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 20Phone +46 8 452 70 00 | Fax +46 8 452 70 50www.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
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 20132015 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
The Chief Economists 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
An aggregate picture of municipalities and county councils 10
The Economy Report. October 2011 On Swedish Municipal and County Council Finances 3
The Chief Economists 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.
The Chief Economists conclusions
4 The Economy Report. October 2011 On Swedish Municipal and County Council Finances
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
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 Chief Economists conclusions
The Economy Report. October 2011 On Swedish Municipal and County Council Finances 5
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