7164 688 0

The Economy Report.ON SWEDISH MUNICIPAL AND COUNTY COUNCIL FINANCES– OCTOBER 2011

Information concerning the content of the report:Annika Wallenskog tel +46 8 452 7746Bo Legerius tel +46 8 452 77 34

Swedish Association of Local Authorities and RegionsDepartment of Economy and Governance, Section for Economic AnalysisSE-118 82 Stockholm | Visitors Hornsgatan 20

Phone +46 8 452 70 00 | Fax +46 8 452 70 50

www.skl.se

© Sveriges Kommuner och Landsting1st edition, October 2011

Graphic form & production Elisabet JonssonTranslation Ian MacArthurCover illustration Jan Olsson Form & Illustration ABPrinters ABA Kopiering AB, StockholmFonts Chronicle and WhitneyPaper Color Copy 120 gr

ISBN 978-91-7164-688-0

[Swedish edition: 978-91-7164-686-6, ISSN: 1653-0853]

The Economy Report. October 2011 On Swedish Municipal and County Council Finances 1

Foreword

The Economy Report illustrates the financial situation and conditions of county councils and municipalities and the development of the Swedish economy over the next few years. It is published twice yearly by the Swe-dish Association of Local Authorities and Regions (SALAR). The calcula-tions in this edition were closed on 3 October. They look forward to 2015.

In 2011 net income for the sector will deteriorate from SEK 18 billion to SEK 2 billion. We expect that the European financial crisis can be cleared up without chaos arising in financial markets – the impact on municipali-ties and county councils will therefore be limited. However, the sector will receive somewhat lower increases in tax revenue than in previous fore-casts. The low interest rate in Sweden is increasing the present value of the local government sector's pension liability, resulting in a temporary weakening of net income by SEK 8 billion. In 2012, when the whole of the cyclical support from central government has been phased out, net in-come for the sector is expected to be SEK 5 billion. For each year in the period 2013–2015 we have used new assumptions in our calculations. We expect slightly lower costs growth than previously for the municipalities, and we expect higher central government grants as of 2013.

This is an abridged version of the report. It contains the Summary (supplemented with some tables and diagrams from the main report) and the Annex. It has been written by staff at the SALAR Section for Eco-nomic Analysis and has not been considered at political level within the Association. The people who can reply to questions are given on the in-side cover page. Other SALAR staff have also contributed facts and valu-able comments. The translation is by Ian MacArthur, following slight revisions by Elisabet Jonsson, Anna Kleen and Bo Legerius. We are very grateful to the municipalities and county councils that have contributed basic data to our report.

Stockholm, October 2011

Annika Wallenskog, Section for Economic Analysis

2 The Economy Report. October 2011 On Swedish Municipal and County Council Finances

Contents

The Chief Economist’s conclusions 3

The storm clouds pile up 3

Global slowdown but not a recession... 4

...but considerable risks of a worse scenario 5

The sector will achieve a surplus thanks to restraint, higher taxes and greater government grants 6

Annex 10

An aggregate picture of municipalities and county councils 10


The Chief Economist’s conclusions

At the beginning of the year there was considerable optimism and relief that the world economy finally seemed to have come through the financial crisis. However, the storm clouds already began to gather in the early part of 2011. Since then there has been a dramatic change in the mood of the global economy. The local government sector, whose finances are influenced by the increasingly turbulent international econ-omy, is now facing several tough years after having coped with the financial crisis with record levels of net income. Net income will fall from SEK 18 billion to SEK 2 billion and the county councils will report a deficit in 2011, mainly due to a one-time cost for a higher pension liability. However, in the coming years, until and including 2015, the sector will man-age to report a small surplus, thanks to restraint in volume growth, higher government grants and tax increases in the county councils.

The storm clouds pile up

We can now see a clear slowdown in the US, where the finances of both the public sector and households are poor. The situation in the labour market remains weak, which means that household income is not grow-ing at a rate that permits a rapid continued recovery.

Then when the latent debt crisis, chiefly in parts of southern Europe, en-tered a new, acute phase in the early summer, the financial markets caught a severe cold. In the late summer and autumn there have been periods of pure panic on financial markets with both large falls and great volatility in world stock exchanges, at the same time as interest rates have shot up to extremely high levels in the most vulnerable countries such as Greece, etc. As financial capital has moved from unsafe havens, interest rates have instead fallen to historically low levels in safe havens such as the US and Sweden.

For a time it looked as though the problems in the real economy could be isolated to the indebted countries, but recently we have seen clear sig-nals that the strong economies in northern Europe have also been af-fected by the turbulence. In the second quarter most of the large Euro-pean economies, such as France, the UK and Germany, more or less came to a standstill. We have also been able to note a clear slowdown among the emerging economies, for example Russia and Brazil.



Global slowdown but not a recession...

Even though there are many signs that China will continue to steam ahead, this cannot offset the weakness in the industrialised world.

Table 2 • International GDP growth

Percentage change

Much weaker growth in the devel-

oped economies in 2011 and 2012

while China will continue to grow at

a high rate. As a result, world

growth will fall below 4 per cent.

2010 2011 2012

US 3.0 1.6 1.8

EU 1.8 1.7 1.2

China 10.3 9.2 9.0

World* 5.0 3.7 3.7

Export-weighted GDP** 2.7 2.4 2.1

Sweden 5.6 4.4 1.8

*Weighted using purchasing power adjusted weights. **GDP growth in a number of coun-

tries weighted by their importance as recipients of Swedish exports.

Sources: National Institute of Economic Research and Swedish Association of Local Authorities and

Regions.

We now expect export-weighted GDP growth of 2.1 per cent in 2012 and only moderate acceleration in 2013. This is a substantial downward revi-sion compared with the Economy Report in May. However, we retain the main lines of the forecast for 2012 that we presented in August while our forecast for 2013 has been drawn down. Even though Sweden has stood strong up until now, the development of the Swedish economy cannot be expected to deviate in a decisive way from that of the rest of the industri-alised world. Sweden is deeply embedded in the international economy, through extensive foreign trade and, in particular, via links through fi-nancial markets and the general mood internationally. Although Sweden has a favourable position in many ways compared with many other coun-ties – clearly stronger government finances, a high level of savings in the private sector, etc. – we cannot expect to avoid a global slowdown.

Diagram 2 • GDP and hours worked

Seasonally adjusted values, index 2008, quarter 1 = 100

The recovery in the labour market

will slow down in 2011 and end

completely in 2012. There is a lag

between a GDP increase and an

increase in the number of hours

worked.

Sources: Statistics Sweden and Swedish Association of Local Authorities and Regions.



The result is that we also reduce our forecast for Swedish GDP growth for the next few years. We now expect Swedish GDP to grow by 1.8 per cent in 2012 and then to accelerate to 2.7 per cent in 2013. Such a relatively favourable scenario would also enable the Swedish labour market to con-tinue its recovery in 2013 with growth in the number of hours worked and falling unemployment, after a temporary break next year.

The relatively short downswing, with Swedish growth already above the level that we assess as sustainable in the long term in 2013, reflects our assessment that the debt crisis in southern Europe can be solved in fairly orderly forms. Here “orderly forms" mean that Greece and other countries succeed in reducing their debt mountains without running into acute liquidity problems, partly with the aid of support measures set up by the troika consisting of the IMF, EU and ECB, Another and perhaps more likely scenario is that Greece is forced to/chooses to make a sub-stantial writedown of its government debt. This scenario can still be con-sistent with "orderly forms" if it is handled in the right way. One neces-sary prerequisite for a successful outcome of a Greek debt writedown is that the global political system ensures that there are no knock-on effects to other indebted countries such as Italy, Spain and Portugal. This ought to be possible since, essentially, these countries are by no means in the same precarious situation as Greece, but to avoid the contagion spreading substantial expansion of the mandate of the financial institutions estab-lished by the troika is likely to be required. “Orderly forms” means, at any rate, that the financial turbulence can be dispersed in the next few years, which is necessary for a substantial global recovery to take place.

...but considerable risks of a worse scenario

However, it is not possible to rule out events taking a more dramatic turn. The European banking system has considerable exposure to indebted countries since many banks have lent large sums to the governments of these countries. A disorderly Greek default with considerable risks of major bank losses could, for example, trigger a wave of panic with severe outflows of capital from both Greece and the other indebted countries.

Table 8 • Tax base growth using different definitions, price growth for municipality and county council costs for services

Percentage change

2010 2011 2012 2013 2014 2015

As a result of successive increases in

the basic tax deduction for people

aged 65 and older in 2010 and 2011,

underlying tax base growth is higher

than actual growth in these years.

Actual change 2.1 2.6 3.5 3.2 4.1 4.7

Underlying* 2.7 4.1 3.5 3.2 4.1 4.7

Price change 2.1 1.9 1.9 2.0 2.4 2.7

Real change 0.6 2.1 1.5 1.2 1.7 1.9

*The effects of regulatory changes adjusted via the general government grants have been

removed; one example is the increase of the basic tax deduction for pensioners in 2010 and

2011.

Sources: Swedish Tax Agency and the Swedish Association of Local Authorities and Regions.

To prevent risks to the financial system several states would be forced to carry out extensive rescue operations for exposed banks, which then risk eroding the government finances of these countries. In all likelihood such a development would trigger new steep falls in stock prices and rapidly rising interest rates in indebted countries. It would also lead to very sharp movements on currency markets. In this case it is hard to see that the



euro zone would be able to avoid being pulled down into a recession. There is also a great risk that the vulnerable US economy would be drawn in, which would, taken together, also lead to a much weaker path for the Swedish economy. A risk scenario with these ingredients would lead both to a much deeper downturn and to a much more protracted downswing for Sweden than in our forecast. This would obviously also lead to a much weaker labour market with consequences for tax base growth in the next few years (table 8).

The sector will achieve a surplus thanks to restraint, higher taxes and greater government grants

Our forecast for the sector’s revenue is based on the orderly resolution of the debt crisis. Otherwise we see a much darker development for munici-palities and county councils. After the crisis in the 1990s the sector, and county councils in particular, went through many tough years. It took 13 years for the finances of the county councils to come into balance. Follow-ing a concerted drive with major savings in 2004 both the municipal and the county council sectors have reported positive net income every year since 2005. A look back at the 2000s shows that municipalities and county councils have got ever better at financial management.

However, despite the major surpluses in the past two years, there are a couple of county councils and almost twenty municipalities that have not managed to bring their finances into balance even during these years. Now that tax revenue is rising more slowly than in our earlier forecasts, the cyclical support is being phased out and government grants are de-creasing on account of the new upper secondary school, these authorities and a number of other municipalities and county councils will face very tough challenges.

Between 2010 and 2011 net income for the sector will fall from SEK 18 billion to SEK 2 billion. However, in 2011 there is a one-time cost because the municipalities and county councils’ pension liability, which is recog-nised at its present value, will rise on account of the historically low Swedish interest rate. The higher pension liability has a negative effect of SEK 8 billion on net income, with the county councils suffering most, SEK 6 billion, on account of more employees with high incomes. This means that the county councils will run a deficit of SEK 3 billion in 2011. Thanks to positive net income for the municipalities aggregate net income for the sector will be SEK 2 billion.

Hard to hold back cost increases

The good years of 2009 and 2010 came about because the crisis awareness and expected savings were so high as a result of the financial crisis. Then, when central government put up SEK 17 billion in cyclical support and the effects on the Swedish labour market were not as substantial as had been forecast by all analysts, net income reached record levels. It can be very diffi-cult to come up with yet another savings programme in a situation when net income turned out to be very positive despite all the earlier warnings. There is an inner force in services pushing for development, there is always a ser-vice that can be improved and demand for local government services is not moderating as a result of the European financial crisis. There are many calls for better schools, shorter queues in healthcare and more public transport, and it is difficult for the sector to resist all the demands. In a report we esti-



mate1 that costs increase by 1 per cent per year over and above demography, which leads to a deficit of SEK 200 billion in 2035. This is equivalent to 13 percentage points in local taxes.

After having increased, over a twenty-five year period, by 1 per cent per year over and above the consequences of demographic needs, we can now note that in the first decade of the 21st century the rate of increase for municipalities was o.7 per cent over and above demography.

Table 9 • Public sector finances

Per cent of GDP

2009 2010 2011 2012 2013 2014 2015

An expenditure ratio that falls more

rapidly than a revenue ratio leads to

a gradual reinforcement of public

finances.

Revenue 52.1 50.9 49.9 49.6 49.6 49.5 49.4

Of which taxes and con 46.6 45.6 44.7 44.5 44.4 44.3 44.1

Expenditure 53.1 51.0 49.7 49.2 48.8 48.2 47.5

Household transfers 17.6 16.5 15.5 15.5 15.3 14.9 14.5

Other transfers 3.2 3.2 3.1 3.0 3.0 3.0 3.0

Consumption 27.7 27.0 26.5 26.4 26.2 25.9 25.6

Investments 3.3 3.3 3.3 3.2 3.2 3.1 3.0

Interest expenditure 1.2 1.0 1.3 1.1 1.1 1.3 1.3

Net lending –0.9 –0.1 0.2 0.3 0.8 1.3 1.9

Maastricht debt 41.9 39.7 37.0 34.5 32.7 30.2 27.0


For the county councils the rate of volume growth remains unchanged at just over 1 per cent per year over and above demography. Our assessment is also that the county councils will not be able to hold back as much as is needed to be able to achieve positive net income in the period covered by the calculation, and we therefore expect the county council tax to be in-creased in stages by 0.19 percentage points until and including 2015.

Diagram 10 • Cost increase in constant prices and increase in demographic needs for municipalities and county councils

Per cent

Demographic needs are currently

increasing more rapidly in county

councils than in municipalities. At

the end of the calculation period

demographic needs also begin to

increase in municipalities. In addition

to costs due to demographic needs,

other costs are also rising more

rapidly in county councils, which

means that volume increases more

rapidly in county councils. County

councils have only had a slightly

lower rate of volume growth than

municipalities in 2007 and 2010.

2004 is the only year in which vo-

lume decreased in the sector.

Source: Swedish Association of Local Authorities and Regions.

1 Framtidens utmaning – välfärdens långsiktiga finansiering (The challenge of the future – the

long-term financing of welfare services), SALAR 2010.



Table 1 • Aggregate income statement 2010–2015

SEK billion in current prices unless otherwise stated.

With new assumptions, net income

for the sector is expected to be posi-

tive in the whole period until and

including 2015. Without an upward

adjustment of both general and spe-

cific government grants, net income

for 2015 would be minus SEK 8

billion instead.

Out-

come Forecast Calculation

2010 2011 2012 2013 2014 2015

Income of activities 150 152 156 161 168 175

Expenses of activities –756 –781 –804 –830 –863 –902

Depreciation and impairment –24 –24 –25 –26 –27 –28

Operating expenses, net –630 –653 –673 –695 –722 –754

Tax revenue 521 538 556 575 599 628

General government grants

and equalisation

123 123 120 125 129 133

Net financial income/expense 4 –5* 2 2 2 2

Net income before extra-

ordinary items

18 2 5 7 8 9

Share of taxes and grants, % 2.8 0.4 0.8 1.0 1.1 1.2

Note: Consolidation has been carried out with respect to purchases between the sectors.

Interest rate decrease in 2011 according to guidelines for calculating pension liability: A one-

time effect of SEK-7.6 billion is included.


In this calculation we have made a new assumption to the effect that gen-eral government grants will increase by 2 per cent per year in real terms and that specific government grants will increase in line with costs as of 2013, even though government decisions to make increases are required if government grants are not to remain unaltered in nominal terms over time. The reason is that the volume growth in the sector is partly due to new government regulations followed by new government grants. On this basis net income for the sector is positive throughout the period. Despite the assumption of a higher tax rate, a low rate of volume growth for mu-nicipalities and higher government grants, the sector does not reach net income corresponding to 2 per cent of taxes and government grants in any year until and including 2015, where 2 per cent is the level designated as healthy finances. If, all else being equal, we had not made an upward adjustment of government grants in our calculation, the financial situa-tion in 2015 would instead have resulted in a deficit of SEK 8 billion.



Diagram 23 • Net income for municipalities

SEK billion

On average, municipalities have had

net income corresponding to 2 per

cent of taxes and government grants

in the 2000s. Net income falls sharp-

ly in 2011 chiefly as a result of the

phasing out of cyclical support. In

addition, the reduction of the interest

rate for pension liability means a

one-time cost of SEK 2 billion for

municipalities. When the final part of

the cyclical support is phased out in

2012, restraint will be required in

cost growth in order to attain positive

net income. During the calculation

period 2013–2015 government

grants are expected to increase and

costs are expected to follow the

trend. Net income improves during

the calculation period but does not

reach a level of 2 per cent of taxes

and government grants.


Diagram 30 • Net income for county councils

SEK billion

It took a long time to come back

from the crisis in the 1990s. But

since 2005 the county councils have

reported positive net incomes. Ad-

justed for temporary items, SEK 5.6

billion in an interest rate effect on

pension liabilities, net income for

2011 will also be positive. But net

income is poorer in the whole period

after the record year of 2010.

Note: Net costs per county council are adjusted for differences with respect to age and gend-

er. The effect of tax shifts between municipalities and county councils has been excluded.

The increase in life expectancy relates to the change between 1981–1985 and 2006–2010.



Annex

This annex presents some key indicators and the overall in-come statements of municipalities and of county councils, as well as an aggregate income statement for the sector to give an overall picture.

For diagrams showing the distribution of costs and revenue for munici-palities and county councils separately, tables presenting overviews of central government grants and other data that we usually present in the Annex to the Economy Report, we refer to our website, where we are now building up a new area called Sektorn i siffror (The sector in figures). Go to www.skl.se, choose Vi arbetar med, Ekonomi, Sektorn i siffror.

An aggregate picture of municipalities and county councils

Table 21 • Key indicators for municipalities and county councils 2010–2015

Per cent and thousands of people

2010 2011 2012 2013 2014 2015

Average tax rate, % 31.56 31.55 31.59 31.67 31.71 31.74

municipalities, incl Gotland 20.74 20.73 20.73 20.73 20.73 20.73

county councils*, excl Gotland 10.87 10.88 10.92 11.00 11.04 11.07

No of employees**, thousands 1,048 1,056 1,059 1,064 1,070 1,079

Municipalities 790 798 801 806 812 818

County councils 258 258 258 258 259 261

Note: For the average tax rate the calculations are based on unchanged tax rates for munici-

palities as of 2011. For county councils there is a tax rate increase.

*The tax base of Gotland is not included, which is why the totals do not add up.

**Thousands; average number of people in employment according to the National Accounts.

Sources: Statistics Sweden and The Swedish Association of Local Authorities and Regions.

Annex


Table 22 • Income statement for the municipalities, 2010–2015

SEK billion

Outcome Forecast Calculation

2010 2011 2012 2013 2014 2015



Depreciation –17 –17 –18 –18 –19 –20

Net expenses of activities –409 –425 –438 –452 –469 –489

Tax revenue 343 354 365 376 392 410

Gen gov grants & equalisa-

tion

76 75 74 77 80 82

Net financial income 4 1* 3 3 3 3


ordinary items

14 6 4 5 6 7

Share of taxes and grants,

%

3.2 1.3 1.0 1.1 1.3 1.5

*The one-time effect of the interest rate for pensions liabilities of SEK –2,0 billion is in-

cluded in net financial income/expense.

Table 23 • Income statement for the county councils, 2010–2015

SEK billion

Outcome Forecast Calculation

2010 2011 2012 2013 2014 2015



Depreciation –7 –7 –7 –8 –8 –8

Net expenses of activities –221 –229 –235 –243 –253 –266

Tax revenue 179 185 191 199 208 218

Gen gov grants and equali-

sation

47 47 46 48 49 51

Net financial income 0 –7* –2 –1 –1 –1


ordinary items

5 –3 1 2 2 2

Share of taxes and grants,

%

2.1 –1.4 0.3 0.9 0.8 0.6

*The one-time effect of the interest rate for pensions liabilities of SEK –5.6 billion is in-

cluded in net financial income/expense.

Source: The Swedish Association of Local Authorities and Regions.

The Economy Report. October 2011

On Swedish Municipal and County Council Finances

is a series published twice yearly by the Swedish Association ofLocal Authorities and Regions (salar). In it we deal with the pre-sent economic situ ation and developments in municipalities andcounty councils. The calculations in this issue extend to 2015.

The local government sector has shown historically good levels ofnet income in both 2009 and 2010, but this year net income for thesector will fall drastically. The main explanation is that the lowlevel of interest rates increases the present value of the local go-vernment pension liability and that a gradual start is being madeon the phasing out of cyclical support. The net income forecast isbased on an orderly resolution of the debt crisis in Europe; other -wise the development of the sector can be much darker. Subse-quent years see a slight improvement of net income. This is duein part to restrained cost growth, but is also due to our assump-tion of decisions on future increases in government grants. Forthe county councils, tax increases will also be required if their ag-gregate net income is not to fall below zero.

The report is not for sale, but it can be downloaded from the web -site of Sveriges Kommuner och Landsting: www.skl.se. Choose InEnglish and then Publication and reports.

Download at www.skl.se/In English, Publications and reports.

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