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Public sector.

9.1 An overview

A picture of total public sector revenue and expenditure is obtained by summing the three sub-sectors (central government, social security and local governments) and netting out internal transfers apart from interest payments.

In 1991 total public saving is estimated to show a surplus of about 27bn kronor or roughly half as much as the year before (Table 9.1). Saving is falling mainly for the central government, accompanied by a sharp improvement to a surplus for local governments. In 1992 total public saving is estimated to go on falling at a more modest rate to 22bn kronor.
 1989 1990 1991 1992
Revenue 805.0 878.9 925.0 961.6
Taxes 516.5 556.7 576.9 593.3
 Direct 310.9 316.5 307.0 324.9
 Indirect 205.6 240.2 269.9 268.4
Social security contributions 176.7 199.6 219.7 227.9
Interest income 61.1 69.1 73.3 73.0
Other 50.7 53.5 55.1 67.4
Expenditure 738.7 827.3 898.2 939.5
Transfers 390.9 430.4 485.5 502.7
 Households 252.4 276.9 316.9 327.1
 Firms 63.5 68.1 74.3 78.3
 International activities 8.2 9.3 10.2 10.7
 Interest expenditure 66.8 76.1 84.1 86.6
Consumption 317.7 366.0 379.4 395.7
Investment(1) 30.1 30.9 33.3 41.1
Financial saving 66.3 51.6 26.8 22.1
Per cent of GNP
Taxes and charges 56.6 56.4 55.7 54.9
 Taxes 42.2 41.5 40.3 39.6
 Charges 14.4 14.9 15.4 15.2
Expenditure 60.3 61.7 62.8 62.8
Financial saving 5.4 3.8 1.9 1.5
(1)Gross fixed investment, stockbuilding and net purchases of land and real esta
te.
Note. The table is derived from Tables 9.2--4 with international transfers (apar
t
from interest payments) netted out.


The level of public sector financial saving in 1991 is equivalent to not quite 2 per cent of GDP, which is half as much as in 1990. In 1992 the level will go on falling to 1.5 per cent of GDP. The decline this year comes from decreased revenue as a share of GDP as well as increased expenditure. In 1992 the GDP share for revenue is expected to go on falling, with little change in the expenditure share. The tendency for revenue has to do with a falling tax ratio (total revenue from taxes and payroll charges relative to GDP). From a level of 56.4 per cent in 1990, the tax ratio is estimated to fall to 55.7 per cent this year and to 54.9 per cent in 1992. The drop in the tax ratio this year is partly explained by the public sector receiving compensation for VAT. An additional reason next year is the reduction of payroll charges to offset the initial sick wage liability.

Public expenditure for consumption and investment is estimated to fall as a share of GDP this year, partly due to a declining volume of investment and partly to compensation for VAT. In 1992 this ratio is expected to rise again in connection with a growing share for investment, while the consumption ratio is unchanged. Public transfers to households are rising as a share of GDP in 1991, mainly as a result of the tax reform and the weakening of the labour market.

9.2 Central government and social security

9.2.1 Central government

Central government financial saving is estimated to swing sharply in 1991 from a surplus of almost 14bn kronor the year before to a deficit of 18bn (Table 9.2). This deterioration reflects increased expenditure accompanied by unchanged revenue. In 1992 financial saving is expected to go on weakening, mainly due to increased expenditure, with some contraction of revenue.
 1989 1990 1991 1992
Revenue 432.7 455.1 455.8 453.0
Taxes 328.9 347.0 342.1 326.8
 Direct 125.0 108.7 72.9 59.2
 Indirect 203.9 238.3 269.2 267.6
Social security contributions 58.5 54.9 58.0 63.2
Interest income 20.0 24.2 26.0 22.6
Other 25.3 29.0 29.7 40.4
Expenditure 394.0 441.3 473.8 481.2
Transfers 298.7 328.8 354.9 358.7
 Households 108.3 117.1 139.7 148.2
 Firms 41.6 46.6 50.1 53.1
 Social security sector 20.2 20.4 16.3 13.2
 Local governments 60.9 67.5 64.1 56.4
 International activities 8.3 9.3 10.2 10.7
 Interest expenditure 59.4 67.9 74.5 77.1
Consumption 85.7 100.0 104.1 104.8
Investment 9.6 12.5 14.8 17.7
 Gross fixed investment 11.1 12.9 14.9 17.9
 Stockbuilding -0.4 -0.2 0.5 0.0
 Land and real estate, net -1.1 -0.2 -0.6 -0.2
Financial saving 38.7 13.8 -18.0 -28.2
Sources: National Social Insurance Board, National debt Office, National Audit
Bureau, Statistics Sweden and the Institute.


Direct tax revenue is falling sharply in 1991, mainly because of the tax reform. Some decrease is also estimated for 1992. In both years the level is pulled down by sharply rising disbursements of local tax funds.

Revenue from indirect taxes is rising substantially in 1992, followed by some fall in 1992. The increase this year comes mainly from VAT and is a feature of the tax reform: the base for VAT has been broadened to finance the major part of the income tax cuts in 1990 and 1991. Moreover, the rate of VAT has been raised temporarily by one point (from 19 to 20 per cent) from July 1990 to the end of 1991. On the other hand, as of 1991 local authority consumption and investment are not burdened by VAT and the same applies to central government authorities as of July this year. For the loss of VAT revenue from local governments the central government obtains compensation via a settlement tax, which is included in Table 9.4 as a negative central government grant. For central government authorities the arrangement corresponds to decreased expenditure for consumption and investment.

As of 1991 VAT is no longer levied at a reduced rate on building and construction, which tends to increase the revenue from this tax. To compensate for the increased costs, however, a central government subsidy is available for residential construction.

In 1992 the decreased revenue from VAT is mainly a consequence of the return to the lower rate. There is also the full annual effect of VAT compensation for central government authorities. Moreover, residential investment in particular is estimated to be lower than this year.

The group of indirect taxes includes a number of payroll taxes and revenue from these is calculated to fall both this year and next. For 1991 this is partly because the temporary 1.5 per cent work environment charge has been terminated. Moreover, the labour market charge is not expected to yield any tax revenue; this charge serves in the first place to cover unemployment insurance disbursements and it is only the remainder that is booked as an indirect wage tax. In 1990 the residual indirect tax yield was just over 6bn kronor. In the prevailing situation in the labour market, however, the entire yield from the labour market charge will no doubt be needed to cover unemployment insurance disbursements in both 1991 and 1992.

The decreased revenue from these payroll taxes is offset in part by the combined yield from the general and the specific wage taxes, which in 1991 is calculated to rise more than 11bn kronor. The specific wage tax, to be levied at 22.2 per cent of service pension costs, was proposed by the Government as one means of financing the tax reform; pending a decision on this proposal, the general wage tax was raised from 0.34 to 1.64 per cent for the first half of 1991. The specific wage tax was then approved by Parliament, which laid down that it was to apply retroactively from 16 March 1991, which meant that the general wage tax could be lowered again. The rate from July 1991 to the end of 1992 is therefore 0.16 instead of 0.34 per cent.

Under indirect taxes there is also decreased revenue from the tax on securities; the turnover tax on shares and options has been halved as of 1991. The deregulation of agriculture at mid 1991 involved the abolition of internal market regulations, including the internal charges that financed this system. During a transitional period, however, some charges have been retained in order to finance measures for facilitating agricultural adjustment. Tax revenue from real estate is rising 6bn kronor in 1991 as a result of the tax reform and a temporary increase in the tax on commercial premises.

Central government revenue from social security charges is rising both this year and next. The increase for 1991 reflects the broader base for payroll charges in connection with the tax reform. One factor for 1992 is that sick wages will then be included in the base for payroll charges, thereby broadening this by more than 11bn kronor.

The sharp increase in other revenue in 1992 is partly explained by large, non-recurrent payments from public enterprises.

Total central government expenditure is rising rapidly in 1991, followed by a considerably slower increase in 1992. Transfers to households are calculated to grow almost 23bn kronor this year, mainly because subsidies have been increased in connection with the tax reform; the pension increment, municipal housing supplements and study funds have been uprated to compensate for increased indirect taxes. In the prevailing situation in the labour market, moreover, disbursements from the wage guarantee fund and labour market training expenditure are both rising. In 1992 transfers to households are estimated to rise just over 8bn kronor.

Central government transfers to firms are expected to go on rising in both 1991 and 1992. Interest subsidy expenditure is increasing sharply this year, mainly due to the level of interest rates, the level of production and the cost in recent years of residential construction with state loans. Beginning in 1992, the interest subsidy system is to be replaced in stages by a new system of housing finance, based entirely on the open credit market, where loans can also be obtained to redistribute interest costs over time. The new system is to include interest subsidies for tax compensation (for rented and cooperative housing), real interest subsidies for high real rates of interest and government credit guarantees. Extra interest subsidies will also be available in 1993 and 1994.

The new interest subsidy system is to be introduced for new housing as of 1992 and for housing that qualifies under the current regulations as of 1993. As the tax-offsetting interest subsidies in the new system are to be paid out quarterly in arrears, they will show up to some extent in the central government budget for 1992. The real interest subsidies, on the other hand, are to be paid out annually in arrears and will accordingly not show up before 1993. The interest subsidies in 1992 are therefore almost entirely a consequence of the existing system.

Food subsidies have been abolished as of 1991 in connection with the tax reform. The new food and agriculture policy, involving market adjustment and deregulation, applies from mid 1991 and aims to achieve a better balance between production and demand. Some transitional support is being provided to facilitate the adjustment of the agricultural sector to the new conditions. The removal of food subsidies at the beginning of 1991, followed by a diminishing degree of support for adjustment, is tending to curb central government transfers to agriculture in 1991 and 1992.

Central government grants to the social security sector are calculated to fall in both 1991 and 1992. This has to do with health insurance, where the sick rate is expected to fall in both years, the level of sickness benefits has been lowered as of 1991 and employers are to be responsible for an initial sick wage as of 1992. The reform of care for the elderly as of 1992 also terminates the grants to the social security sector that currently finance health insurance compensation to the health service.

In connection with the extended right of local authorities to deduct VAT, compensation is to be paid to the central government. This is done via a corresponding reduction in central government grants to local governments.

Central government interest expenditure is affected above all by the size of the national debt and the current level of interest rates. As of July 1989 interest on debt swap agreements is booked gross and these agreements accordingly affect interest income as well as expenditure, though not financial saving. Central government interest expenditure is rising in both 1991 and 1992 in connection with an increased borrowing requirement.

The volume of central government consumption is calculated to rise 1.6 per cent in 1991 and then fall somewhat less than this in 1992. The major items here are wage costs and other consumption. In spite of the goals for rationalization and economies, the volume of central government employment is expected to rise almost 1 per cent this year and other consumption 2.5 per cent. In 1992, on the other hand, employment is expected to fall about 1 per cent and other consumption by almost as much.

Central government expenditure for fixed investment is expected to rise in 1992 in particular because infrastructural investments as well as the construction and reconstruction of some central government buildings are to be brought forward as part of the efforts that the government presented in the late summer this year in order to promote growth and combat unemployment.

9.2.2 Social security

The social security sector comprises three fields: public health insurance (including parental insurance), national supplementary pensions and unemployment insurance. Financial saving in this sector largely corresponds to capital movements in the National Pension Fund and is estimated to be about 43bn kronor both this year and next.

National supplementary pensions

This system, known as ATP, is financed with fees and the return on 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 and income from this source balanced disbursements last year. In 1991 and 1992 pension disbursements are again calculated to exceed income from fees even though the tax reform has somewhat enlarged the base. Pension disbursements this year are estimated to total almost 88bn kronor, followed by almost 96bn in 1992. The profit-sharing tax, which has been levied since 1983, is channeled via the Pension Fund to the employment investment funds; the law on the profit-sharing tax was rescinded in June 1990 but the flow of payments is continuing this year.

Health insurance

Health insurance is financed with payroll charges and central government grants. Sickness benefit payments are calculated to fall by 3.5bn kronor this year because the level has been lowered as of March and the sickness rate is falling. As of 1992, employers are to assume responsibility for a sick wage for the first 14 days of an illness; together with a further fall in the sickness rate, this is calculated to reduce health insurance costs by more than 40 per cent to less than 18bn kronor. To compensate employers, the health insurance charge is to be reduced by 1.9 percentage points. The decreased expenditure in 1992 reduces the central government grant, while the lower payroll charge reduces income. In that employers are to be responsible for an initial sick wage, the insurance offices will have more time to promote rehabilitation. This is also the aim of the rehabilitation benefit that is to be available as of 1992 for those who participate in occupational rehabilitation.

Unemployment insurance

Unemployment insurance benefits are financed with payroll contributions, which are transferred as a central government grant to the unemployment funds, plus a small fee from members. With rising unemployment, disbursements to households are expected to rise more than 12bn kronor this year and 17bn in 1992. The efforts to combat rising unemployment include the introduction of a system at mid 1991 whereby unemployed people are taken on as temporary replacements for employees during training, while employers obtain compensation in the form of a lower labour market charge.

9.3 Local governments

The local government sector consists of municipalities, county councils, parochial authorities and local government associations. The financial situation in this sector in the second half of the 1980s was very weak, with annual deficits that fluctuated between 4bn and 6bn kronor. In 1990 the deficit grew to more than 8bn kronor even though real estate and land were sold on a substantial scale (Table 9.4). This year there is the prospect of a sharp improvement to a surplus of almost 2bn kronor, followed by a further improvement in 1992 to a surplus of almost 7bn, thereby largely balancing the 1990 deficit. The reason for the improvement in both these years is that revenue is rising more rapidly than expenditure.

Total revenue rose 10.4 per cent in 1990, while the increase in this and the coming year is calculated to be somewhat weaker, just under 8 per cent in both cases. More than 60 per cent of the total comes from taxes and this revenue is transferred from the central to the local government sector in the light of the tax base two years earlier. Tax revenue is estimated to rise more than 13 per cent this year and by more than that in 1992, mainly as a consequence of wage increases in recent years. Moreover, the tax reform has enlarged the local tax base both by widening the base for income tax and by eliminating capital deductions in that capital is no longer taxed locally (the taxation of capital normally shows a deficit, so the net effect benefits local governments). Increases to local tax rates have been prohibited for 1991 and 1992; for 1991 the average rate has fallen by 0.01 of a point to 31.15 per cent.

Central government subsidies make up between 15 and 20 per cent of total local government revenue and are general or specific. One of the general subsidies is for tax equalization, constructed to make economic conditions as equal as possible for local government activities. 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. The subsidy is financed in part by a tax equalization charge on local governments with a high tax potential; in Table 9.4 this charge has been deducted from the subsidy.

The other general subsidies provide compensation to municipalities for the abolition of the tax on legal entities as well as for the loss of revenue because the guaranteed taxation of personal property has been abolished. The specific subsidies are tied to mandatory activities of local authorities.

The subsidy to compensate for the guaranteed property tax has been terminated as of 1991 to offset some effects of the tax reform that favoured the local government economy. For the same reason a specific levy, known as the settlement tax and deducted from central government subsidies to local governments, was introduced; computed on the local tax base, it is estimated to yield about 6.5bn kronor in 1991 and more than 15bn in 1992. In 1992 the tax equalization charge is to be raised temporarily, on top of the increase approved earlier by Parliament; the additional withdrawal from local governments amounts to about 3bn kronor. This is accompanied by increases to specific subsidies, for instance in connection with the reform of care for the elderly.

In this reform, responsibility for services and care for the elderly and disabled is to be transferred from county councils to municipalities as of 1992. The change is accompanied by a financial settlement to cover the increased costs for municipalities; just over 20bn kronor will be transferred directly or indirectly from county councils to municipalities. Besides a tax swap between county councils and municipalities, there is to be a change in the tax equalization system. There is also to be an internal system for cost equalization. Central government subsidies for services and care for the elderly and disabled are to be introduced for municipalities, accompanied by decreased social security grants to county councils, so that the overall financial effect on the local government sector will be neutral.

Another factor behind the increased specific subsidies in 1992 is that investment in the work environment at schools is to be brought forward as part of the government measures in the late summer of 1991 to promote growth and combat unemployment. The central government subsidy covers 50 per cent of these investment costs.

Local government expenditure is largely for consumption, which is calculated to rise about one per cent in volume this year and about as much in 1992. The main items are wage costs and other consumption. The available statistics for the first half of this year indicate that the number of local government employees was much the same as a year earlier, which includes an increase of just over 5,000 in relief work and special induction places. With the weaker labour market, the number employed by job-creation measures, will no doubt go on rising in the second half of this year but the annual level of total local government employment in 1991 is assumed to be unchanged from 1990. Average hours worked rose in the first half of this year, mainly because women stepped up their working hours. The forecasts point to an overall increase in the volume of hours by 1/2 per cent in 1991.

In 1992 there is the prospect of some increase in the number of local government employees. This assumes that the number in job-creation measures goes on rising because the labour market will remain weak. With some increase in average hours worked, the volume of hours is calculated to rise 1/2 per cent.

Local government purchases fell in 1990, no doubt because certain purchases were postponed because compensation for VAT could be obtained after the turn of the year. Other consumption is therefore expected to rise again in both 1991 and 1992. In this period local governments are likely to levy charges on an extended range of activities. As these charges are booked in the National Accounts as private consumption and as business sector inputs, they are deducted here. As of 1991 local governments are compensated for VAT payments in connection with consumption and investment. Allowing for this change, local government consumption at current prices is estimated to rise 3.4 per cent in 1991 and almost 6 per cent in 1992. Hourly wage costs, including extended holidays, are calculated to rise 5 1/2 per cent in 1991. The wage bill paid out, including the change in the volume of hours, is estimated to rise just over 5 1/2 per cent. In 1992, the existing settlements indicate an increase of about 5 per cent in hourly wage costs. With the change in employment, growth of the wage bill paid out would be somewhat higher than this. Increases to local government charges are expected mainly in 1991. [Tabular Data 9.3 and 9.4 Omitted]
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Title Annotation:Sweden
Publication:The Swedish Economy
Date:Sep 22, 1991
Words:3974
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