This chapter first presents the NIER's forecast for 2012-2016, with special focus on the period 2014-2016. (2) This is followed by a detailed analysis of the forecast development of monetary and fiscal policy in 2012-2016.
Two special analyses are presented at the end of the chapter. In one, "Disorganized Resolution of the Euro Area Debt Crisis Far Too Costly," there is a discussion on how serious developments can get if the debt crisis, contrary to the assumption in the forecast, is not resolved in an orderly manner. The other special analysis, "How to Compare the Macro Forecasts of the National Institute of Economic Research, the Government and the Swedish National Financial Management Authority (ESV)," provides a comparison of forecasts under the assumption that fiscal policy develops according to so-called "unchanged rules," that is, in a situation where no new fiscal policy decisions are taken.
The chapter begins with a brief summary.
UNEMPLOYMENT TO REMAIN OVER 7 PERCENT IN 2015 DESPITE A HIGHLY EXPANSIONARY MONETARY POLICY
The recession is severe in the US, the euro area and the United Kingdom, and all are major trading partners of Sweden. The financial crisis of 2008-2009 has been followed by a crisis in the government finances of many OECD countries. In the euro area the crisis in government finances has escalated further during the autumn and has thus been a factor in the severe deterioration of the economic outlook.
In addition, the European Council has decided to recommend higher capital coverage requirements for European banks in order to improve the preparedness of the banking system for future crises. The substantial tightening of credit discernible in the euro area will contribute to an even deeper and more prolonged contraction than previously feared (see Diagram 14). All aspects considered, the lacklustre development of the international economy will mean abnormally weak growth of the market for Swedish exports in 2012-2013. As a result of this development, together with the postponement of consumption and investment decisions, GDP growth will not be high enough for the labour market to improve (see Diagram 15). As described in the chapter "Development of the International Economy," it is assumed that the acute crisis in government finances within the euro area will subside in the first half of 2012. As confidence gradually returns both to our trading partners and in Sweden, pent-up needs for consumption and investment will result in gradually higher growth in 2013-2016.
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The deterioration of the economic outlook, together with wider interest margins, particularly for households, calls for powerful monetary policy measures. Monetary policy will therefore shift in an even more expansionary direction in Sweden. The repo rate will be lowered to 0.75 percent in the first half of 2012 and will not be raised before the second half of 2013 (see Diagram 16). Nevertheless, unemployment will continue to rise and will still exceed 7 percent in 2015 (see Diagram 15).
On the other hand, the Government is not expected to pursue an even more active fiscal policy for the purpose of speeding up the recovery of the Swedish economy. As measured by the change in cyclically adjusted net lending, fiscal policy on average will be somewhat contractionary in 2012-2016, and the net lending of the general government sector will rise to slightly above 1 percent of GDP in 2016 (see Diagram 17).
SAVING A DRAG ON GROWTH FOR THE NEXT FEW YEARS
It is assumed in the NIER's forecast that financial turbulence will decrease during 2012 and that the confidence of households and firms in the OECD area will gradually be restored. This requires that the problems with government debt be resolved in an orderly fashion (see the chapter "Development of the International Economy"). (3) However, households in many OECD countries where real estate prices have fallen will also be forced in 2013 to maintain a high level of saving in order to reduce their indebtedness. Moreover, the need for contractionary fiscal policy measures will remain substantial and contribute to further slackening of growth in 2013. In the euro area and the US, the fiscal policy measures are expected to total about I percent of GDP in 2013. All factors considered, growth will rise somewhat in the OECD countries but will not be high enough to bring any significant decrease in unemployment. Thus, resource utilization will still be low at the end of 2013 (see Diagram 18).
Recovery will be stronger in 2014-2015, with consumption and investment as the principal driving forces. In the OECD countries, GDP will grow by an annual average of 2.5 percent (see Table 2), which is somewhat higher than the potential growth rate. Resource allocation will thus increase and will approach balance toward the end of the period (see Diagram 18).
In 2012 austerity measures to relieve the strain on resource utilization in several emerging economies will mean that GDP in these markets will grow more slowly in 2012. During the period 2013-2016, GDP will increase in the growth economies by about 7 percent per year (see Table 2), a rate compatible with a balanced development of the economy.
LOW INFLATION AND LOW RESOURCE UTILIZATION MEAN LOW INTEREST RATES
With the lacklustre development of the economy in the OECD countries and more limited increases in prices of primary products, inflation will be decreasing in most countries in 2012 (see the chapter "Development of the International Economy"). The slack economy will limit the rate of price increases in 2013-2016 as well (see Table 2). Not until 2015 will CPI inflation reach the inflation targets of the respective central banks in most OECD countries. Low inflation and a continued low level of resource utilization in the next few years will also require maintaining an expansionary monetary policy in the major economies of the OECD. Since resource utilization will still be below normal in 2016, monetary policy will be expansionary even though inflation is on target. Not until 2016 will policy interest rates in the euro area and the US approach levels indicative of a neutral monetary policy (see Diagram 19).
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Macroeconomic Development in Sweden
SWEDISH ECONOMY SLOWED BY EURO CRISIS
The gloomy outlook in other countries is now leaving a clear imprint on the Swedish economy. The NIER's economic tendency indicator, which is an overall measure of sentiment in the economy, is now dropping just about as rapidly as during the initial phase of the financial crisis of 2008 (see Diagram 20). The NIER's present assessment is that GDP will decrease in the final quarter of this year and then remain largely unchanged during the first half of 2012.
Domestic conditions for growth in the Swedish economy, however, are relatively favourable. In contrast to many other countries, public finances are strong and household saving is high. Furthermore, the business sector is competitive by international standards, as is reflected in sizable foreign trade surpluses.
Foreign trade being of such importance, the Swedish economy is heavily dependent on developments in other countries. It is assumed in the forecast that the acute problems associated with government debt in the euro area will subside during the first half of 2012 and that confidence will gradually return to financial markets (see the special analysis "Disorganized Resolution of the Euro Area Debt Crisis Far Too Costly"). Nevertheless, large-scale commitments to save will result in very slack development of the economy in the OECD countries, and particularly the euro area, for the next few years. The downturn in the OECD will therefore be prolonged (see Diagram 18).
SLUGGISH GROWTH OF EXPORTS IN 2012 AND DEEPENING RECESSION
The low growth in the OECD countries will curtail market growth for Swedish exporting companies in 2012 (see Diagram 21). Particularly hard-hit by the weakness in international demand will be input and investment goods, which are especially important for Swedish exporting industries. Therefore, Swedish exports will virtually stagnate in 2012 and contribute to the sharp slowdown in GDP growth. This means that resource utilization in the Swedish economy as a whole will decrease rapidly in the next few quarters, and that unemployment will begin rising. For the full year 2012, the so-called output gap will be nearly -3 percent (see Diagram 22). The recession is also evident on the labour market, where unemployment will be about 8 percent in 2012.
POTENTIAL GDP TO GROW MORE THAN 2 PERCENT
In 2013-2016 potential GDP will increase by an average of about 2.3 percent per year (see Table 3). This growth will be driven primarily by rising productivity in the business sector as a consequence of technological development and investment in productive capital. At the same time, the labour force will be expanding somewhat as a consequence of both demographic developments and the Government's reforms in the area of labour market policy (see the special analysis "Long-Term Effects of Economic Policy Reforms on the Labour Market").
With the combination of substantial unutilized resources at the end of 2012 and a potential growth rate in 2013-2016 averaging 2.3 percent per year, there will be a considerable margin for the Swedish economy to expand in 2013-2016 without any tendency toward overheating.
DOMESTIC DEMAND MORE IMPORTANT AS A DRIVING FORCE
The rate of growth for both the Swedish export market and for Swedish exports will average only about 2 percent per year in 2008-2012, far below the historical trend (see Diagram 21). Although the Swedish export market will recover and grow by more than 7 percent per year in 2013-2016, demand for Swedish exports of goods will be lower than it would have been according to the trend prior to the financial crisis. Growth in domestic demand will thus become increasingly important if the Swedish economy is to recover during 2013-2016.
Demand from the general government sector, however, is expected to show little growth in 2013-2016, when fiscal policy is anticipated to shift in a somewhat contractionary direction (see the section "Fiscal Policy" below). This means that demand, particularly from households and firms, must increase if growth is to pick up in Sweden. Concern on financial markets, however, has contributed to substantial decreases in asset prices in Sweden as well. Partly as a consequence of this development, together with a gloomier labour market outlook, households will be cautious about increasing their consumption in the first half of 2012 despite low interest rates. Only later will households begin to increase their consumption more substantially, when the concern on financial markets subsides and the labour market stabilizes.
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For the full year 2012, household consumption will increase by a modest 1 percent. This will be the second consecutive year of extremely low growth in consumption. This will also mean that household saving will rise to historically high levels (see Diagram 23). The combination of low interest rates, a brightening outlook on the labour market and pent-up needs for consumption will mean that household consumption picks up in 2013. Households will thereafter increase their consumption by some 3.5 percent per year in 2014-2016 (see Table 4). By historical standards, this is a high growth rate, and it reflects initially higher than normal saving. Thus, household consumption will increase somewhat as a share of GDP after the previous decrease in 2010-2012 (see Diagram 24).
A prerequisite for such a development is that employment goes up and that the stance of stabilization policy remains expansionary. The Riksbank is therefore expected to lower its policy interest rate during the first half of 2012 to 0.75 percent (see the section "Monetary Policy, Interest Rates and Exchange Rates", below). This level of the interest rate will be maintained until the end of the first half of 2013, when recovery will be more robust and a cycle of interest rate hikes begins.
Gross fixed capital formation dropped sharply in connection with the financial crisis of 2008/2009. As a share of GDP, investment fell from 20 percent in 2008 to 18 percent in 2009 (see Diagram 24). Investment has subsequently remained at this relatively low level in proportion to GDP. The proportion will rise only slightly in 2012 since some companies will postpone their investments in view of the high uncertainty about future developments. Housing investment will also decrease in 2012. When demand picks up in 2013 and uncertainty diminishes, firms will have a rapidly rising need to increase their production capacity, a normal development in an economic upturn. Investment will therefore go up by 6-7 percent per year in 2013-2015; thereafter, the rate of increase will fall off to about 5 percent in 2016 (see Diagram 25 and Table 4). Investment will then equal about 20 percent of GDP, a level that in the NIER's opinion may be considered normal in the long run.
IMPORTS TO INCREASE MORE RAPIDLY AS THE SWEDISH KRONA STRENGTHENS
At the same time, the recovery means that imports will increase more rapidly. During 2012 imports will virtually stagnate, but as demand picks up during 2013, imports will rise by 6 percent (see Table 4). The increase in net exports in recent years will thus be interrupted (see Diagram 24). In 2014-2016 imports will continue to grow at a relatively fast pace. The principal explanation is rising demand, but in addition the upswing will be fuelled by a krona that has strengthened by more than 5 percent during the period 2013-2016 (see Diagram 26). Net exports will gradually drop just below 6 percent of GDP in 2016. Sweden will thus maintain a high, though gradually diminishing, level of net saving in relation to other countries.
GDP GROWTH TO PICK UP IN 2013
On an overall basis, GDP growth will rise to 3 percent in 2013 after the temporary slump in 2012 (see Diagram 27 and Table 4). Growth will remain high in 2014-2016, and resource utilization in the economy will therefore gradually rise. In 2016 the economy will be virtually in cyclical balance, as will be reflected in an output gap close to zero (see Diagram 22).
NO TURNING POINT ON THE LABOUR MARKET UNTIL 2014
The higher growth of GDP in 2013 will not be fully reflected on the labour market. The reason is that firms will not have reduced staff to any major extent, despite lacklustre growth in demand during 2012. Thus, there will be a relative abundance of unused resources at firms when demand begins to accelerate in the latter months of 2012 and in 2013. Employment will therefore increase by only 0.3 percent for the full year 2013 (see Diagram 28 and Table 5).
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Thus, there will be no clear turning point on the labour market until 2014, when employment will increase by 0.7 percent. At the same time, unemployment will begin to recede somewhat after peaking at around 8 percent in 2013. In 2015-2016 employment will increase by an annual average of about 1 percent. The labour force will be growing at an average rate of only 0.3 percent during these years; this means that unemployment will drop back relatively quickly to 6.5 percent in 2016. This level is roughly equivalent to the NIER's estimate of equilibrium unemployment for that year (see the special analysis "The NIER's Assessment of Structural Unemployment"). The labour market gap will thus be virtually zero in 2016 (see Diagram 22 above).
INFLATION TO REMAIN LOW
The weakening labour market is expected to be one reason why the current pay negotiations will result in increases of more than 3 percent next year (according to the Short-Term Wage and Salary Statistics). As a consequence of the soft labour market in 2012-2013, the rate of pay increases in 2013 will be less than the 3.5 percent that the NIER considers compatible with the inflation target in the longer term (see Diagram 29 and Table 6). In 2014-2016 earnings will gradually accelerate as the labour market improves, and in 2016 earnings will rise by 3.7 percent.
A temporary slump in the development of productivity- during 2012, when firms to a large extent are expected to retain their staff despite a lacklustre demand tendency, will mean that unit labour costs in the business sector rise more rapidly than usual (see Diagram 29). In 2013-2015 there will be a cyclical recovery of productivity when resource utilization rises at firms. Productivity. will then increase by an average of more than 2.5 percent per year. Together with pay increases of more than 3.5 percent, this will mean that unit labour costs increase more slowly in these years than in years of cyclical balance. Moreover, prices of imports will be very slack during the forecast period. This soft tendency will be due largely to an appreciating krona (see Diagram 26 above).
All factors considered, the costs of firms will increase more slowly than normal during the forecast period as a whole. In 2013-2015 inflation in terms of the CPI with a fixed interest rate (CPIF) will be about 1.5 percent (see Diagram 30 and Table 6). In 2016 inflation in terms of the CPIF will rise to nearly 2 percent when unit labour costs and prices of imports are rising more rapidly and the economy is approaching cyclical balance. In terms of the CPI, inflation will be rising much faster during 2014-2016. The reason is that the Riksbank will be raising the repo rate during this period, so that rising home mortgage interest rates will be fuelling CPI inflation.
Monetary Policy, Interest Rates and Exchange Rates
Resource utilization in the Swedish economy is low, as is reflected in a high rate of unemployment that will rise further in the future, as well as decreasing capacity utilization. The severe recession in the wake of the financial crisis will now also be followed by a new downturn in demand. At the same time, underlying inflation (CPIF) will be low. To stimulate the economy further, the repo rate will therefore be cut during the spring of 2012 to 0.75 percent. Moreover, monetary policy will remain expansionary for several years in order to support economic recovery and in time to bring inflation in line with its target. The NIER's assessment is that resource utilization in the Swedish economy will not be in balance until 2016, when unemployment will be about 6.5 percent. Monetary policy will gradually become less expansionary and is expected to be neutral at the end of the period.
REPO RATE LOWERED TO 0.75 PERCENT IN 2012
It is assumed in the forecast that the Riksbank lowered the repo rate by 0.25 percentage point at its monetary policy meeting in December 2011. (4) The repo rate will be lowered by an additional 1.0 percentage point during the spring of 2012. Thereafter it will remain at 0.75 percent for over a year. To judge by the pricing of forward contracts, the market as of mid-December was also expecting the repo rate to decline, though at a somewhat slower rate (see Diagram 31).
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The reductions in the repo rate will come in anticipation of deteriorating demand in the Swedish economy for the next few quarters. Moreover, short-term fixed interest rates on home mortgage loans have continued to rise even though the repo rate has remained unchanged since July (see Diagram 32). Home mortgage interest rates have risen primarily in relation to the interbank interest rate. Since the interbank rate is a measure of the financing costs of banks, this indicates that the banks' margins on home mortgage loans have increased. The interbank rate is also somewhat higher than it normally would be in comparison to the repo rate. One explanation is that the financial turbulence has led to higher risk premiums for financial institutions in general. This has also entailed higher borrowing costs for Swedish banks.
The NIER is assuming that the differential between the interest rate on home mortgage loans and the repo rate will remain somewhat larger than normal in the coming period, but that as the financial turbulence subsides during 2012, it will begin to drop back to more normal levels. With the higher home mortgage interest rates, monetary policy in the immediate future, all else being equal, will be somewhat more contractionary than would be the case with a more normal situation on the home mortgage loan market. Thus, the need for reducing the repo rate in order to make monetary policy sufficiently expansionary will be greater than normal. Alternatively, the Riksbank can take other steps to provide greater liquidity that would lead to lower home mortgage interest rates.
The repo rate cuts will contribute to a declining repo rate in real terms in 2012 and 2013 (see Diagram 33); thus, monetary policy, if judged solely by the repo rate, will be more expansionary. A narrowing differential between home mortgage interest rates and the repo rate will also contribute to a more expansionary monetary policy.
The expansionary monetary policy should also be viewed in light of the state of the economy, which is now entering a down-turn in a situation where unemployment is already high and has been so since 2009. It is therefore very important to avert a sizable increase in unemployment during the next few years; otherwise there could be lasting negative effects on both labour force participation and unemployment.
MONETARY POLICY GRADUALLY LESS EXPANSIONARY IN 2014-2016
The expansionary monetary policy will support the recovery of the economy beginning in the second half of 2012 (see Diagram 33). Higher resource utilization will help in the longer term to stabilize inflation around the inflation target. CPIF inflation will rise from 1.4 percent to just under 2.0 percent in 2016. As a consequence of the rising nominal repo rate, the real repo rate will also increase during the period 2014-2016, and monetary policy will gradually become less expansionary (see Diagram 33).
REPO RATE HIGH BY INTERNATIONAL COMPARISON
After the reductions in the first half of 2012, the repo rate is expected to be just under the ECB's policy interest rate until 2013 (see Diagram 34). The overnight lending rate on the interbank market in the euro area, however, was slightly above 0.5 percent in mid-December, which was less than the policy interest rate. The overnight rate is expected to remain at that level until the ECB raises interest rates again at the outset of 2014. At the same time, interest rates for households and firms in the euro area have risen during the autumn because of the high degree of uncertainty on financial markets and higher capital coverage requirements for banks (see the section "The Euro Area" in the chapter "Development of the International Economy"). The uncertainty on financial markets is expected to diminish during 2012.
The repo rate will be higher than the US policy interest rate (federal funds rate) through the first half of 2014. The relatively high level of the repo rate during this period is explained by the fact that resource utilization in the Swedish economy, despite deteriorating in 2012, will be higher than in the euro area and the US.
During the period 2014-2016 policy interest rates will be raised again in the US, the euro area and Sweden, and will rise toward more normal levels (see Diagram 34) as the recovery of their respective economies proceeds.
EXTREMELY LOW INTEREST RATES ON GOVERNMENT BONDS
The rate of interest on Swedish government bonds has decreased to exceptionally low levels during the autumn (see Diagram 35). The interest rate on 10-year government bonds has not been so low at any other time in the entire postwar period. A more pessimistic outlook for growth, particularly in OECD countries, and concern over the future course of the debt crisis in the euro have contributed to the decrease in Swedish long-term rates. The reason is that investors consider a Swedish government bond to be a relatively safe investment. The increased demand for Swedish government bonds has pushed up their price, resulting in a lower interest rate. With growing confidence on financial markets, interest rates on Swedish government bonds will be rising in the period ahead (see Diagram 35 and Table 7).
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KRONA TEMPORARILY WEAKENING
The krona strengthened rapidly through February 2011, but since then it has weakened to roughly), the same level as at the end of 2010, as measured by the KIX, the nominal effective index for the krona (see Diagram 36). (5) Worry on financial markets caused by the debt crisis in the euro area has contributed to the weakening of the krona. The krona depreciated during the same period by 5 percent against the dollar and by 4 percent against the euro (see Diagram 37). The assessment is that the weakening observed in 2011 is temporary and that the krona will resume strengthening during the forecast period.
In the longer term, the fundamental determining factors for the krona, and particularly an increasingly strong net foreign position, indicate that the krona will appreciate in real terms. In 2016 the krona will have strengthened in real terms by 2 percent compared to 2010. Since inflation is expected to be higher abroad than in Sweden, this will entail a nominal appreciation of the krona by 5 percent for the same period (see Table 8) (6).
In the Budget Bill for 2012, the Government proposes new unfunded measures totalling SEK 15 billion, to be implemented in 2012. The NIER's forecast is that in addition to these steps further measures totalling SEK 50 billion will be taken in 2013-2016. With these additional measures, cyclically adjusted net lending will be 1.5 percent of potential GDP in 2016, which means that actual net lending is expected to be in line with the surplus target. In a fact box at the end of this section, the principles for the NIER's fiscal policy forecasts are presented.
HAS THE SURPLUS TARGET BEEN MET SINCE 2000?
According to the surplus target, the net lending of the general government sector is to average 1 percent of GDP over an economic cycle. The NIER uses cyclically adjusted net lending to determine whether fiscal policy is consistent with the surplus target.
The surplus target should primarily be given a forward-looking interpretation to determine the margin for unfunded measures or, in the alternative, the need for cutting expenditure. It may be important, however, to analyze goal achievement in retrospect in order to identify any systematic deviations from the surplus target. If there are any systematic deviations, there may be a need for changes in the fiscal policy framework for the purpose of improving goal achievement.
The surplus target was introduced in 2000. During 2000-2010 actual net lending was equivalent to an average of 1.1 percent of actual GDP, and cyclically adjusted net lending was equivalent to the same percentage of potential GDP (see Table 9).
To obtain a better evaluation of whether the surplus target has been met, the analysis should be performed with the economic cycle as the starting point. (7) During the eight-year economic cycle of 2000-2007, net lending averaged 1.3 percent of GDP. Cyclically adjusted net lending averaged 0.7 percent of potential GDP, for the output gap was slightly positive, on average, in these years (see Diagram 38).
During the five-year economic cycle of 2005-2009, both actual and cyclically adjusted net lending were almost 2 percent, and the output gap averaged -0.6 percent. Net lending appears to be on the high side in relation to the surplus target during this period.
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FISCAL POLICY MEASURES IN 2012
Referring to the government debt crisis in Europe and the uncertainty in other countries, the Government has decided to postpone some reforms. One reform that has been postponed is an additional tax credit on earned income. In the Budget Bill for 2012, the Government proposes new unfunded measures totalling about SEK 15 billion for that year (see the special analysis "The Budget Bill for 2012"). In addition, the average local government tax rate will be raised in 2012. (8) The increase in local government taxes will generate about SEK 1 billion in additional tax revenue in 2012.
With the measures mentioned above, cyclically adjusted net lending will decrease as a share of potential GDP from 1.2 to 0.9 percent between 2011 and 2012. The stance of fiscal policy in 2012 will thus be somewhat expansionary (see the explanation in the margin).
MARGIN FOR UNFUNDED MEASURES IN 2013-2016
The starting point for the NIER's fiscal policy forecast is the surplus target in the Government's fiscal policy framework. It is assumed in the fiscal policy forecast that cyclically adjusted net lending will be 1.5 percent of potential GDP over an economic cycle so as to increase the probability that actual net lending will average 1 percent of GDP. In view of the low level of resource utilization in the economy, it is justfiable to let cyclically adjusted net lending temporarily drop below 1.5 percent. The opposite applies if resource utilization is high.
In the NIER's opinion, for public finances to be in line with the surplus target, further unfunded measures totalling SEK 50 billion will need to be taken in the period 2013-2016. The Government is not expected to follow an even more expansionary fiscal policy during the next few years for the purpose of speeding up the recover), of the Swedish economy. The forecast is therefore that there will be a gradual increase in cyclically adjusted net lending to 1.5 percent in 2016 (see Diagram 39).
This means that unfunded measures totalling SEK 11 billion are forecast for 2013. With this fiscal policy there will be no appreciable effect on cyclically adjusted net lending in 2013, an indication that the stance of fiscal policy will be neutral. The apportionment of the remaining margin of SEK 39 billion is shown in Table 10 below.
FISCAL POLICY FORECAST FOR 2013-2016 CONSISTENT WITH SURPLUS TARGET
With unfunded fiscal policy measures totalling SEK 50 billion in 2013-2016, cyclically adjusted net lending will be 1.5 percent of potential GDP in 2016, which is considered to be in line with the surplus target. Actual net lending will then be 1.1 percent of GDP (see Table 11 and Diagram 39). The fact that cyclically adjusted net lending will be less than 1.5 percent of GDP during the period 2013-2015 is justified by the low level of resource utilization (see Diagram 38).
There is no conflict of objectives between the surplus target and unfunded measures totalling SEK 50 billion in 2013-2016. Without any unfunded measures during this period, cyclically adjusted net lending would amount to 2.7 percent in 2016. Resource utilization would then be even lower (see the special analysis "How to Compare the Macro Forecasts of the NIER, the Government and the ESV?")
CONTENT OF FISCAL POLICY IN 2013-2016
The SEK 11 billion in unfunded measures forecast for 2013 has been allocated according to the NIER's assessment based on the Government's announcements of future measures and the stance of fiscal policy, as well as the assessment of the Swedish Association of Local Authorities and Regions (SALAR) that the average local government tax rate will increase in 2013 (see Table 12).
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The allocation of the remaining SEK 39 billion in fiscal policy measures in 2014-2016 follows the principles described in the fact box below: that general government consumption will increase according to demographically determined needs, that general government investment will increase at the same rate as GDP and that funds will be appropriated to prevent any deterioration in real terms of the system of transfer payments. After the appropriation to safeguard the value of the system in real terms, SEK 6 billion remain. This amount will be distributed to households in the form of additional transfer payments. This means a total of SEK 39 billion in higher expenditure in 2016 than with unchanged rules in 2014-2016 (see Table 13).
Principles for the NIER's Fiscal Policy Forecasts
The surplus target is the anchor. The starting point for the NIER's fiscal policy forecasts is the Government's fiscal policy Framework. (9) Among the factors on which the fiscal policy forecast is based, the surplus target is the anchor. However, the expenditure ceiling and the balanced budget requirement for local governments are also considered (see the explanation in the margin).
The NIER regards the surplus target as forward-looking; in other words, the forecast development of net lending is to be in line with the target. The NIER uses a measure of cyclically adjusted net lending as an indicator of whether the surplus target has been met.
Principle of Caution in Interpreting the Surplus Target.
The difference between actual and cyclically adjusted net lending depends, among other things, on the output gap. As measured by the NIER, the output gap has historically been negative. If this is the case in the future as well, the mean value of cyclically adjusted net lending will be higher than the mean value of actual net lending. The Government takes this risk into account in determining whether the target has been met. (10) For these reasons, the NIER assumes in its forecast that cyclically adjusted net lending will be 1.5 percent of potential GDP over an economic cycle in order to increase the probability that actual net lending will average 1 percent of GDP.
Need to Stimulate the Economy or Tighten Economic Policy.
Within the framework for the surplus target, the NIER also considers the need for fiscal policy stimuli or for a tighter fiscal policy based on whether resource utilization in the economy is lower or higher than normal. For example, a cyclical downturn (upturn) may mean that cyclically adjusted net lending should temporarily be less (greater) than 1.5 percent in order to bring the economy more rapidly into balance.
Difference between a Forecast and a Recommendation.
The NIER's fiscal policy forecast is governed to a large extent by proposals and announcements in the Budget Bill and in the Spring Fiscal Policy Bill. As for future years, for which information is not available in budget bills, the fiscal policy forecast is based on the NIER's assessment of how the fiscal policy framework will be applied. The NIER differentiates between the need for a forecast fiscal policy and for a recommended one. The distinction is applicable if the Government clearly announces that it intends to follow a fiscal policy that in the NIER's opinion deviates plainly from the policy called for by the surplus target and the level of resource utilization in the economy.
Allocation of the Content of Fiscal Policy.
For the years immediately to follow, the fiscal policy forecast is based on the Government's announcements of future measures and the stance of fiscal policy. As for subsequent years, for which information is not available--currently 2014 and thereafter--the basic guiding principle for the revenue forecast is that the implicit tax rates will be unchanged. In regard to expenditure, the basic principle is that funds will be appropriated so that 1) there is no deterioration in the system of transfer payments in real terms, 2) general government consumption follows demographically determined needs and 3) general government investment follows the development of GDP. If further adjustments are needed in order to meet the surplus target, this will be done through adjustment of transfer payments to households.
Fiscal Policy Concepts
The fiscal policy multiplier refers to the effect of fiscal policy variables on GDP, for example. Thus, if general government consumption increases or taxes are reduced by SEK 10 billion, and GDP as a result increases by SEK 7 billion, the multiplier is 0.7.
The term unfunded measures refers to fiscal policy decisions on increasing expenditure and/or reducing taxes, when such decisions are not funded by equally large decreases in expenditure and/or higher taxes in some other area. Thus, these measures in themselves constitute a deterioration in the net lending of the general government sector and, in addition, normally have a positive effect (multiplier) on GDP.
Cyclically adjusted net lending is a calculation of what the net lending of the general government sector would be with balanced resource utilization (a cyclically neutral state) and a normal composition of major tax bases. It is usually presented as a share of potential GDP.
The stance of fiscal policy in a particular year is derived from the change in cyclically adjusted net lending in relation to potential GDP. If cyclically adjusted net lending is decreasing as a share of potential GDP, this indicates that the stance of fiscal policy is expansionary in regard to resource utilization (potential GDP) in the economy. The reason may be that cyclically adjusted tax revenue (because of reduced tax rates, for example), is not keeping up with the increase in potential GDP, or that cyclically adjusted general government expenditure is rising faster than potential GDP, or a combination of both. Correspondingly, if cyclically adjusted net lending is increasing in proportion to potential GDP, this indicates that the stance of fiscal policy is contractionary. Finally, fiscal policy is neutral when cyclically adjusted net lending is unchanged in relation to potential GDP
In the area of fiscal policy, the term unchanged rules refers to the development of fiscal policy variables when no further fiscal policy decisions are taken by Parliament and the Government. As a practical matter, however, there are significant problems in drawing boundaries.
(2) A detailed description of the short-term forecast, for 2011-2013, can be found in the next five chapters.
(3) See the special analysis "Disorganized Resolution of the Euro Area Debt Crisis Far Too Costly" for a discussion on a disorganized resolution of the crisis. As noted there, such a development would entail great risks; this realization makes it more likely that an orderly resolution will be reached.
(4) The NIER concluded the calculations for this forecast on December 15, 2011. The Riksbank published its monetary policy decision on December 20, 2011.
(5) See Erlandsson, M. and A. Markowski, "The Effective Exchange Rate Index KIX--Theory and Practice," Working Paper no. 95, NIER, 2006.
(6) Inflation abroad here refers to the countries included in KIX. In a number of these countries, e.g., India, Brazil and China, inflation is relatively high.
(7) An economic cycle has been defined here as the period either between two troughs (2005-2009) or between two peaks (2000-2007) of the output gap.
(8) This increase refers to the net increase in the local government tax rate. The average local government tax for municipalities will be lowered in 2012, and the average county council district tax will be raised.
(9) See "Framework for Fiscal Policy", Government Letter 2010/11:79. The fiscal policy framework includes the surplus target, the ceiling on central government expenditure and the balanced budget requirement for local governments, which are also discussed in the chapter "Public Finances". See the brief explanation of these terms in the margin.
(10) See "Framework for Fiscal Policy", Government Letter 2010/11:79, p. 23.
Table 2 Selected International Indicators Percentage change 2012 2013 2014 2015 2016 2017 GDP, OECD (1) 1.8 1.4 2.2 2.7 2.6 2.2 GDP, emerging economies (1,2) 6.0 5.6 6.2 7.3 7.2 6.9 GDP, worldwide (1) 3.8 3.4 4.1 5.0 4.9 4.6 CPI, OECD 2.8 1.7 1.6 1.9 2.1 2.1 CPI, worldwide 4.9 3.8 3.4 3.4 3.4 3.4 (1) Constant prices. (2) Emerging economies here denote all non-OECD countries. Sources: IMF, OECD and NIER. Table 3 Potential Variables Percentage change 2011 2012 2013 2014 2015 2016 Potential GDP 1.7 2.1 2.3 2.3 2.3 2.2 Potential hours worked 0.6 0.5 0.5 0.5 0.4 0.3 of which potential employment 0.8 0.5 0.3 0.3 0.3 0.2 of which demographic contribution 0.4 0.3 0.2 0.2 0.1 0.1 Potential productivity 1.0 1.6 1.7 1.8 1.9 1.9 Potential productivity, business sector 1.7 1.9 2.0 2.1 2.3 2.3 Note: The calculations are calendar-adjusted. NIER's assessment of the potential productivity development is based, among other things, on the development of the capital stock and the total factor productivity (TFP) trend in the business sector. Sources: Statistics Sweden and NIER. Table 4 Supply and Demand Percentage change, constant prices, calendar-adjusted values 2011 2012 2013 2014 2015 2016 Household consumption expenditure 1.4 1.1 3.7 3.6 3.6 3.3 General government consumption expenditure 1.7 0.6 0.7 0.7 0.7 0.7 Gross fixed-capital 6.1 3.0 6.2 7.3 6.4 5.2 formation Final domestic demand 2.4 1.4 3.3 3.5 3.4 3.1 Stock building (1) 0.7 -0.7 0.0 0.0 0.0 0.0 Total domestic demand 3.1 0.5 3.3 3.6 3.4 3.0 Exports 8.2 1.0 5.0 6.7 6.7 5.9 Total demand 4.9 0.7 3.9 4.7 4.6 4.1 Imports 5.7 0.2 6.0 8.1 8.1 7.1 Net exports (1) 1.6 0.5 -0.1 -0.1 -0.2 -0.2 GDP 4.5 1.0 3.0 3.2 3.0 2.6 (1) Change in percent of previous year's GDP. Sources: Statistics Sweden and NIER. Table 5 Labour Market Percentage change 2011 2012 2013 2014 2015 2016 Number of hours worked (1) 1.3 0.0 0.8 1.1 1.0 0.9 Labour force 1.1 0.4 0.5 0.5 0.4 0.2 Number of employed 2.1 0.1 0.3 0.7 0.9 0.9 Unemployment (2) 7.5 7.8 7.9 7.7 7.2 6.5 (1) Calendar-adjusted. (2) Percent of labour force. Sources: Statistics Sweden and NIER. Table 6 Wages and Prices Percentage change 2011 2012 2013 2014 2015 2016 Hourly earnings (1) 2.6 3.2 3.0 3.2 3.4 3.7 Hourly earnings, business sector (1) 2.8 3.3 2.9 3.2 3.4 3.7 CPI 3.0 1.1 1.5 1.9 2.3 2.4 CPIF 1.4 1.2 1.5 1.4 1.6 1.9 (1) According to Short-Term Wage and Salary Statistics. Sources: Statistics Sweden and NIER. Table 7 Interest Rates Percent 2011 2012 2013 2014 2015 2016 At year-end Repo rate 1.75 0.75 1.25 1.75 3.00 3.75 Annual average Repo rate 1.7 1.0 0.9 1.5 2.3 3.3 5-year government bond 2.3 1.7 2.7 3.5 4.0 4.3 10-year government bond 2.6 2.0 2.7 3.5 4.3 4.5 Sources: The Riksbank and NIER. Table 8 Exchange Rate Indices for the Swedish Krona Annual averages 2011 2012 2013 2014 2015 2016 KIX 107.7 107.9 105.9 103.9 102.8 102.3 TCW index 122.4 123.3 120.5 117.8 116.3 115.6 Sources: The Riksbank and NIER. Table 9 General Government Net Lending, Backward-Looking Averages Percent of GDP and percent of potential GDP, respectively 2000-2010 2000-2007 2005-2009 Peak-to- Trough-to- peak trough Net lending 1.1 1.3 1.8 Cyclically adjusted net lending 1.1 0.7 1.9 Output gap -0.4 0.8 -0.6 Sources: Statistics Sweden and NIER. Table 10 Unfunded Measures Forecast for 2013-2016 Billions of SEK, change from previous year 2013- 2013 2014 2015 2016 2016 Unfunded measures forecast 11 11 13 15 50 Source: NIER. Table 11 General Government Net Lending and Cyclically Adjusted Net Lending Given Different Fiscal Policy Forecasts Percent of potential GDP 2011 2012 2013 2014 2015 2016 Net lending 0.1 -0.4 -0.2 0.1 0.6 1.1 Net lending excluding additional measures 2013-2016 0.1 -0.4 0.1 0.5 1.1 1.9 Cyclically adjusted net lending 1.2 0.9 1.0 1.0 1.2 1.5 Cyclically adjusted net lending excluding additional measures 2013-2016 1.2 0.9 1.3 1.6 2.1 2.7 Source: NIER. Table 12 Assumed Allocation of Unfunded Measures Forecast by NIER for 2013 Billions of SEK, change from previous year Household direct taxes (1) -3 Revenue -3 General government consumption 3 General government gross fixed-capital formation 3 Transfers to households 2 Expenditure 8 Total -11 (1) Including increased local government taxes. Note: The table shows the direct effect on net lending of a measure with no consideration given to the possibility that the measure may give rise to changes in behaviour, which in turn may lead to changes in tax revenue and transfer payments. Source: NIER. Table 13 Unfunded Measures 2014-2016 Billions of SEK, change from previous year 2014 2015 2016 2014- 2016 Total effect on cyclically adjusted net lending -11 -13 -15 -39 Of which preserving the real value of general government expenditure (1) 9 12 12 33 Preserving the real value of general government expenditure means that funds are appropriated so that general government consumption increases at the same rate as demographically determined needs, that general government investment increases at the same rate as GDP and that deterioration of the real value of transfers is prevented. Source: NIER.
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|Publication:||The Swedish Economy|
|Date:||Dec 1, 2011|
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