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Household finances.

6.1 Summary

Household saving fell for most of the 1980s. In connection with deregulation of the credit market, households acquired liabilities at a faster rate than ever before in the postwar period. In 1988 private consumption exceeded income by more than 5 per cent. In recent years, however, saving behaviour has swung markedly and this tendency is expected to continue in the forecast period, leading to a household saving ratio of more than 5 per cent in 1993 and 1994. As the growth of real income is judged to be very weak, much of the continued adjustment will require decreased expenditure on consumption. This is a striking contrast to the pattern in the 1980s.
Table 6.1 Household saving
Change in period, per cent
 1980- 1988- 1991-
 1988 1991 1994
Real income 4.4 9.7 0.0
Consumption 15.3 2.4 -3.7
Saving ratio(1) -10.0 7.0 3.6
(1) Change in period in percentage points.
Sources: Statistics Sweden and the Institute.

6.2 Income

Household income is likely to be weak throughout the forecast period. From 1991 to 1992 wage income will hardly rise at all because employment is falling steeply and earnings are slack. On the other hand, public income transfers are still rising rapidly; the level of transfers directly related to the situation in the labour market has more than trebled since 1990 and is equivalent to 7 per cent of the wage bill in 1992. With the retardation of inflation, moreover, transfers linked to the base amount (pensions in particular) are rising relatively strongly in real terms. The indexed adjustment of the tax scale also has a positive effect. In real terms, total household income is calculated to rise 2 per cent. The whole of this increase comes from transfers, with a negative real contribution from factor income (wages and other earned income).

In 1993 household income will be greatly affected by the two crisis packages; decreased transfers and increased taxes are calculated to result in a direct reduction of real income by about 3.5 per cent. With a further fall in employment and weak earnings, this means that the real disposable income of households will decline for the first time in a decade.

In 1994 household income will still be slack. The high level of saving does give a further improvement in the interest item but employment will still be falling, accompanied by additional effects of the crisis packages (decreased interest subsidies and no reduction of wealth tax). Total real income is estimated to rise only 1 per cent.

6.3 Consumer prices

After two years of very rapid inflation, price increases slackened abruptly at the beginning of 1992; in the first two months the 12-month change dropped from 8.0 to 2.5 per cent. This was largely because effects of the 1991 tax reform ceased to affect the price rise. In March prices rose 0.5 per cent, mainly due to seasonal increases for clothing and footwear. Since then the level has been virtually unchanged. From December 1991 through August this year prices rose only 0.4 per cent, a very low figure even internationally. Diagram 6.1 presents 12-month change figures for consumer prices since 1980.

One factor behind the low rate of price increases is the reduction of VAT on hotel and restaurant services, food, etc. as of 1992. In the course of this year food prices have fallen 4.3 per cent and prices for hotel and restaurant services have also decreased, though not as much. The cut in VAT also applies to domestic passenger transport, for which prices excluding local transport tariffs have dropped 10.7 per cent.

The low price rise also has to do with the international and domestic recession. Import prices have fallen 2.5 per cent. Rising unemployment in Sweden has been accompanied by subdued wage increases. Low domestic demand has also limited the scope for increased margins.

In contrast to other prices, however, some tariffs have risen appreciably. Local transport tariffs rose almost 9 per cent in January and the tariffs for prescribed drugs and dental fees went up more than 18 per cent in July.

Prices in 1992

Price increases in the rest of this year are also expected to be very modest. Demand is so weak that sizeable increases are hardly feasible. At the year-end the 12-month figure is estimated to have slackened to 1.3 per cent. A factor that renders the forecast highly uncertain in the near future is the level of interest rates. The high rates in September add substantially to housing costs. We assume, however, that the high interest rates are a temporary phenomenon. From a level of 21 per cent in September, the variable mortgage rate is assumed to fall back to 18 per cent in October and 15 per cent in December. If the rate were to stay instead at the level in September, it would add an additional 0.85 per cent to the Consumer Price Index. The contributions from the various components are presented in Table 6.4.


Due to the sizeable effect of the cut in VAT, the Net Price Index is rising appreciably more than the CPI but the increase in the course of the year is still calculated to be less than three per cent.

Prices in 1993

The price forecast for 1993 starts from a bleak picture of the labour market, with high unemployment, and persistently weak domestic demand. In contrast to 1992, however, import prices are not expected to go on falling. The various tax adjustments, moreover, are calculated to raise the price level in 1993 in contrast to the downward effect in 1992. The price rise in 1993 is therefore calculated to be stronger than in 1992 but still low compared with the last two decades.

Many adjustments are being made to indirect taxes. The specific taxes on cosmetics, chocolate, cassette tape and other items are to be abolished. After a temporary cut, the property tax goes up from 1.2 to 1.5 per cent. The taxation of energy is being rearranged to shift the burden from manufacturing to households. An extra escalation of the guaranteed interest rate adds to housing costs.

Further tax adjustments were included in the September crisis packages. The tax on petrol is to be increased by 1.00 kronor a litre for leaded grades and 0.50 kronor for unleaded and the tax on tobacco goes up 0.15 kronor per cigarette. In addition to the above-mentioned adjustments to taxes on energy, the total levy on energy is to be raised so as to strengthen the budget by two billion kronor. VAT on food, domestic passenger transport, hotel and restaurant services is to be 21 instead of 18 per cent.

The net effect of these tax changes is calculated to raise the price level 2.4 per cent, of which 1.8 points come from the crisis packages. The crisis proposals also include a reduction of payroll charges; this has been treated, not as a change in indirect taxes but as a direct effect on labour costs; the effect on the CPI is a reduction of approximately 1.5 per cent.

Wages are expected to be subdued, rising less than three per cent. Excluding the extra escalation of the guaranteed interest rate, rents are assumed to rise five per cent. The calculations assume that the general level of interest rates tends to fall.

Under these circumstances, the CPI would rise 3.7 per cent in the course of 1993, while the Net Price Index is calculated to rise less than 1.4 per cent.

Prices in 1994

The rate of price increases should remain low in 1994. Import prices are estimated to rise faster than the year before and domestic demand should begin to recover but unemployment will still be high. Indirect taxes are assumed to be unchanged apart from a reduction of housing subsidies. Downward pressure will also come from a further fall in interest rates, moderate rent increases (four per cent) and unchanged profit margins. Wage increases may be somewhat higher (four per cent) but this is counteracted by productivity gains.

The rise of consumer prices in the course of 1994 is calculated to be 2.7 per cent. With relatively limited tax changes, the Net Price Index shows much the same change.

Implicit Price Index

The IPI is based on private consumption at current and constant prices and its course in the longer run should correspond to the CPI. In any one year, however, the differences may be substantial due to the use of different systems of weights and different ways of measuring housing costs. For 1992 and 1993 the differences between the CPI and the EPI are small (Table 6.4). In 1994 the low interest costs mean that costs for owner-occupied dwellings rise more slowly than rents. As the IPI assumes that private housing costs follow rents, it rises over half of one per cent more than the CPI.

Base amount

The base amount is adjusted annually in relation to the change in consumer prices from October two years earlier to October one year earlier. For 1991 and 1992 this adjustment was made with a reduction for the computed effect of the tax reform on prices. This effect was put at 2.9 percentage points for 1991 and 3.2 for 1992.

6.4 Saving and consumption

In the first two quarters of 1992 private consumption fell steeply from a high level in the fourth quarter of 1991. In the first half of 1992, the level of consumption, excluding normal seasonal variations, was more than 2 per cent down on the second half of 1991. Compared to the first half of 1991 it was more than 1 per cent down.

Two factors are largely responsible for this development. One was the unusually high level of household purchases of used cars (including leasing cars) in 1991. Although new car sales fell about 15 per cent, total car purchases via households were unchanged from 1990. In 1992 sales of used cars will probably normalize while new car sales go on falling. The National Accounts indicate that at constant prices, total car purchases by households in the first half of this year were more than 15 per cent lower than a year earlier (Table 6.5).


The other factor is that retail turnover appears to have fallen very sharply. The drop comes entirely from infrequent purchases (clothing, domestic equipment, leisure goods), for which turnover at constant prices was more than 5 per cent lower than in the first half of 1991. The preliminary figures suggest that this fall may even have accelerated in the second quarter. Everyday retailing did considerably better and turnover may have risen.

The interpretation of consumption is complicated in that Statistics Sweden has introduced new methods for measuring turnover this year, rendering comparisons with earlier years uncertain. According to the previous method, which is still being used to a large extent by the Wholesale & Retail Research Institute, the fall in retail turnover was less dramatic.

Our annual forecast for 1992 assumes that the level of consumption goes on falling in the second half-year, though less sharply than in the first half. Income will probably be considerably stronger in the second half, partly because disposable income was pulled down early in the year by large supplementary tax payments, while the excess tax refunds in December are expected to be relatively high. It is also probable that infrequent goods win be marketed with bargain offers and discounts in order to activate sales.

At the same time, other factors suggest that private consumption could go on falling sharply. The problems in the real-estate market are hitting households via high interest rates as well as difficulties in selling houses (for instance when changing jobs). A growing number of long-term unemployed whose benefits expire implies a loss of income. The purchasing power of young adults is weakening as unemployment rises. Personal reserves, such as savings, may soon be exhausted.

Households, moreover, have unquestionably been alerted to the crisis by events in September. Although the proposed measures do not affect household income before 1993, consumption expenditure may be adjusted before the end of this year.

In 1993, with the need to maintain high saving and reduce liabilities, the fall in the real level of household income is assumed to lead to almost as large a reduction of consumption expenditure. The effect is likely to show up primarily in purchases of durables that are normally financed in part by borrowing or withdrawing savings. New car sales are assumed to go on falling in 1993 and infrequent purchases (household appliances, home electronics, furniture, clothing) will probably be heavily hit as well. The crisis package also does away with the stimulus from the earlier decision to cut VAT on such goods. The total volume of infrequent purchases is expected to fall about 15 per cent from 1991 to 1993, bringing turnover at constant prices below the level in 1987.

As household investment (for instance in housing) is falling in the forecast period, the increase in total saving raises the financial saving ratio to a very high level. The net result of amortization and new saving is estimated to total more than 60 billion kronor a year in 1993 and 1994.
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Publication:The Swedish Economy
Date:Sep 22, 1992
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