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Finances in subsectors of general government.

Deficits in Central Government Finances

Central government finances have been showing deficits since 2002, and forecasts indicate that these deficits will continue in 2005-2006 (see Table 44). However, the deficit was less than expected in 2004, one reason being surprisingly low central government consumption.

Both for 2005 and for 2006, the budget balance, which is equal to borrowing needs but with the opposite sign, will be stronger than net lending. One reason for the difference in 2005 will be the realization of foreign-exchange and debt-service gains on central government debt, mainly arising from the appreciation of the krona in recent years. Another reason will be the announced repurchases by TeliaSonera and Nordea of their own shares. Since the central government will maintain its percentage of the equity in the two companies, it will be selling shares for a total of SEK 6.5 billion in 2005 and 5.5 billion in 2006 in connection with the repurchases. The proceeds received by the central government are reported as revenue from the sale of property and will therefore affect the budget balance but not net lending (see Table 45 and Diagram 186).

Central government debt will increase as a consequence of the budget deficits but will continue to decrease in proportion to GDP; see Diagram 187.

Higher Pensions Due to Pension Reform

In the new pension system, pensions are revised upward by a so-called adjustment index (see Table 46 and Diagram 188). The rate of indexation is determined by the change in prices in the preceding year and by the development of the real incomes of wage earners in the three preceding years. Since the increase in prices was very slight in 2004, pensions will be indexed upward by only 0.8 percent in 2005. For 2006 it is also estimated that the rate of indexation will be low because of the modest price increases between June 2004 and June 2005. Both this year and next year, pensions will increase faster than the price-related base amount, the reason being that real incomes will be rising at a rate exceeding the norm of 1.6. The transition to adjustment indexation will therefore mean higher indexation of pensions in both 2005 and 2006 compared to the previous system of indexation by the price-related base amount (see Diagram 188). With the new method of indexation, pension levels will be 3.7 percent higher in 2006 than they would have under the old system. The pension reform has thus benefited pensioners, though it has also increased general government expenditure.

A pension has two components: one is from the pay-as-you-go system, where the National Pension Funds serve as a buffer; the other is from the premium pension system (PPM), where pension capital is entrusted to investment-fund managers chosen by the individual. The contributions paid for the two parts are 16.0 and 2.5 percent, respectively, of the individual's pension base. Since revenue from contributions currently exceeds pension disbursements, the net lending of both the National Pension Funds and the PPM system is positive (see Table 47 and Diagram 189). The combined net lending of the pension system is stable at about two percent of GDP. Thus, meeting the net lending target of two percent for the general government sector as a whole currently entails zero aggregate net lending for the central government and local government subsectors.

Eurostat, the EU bureau of statistics, has recently adopted the principle that funded pension systems are not to be included in the general government sector in the National Accounts. Eurostat and Statistics Sweden are currently discussing how this principle will affect the classification of the PPM system.

Improvement in Municipal Net Lending

Municipal net lending was better than forecast in 2004, largely because of unexpectedly high revenue from the sale of real estate. Municipal net lending has been improving since reaching a low point in 2002, primarily from increases in local government taxes in 2003 and 2004 together with cutbacks in expenditure (see Diagrams 190 and 191). Municipal net lending has not been positive since 2000 and will still be slightly negative in 2005 and 2006. This year, expenditure will increase in proportion to GDP, but revenue will rise even more, partly as an effect of central government subsidies. Next year, by contrast, expenditure will go up more than revenue since there will be little increase in central government subsidies.

Healthy Finances in County Council Districts

The net lending of county council districts was positive in 2004 for the first time since 1998. This year, net lending will improve further as revenue--primarily from central government subsidies--rises while expenditure remains stable in proportion to GDP (see Diagram 192). Expenditure will be curtailed for reasons that include a reduction in temporary hiring and the fact that the costs of pharmaceuticals are no longer increasing. The outcome data for the initial months of this year confirm the downward trend in the pharmaceuticals benefit. The net lending of county council districts will decrease in 2006 because of a weaker revenue tendency with the more limited addition from central government subsidies than in 2005.
Table 45 Central Government Net Lending and Budget
Balance

Billions of SEK, current prices, and percent of GDP

 2002 2003 2004 2005 2006

Net lending -44 -43 -21 -48 -46

Percent of GDP -1.9 -1.7 -0.8 -1.8 -1.7
Adjustments
 Provided by the Riksbank 20 0 0 0 0
 Privatization of corporations 0 0 0 7 5
 Transfer from National
 Pension Fund 9 13 4 20 0
 Lending, repayment, net -7 -10 -15 -15 -17
 Foreign-exchange and debt-
 service losses -11 -8 -19 4 -3
 Interperiod adjustments,
 other 32 2 -2 18 20
Budget balance -1 -46 -53 -32 -41
Percent of GDP -0.1 -1.9 -2.1 -1.2 -1.5
Change in value, other 34 -18 26 -4 2
Central-government debt, change -33 64 28 37 39

Central-government debt
(consolidated) 1 122 1 186 1 213 1 250 1 290
Percent of GDP 47.7 48.6 47.7 46.9 46.0

Note: New definition of central-government debt in 2003.

Sources: Statistics Sweden, Nation Debt Office and NIER.

Table 46 Indexation of Pensions and Pension Capital

Annual percentage change and index

 2002 2003 2004 2005 2006

Pensions (adjustment 3.3 3.6 1.8 0.8 1.1
index)
of which: Real incomes (1) 2.2 3.4 1.8 2.0 2.2
 Norm (2) -1.6 -1.6 -1.6 -1.6 -1.6
 CPI (3) 2.7 1.8 1.6 0.4 0.4
Pension capital 2.9 5.3 3.4 2.4 2.7
Income index 106.16 111.79 115.64 118.41 121.56
Income-related base
amount (4) 38 800 40 900 42 300 43 300 44 500
Price-related base
amount 37 900 38 600 39 300 39 400 39 600

(1) Average change in real incomes in the three preceding rears for all
persons aged 16-64 with pension-qualifying income

(2) In the calculation of the initial amount of a pension, a growth
rate of 1.6 percent is taken into account; this feature is disregarded
here.

(3) CPI inflation in June of the preceding year

(4) Used in the calculation of the ceiling on pension-qualifying
income

Source: NIER.

Table 47 Net Lending of the National Pension System

Billions of SEK, current prices, percent of GDP

 2002 2003 2004 2005 2006

Revenue 199 205 216 223 233
Percent of GDP 8.5 8.4 8.5 8.4 8.3
 Social security contributions 161 166 173 178 186
 Premium pension investments 20 20 22 23 24
 Return on capital 19 19 21 22 23
Expenditure 154 159 168 173 180
Percent of GDP 6.6 6.5 6.6 6.5 6.4
 Pensions 152 155 163 169 176
 Other 3 3 5 3 4
Net lending 45 47 48 50 53
Percent of GDP 1.9 1.9 1.9 1.9 1.9
of which: National Pension Funds 1.0 1.0 1.0 1.0 1.0
 Premium Pension system 0.9 0.9 0.9 0.9 0.9

Sources: Statistics Sweden and NIER.
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Title Annotation:Public Finances
Publication:The Swedish Economy
Date:Mar 1, 2005
Words:1363
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