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Household finances.

6.1 Summary

Private consumption rose considerably more rapidly than household income in the second half of the 1980s. Household saving, already historically low at the beginning of this period, fell sharply from 1986 onwards to -5 per cent in 1988. This is usually attributed to the increased opportunities that credit market deregulation provided for borrowing with the rising value of shares and real estate as security. There was probably also an accumulated need to add to the stock of capital goods, cars, for instance. Increased purchasing of capital goods is not necessarily perceived as a drain on the net assets of individual households but in the National Accounts it is registered as decreased saving.

Given such explanations, a relatively prompt return to "normal" saving levels should be expected when the adjustment has been completed. The savings ratio does in fact appear to have risen strongly in 1989 and 1990. The consumption propensity of households may have been subdued to some extent by the temporary mandatory saving system.

A number of factors suggest that household saving will go on rising in the coming years. Altered tax rules for capital income, together with high real rates of interest, make liabilities costly and saving profitable, particularly when inflation is as low as we foresee. In 1991 and 1992 private consumption is expected to rise by a total of 2 per cent, while real income is calculated to grow more than 5 per cent (Table 6.1). The savings ratio would then reach 3 per cent, the highest level for a decade.

6.2 Income

Wage income growth in 1991 is considerably weaker than in earlier years (Table 6.1). The hourly wage rise has been subdued and the employment component is negative. The drop in income as a result of decreased employment is partly offset by transfers connected with the situation in the labour market.

In 1992 wage bill growth is calculated to pick up again but this includes the sick wage that, as of 1992, employers will pay directly for the first 14 days of an illness. Excluding the sick wage component, which is estimated to total about 11bn kronor, wage bill growth is unchanged from 1991. The hourly wage rise is assumed to go on slackening but the employment component should be somewhat less negative. Markedly reduced inflation gives an increase in the real wage bill excluding sick wages.

Pension income is pegged to the base amount, which for 1991 is 32,200 kronor, an increase of more than 8 per cent from 1990. The implicit price index for private consumption is rising more than 10 per cent. With the reinforcement of the pension increment and the housing supplement for basic pensioners, as well as the ongoing growth of supplementary pensions, household income from statutory pensions is still rising 2 per cent in real terms (Table 6.2).

For 1992 the base amount is estimated to be 33,500 kronor, an increase of 4 per cent from 1991. Prices are also estimated to rise at roughly this rate but a further strong increase in the volume of supplementary pensions means that total pension income will grow 2.5 per cent in real terms.

The level of sickness benefits was lowered as of March this year from 90 to 65 per cent for the first three days of an illness, followed by 80 per cent up to ninety days. The sickness rate, moreover, has fallen back from 22 to 21 days per insured person. Total disbursements to households are therefore estimated to be more than 5bn kronor lower than would have been the case with an unchanged level of benefits and absenteeism for sickness; the effect of decreased benefits accounts for almost 4bn of this. In 1992 the dramatic reduction of health insurance disbursements mainly reflects the introduction of a sick wage; households obtain the corresponding income via the wage bill.

Public income transfers to households on account of the labour market situation are calculated to rise more than 10bn kronor in 1991 on account of the drop in labour demand. The increase is assumed to continue at a slower rate in 1992.

Income tax is falling sharply in 1991 as a result of the tax reform. The average tax level is reduced by more than 3.5 percentage points relative to household taxable income. With an unchanged tax ratio, revenue from income tax would have been more than 30bn kronor higher. The cuts are being financed largely with increased indirect taxes; this raises consumer prices and accordingly reduces real post-tax income. To some extent, however, the cuts are being financed in ways that have no immediate impact for households. This applies, for instance, to the yield tax on individual pension saving; in accordance with National Accounts definitions, revenue from this tax, which is estimated at just over 2bn kronor, is booked in Table 6.1 as a direct tax but can hardly be said to have a direct effect on household purchasing power. The income tax cut may accordingly be perceived in the short run as larger than is actually the case.

In 1992 the tax reform continues to affect income directly. The income threshold for state tax is uprated by the 1991 rate of inflation plus 2 percentage points. This amounts in practice to a further reduction of the average income tax levy and adds 3bn to 4bn kronor to disposable income.

6.3 Consumer prices

The consumer price rise in 1990 was the largest since the early 1980s but it should be added that the rate was greatly accentuated by the tax reform. The price rise during the year totalled 10.7 per cent, of which 2.8 points is estimated to have come directly from the tax reform. The corresponding increase in the net price index was 7.3 per cent.

The major contributions to the price rise came in the first half-year. In January, for instance, VAT was increased to the full rate for restaurant and hotel services, refuse collection and so on as part of the tax reform and petrol tax also went up. The broadening of VAT bases continued in March with the inclusion of energy, accompanied by a sharp increase in interest rates that boosted dwelling costs. In July there was a general increase in the VAT rate from 19 to 20 per cent.

In the autumn, oil prices rose sharply in connection with the crisis in Kuwait and increased interest rates pushed dwelling costs up again in November and December. But as the overall increase did not differ appreciably from the same period a year earlier, the 12-month change remained constant at a high level, around 11 per cent. The development of consumer prices since 1980 is presented in Diagram 6.1 in terms of 12-month changes.

The price forecasts for 1991 and 1992 incorporate only such changes to indirect taxes and other economic policy measures as have already been approved. We assume that VAT is lowered back to 19 per cent as of 1992 and that the present system with mortgage interest subsidies begins to be replaced by a system of loans for interest costs.

Prices in 1991

The consumer price rise during the year is expected to stop at 7.5 per cent. The rise in the first eight months was 6.3 per cent and the increases in the rest of the year are expected to be very moderate. As in 1990, the tax reform contributed several percentage points to the increase in the early part of the year. In February, the 12-month change accelerated temporarily by more than two percentage points because rent increases were introduced later than usual. From April to August the price level even tended to fall, which gave diminishing 12-month changes during the spring and summer. Some minor price increases are foreseen in the autumn and winter but the 12-month changes will go on falling.

The calculations assume that labour costs in the business sector rise 7.5 per cent and that profit margins are lowered. Rents are assumed to go up 11 per cent excluding effects of the tax reform. Following the marked decline of interest rates in the spring and early summer, little change in mortgage rates is foreseen in the rest of the year. Import prices fell in the first half-year but an increase is assumed in the rest of 1991, giving only a slightly negative annual effect.

The consumer price rise 1990-91 is calculated to be 1.7 points higher than the increase during this year. This is largely because the effects of the tax reform were largely concentrated to the first two months. The contributions from the various components are given in Table 6.3.

Prices in 1992

The calculations for 1992 suggest that prices will rise appreciably less than in the preceding years. The main differences with 1991 and 1990 are that the price rise is no longer accentuated by the tax reform, while the lowering of VAT holds prices back. The 12-month rate will drop immediately to about 2.5 per cent in January and February, followed by an acceleration of one point in the summer and a virtually unchanged level in the rest of the year.

Mortgage interest rates are assumed to be unchanged during the year. Rent increases and the rise of labour costs are both likely to be lower than the year before, 7 and 5 per cent, respectively. Only import prices are assumed to rise more strongly than in the preceding years but would still not increase more rapidly than prices in general.

Implicit price index

In the longer run the consumer price index and the implicit price index follow a similar path but the differences in a particular year may be considerable. The calculations for these two indexes differ mainly in the measurement of housing costs and in the system of weights for the various components.

In 1990 the IPI rose more than one point less than the CPI, partly because car sales fell sharply; the IPI catches this via shifts in the weights whereas the CPI does not because its weights are not changed during the year. In 1991 the IPI is calculated to rise faster than the CPI because costs for rented dwellings are increasing considerably more than for own homes; instead of measuring the latter item separately, the IPI assumes that own home costs follow rents. For 1992 the CPI and IPI forecasts differ only slightly and the reason lies mainly in the measurement of housing costs.

Base amount

The base amount is adjusted annually to reflect the consumer price rise in the preceding year (October -- October). For 1991 and 1992, moreover, the level is being reduced by an estimated effect of the price impact of the tax reform; this effect has been fixed at 2.9 percentage points for 1991 and is estimated to be 3.2 points for 1992. See also Table 6.3.

6.4 Private consumption

Private consumption was very weak in 1990 (Table 6.4) and the decline was particularly marked in the final quarter. The National Accounts indicate that the level of consumption at the end of the year was almost 3 per cent down on the admittedly very high level a year earlier. The Gulf crisis, the stabilization package and uncertainty about effects of the tax reform probably contributed to cautious consumption. Inflationary expectations were still high (Diagram 6.2).

An important item behind the fall in consumption was a drop in car sales, which display the characteristics of an investment cycle. Having reached a high in the second quarter of 1988, car sales began to fall in 1989 and this tendency accelerated in 1990. By the end of the year, car consumption at 1985 prices had fallen to less than 50 per cent of the peak in 1988.

Another major factor behind the weak consumption in 1990 was the increased taxation of services as part of the tax reform. This probably affected the pattern of consumption by residents as well as non-residents in Sweden. Hotel and restaurant turnover in particular fell sharply during the year, partly because there were fewer foreign tourists.

In the first two quarters of this year consumption tended to pick up from the low level at the end of 1990. Car sales seem to have reached a low. Seasonally adjusted, the National Accounts indicate that car consumption even rose in the early part of this year.

The index of retail turnover from Statistics Sweden shows an increase of 1.5 per cent between the first halves of 1990 and 1991. Infrequent purchases rose almost 4 per cent, a very strong increase from the high level in the first half of 1990. The drop in the consumption of services seems to have slackened, though the annual rate for some components is still very weak. The winter and spring were colder than a year earlier, which contributed to increased heating costs. The combined result indicates that private consumption in the first half of 1991 was somewhat lower than a year earlier. Allowing for seasonal variations, this implies that the level did rise from the second half of 1990.

There are no signs at present that consumption will turn downwards again in the second half of this year. On the contrary, households are considerably more optimistic about the future than at the end of 1990 (Diagram 6.2). This applies in the first place to expectations about their own economic situation in the coming year. The very low level to which inflationary expectations have been adjusted is also notable. We forecast a further increase in private consumption from the first half; as the level in the second half of 1990 was low, this

implies a relatively strong annual rate in the current half-year. The annual increase in consumption from 1990 would then amount to just over half of one per cent.

Real disposable income is calculated to rise almost 3 per cent from 1990 to 1991 and in this perspective the forecast increase in consumption may seem on the low side. One argument against a stronger increase in consumption expenditure is the high real rate of interest. Moreover, the difficulties in the financial sector may tend to make lending to households more cautious. Thus our forecast for 1991 implies a further substantial increase in household saving.

In 1992 private consumption is calculated to rise more than 1 per cent. Income is rising 1 point more than this in real terms and purchasing power will be strengthened in addition by the repayment of mandatory savings. About 3bn kronor that had been saved in 1989 was repaid in the spring of 1991. The 1992 repayment totals about 8bn kronor and adds 0.6 per cent to purchasing power. Even if part of this amount is absorbed by efforts to stimulate saving and by the possibility of offsetting tax arrears, there will probably be some tendency to boost consumption. Our forecast implies a further increase next year in the savings ratio to just over 3 per cent, the highest level since 1981. [Tabular Data 6.1 to 6.4 Omitted] [Diagrams 6.1 and 6.2 Omitted]
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Title Annotation:Sweden
Publication:The Swedish Economy
Date:Sep 22, 1991
Previous Article:Labour market.
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