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Public sector.

9.1 Introduction

A number of far-reaching changes have occurred in economic policy in the past three years. At the same time the transition from high to low inflation generates major strains of a temporary nature, not least for public finance.

The tax reform in 1990 and 1991 is an important step in this process. Two main components are lower income tax and a broader base for VAT. The reform also has a positive net effect on the base for local tax. To neutralize this effect and compensate the central government for the circumstance that as of 1991 local governments are not burdened by VAT, the subsidy to compensate local governments for the abolition of the guaranteed property tax was terminated. A settlement tax was also introduced as a deduction from central government grants to the local government sector.

As of 1993 local tax funds will disbursed from the central government in the year in which the tax is collected instead of after the present lag of two years. Transitional rules concerning the final settlement will apply in 1993 and 1994 to achieve a neutral outcome between the central government and local governments.

The system of central government grants to local governments is also being reorganized. The subsidy for equalizing local tax rates and many of the specific subsidies are being replaced by a general grant, designed as a supplement to local tax revenue. Allowance is being made for the simultaneous termination of the settlement tax and the tax equalization charges, as well as for effects of the reform whereby, as of 1992, responsibility for services and care for the elderly and disabled was transferred from county councils to the municipalities. For reasons to do with the economic situation, however, central government grants to the local government sector are to be reduced in 1993 by a net figure of 7.5bn kronor.

In September this year, the Government and the Social Democrat opposition agreed on measures for eliminating the structural budget deficit and strengthening competitiveness. Payroll charges are to be cut by 4.3 percentage points as of 1993. Other measures represent a continuation of changes initiated earlier. They include further amendments to rules for housing subsidies and health insurance, for instance.

Interest subsidies in respect of new housing for which construction begins after the turn of 1992 will cover a successively diminishing share of interest costs. This descending scale, moreover, will start at a lower level for each new construction year. The guaranteed interest rate for older housing is to be increased as of 1993 along with the termination of the grant for new construction and reconstruction that was introduced in 1991 to compensate for increased VAT. The measures in September amount to a further reduction of housing support by 3bn kronor from 1994.

As of 1992 employers are responsible for paying a sick wage for the first 14 days of an illness and they have been compensated with a reduction of the health insurance charge by 2.3 percentage points. The September packages includes the introduction as of 1993 of an initial qualifying (no-benefit) day in health insurance, accompanied by a reduced level of sickness benefits, as follows: 75 per cent for days 2-3, 90 per cent for days 4-89, 80 per cent for days 90-365, and 70 per cent thereafter. An individual contribution is also to be introduced in health insurance up to 7.5 base amounts. The individual contribution to unemployment insurance has been doubled this year.

Pensions will continue to be indexed to the base amount but disbursements are to be reduced 2 per cent as of 1993. To neutralize this effect for the pensioners who are worst off, the pension increment and municipal housing allowances are to be adjusted for this group. The general retirement age is to be increased by one year (in stages of a quarter annually, starting with 1994) and the starting date for pensions is to be the end of the quarter in which retirement age is reached.

Tax payments in 1993 are to be brought forward by including secondary income in the preliminary tax levy and reorganizing the collection of B-tax (on income from self-employment). The standard deduction from income from employment is to be replaced by a limited right to deductions as of the 1994 assessment year. In the September packages the tax cut on capital income (and deficit deductions) from 30 to 25 per cent has been postponed one year to 1994 and wealth tax will continue to be levied in 1994. Moreover, the protection for real earnings in the tax scale (the upward adjustment of the tax threshold by 2 per cent more than inflation) will not be implemented in 1993 and 1994. The reduction of payroll charges is to be financed in part by lowering the basic deduction in tax returns by 2,500 kronor.

The real-estate tax on commercial property is to be abolished in 1993, as are the specific taxes on a number of products such as chocolate, soft drinks and perfume. The taxation of energy is also to be shifted from industry to other consumers, including households. In the September packages, central government revenue was reinforced by increasing the taxes on tobacco, petrol and some other goods as of 1993. The reduction of payroll charges is also being financed by keeping the general rate of VAT at 25 per cent, instead of lowering it as of 1993, and by raising VAT on food, domestic travel and restaurant and hotel services from 18 to 21 per cent.

9.2 Central government and social security

9.2.1 Central government

The volume of central government consumption is calculated to rise 1.7 per cent this year and then fall more than 1 and 2 per cent in 1993 and 1994, respectively. Public sector employment is falling some tenths of one per cent this year and by about 1 1/2 per cent in each of the next two years. Central government investment continues to rise this year and next, partly because efforts for infrastructure have been brought forward.

Transfers to households are expected to rise 14bn kronor this year, mainly on account of the weak labour market. The grant for labour market training is thus going up more than 4bn kronor. Pension expenditure is also rising about 4bn kronor as a consequence of the one-year lag and the rapid rate at which prices were still rising in 1991. Disbursements of study grants and wage guarantees are each calculated to rise approximately one billion kronor but the grant to study circles has been terminated and the central government share of the housing allowance has been transferred to the municipalities.

In 1993 the growth of transfers to households will slacken but still be high, amounting to about 6bn kronor mainly as a result of increased grants for labour market training, and then be unchanged in principle in 1994.

Transfers to firms are calculated to go on rising this year and then fall by degrees. Interest subsidies for housing are still rising in 1992 as a consequence of high interest rates together with the volume and cost of housing produced with state loans. With the new rules, disbursements are expected to fall somewhat in 1993 and considerably more in 1994. Grants for measures of labour market policy that are channelled through firms, relief work in particular, are expected to rise, particularly in 1993.

The Working Life Fund, which was used to ease the overheating in the economy in 1989-90, is now being deployed to stimulate the economy in the recession. Grants are to be provided for various rehabilitation efforts and measures for job improvement by employers. The Government has instructed the Fund to step up the provision of grants and pay particular attention to opportunities for small enterprises to use these resources.

The health insurance grant is reduced by the introduction of a sick wage as of 1992 as well as by a qualifying day, lower levels of compensation and decreased rehabilitation benefits as of 1993. As of 1992, moreover, the government grants that previously financed compensation to the health authorities are terminated by the reform that transfers services and care for the elderly and disabled from county councils to municipalities. With the large disbursements from unemployment insurance funds, we estimate that central government grants for this purpose will total almost 11bn kronor this year and the figure will rise strongly in the next two years as unemployment grows.

Interest expenditure is determined by the size of the national debt and current rates of interest. In the forecast period the central government borrowing requirement will generate a successive increase in interest expenditure.

Central government revenue from direct taxes is falling sharply this year; declining employment and low wage increases are weakening tax payments by households, while subdued profits are reducing revenue from corporate tax. This is accompanied by a substantial increase in disbursements of local tax funds because these are determined by the tax base two years earlier, when wages were rising sharply. Direct tax revenue will rise again in 1993 and 1994, largely as a result of measures in the "crisis" packages.

Revenue from indirect taxes is also falling substantially in 1992, followed by increases in the next two years. This year's decline comes mainly from VAT and is partly explained by reduced rates but since the spring of 1991 revenue from VAT has also lagged behind the taxable consumption and current tax rates. The loss of revenue has grown continuously and reached around 10bn kronor in fiscal 1991/92.

A minor explanation for this lies in changes to the VAT system as of 1991 in that firms with a small annual turnover (maximum 200,000 kronor) declare VAT in their income tax returns; in the central government accounts this VAT revenue is accordingly assigned instead to income tax. Preliminary assessments of income tax returns for 1991 put the declared total for VAT at 1.4bn kronor. This misleading registration does not represent a loss to the central government. A loss has been incurred, on the other hand, in that construction firms brought forward invoices to the close of 1990 before VAT was levied at the full rate on construction investment as of 1991. The extent of this practice is not known but it may have deprived the central government of one or more billion kronor, primarily in fiscal 1991/92.

It seems, however, that the large discrepancy between estimated and actual revenue from VAT is mainly connected with the weakening of economic activity. Cases involving the recovery of VAT revenue have increased substantially at the enforcement service and losses in connection with bankruptcy have no doubt increased sharply.

The decreased revenue from indirect taxes in 1991 also has to do with the termination of the turnover tax on securities as of December 1991 as well as lower wage taxes. The tax share of the labour market charge this year is half the level in 1991, while in 1993 and 1994 it is expected to be zero. This charge covers disbursements for unemployment insurance in the first place and it is only the residual amount that is booked as an indirect tax. In the current situation in the labour market, all of the revenue from the labour market charge will probably be needed to cover disbursements for unemployment benefits in the next two years.

Other revenue is calculated to rise sharply this year, partly as a result of large one-off contributions from the public enterprises.

The development of expenditure and revenue outlined above results in large financial deficits for the central government in the forecast period (Table 9.1). From 1990 to 1991 there was a marked swing from a surplus of almost 15bn kronor to a deficit of not quite 63bn. In 1992 the deficit is calculated to more than double to 137bn kronor, followed by a further slight increase in 1993 and a reduction of about 13bn in 1994.
Table 9.1 Central government revenue and expenditure
Excl. companies and public enterprises
Billion SEK, current prices
 1990 1991 1992 1993 1994
Revenue 458.0 420.2 378.6 403.1 420.3
Taxes 348.2 304.1 251.0 303.3 318.7
 Direct 111.1 49.9 19.0 63.6 74.9
 Indirect 237.1 254.2 232.0 239.7 243.8
Social security
contributions 54.9 57.5 57.1 31.7 33.0
Interest income 24.9 28.5 26.4 26.7 27.2
Other 30.0 30.1 44.1 41.4 41.4
Expenditure 443.1 482.9 515.4 542.9 547.2
Transfers 329.5 365.6 396.9 424.8 428.6
 Households 117.1 138.6 153.0 159.1 160.0
 Firms 46.6 57.3 65.3 60.9 44.0
 Social security
 sector 20.5 17.8 26.6 20.1 17.5
 Local governments 67.6 65.8 60.6 70.6 77.8
 activities 9.7 9.7 10.5 10.1 10.1
 expenditure 68.0 76.4 80.9 104.0 119.2
Consumption 100.0 104.0 101.1 99.1 99.8
Investment 13.6 13.3 17.4 19.0 18.8
 Gross fixed
 investment 13.5 13.1 16.7 18.5 18.6
 Stockbuilding -0.2 0.3 0.3 0.0 0.0
 Land and real
 estate, net 0.3 -0.1 0.4 0.4 0.2
Financial saving 14.9 -62.7 -136.8 -139.8 -126.9
Note. Due to rounding, the items do not necessarily sum to their totals.
Sources: National Social Insurance Board, National debt Office, National Audit B
Statistics Sweden and the Institute.

9.2.2 Social security sector

Financial saving in the social security sector (Table 9.2) is calculated to total almost 34bn kronor this year, which roughly corresponds to capital growth in the National Pension Fund. Some fall in the level of financial saving is foreseen in the next two years.
Table 9.2 Social security sector revenue and expenditure
Billion SEK, current prices
 1990 1991 1992 1993 1994
Revenue 212.6 227.4 224.6 222.9 225.3
Taxes 5.1 3.3 0.9 0.0 0.0
 Direct 3.9 3.3 0.9 0.0 0.0
 Indirect 1.2 0.0 0.0 0.0 0.0
Central government
grants 20.5 17.8 26.6 20.1 17.5
Social security
contributions 144.7 159.7 148.2 152.5 157.2
Interest income 41.0 45.0 48.0 49.2 49.4
Other 1.3 1.5 0.9 1.1 1.2
Expenditure 166.2 184.0 190.8 191.1 196.9
Transfers 161.1 178.3 184.8 185.3 191.1
 Households 134.5 149.6 157.1 164.4 174.5
 Firms 11.3 12.8 14.5 13.0 13.0
 Central government 0.4 0.4 0.4 0.5 0.5
 Social security
 sector 0.2 0.3 0.3 0.3 0.3
 Local governments 14.4 15.1 12.3 7.0 2.7
 Interest expenditure 0.2 0.2 0.2 0.2 0.2
Consumption 4.9 5.1 5.4 5.2 5.1
Investment 0.2 0.6 0.6 0.6 0.6
Financial saving 46.4 43.4 33.9 31.9 28.4
Note. Direct tax consists of the profit-sharing tax, indirect tax of payroll cha
rges. Due to
rounding, the items do not necessarily sum to their totals.
Sources: National Social Insurance Board, National Audit Bureau, Statistics Swed
en and
the Institute.

National supplementary pensions, known as ATP, are financed with fees and the return on the Pension Fund assets. Since 1982 pension disbursements have exceeded the income from fees, making it necessary to finance a part with the return on the Fund. As of 1990, however, the supplementary pension charge was raised from 11 to 13 per cent of the income base and disbursements were balanced from this source. In 1991, however, pension disbursements were already exceeding income from fees once more even though the base had been somewhat enlarged by the tax reform. In 1992 pension disbursements are expected to total more than 96bn kronor and to grow somewhat faster than the fee base in the next two years, which is why financial saving in the social security sector win fall in those years.

Health insurance is financed with payroll charges and central government grants. Sickness benefit payments fell last year because their level was lowered as of March and the sickness rate decreased. In 1992 the introduction of a sick wage has almost halved health insurance payments and the introduction of a qualifying day next year will lead to a further far. Besides reflecting lower health insurance costs, the marked reduction of the central government grant in the next two years comes from decreased grants to local authorities.

Unemployment insurance benefits are financed with payroll contributions, which are transferred as a central government grant to the unemployment funds, plus a fee from members. With rising unemployment, disbursements to households are estimated to double this year to almost 25bn kronor and rise to 32bn and 36bn in 1993 and 1994, respectively.

9.3 Local governments(1)

The financial situation in the local government sector was weak in the second half of the 1980s and the early '90s, when the annual deficit fluctuated between 4bn and 8bn kronor. With comparatively high investment activity, however, gross saving was consistently positive. In 1991 the financial situation improved and the deficit stopped at less than 2bn kronor.

Total local government revenue rose more than 10 per cent in 1991 and another strong increase is expected this year. Revenue is then calculated to level out in 1993 and 1994.

Taxes yield more than 60 per cent of revenue and this item is determined by the tax base two years earlier. A local tax freeze is in force from 1991 to 1993 and the strong growth of tax revenue in 1991 and 1992 comes from the comparatively rapid increase in the wage bill in 1989 and 1990. The system for the disbursement of local tax funds is to be changed as of 1993 so that the revenue is available in the year in which it is collected. The level of revenue is expected to fall 7 and 2 per cent in the next two years.

Central government and social security subsidies made up just over 22 per cent of local government income in 1991. The central government subsidies are general or specific, with a reduction known as the settlement tax. One of the general subsidies is for tax equalization, constructed to smooth differences between local governments as regards tax potential and costs occasioned by structural factors such as the composition of the population. The subsidy is based on a guaranteed tax potential for county councils and municipalities, allowing among other things for the age structure of the population. It is financed in part by a tax equalization charge on local governments with a high tax potential (in Table 9.3 this charge has been deducted from the subsidy). Tbe specific subsidies make up the major share of central government contributions and the largest are for schools and child care.
Table 9.3 Local government revenue and expenditure
Excl. business companies
Billion SEK, current prices
 1990 1991 1992 1993 1994
Revenue 328.4 361.5 396.9 385.8 386.2
Taxes 204.9 232.5 269.5 251.6 246.8
 Direct 204.0 231.6 268.5 250.6 245.8
 Indirect 0.9 0.9 1.0 1.0 1.0
Central government
grants 67.6 65.8 60.7 70.6 77.8
Social security
subsidies 14.4 15.1 12.3 7.0 2.7
Interest income 4.8 5.9 6.4 6.8 6.9
Other 36.6 42.1 48.0 49.8 52.0
Expenditure 336.8 363.3 379.4 376.1 388.1
Transfers 56.8 68.0 76.4 80.1 84.4
 Households 25.5 30.9 34.4 36.9 39.9
 Firms 13.8 15.1 15.4 15.8 16.0
 Central government 5.7 7.1 7.9 8.7 9.5
 Local government 4.6 5.4 9.6 9.9 10.2
 Interest expenditure 7.1 9.4 9.1 8.8 8.8
Consumption 261.6 272.9 277.6 272.7 280.3
Investment 18.5 22.4 25.4 23.3 23.4
 Gross fixed
 investment 27.4 28.3 26.4 24.3 24.4
 Land and real
 estate, net -8.9 -5.9 1.0 -1.0 -1.0
Financial saving -8.5 -1.8 17.5 9.7 -1.9
Sources: National Audit Bureau, Statistics Sweden and the Institute.

The settlement tax was introduced in 1991 to neutralize effects of the tax reform on the local government economy. It is computed on the local tax base and reduces the total amount of central government subsidies. The figure in 1991 was 6.5bn kronor and for 1992 it is estimated to exceed 15.5bn, which helps to explain the fall in the total level of subsidies this year. In addition, the general subsidies are being reduced this year by 3bn kronor as a result of the temporary increase in the tax equalization charge. The specific subsidies are rising, however, for instance for job creation measures and compensation for the reception of refugees.

The subsidies to equalize local tax rates and compensate for the abolition of local corporate tax have been terminated as of 1993. A large proportion of the specific subsidies are to be replaced, moreover, by a new general subsidy(1). A reduced tax equalization charge on county councils is to be retained in 1993; together with the abolition of the settlement tax, this means that total subsidies are expected to rise about 5bn kronor next year. In 1994 the tax equalization charge will also be abolished for county councils but the overall level of subsidies is still expected to go on rising.

Local government expenditure is largely for consumption, for which wage costs are the major item. In 1991 the volume of consumption rose 2.3 per cent but in this as well as in each of the next two years the level is calculated to fall almost half of one per cent.

In the first half of 1992 the available statistics indicate that the number of local government employees was not more than 11,000 lower than a year earlier but as the number employed in municipal relief work and induction places (which are included in local government employment) rose 13,000, the number regularly employed fell 24,000 or more than 2 per cent. At the same time about 9,000 local government employees received dismissal notices and unemployment in this sector also rose sharply. In the second half of 1992 persons aged 16-24 years in municipal relief work and places for youth will be transferred to the youth training scheme, which is classified as training outside the labour force. This shows up as a reduction of registered employment. From 1991 to 1992 the number employed is expected to fall 17,000, or 24,000 excluding relief work. Average hours worked rose sharply in the first half of this year, partly because stand-ins and persons employed by the hour were the first to be affected by personnel cuts. The annual volume of hours is estimated to fall 1/2 per cent in 1992. In 1993 the number of local government employees is expected to be almost 8,000 fewer than this year, which assumes an increase in relief work for the over-25s; regular employment is expected to fall as much as 22,000. With a further increase in average hours worked, the volume of hours would fall another 1/2 per cent. In 1994 local government employment is expected to go on falling, with no further expansion of relief work. With some increase in average hours worked, the total volume of hours would continue to fall 1/2 per cent.

Local government purchases of goods and services rose in 1991, partly because certain purchases had been postponed as compensation for VAT could be obtained as of that year. Assuming that this was a temporary increase, in this and each of the next two years consumption is estimated to fall half of one per cent. In this period local governments are also likely to levy charges on an extended range of activities; revenue from these charges is deducted from consumption here.

Local government consumption at current prices is expected to rise about two per cent this year, followed by some fall in 1993 and a renewed increase in 1994. Hourly wage costs are estimated to rise 3.5 per cent in 1992 and by 3.0 and 4.0 per cent in the next two years. As employment is falling, the wage bill paid out will rise more slowly than this.

Local government finance is then expected to show a marked improvement in 1992 to a surplus of more than 17bn kronor, largely due to the construction of the tax collection system. In 1993 the surplus is calculated to be almost halved, followed by a marked deterioration in 1994 to a deficit of almost 2bn kronor.

9.4 An overview of the public sector

In the period 1987-90 public sector financial saving showed a surplus that exceeded 4 per cent of GDP but in 1991 this swung to a deficit equivalent to 1.5 per cent (Table 9.4). In 1992 financial saving is weakening as much as 64bn kronor to a deficit of about 85bn or 6 per cent of GDP (Diagram 9.1). This deterioration comes mainly from the central government, accompanied by an improvement for local governments.
Table 9.4 Total public sector revenue and expenditure
Excl. companies and central government enterprices
Billion SEK, current prices
 1990 1991 1992 1993 1994
Revenue 885.4 897.1 882.4 894.7 913.4
Taxes 558.3 539.9 521.3 554.9 565.5
 Direct 319.0 284.8 288.4 314.2 320.7
 Indirect 239.2 255.1 232.9 240.7 244.8
Social security
contributions 199.5 217.2 205.3 184.2 190.1
Interest income 70.7 79.4 80.9 82.7 83.5
Other 56.9 60.6 74.9 72.8 74.3
Expenditure 832.6 918.3 967.8 992.9 1013.9
Transfers 433.9 499.9 540.3 573.0 585.8
 Households 277.1 319.1 344.5 360.4 374.4
 Firms 71.7 85.2 95.2 89.6 73.0
 activities 9.7 9.7 10.5 10.1 10.1
 Interest expenditure 75.3 85.9 90.2 112.9 128.3
Consumption 366.5 382.0 384.1 376.9 385.3
Investment(1) 32.3 36.4 43.4 42.9 42.8
Financial saving 52.8 -21.2 -85.4 -98.2 -100.4
Per cent of GNP
Taxes and charges 56.1 53.0 50.9 52.5 51.8
 Taxes 41.3 37.8 36.5 39.4 38.8
 Charges 14.8 15.2 14.4 13.1 13.0
Expenditure 61.7 64.2 67.8 70.5 69.5
Financial saving 3.9 -1.5 -6.0 -7.0 -6.9
(1) Gross fixed investment, stockbuildning and net purchases of land and real es
Note. The table is derived from Tables 9.1-3 with international transfers (apart
interest payments) netted out. Due to rounding, the items do not necessarily sum
 to their

Total financial saving in the public sector is likely to go on weakening in the rest of the forecast period, though considerably less markedly than in 1992. The deterioration in 1993 and 1994 comes mainly from local governments. As a share of GDP, the deficit is calculated to rise to about 7 per cent in 1993 and 1994, which is much the same as the low in 1982. For comparison it can be mentioned that one of the convergence criteria for EMU in the European Community is a public sector deficit of less than 3 per cent of GDP.

The tax ratio (total revenue from taxes and social charges relative to GDP) in the period 1987-90 averaged 55.5 per cent. The tax reform in conjunction with the recession, including the slower rise of prices and wages, caused the ratio to fall to 53 per cent in 1991. The fall is also explained in part by the public sector receiving compensation for VAT. In 1992 the tax ratio is calculated to go on falling, partly because payroll charges have been cut to offset the initial sick wage liability as of 1992. In the forecast period the tax ratio averages 51.7 per cent. Public transfers to households rose relative to GDP in 1991 mainly as a result of the tax reform and the weakening of the labour market. A further increase is foreseen in the forecast period. Transfers to firms are also expected to go on rising in 1992 but to fall after that. The sizable public sector deficits in the period 1991-94 imply a growing borrowing requirement and rising interest expenditure. In connection with efforts for infrastructure, the investment share of expenditure should be higher from 1992 onwards.

(1) The systems for central government subsidies and local tax disbursements are being revised as of 1993 but the details have not been finalised, which renders our assessments uncertain.

(1) The new general subsidy, which is intended to create more uniform economic conditions among local governments, incorporates three criteria: (i) the equalization of local tax revenue up to a general guaranteed level, defined as a percentage of an uprated average tax potential; (ii) a supplement/deduction for unavoidable structural differences; and (iii) a supplement for a declining population.
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Publication:The Swedish Economy
Date:Sep 22, 1992
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