1. Fiscal Sustainability in Sweden
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The Swedish National Audit Office

2. The Swedish National Audit Office
The Government’s sustainability analysis
Audit results
The Swedish National Audit Office
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3. Why is Fiscal Sustainability Important?
Macro-economic stability
Confidence in the welfare systems => willingness to pay high taxes
Political contract between generations
Potential problems: Eroding tax- bases, demographic development
Low confidence in the market for the stability of public finances may trigger higher interest rates which will slow down economic growth and affect employment. We learned that the hard way at the beginning of the 1990-ies.
The Swedish welfare system is largely ”pay-as-you go”. If you are confident that you will get good services in the future when grow old, you are more willing to pay taxes while you are in working age.
The welfare system is to a large extent a redistribution between generations, it is a political contract. It is desirable that the redistribution is reasonably fair.
The threats to the system is of course the demographic development with an increasing share of elderly people and fewer people of working age to pay taxes for the welfare services.
For Sweden with its high taxes another possible threat is globalization and erosion of tax bases (leakage) .
Fiscal sustainability is seen as a corner stone in the fiscal policy framework. The surplus target a way to achieve sustainability. Strong political consensus, endorsed by Parliament several times.
The Swedish National Audit Office
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4. The Government's Analysis
Long-term projections presented in the Budget Bill and in annual report to the EU
Public sector revenues and expenditures are projected in a 50 year (or longer) perspective
Central government debt used as sustainability indicator
The Government publishes long term projections in an annex to the Budget Bill.
The Government is also forced to give a report on this issue to the European Union once a year.
A macro economic scenario is created at the ministry of finance based on a population forecast and a number of other assumptions such as
Labour supply
Productivity growth
Household consumption and saving patterns
Return on capital in different sectors of the economy
Etc.
The Government uses its own stability indicator – the development of central government gross debt.
The Swedish National Audit Office
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5. Swedish Population Age Group 65+, Per Cent of Total Population
Population forecast by Statistics Sweden – annual updates
Almost all population growth till 2050 made up of 65+.
Elderly ratio from 10 to 18% (40 years), from 17 to 24 % (20 years).
The very old (80+) increase muck faster due to increasing longevity (length of life). More than twice as many as in 2000.
Growth of population in working ages, years, entirely dependant on positive net migration. Composition of the working age population will change – a larger share being born outside Sweden – and a larger share of these coming from more distant countries, geographically and perhaps culturally. Immigrants used to come from Finland, now they come from Iraq or Somalia, mostly refugees and relatives to these => Integration important . Employment rate substantially lower for first (and second) generation immigrants.
Still – the demographic picture better than in many other OECD and EU countries.
The Swedish National Audit Office
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6. General Government Income and Expenditure Per cent of GDP
Macro economic scenario made by the government. High degree of disaggregation in revenue and expenditure projections.
Government fiscal policy guided by explicit targets for expenditure and savings.
Tax rates varied slightly to achieve a 1 per cent surplus till 2015, then kept constant relative to tax bases. – Relatively stable tax to GDP ratio
Expenditure dependent on ambition to keep service level in the public sector constant, despite increase in users. Constant service level defined as unchanged number of hours worked per user in public service production, and increase in transfer payments per recipient in line with the general income increase in the economy. Expenditure ratio increases some 4 percentage points of GDP between 2015 and 2035.
The Swedish National Audit Office
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7. General Government Net Lending Per cent of GDP
Target for net lending 1 per cent (2 per cent in calculation made in autumn of 2006) The change is explained by a re-classification of the funded part of pension system. Constant taxes in 2015 and onwards leads to gradually lower public sector savings.
Savings in the funded part of the pension system, the so called PPM-system, amounts roughly to 1 per cent of GDP, so the saving ambition in the rest of the public sector is really not affected.
The Swedish National Audit Office
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8. Central Government Debt Per cent of GDP
Government’s definition of sustainable fiscal policy: Central Government gross debt not higher as a share of GDP in 2050 than in 2000.
Substantial fall in the debt to GDP ratio during the next 15 or so years foreseen.
Fast increase in debt ratio after 2025.
The Swedish National Audit Office
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9. Auditing Public Finances
Program started early 2006
New area of performance auditing at SNAO
6-7 persons involved
Focus on the Government's presentation in the Budget Bills
9 reports published
Let me now turn to our work at the Swedish national audit office….
2 years ago we started a program called ”Public Finances”.
A new area of performance auditing
The aim is to examine/review the Governments presentation of fiscal policy in the budget bills, and to supervise and assess the Government's application of the fiscal framework, which was implemented some 10 years ago.
Following the fiscal crises of the early 1990:es several reforms were introduced. There was a fundamental pension reform and also a comprehensive reform of the budget process with binding targets for fiscal policy: An expenditure ceiling, a surplus target, medium and long term projections to account for stability in public finances.
9 reports so far:
The quality of macro-economic and revenue forecasts
The use of tax-expenditures
Monitoring and reporting of local government finances
Monitoring the surplus target
The expenditure ceiling and tax-policy
The presentation of budget-effects of reforms
Analysis of sustainable fiscal policy (which I will tell you a bit more about)
The studies will be synthesised in this years annual report. The program will continue.
The Swedish National Audit Office
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10. The Audit Question:
Has the Government presented transparent information about the assumptions on which its analysis of long term sustainability of public finances is based?
To answer this rather long and complicated question we went through all government long term sustainability analyses which has been published since 1999.
It resulted in the following observations:
The Swedish National Audit Office
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11. SNAO conclusions
The Government's presentation and analysis of fiscal sustainability has serious shortcomings
The sustainability indicator is inaccurate
The link between the sustainability analysis and short term fiscal policy is weak
The results are very sensitive to assumptions made, on for example labour supply, household savings, etc. Hence, it is of vital importance that all calculation assumptions and principles are stated clearly, and that changes are explained and motivated. This was far from the case. One example is a change in the assumption of the average number of hours worked per employed person => next slide
Long term projections are very uncertain, but there is very little sensitivity analysis.
The main sustainability indicator is central government gross debt. (gå tillbaks till bild på skuldkvoten)
If it is not higher in 2050 than today, then public finances are assumed to be sustainable. However, central government debt is a gross debt. You can reduce the debt by selling financial assets and that is exactly what the new government is planning. But reducing debt by selling assets does not increase sustainability!
The government also used several different years as reference years in which the debt ratio was considered sustainable.
It is also the case that in the early years of this century the debt ratio is falling fast, were as it is rising fast at the end of the scenario, and soon will be above the desired level.
A third observation was that there are expenditure restrictions which are necessary for sustainability, such as the growth rate of public consumption, which are not reflected in present gov. policy. This was never commented on.
(Although we are critical (as always) the Swedish Government is probably more open with these presentations than most European governments!)
The Swedish National Audit Office
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12. Labour Supply Millions of hours worked
Example of important calculation assumption which was not clearly stated.
Between last years budget bill and this years bill number of hours worked in 2050 increased by some 10 per cent. Strongly affects gov. income (and expenditure) and sustainability result.
The new assumption might be justified, but the point is that the government didn't justify the higher level. It was not touched upon at all in the presentation of the new long-term scenario.
The Swedish National Audit Office
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13. SNAO Recommendations The Government should:
Improve the presentation of the sustainability of fiscal policy and develop the analysis
Review the sustainability indicator
Strengthen the role of the long term estimates in the design of short term fiscal policy
As in most performance reports, we offer the government a set of recommendations.
Improve presentation and analysis: * More explanation of macro-economic assumptions. * Clear presentation of changes of the assumptions and the reasons for the changes. * More sensitivity analysis
Review the sustainability indicator. Gross debt can be highly misleading.
There is still a gap between the long term analysis and the design of medium term fiscal policy. * The long term projections are presented in an annex to the budget bill. * The long terms effects of reform proposals are not presented. (This is something that the US Audit office (Gov Accountability Office) points out very strongly in relation to the US budget.)
The Swedish National Audit Office
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