IV Public Finances, Adjustment Programs, and Debt Dynamics
Author: Mr. J. H. Green
Language:
English
Keywords:
OP; recession; labor market program; pension; GDP path; interest expenditure; debt dynamics equation; OECD debt; government debt ratio; Budget planning and preparation; Government debt management
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Abstract

Over the past few years, Sweden’s overall public finances deteriorated sharply from a large surplus as late as 1990 to an estimated deficit of 10 ½ percent of GDP in 1994. As discussed below, factors underlying this shift included the unintended underfinancing of the 1991 tax reform that was exacerbated by a change in the composition of GDP; a sharp rise in household transfers; the cyclical downturn and the rise in total unemployment to over 13 percent of the labor force; and, more recently, higher debt interest payments.

Over the past few years, Sweden’s overall public finances deteriorated sharply from a large surplus as late as 1990 to an estimated deficit of 10 ½ percent of GDP in 1994. As discussed below, factors underlying this shift included the unintended underfinancing of the 1991 tax reform that was exacerbated by a change in the composition of GDP; a sharp rise in household transfers; the cyclical downturn and the rise in total unemployment to over 13 percent of the labor force; and, more recently, higher debt interest payments.

The ballooning of the public sector deficit prompted several attempts to rebalance policies. Measures adopted by parliament under the Bildt Government are estimated to have reduced the fiscal deficit by more than 5 percent of GDP in 1994, with an additional 1 percentage point in savings in the pipeline. More than one half of these savings reflect transfer and other expenditure reductions. The Social Democratic Government, which came to office in October 1994, has put in place further substantial budget savings (see below).

The fiscal adjustment measures proposed by the new Government since November 1994 are aimed at stabilizing the public debt ratio. Under official projections, present plans would be sufficient to reach this target by 1996. However, if interest rates do not decline substantially from mid-1995 levels and if economic growth falls below projections, the debt ratio could continue to rise, making further adjustment necessary. Alternate debt scenarios are discussed in the last part of this section.

Recent Fiscal Developments

General Government

Sweden’s general government financial balance has worsened by about 15 percentage points of GDP since 1990, when the economy was operating above potential, to an estimated deficit of 10 ½ percent of GDP in 1994 (Table 4-1). This swing is mostly explained by the deterioration in central government finances. Since 1991, local authorities have improved their financial balance by about 1 percent of GDP to near balance, while the surplus in the social security sector system has declined slightly.

Table 4-1.

General Government Accounts

(In percent of GDP)

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Sources: National Institute of Economic Research; and Ministry of Finance.

According to official estimates, the general government financial deficit reached a peak in 1993 at SKr 200 billion, or 13 ½ percent of GDP. The primary deficit improved from 7 ½ percent of GDP in 1993 to 4 percent of GDP in 1994, mainly corresponding to the ending of public support to the banking system, which amounted to about 3 percentage points of GDP in 1993. Because of the rapid increase in the stock of public debt, gross interest payments of the general government rose to more than 7 percent of GDP in 1994.

The deterioration in the general government financial position over the four years to 1994 reflected both a decline in the aggregate revenue ratio and, more important, a rise in overall spending. Thus, as a percent of GDP, public spending increased from 61 percent in 1990 to an estimated 70 ½ percent in 1994. The main factors contributing to this increase were a substantial rise in household transfer payments and in cyclically related entitlement programs. Debt interest expenditures contributed about 2 ½ percentage points to the overall rise in the spending ratio, while investment spending and business subsidies increased somewhat. The general government consumption ratio to GDP was unchanged over the period.

Transfers to households as a percent of GDP increased by 5 percentage points, more than one half of the rise in the aggregate public expenditure ratio, to an estimated 25 ½ percent of GDP in 1994. About one half of this rise reflected higher unemployment benefits and labor market program costs, which together amounted to 4 percent of GDP in 1994. Pension costs increased by a similar magnitude, owing to both an increase in the number of new retirees (at higher benefit levels) and the impact of indexation in an environment of falling inflation. These higher transfers, along with increases in other transfer categories such as child and study allowances, more than offset reduced costs in health and work injury insurance, which were cut as part of the 1992-94 fiscal adjustment programs with an effect of about 1 percentage point of GDP.

The general government revenue ratio fell from 65 percent of GDP in 1990 to 60 percent in 1994, mainly owing to a drop in tax collections.1 Much of the decline in the tax ratio to GDP took place in 1991-92 and was associated with the 1990-91 tax reform effort. This reform was intended to be revenue neutral with reductions in direct taxes to be made up with a broadening of the VAT base and business taxes. However, with hindsight it appears that the reforms were underfinanced by about 1 percent of GDP. Over a longer period to 1994, reductions in direct taxes had yet to be made up by higher revenues elsewhere, in part reflecting the unanticipated shift in the composition of GDP from consumption to exports that in effect diminished the VAT tax base relative to GDP.

Other measures that contributed to the drop-off in collections included the second 1992 Emergency Fiscal Package, which lowered the payroll tax rate by more than 4 percentage points. This measure led to a further 2 percentage point decline in the overall tax ratio to GDP that was in part offset by spending reductions and the cancellation of a proposed reduction in the standard VAT rate. Although the overall tax-to-GDP ratio continued to fall in 1993-94, some tax rates were raised. In particular, an employee- paid wage tax was instituted in 1993 (1 percent of wages in 1993 and 2 percent in 1994). These and other revenue measures are outlined below.

Central Government

As noted above, the deterioration in the overall fiscal situation primarily resulted from a weakening in the finances of the central government. On a national accounts basis, the central government’s financial position moved from a slight surplus in 1990 to an estimated deficit of around 12 percent of GDP in 1994 (Table 4-2). As with the general government, substantial support to the banking sector and the trough in economic activity resulted in a peak deficit in 1993.

Table 4-2.

Central Government Accounts

(In percent of GDP)

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Sources: Ministry of Finance; and IMF staff estimates.

Central government revenue declined sharply over the period 1990-94. In 1991-92, the decline in central government revenue (which is presented net of disbursements to local authorities) reflected in part the interaction of falling inflation and employment with the two-year lag in tax disbursements to local authorities. With the recession overall revenues fell in 1991-92, but payments to local authorities, which were based on income in the two preceding years, remained high; in consequence, net revenue to the central government fell.2 In addition, tax reform resulted in a disproportionately large reduction in central government income (relative to local authorities) owing to a key provision in the package, which eliminated the central government income tax for all but the top 20 percent of wage earners. The lost revenue, which was to be made up by taxes paid to the central government, the VAT, and business taxes, was not fully realized. As a result, the revenue shortfall from the underfinancing of tax reform was concentrated at the central government level.

Central government expenditures as a ratio to GDP rose by more than 6 percentage points from 1990 to 1994, and accounted for just under one half of the worsening in the central government’s finances. The main elements of the sharp rise in expenditures—higher transfers to households and increased debt interest payments—were described above. Specific to the central government, public consumption rose as a share of GDP by almost a full percentage point, while grants to the local authorities remained stable as a share of GDP.

Local Authorities and the Social Security Sector

Local governments, which in the past had generally registered moderate overall deficits, have moved close to balance in recent years because of consolidation efforts implemented ahead of an expected squeeze on revenues. Local governments in Sweden depend on two principal sources of income: transfers from the central government and household income taxes. Transfers from the central government were reduced as part of the 1992 budget bill (but with little impact on the ratio of grants to GDP from a five-year perspective) and, for the period ahead, the Social Democratic Government has announced further steps in this area.

Local authority tax revenue comes from the first income band in the national income tax system. The rate of increase from this tax source has fallen off in recent years and is not expected to pick up in the current low-inflation environment. Moreover, the tax rate, which varies by locality, has been frozen at close to 30 percent since the 1991 tax reform and will not be allowed to increase in the future.

The social security system registered a surplus of about 2 percent of GDP in 1994. Revenue to this sector is mainly based on receipts from the payroll tax.3 Collections, however, provide only about 60 percent of the system’s total income, with the balance coming from returns on the pension fund’s financial assets. Despite the consistent financial surplus, the social security system has not recorded a current account surplus since 1990. In an effort to re-store long-run viability to the social security system, in July 1994 parliament approved a bipartisan reform proposal. As described more fully in Section V, the basic thrust of this proposal was to tie pension benefits more closely to personal contributions and to limit payment increases in the event that real economic growth slowed. While substantial fiscal improvement from these changes was expected in the long term, budget savings were not expected before the end of the century, until the new system was more fully phased in.

Adjustment Policies

Against the background of the marked deterioration in the public finances, since late 1991 Sweden has proposed fiscal policy adjustment measures totaling around 10 percentage points of GDP. About one half of these measures had taken effect by 1994/95.

Budget Savings Policies, 1992-94

In response to the substantial ballooning of the public deficit, beginning in the fall of 1991, a series of budget savings packages were introduced (Table 4-3). The Ministry of Finance estimates that the deficit reduction measures passed by the parliament through the summer of 1994 had the effect of reducing the 1994/95 fiscal deficit by about SKr 70 billion, or 5 percent of GDP, relative to the deficit that would have occurred had there not been a change in the stance of policies.4 Given the lags in the realization of the full savings to be obtained from the adopted measures, these packages were estimated to have a full savings effect by 1998 of SKr 90 billion or 6 percent of GDP.

Table 4-3.

Budget Measures, 1992-94

(In billions of kronor)

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Source: Ministry of Finance.

The budget savings packages between 1992 and 1994 relied more on spending measures than on tax increases, especially in the early part of the period.5 Lower spending relative to the Ministry of Finance’s counterfactual estimates on the basis of no policy change were estimated at SKr 65 billion, or about two thirds of all measures adopted in this period. Of these anticipated savings, most resulted from changes in rules governing transfers to households, although aid to local governments was reduced by SKr 8 billion, or ½ of 1 percent of GDP, in 1992. Housing grants and housing subsidies were reduced first in the 1992 revised budget bill and again later with an estimated final savings of SKr 18 billion, or 1 percent of GDP. A reduction in sick leave benefits was estimated to achieve savings of about SKr 8 billion; increased charges in unemployment insurance contributed to a similar level of fiscal consolidation. Other savings efforts in the area of public spending were spread over the budget.

Tax and revenue increases between 1992 and 1994 were estimated at about SKr 25 billion, or slightly less than 2 percent of GDP. In the first 1992 Emergency Package, which preceded the floating of the krona, an additional fee for health care and higher excise taxes on gasoline and tobacco (justified in part on environmental and health considerations) made up the bulk of the new revenue package. The second 1992 Emergency Package, which also predated the currency devaluation, reduced the employer payroll tax by about 4 percentage points (Table 4-4). To offset the direct revenue impact of this “internal devaluation,” the scheduled general VAT rate reduction was eliminated (it remained at 25 percent); a special VAT was levied on food; and the standard tax deduction was reduced. In the fall of 1993, the payroll tax earmarked for unemployment was increased, as were excise and environmental taxes.

Table 4-4.

Payroll Taxes

(In percent of wage)

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Source: National Institute of Economic Research.

Supplementary pension and health (leave) insurance.

Includes basic pensions and partial retirement, labor market charge, and work injury.

Includes child care charge and adult training (through 1992) and work safety charge.

Includes charges for health and unemployment insurance and pensions. This fee is paid by the employee.

Budget Savings Policies, November 1994-April 1995

Following up on its campaign proposals, the Social Democratic Government elected in September 1994 announced a series of budget savings measures (Table 4-5). In November 1994, it announced a savings package that was intended to reduce the fiscal deficit by SKr 56 billion by 1998 (4 percent of GDP). This savings package included SKr 36 billion in tax increases and SKr 20 billion in savings on the expenditure side (approximately 3 percent and 1 percent of GDP, respectively). The January 1995 budget proposed an additional SKr 19 billion in spending reductions. Shortly after the November supplementary budget and following the public referendum that endorsed Sweden’s accession to the European Union, the Government announced a package of measures to finance the country’s estimated SKr 20 billion in annual contributions.6 In the April 1995 revised budget, an additional SKr 4 billion (V4 of 1 percent of GDP) in medium-term savings were proposed.7

Table 4-5.

Budget Measures, November 1994-April 1995

(In billions of kronor)

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Source: Ministry of Finance.

The tax increases in the November 1994 savings package included the raising of the marginal rate on the upper income tax bracket from 50 percent to 55 percent; an increase in social security fees by 3 percentage points; the elimination of the tax exemption on dividend payments; and the reduction of the indexation provisions on tax brackets and on the standard deduction. Under the November 1994 plan, most tax increases were made effective as of January 1995. However, employee payroll taxes, which were already scheduled to rise by 2 percentage points with effect from January 1995, were planned to rise by a further 1 percentage point a year in 1996-98.

The main elements of the spending measures announced in November 1994 consisted of a reduction in family allowances and a move to only the partial indexation of social security benefits. Benefits would be indexed for only 60 percent of annual inflation while the budget deficit remained above SKr 50 billion. Spending reductions of SKr 19 billion (1 ¼ percent of GDP) announced in January 1995 covered all ministries, with the largest reductions coming from changes in pension and other transfers.

The revised budget presented to parliament in April 1995 included an additional SKr 4 billion in medium-term savings. Although the estimated impact on the deficit was small, the April budget featured reductions in both spending and revenue. On the spending side, savings stem from a reduction in the replacement ratio for unemployment, health, and parental insurance to 75 percent. As recently as 1992, benefits in these programs were linked to 90 percent of wages. The projected expenditure savings made room for a reduction in the VAT on food from 21 percent to 12 percent.

The savings packages announced from November 1994 through April 1995 come on top of the SKr 18 billion in savings that are anticipated from plans that had been approved earlier, but have yet to yield full effect. In consequence, the Ministry of Finance has estimated that budget savings of about SKr 95 billion, or more than 6 percent of GDP, can be expected in the four-year period to 1998 with about two thirds of the savings taking effect in 1995-96. As discussed below, these measures are officially estimated to stabilize the ratio of public debt to GDP by 1996.

Public Sector Debt and Debt Dynamics

The Government has announced that its main fiscal policy objective is to stabilize Sweden’s government debt ratio by 1996. The historical background to Sweden’s debt situation is given below, followed by an analysis of the rapid rise in the public debt-to-GDP ratio in a dynamic debt framework. Two medium-term debt scenarios are then developed using a more complete model, which attempts to capture some of the unique features of the Swedish economy.

Measurement and Historical Background

Financial assets and liabilities are held by each of the three major levels of government. As shown in Table 4-6, the major part of the public sector’s gross liabilities is held by the central government (about 80 percent of GDP at the end of 1993) and by the local authorities (7 percent of GDP). Against these liabilities, there are significant financial assets, in particular those held by the social security system (38 percent of GDP).

Table 4-6.

General Government Assets and Liabilities, End-1993

(In percent of GDP)

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Source: Ministry of Finance.

In recent publications, the Ministry of Finance has tended to place greater emphasis on the net debt of the general government rather than on the gross debt of the central government. This emphasis is justified on the grounds that Sweden’s financial assets provide significant capital income that is important for fiscal policy sustainability and for debt dynamics calculations. The IMF staff, however, believes that in the Swedish context gross debt levels are economically more relevant because assets in the social security sector are more than offset by the future liabilities of the pension funds.8 A third measure, consolidated debt (“Maastricht” definition), lies between these two concepts and is defined as gross debt net of intergovernment holdings. At the end of 1993, consolidated debt was 74 percent of GDP, reflecting a ratio of gross debt to GDP of 85 percent and pension fund holdings of central government debt of about 11 percent of GDP.

In the early 1980s, Sweden’s gross public debt ratio increased by 20 percentage points to almost 70 percent of GDP. This occurred due to the emergence of large public deficits that resulted from a slowdown in economic activity and the efforts to stabilize overall employment through public sector expansion (Chart 4-1). In the second half of the 1980s, the debt ratio declined, reflecting both fiscal consolidation efforts and the effects of high inflation. Since 1991, however, there has been an approximate doubling of the ratio of gross public debt to GDP from around 45 percent in 1991 to around 90 percent by the end of 1994, because of the ballooning of the Government’s borrowing requirement over this period.

Chart 4-1.
Chart 4-1.

Public Sector Debt in Sweden and OECD Countries

(In percent of GDP)

Sources: Swedish National Debt Office; and Organization for Economic Cooperation and Development.

Sweden’s share of public debt denominated in foreign currency has increased sharply in recent years (see Chart 4-1). Sweden first began foreign currency borrowing in the mid-1970s, and there was a buildup in foreign denominated debt until 1985, when parliament imposed a freeze on net new borrowing. This restriction was lifted in connection with the 1992 financial crisis, when foreign currency was used to support the krona peg and later to strengthen commercial bank liquidity. In the context of each year’s budget, parliament now sets a limit on net new foreign public borrowing for the budget year.

The development of Sweden’s public debt differs from that in most other OECD countries. As shown in Chart 4-1, gross debt of the OECD as a group increased over the 1980s from about 40 percent of GDP in 1980 to nearly 60 percent in 1990. As with Sweden, OECD debt increased in the first half of the 1980s, but it was not significantly reduced in the latter part of the 1980s as it was in Sweden. As a result, by 1990, Sweden’s gross general government debt ratio at 45 percent was well below the OECD average. In the 1990s, however, Sweden’s financial borrowing greatly outstripped that in the rest of the OECD, causing its debt-to-GDP ratio to soar well above the OECD average.

The Debt Equation: Historical Illustration9

The recent rise in the ratio of Sweden’s public debt to GDP is best analyzed in terms of the debt dynamics equation, which can be written as follows:

d=d−1(1+i−y)+b.(1)

The debt-to-GDP ratio d depends on the previous debt ratio d-1; the difference between the real interest rate i and the real GDP growth rate y; and the primary borrowing requirement b. A higher primary borrowing requirement or an increase in the difference between the real interest rate and real GDP growth will act to increase the debt-to-GDP ratio.

Equation (1) can be used to derive the stability condition under which the debt-to-GDP ratio would remain unchanged, as follows:

d=d−1,whend−1(i−y)=−b.(2)

Thus, for an unchanged debt-to-GDP ratio, a primary surplus is needed that is equivalent to the difference between the real interest rate and real GDP growth weighted by the debt-to-GDP ratio. The required primary balance to have stabilized the ratio of public debt to GDP over the past ten years is shown in the middle of Table 4-7. In the period 1986/87 to 1990/91, high income growth outstripped high interest rates and acted to hold down the primary surplus that was required to bring down the debt-to-GDP ratio. At the same time, the Government’s primary balance was in substantial surplus, and as a consequence the ratio of Sweden’s public debt to GDP fell sharply.

Table 4-7.

Central Government Debt Dynamics

(In percent of GDP)

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Sources: Ministry of Finance; and IMF staff estimates.

Including off-budget borrowing.

A negative number denotes a primary surplus.

In 1990/91, Sweden’s overall primary budget surplus began to erode, and a significant overall public sector borrowing requirement developed. Still, however, the debt-to-GDP ratio continued to fall, albeit moderately, because the difference between real interest rates and real economic growth remained small. However, this situation changed dramatically from 1991/92 onward as the economy moved deeply into recession and as a sizable primary borrowing requirement emerged. As the economy began to recover from the recession beginning in the first half of 1993, the debt-to-GDP ratio continued to increase sharply. Underlying the continued explosive increase in the ratio of public debt to GDP in 1993/94 was a primary budget deficit of the order of 10 percent of GDP and a real interest rate on the public debt that substantially outstripped the real growth of the economy.

In the fiscal year 1994/95, the primary budget deficit narrowed to 7 ½ percent of GDP. However, as real interest rates rose further in reflection of increased uncertainty about the Government’s ability to address its public finance crisis, the primary budget surplus required to stabilize the debt ratio remained at around 2 ½ percent of GDP. Accordingly, a swing of about 10 percentage points in the public sector’s primary imbalance will be required to stabilize the debt ratio at prevailing interest rates.10

Official Debt Projections

The Ministry of Finance’s central scenario illustrates the impact of its fiscal consolidation package on the public finances and the ratio of public debt to GDP.11 The scenario is based on a GDP growth path that returns the economy to its estimated level of potential output by 1998 and declines in nominal interest rates (the yield on five-year government bonds) from 10 ½ percent in 1994 to 8 ½ percent in 1998. On the basis of these assumptions, general government debt ratios (both gross and consolidated) would stabilize in 1996 and show declines in 1997-98 (Table 4-8).

Table 4-8.

Official Fiscal Adjustment Scenario

(In percent)

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Sources: Ministry of Finance; and IMF staff estimates.

In percent of labor force.

Under the official scenario, the overall tax-to-GDP ratio would rise by about 2 percentage points from 1994 to 1998, reflecting programmed increases in payroll charges and other taxes. More dramatically, public spending is estimated to decline by nearly 8 percentage points of GDP over this period partly because of already announced budget savings measures, but also importantly as a consequence of the anticipated improvement in Sweden’s relative cyclical position. Under these conditions, overall financial savings would improve by about 9 percentage points from 1994 to 1998 and the overall deficit would amount to about 1 percent of GDP in 1998.

The Impact of Lower Growth and Higher Interest Rates on Public Finances

Lower GDP growth in the period ahead would have a significant impact on the Swedish public finances (Table 4-9).12 Staff calculations indicate that, assuming a GDP growth rate 1 percentage point below the scenario presented above, the general government financial deficit would be increased by 3 ¼ of 1 percentage point of GDP above the baseline in the first year of the scenario. By 1998, the deficit would be increased by 2 ½ percentage points of GDP above the base case, at which time the gross debt ratio would be 7 ½ percentage points of GDP higher than in the base case.

Table 4-9.

Alternative Public Sector Scenarios

(Deviation from baseline; in percent of GDP)

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Source: IMF staff calculations.

Deviation from baseline.

The impact of a lower GDP path operates through both expenditures and revenues. On the expenditure side, the scenario shows a rise in the aggregate spending ratio that mainly reflects an increase in the level of unemployment support and labor market program costs. In turn, debt interest charges would rise, owing to a higher level of public debt. Other main public spending categories are assumed to be independent of the economic cycle and are therefore unchanged in real terms in the scenario. However, this primary spending as a ratio to GDP would rise owing to the change in the denominator.

Lower GDP growth has a countercyclic impact on the overall tax ratio. The rise in the ratio stems from the fact that unemployment benefits and other transfers are taxable and make up a sizable part of the tax base (about 30 percent of Swedish household taxable income in 1994). In consequence, a lower GDP path has a proportionately smaller impact on the household tax base and, under the assumption of unchanged tax rules, the tax ratio to GDP can increase when the GDP path is lowered. In this exercise, the overall revenue ratio increases by 3 ¼ of 1 percentage point of GDP in 1998 relative to the base case, which acts to offset the increase in the spending ratio.

Higher interest rates would also have a significant impact on the evolution of Swedish public finances (see Table 4-9, lower panel). On the assumption that the effective interest rates on the public debt were 1 percentage point higher each year than in the base case, by 1998 the financial deficit would be 3 ¼ of 1 percentage point of GDP higher, at which time the debt ratio would be 2 percentage points higher. In this scenario, it is assumed that the macroeconomy is unaffected by the higher interest rate path. Higher interest rates and lower GDP growth together could potentially result in an unstable debt path. Combining the two alternate scenarios presented above would result in the debt ratio increasing to over 100 percent of GDP.

1

Of the 5 ¼ A percentage point fall in the tax ratio from 1990 to 1993, almost 3 percentage points were associated with offsetting spending reductions. In connection with tax reform, public authorities were exempted from value-added tax (VAT), thus lowering both VAT collections and public spending by 2 percent of GDP. Partial re-form of the health insurance system shifted costs from the public sector to employers but also reduced payroll charges.

2

Income taxes paid to the local governments remained buoyant after the economy entered recession owing to an accounting practice that has since been modified. All income taxes in Sweden are collected by the central government and until 1992, payments to the local authorities were made with a two-year lag. This “automatic stabilizer” acted to restrain local spending when the economy was over-heated, and eased the need for adjustment as the economy entered a deflationary period. Local governments may have limited spending in anticipation of lower revenues and thus contributed to the near balance outcome in 1994.

3

The overall payroll tax rate is near 35 percent. About 20 percentage points of the tax rate are earmarked to the social security sector.

4

The Ministry of Finance, in conjunction with the various spending ministries, estimates the savings potential of each policy change where savings are measured against a counterfactual “current policies” projection. An aggregate current policies’ projection that excludes these measures has not been published. Savings estimates are presented in 1994/95 prices.

5

Estimates of budget savings and the distribution across revenue and expenditure measures are not precise because official ministry estimates have changed over time. These revisions are due to methodological improvements and revised assumptions particularly concerning interest rates, which feed into the housing subsidy calculations.

6

To finance the costs of membership in the European Union, tax increases of about SKr 12 billion (¾ of 1 percent of GDP) were announced in late November 1994. The main tax increase is a 1 ½ percentage point rise in the payroll tax. Spending cuts of about SKr 4 billion make the financing of European Union membership nearly complete.

7

The Government’s June 1995 convergence program is based on the April budget. It plans for additional measures in 1997-98 to eliminate the deficit by 1998. On present projections, new measures of about 1 percent of GDP would need to be legislated to meet this target.

8

The contingent liabilities of the pension system are generally estimated to exceed the equivalent of 200 percent of GDP on a present value basis.

9

Data in this section are on a central government budget basis.

10

On a general government basis, a smaller fiscal improvement is required to stabilize the debt-to-GDP ratio owing in part to the surplus in the social security sector. Based on the projections presented below, the primary balance improves by 6 ¼ A percentage points of GDP in 1995-96 to a surplus of 2 ¾ percent of GDP. This is sufficient to stabilize the general government debt ratio by 1996.

11

See Ministry of Finance (1995).

12

Scenarios in this section were carried out using a model developed by the IMF staff to capture features specific to the Swedish economy. In the model, GDP is disaggregated according to both the major demand components and income categories to facilitate tax collections estimates: private consumption spending is used to calculate VAT revenue, while wage income feeds into household and pay-roll tax estimates. Transfers from the public sector are also included in the household income tax base. Nontax capital revenues are sensitive to changes in the interest rate; public financial assets are assumed unchanged over the forecast period. Public consumption and noncyclical transfers are entered into the accounts by exogenous assumption in real terms. Cyclical unemployment costs—both active and passive support—are endogenously determined and depend on the level of unemployment, which itself is endogenous. Debt interest expenditure is also calculated within the model.

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Cover Challenges to the Swedish Welfare State
Challenges to the Swedish Welfare State
Author: Mr. Desmond Lachman, Mr. Ramana Ramaswamy, Mr. J. H. Green, Mr. Robert P. Hagemann, and Mr. Adam Bennett
ISBN:
9781557754868
ISSN:
0251-6365
Publication Date:
06 Oct 1995
Publisher:
International Monetary Fund
DOI:
https://doi.org/10.5089/9781557754868.084
Pages:
73
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    Public Sector Debt in Sweden and OECD Countries

    (In percent of GDP)

Public Sector Debt in Sweden and OECD Countries

(In percent of GDP)

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