0.3 0.1 0.1 General government transfers 487 2.5 2.7 4.2 7.7 3.4 1.2 2.4 0.3 2.6 4.0 Old age 232 1.0 3.4 4.1 10.8 3.4 0.7 3.0 3.9 5.3 5.4 Sickness 118 11.3 10.1 8.8 7.4 1.0 3.7 0.8 -1.5 2.7 4.3 Labour market 44 -8.1 -18.0 1.9 11.2 10.9 -0.3 -3.8 -17.7 -12.4 -1.9 Family and children 49 4.5 7.4 2.3 3.0 1.8 2.8 9.5 2.7 1.5 2.3 Education 12 -12.6 2.1 -3.6 -9.4 1.2 -3.1 8.7 -2.5 0.4 1.3 Other 33 7.4 2.0 -0.2 -0.4 4.9 -1.6 -0.1 0.9 0.3 0.6 Private transfers 43 -7.8 31.2 -14.9 5.2 3.1 -5.7 2.4 3.2 3.9 3.9 Taxes and charges -530 3.7 -2.7 -3.1 6.6 4.8 4.1 4.7 -2.7 4.5 4.7 Household savings SEK billion 2005 Per cent of disposable income Own savings 55 -1.7 3.9 5.7 5.2 4.6 4.1 3.6 3.7 2.6 1.9 Net savings in supplementary pension schemes 54 4.9 4.7 3.5 4.1 4.1 4.0 4.0 3.9 4.0 4.0 Net savings5 108 3.0 8.2 8.9 8.9 8.4 7.8 7.3 7.3 6.3 5.7 Net lending6 85 2.4 7.9 8.3 7.9 7.0 6.3 5.8 5.7 4.7 4.1 1 Household real disposable income is calculated by deflating nominal income by the implicit price index for household consumption expenditure (IPI). 2 Implicit price index (IPI) for household consumption expenditure. 3 The wage bill corresponds to the number of hours worked multiplied by the hourly wages. 4 Interest and dividends are given as the net contribution to growth in household real disposable income, percentage change. 5 Net savings = net savings inclusive net savings in supplementary pension schemes / (Disposable income + net savings in supplementary pension schemes). 6 Net lending = own financial savings + net savings in supplementary pension schemes. Note: The difference between the terms "net savings" and "net lending" is mainly that capital depreciation on households’ capital stock is deducted when calculating net savings, while investment expenditures are deducted when calculating net lending. If household net investments are larger than the depreciation of capital, i.e. capital stock is growing, then net lending will be lower than net savings. Sources: Statistics Sweden and Ministry of Finance.

Business sector output

SEK billion Percentage change in volume 2005 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 Producers of goods 685 6.7 -0.3 3.7 1.7 8.0 2.6 4.9 3.7 – – of which: Industry 485 8.8 -2.2 5.8 3.7 9.8 2.6 5.3 4.6 – – Construction 109 0.5 5.3 -0.5 -3.3 3.9 7.3 7.5 2.5 – – Producers of services 1 124 5.8 1.8 1.4 2.1 2.7 3.7 4.7 3.6 – – of which: Trade 253 2.0 1.2 2.3 5.9 4.2 5.0 5.5 5.1 – – Corporate services 230 9.3 4.7 -4.0 4.2 4.1 5.4 8.5 4.9 – – Total business sector 1 809 6.2 1.0 2.3 1.9 4.7 3.3 4.8 3.6 3.7 3.2

Sources: Statistics Sweden and Ministry of Finance.

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General government output

SEK billion Percentage change in volume 2005 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 Local government output 363 -2.6 0.6 0.0 0.5 1.7 0.4 1.4 1.8 1.2 0.6 Central government output 131 1.1 -0.1 2.1 1.1 0.7 -0.6 -0.2 0.6 0.2 0.4 General government output 494 -1.7 0.4 0.6 0.6 1.5 0.1 0.9 1.5 0.9 0.6 Sources: Statistics Sweden and Ministry of Finance.

Current account balance SEK, billion, current prices, unless otherwise stated

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 Trade balance 142 149 158 150 171 144 156 170 177 187 Per cent of GDP 6.4 6.5 6.7 6.1 6.6 5.4 5.5 5.7 5.6 5.6 Service balance -14 -5 6 17 43 62 75 86 90 95 Factor income -13 -15 -11 31 -4 0 -5 5 7 9 Current transfers -26 -28 -32 -18 -35 -35 -33 -30 -33 -36 Current account 90 101 121 181 176 171 193 230 240 254 Per cent of GDP 4.1 4.4 5.1 7.3 6.8 6.4 6.8 7.7 7.6 7.7 Capital transfers -4 -2 -1 0 0 2 -21 -4 -5 -5 Net lending 86 99 121 180 176 174 173 226 236 249 Per cent of GDP 3.9 4.3 5.1 7.3 6.8 6.5 6.1 7.5 7.4 7.5 Terms of trade per cent change -2.0 -1.6 -1.8 0.4 -0.9 -1.4 -0.5 1.7 0.0 0.0 Sources: Statistics Sweden, Riksbank and Ministry of Finance.

Components of saving SEK billion Per cent of GDP, current prices 2005 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

Real balance 456 18.3 17.5 16.6 16.4 16.2 17.1 17.4 17.4 17.5 17.6 Fixed capital formation 455 17.5 17.3 16.5 16.0 16.1 17.0 17.6 17.4 17.4 17.4 Stockbuilding 2 0.7 0.3 0.1 0.4 0.1 0.1 -0.1 0.0 0.2 0.1 Net lending 174 3.9 4.3 5.1 7.3 6.8 6.5 6.1 7.5 7.4 7.5 General government 74 5.0 2.6 -0.5 -0.2 1.6 2.8 2.8 2.3 2.6 3.1 Own savings 85 1.2 4.1 4.3 4.1 3.6 3.2 2.9 2.8 2.3 2.0 Business sector 15 -2.3 -2.4 1.3 3.4 1.7 0.5 0.4 2.4 2.5 2.5 Gross balance 630 22.2 21.9 21.7 23.7 23.1 23.6 23.5 24.9 25.0 25.1 Sources: Statistics Sweden, Riksbank and Ministry of Finance.

Gross national income SEK billion, current prices

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 GDP 2 217 2 288 2 372 2 459 2 573 2 673 2 830 3 007 3 163 3 320 Primary income -16 -19 -9 23 -5 -7 -5 7 8 10

GNI 2 201 2 269 2 362 2 482 2 568 2 666 2 825 3 014 3 172 3 330 Sources: Statistics Sweden and Ministry of Finance.

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Tables Chapter 4 Labour market, wages, inflation and resource utilisation

Labour market and resource situation

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 Selected labour market statistics Percentage change unless otherwise stated

GDP 4.3 1.1 2.0 1.7 3.7 2.7 4.0 3.3 3.1 2.7 Productivity1 3.7 0.4 3.3 3.2 3.0 2.0 2.8 2.0 1.9 2.2 Hours worked 1.0 0.5 -1.3 -1.5 0.9 0.5 1.1 1.2 1.2 0.5 Average hours worked -1.1 -1.4 -1.4 -1.1 1.4 -0.3 -0.6 -0.4 0.3 -0.2 Calendar-adjusted GDP 4.4 1.2 2.0 1.8 3.2 2.7 4.4 3.4 3.0 2.7 Productivity1,2 3.6 0.3 3.2 3.0 3.5 2.0 2.7 1.8 2.1 2.2 Hours worked2 1.3 0.8 -1.2 -1.2 -0.3 0.5 1.6 1.4 0.9 0.5 Average hours worked2 -0.9 -1.2 -1.4 -0.9 0.3 -0.3 -0.1 -0.1 0.0 -0.2 Employed 2.2 2.0 0.1 -0.3 -0.5 0.8 1.7 1.5 1.0 0.6 Regular employment rate 3,4 77.5 78.6 78.4 77.9 77.2 77.4 77.7 79.0 79.8 80.2 Labour force 1.1 1.2 0.2 0.7 0.2 0.8 1.3 1.8 0.1 -0.0 Open unemployment4,5 5.0 4.3 4.3 5.3 6.0 6.0 5.6 5.8 5.0 4.3 Labour market policy programmes 5,6 2.6 2.5 2.6 2.1 2.4 2.7 3.1 1.9 1.4 1.5 Total unemployment 5 7.6 6.8 6.9 7.3 8.3 8.7 8.7 7.7 6.3 5.8

Participants in labour market policy programmes Thousands, annual average

Employed 29 25 24 22 27 40 58 37 18 14 In education and training 83 86 93 70 80 83 85 54 46 56 Total 113 112 117 92 107 123 143 91 64 70

Resource situation 7 Per cent of potential level

GDP gap 2.5 0.6 -0.2 -1.3 -1.0 -1.0 -0.1 -0.1 -0.2 -0.0 Productivity gap 0.8 -1.5 -0.8 -0.3 0.7 0.4 0.7 0.2 -0.0 0.0 Average hours worked gap 1.8 1.0 0.1 -0.6 -0.2 0.1 0.2 0.1 -0.0 -0.0 Employment gap 0.2 1.1 0.5 -0.6 -1.7 -1.7 -1.1 -0.4 -0.2 -0.0 1 Growth rates for productivity and hours worked may not add to GDP growth due to rounding and due to the fact that GDP growth is presented at market price whereas productivity growth is presented at base price. 2 Calendar adjustment according to National Institute of Economic Research. 3 Number of employed in age group 20–64, excluding those employed in labour market policy programmes, as a percentage of the population in that age group. 4 According to the LFS after the harmonisation in 2005. 5 Per cent of the labour force. 6 People in labour market programmes. 7 The parts may not add to the GDP gap due to rounding and due to the fact that the GDP gap is calculated in terms of GDP at market price whereas the partial gaps are computed in base price terms. Sources: Statistics Sweden, National Labour Market Board, National Institute of Economic Research and Ministry of Finance.

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Wages and inflation Annual percentage change unless otherwise stated

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 Nominal wages Industry 4.2 3.9 4.2 3.2 3.1 3.1 3.1 3.6 – – Construction 4.0 4.8 3.7 3.8 2.6 3.2 3.6 4.3 – – Private service sector 3.5 4.3 3.8 3.2 3.0 3.3 3.4 3.8 – – Central government 4.8 4.2 4.3 4.2 2.9 3.1 3.2 3.4 – – Local government 3.6 4.9 4.5 3.8 4.2 2.9 3.0 3.6 – – Total, short-term wage statistics 3.7 4.4 4.1 3.5 3.3 3.1 3.2 3.7 3.7 3.8 Total, National Accounts 5.4 4.9 4.5 3.6 2.7 3.6 3.4 3.8 4.0 4.1

Consumer prices CPI, December–December 1.0 2.7 2.1 1.3 0.3 0.9 2.6 2.3 1.7 2.1 CPI, year-on-year 0.9 2.4 2.2 1.9 0.4 0.5 1.6 2.5 2.0 1.9 UND1X, December–December 0.8 3.1 2.0 1.6 0.7 1.2 1.8 1.7 1.5 1.9 UND1X, year-on-year 0.9 2.5 2.3 2.2 0.8 0.8 1.3 1.9 1.5 1.8 HICP, December–December 1.3 3.2 1.7 1.8 0.9 1.3 1.9 2.2 – – HICP, year-on-year 1.3 2.7 2.0 2.3 1.0 0.8 1.6 2.2 – – NPI, December–December 2.4 2.9 2.2 0.8 0.1 0.2 1.0 0.9 – – NPI, year-on-year 2.1 2.6 2.3 1.5 0.1 0.1 0.6 1.1 – – Price base amount, SEK, thousand 36.6 36.9 37.9 38.6 39.3 39.4 39.7 40.3 41.2 42.1 HICP, euro area, year-on-year 2.1 2.4 2.3 2.1 2.1 2.1 2.3 2.2 2.0 1.9 Sources: National Mediation Office, Statistics Sweden and Ministry of Finance.

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Tables Chapter 5 General government sector

General government finances SEK billion unless otherwise stated

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 Revenue 1 312 1 290 1 300 1 360 1 426 1 505 1 575 1 611 1 679 1 754 Per cent of GDP 59.2 56.4 54.8 55.3 55.4 56.3 55.6 53.6 53.1 53.0 Taxes and charges 1 172 1 164 1 170 1 224 1 292 1 357 1 421 1 441 1 505 1 573 Per cent of GDP 52.8 50.9 49.3 49.8 50.2 50.8 50.2 47.9 47.6 47.5 Capital income 69 51 50 54 53 58 64 67 66 70 Other income 71 74 80 82 81 89 89 104 108 111 Expenditure 1 202 1 230 1 311 1 364 1 385 1 430 1 493 1 545 1 602 1 659 Per cent of GDP 54.2 53.7 55.3 55.4 53.8 53.5 52.7 51.4 50.7 50.1 Transfers and subsidies 470 481 502 543 559 578 599 602 619 637 Households 404 415 433 466 482 488 500 505 518 539 Business 40 38 40 44 41 49 53 51 51 44 Abroad 26 28 30 33 36 41 46 46 51 54 Consumption 585 615 658 692 705 728 760 799 837 874 Investment 58 64 73 71 72 73 82 86 88 91 Interest 90 69 77 58 49 52 52 58 57 57 Net lending 110 60 -11 -4 41 74 82 66 77 95 Per cent of GDP 5.0 2.6 -0.5 -0.2 1.6 2.8 2.9 2.2 2.4 2.9 Central government 58 168 -43 -45 -12 10 -16 -3 15 42 Old-age pension system 48 -104 45 47 49 50 79 53 49 45 Local government 5 -4 -13 -5 5 14 19 16 13 8 Financial position Consolidated gross debt 1 160 1 232 1 232 1 273 1 300 1 346 1 312 1 251 1 199 1 122 Per cent of GDP 52.3 53.8 52.0 51.8 50.5 50.3 46.4 41.6 37.9 33.9 Net debt 27 -67 72 -38 -147 -331 -439 -507 -584 -676 Per cent of GDP 1.2 -2.9 3.0 -1.5 -5.7 -12.4 -15.5 -16.8 -18.5 -20.4 Sources: Statistics Sweden and Ministry of Finance.

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Central government finances SEK billion unless otherwise stated

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 Revenue 820 885 717 748 792 851 884 891 925 965 Taxes and charges 708 668 651 679 725 774 807 802 837 874 Transfers from the pension fund 47 155 0 0 2 0 0 0 0 0 Other income 65 62 66 69 66 77 77 90 88 91 Expenditure 762 717 760 793 804 840 900 894 910 923 Transfers to households, business sector and abroad 293 298 314 348 356 369 381 375 381 385 Grants to local government sector 111 114 119 122 121 140 151 160 163 163 Contributions to the pension fund 20 21 21 23 27 27 26 24 23 24 Premium reserve funds 56 18 20 20 22 23 49 27 28 29 Consumption 171 173 184 193 194 197 204 211 220 229 Investment 29 30 34 36 40 39 42 45 45 46 Interest 83 62 68 50 43 46 46 52 50 49 Net lending 58 168 -43 -45 -12 10 -16 -3 15 42 Per cent of GDP 2.6 7.4 -1.8 -1.8 -0.5 0.4 -0.6 -0.1 0.5 1.3 Budget balance 102 39 4 -47 -51 14 -7 55 50 81 Per cent of GDP 4.6 1.7 0.1 -1.9 -2.0 0.5 -0.3 1.8 1.6 2.4 Central government debt 1 278 1 209 1 166 1 186 1 213 1 262 1 233 1 174 1 121 1 041 Per cent of GDP 57.6 52.9 49.1 48.2 47.1 47.2 43.6 39.0 35.5 31.4 Sources: Statistics Sweden and Ministry of Finance.

The old-age pension system SEK billion unless otherwise stated

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 Revenue 236 198 199 205 217 223 260 243 253 262 Social contributions 127 137 140 143 147 151 159 165 172 179 Contributions from central 24 government 20 21 21 23 27 27 26 24 23 Premium reserve funds 56 18 20 20 22 23 49 27 28 29 Interest and dividends 34 21 19 19 21 22 25 27 29 32 Expenditure 188 301 154 159 169 173 180 190 203 218 Pensions 139 144 152 155 163 169 177 187 199 213 Transfers to central government 45 155 0 0 2 0 0 0 0 0 Other 5 3 3 3 4 4 4 4 4 4 Net lending 48 -104 45 47 49 50 79 53 49 45 Per cent of GDP 2.2 -4.5 1.9 1.9 1.9 1.9 2.8 1.8 1.6 1.4 Pension funds1 -9 -124 23 25 24 24 26 19 14 9 Premium pension authority 57 20 21 22 25 26 54 33 35 36 1 The pension funds noted here compromise the distribution part of the old-age pension system. Sources: National Debt Office, Statistics Sweden and Ministry of Finance.

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Local government finances SEK billion unless otherwise stated

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 Revenue 492 517 546 575 592 627 662 691 718 745 Taxes 336 359 379 403 420 432 455 474 495 519 Central government grants excl. VAT 83 84 87 90 90 107 117 123 124 122 Taxes and central government grants, per cent of GDP 18.9 19.4 19.6 20.1 19.8 20.2 20.2 19.8 19.6 19.4 Capital income 10 9 11 11 11 9 10 10 11 12 Other income 62 65 69 71 72 79 80 84 87 91 Expenditure 487 521 559 581 587 613 643 676 707 737 Transfers to households 26 28 26 25 26 25 25 26 26 26 Other transfers and subsidies 8 9 12 12 10 13 17 16 15 15 Consumption 411 438 471 495 507 527 552 584 612 640 Investment 34 39 41 40 39 42 42 44 46 48 Interest 7 7 9 8 6 6 6 6 7 7 Net lending 5 -4 -13 -5 5 14 19 15 12 8 Per cent of GDP 0.2 -0.2 -0.5 -0.2 0.2 0.5 0.7 0.5 0.4 0.3 Financial result 1 1 -7 -1 2 13 22 13 10 6 Sources: Statistics Sweden and Ministry of Finance.

105