sou · GWB3105EN · 2009-01-01 00:00:00 — Långtidsutreningen Huvudbetänkande, english The Long-Term Survey 2008 of the Swedish Economy 2008_SOU försätts S-format_sv.indd 1 This report is on sale in at , which supplies Swedish official government reports (SOUs) and departmental series (Ds) and also on behalf of the Government Offices, Office for Administrative Affairs, arranges for them to be circulated to the competent parties for comments. Telefax: (national) +46 8 690 91 91 (international) Telephone: (national) +46 8 690 91 90 (international) E-mail: Internet: The English translation is by , . 2008_SOU register S-format.indd 1 The Long-Term Survey 2008 has been prepared by the Division for Structural Issues in the . In addition a number of special studies related to the main report have been published as appendices. The work on the main report of the Long-Term Survey 2008 has been carried out under the leadership of Deputy Director . The group that has written the main report includes , Special Advisers and , and Desk Officers and . Senior adviser , Deputy Director , and Desk Officers , and have also participated in discussions concerning the design and contents of the main report. They have also contributed with input to the main report. and have likewise contributed input. Finalisation of the main report was done by Administrative Officer , who, together with Assistant , has also been responsible for administrative work. In the course of the work, seminars were arranged with individual experts in the areas analysed in the Survey. I wish to express my sincere appreciation to all those who have contributed to the Long-Term Survey 2008. Acting Head of Division 1 Introduction: Trends Affecting Growth .......................... 1.1The Long-Term Survey 2008 focuses on the 1.1.1 An ageing and better educated population ................. 1.1.2 Changes in demand patterns with rising incomes...... 1.1.3 Internationalisation affects an increasingly large part of the economy ..................................................... policy areas for meeting the future ................................. Long-Term Economic Development .............................. Growth remains good.............................................................. 2.1.1 Increasing importance of world trade ......................... 2.1.2 Weak increase in the labour supply and a higher level of education.......................................................... 2.1.3 Strong productivity growth continues........................ 2.1.4 Investment holds the capital ratio unchanged ............ 2.1.5 Uncertainty about energy prices and climate Public finances under pressure................................................ 2.2.1 Employment determines tax revenue.......................... 2.2.2 Unchanged quality and coverage in the welfare Contents The Long-Term Survey 2008 Increasing the Labour Supply ...................................... Major changes in the labour market........................................ People are working less................................................. Two divergent trends in the level of education........... 3.2Earlier labour market entry age through a more efficient 3.2.1 people begin working later............................... 3.2.2 Lack of achievement at school leads to problems in the labour market...................................................... 3.2.3 Lengthy university studies ........................................... Many factors steer labour market exit .................................... 3.3.1 Exit now occurs both earlier and later......................... 3.3.2 Health and education affect work opportunities........ 3.3.3 Not everyone benefits from working for a longer 3.3.4 The norm of a pension at age 65 has begun to Good Productivity Growth ............................................ Productivity growth varies substantially ................................ 4.1.1 Healthy productivity growth since the early 4.1.2 Productivity growth varies from industry to Services affect productivity in other industries...................... 4.2.1 The increasing importance of business services as an input in industry....................................................... 4.2.2 Importance of business services for productivity in other industries ......................................................... 4.3Productivity is determined by investment, labour force skills and technological developments .................................... Investment is important for productivity growth ...... The quality of the labour force is important for The Long-Term Survey 2008 Contents 4.3.3 Total factor productivity has many underlying Economic Change and Adaptability ............................ Alternative definitions of change.......................................... The pace of change is unclear................................................ 5.2.1 The pace of structural change has varied................... Stable employment dynamic ...................................... Stable business dynamic ............................................. 5.3Technological development and internationalisation affect Considerable individual effects of change............................ Ways of adjustment for companies and employees............. 5.5.1 Companies have different adjustment strategies...... 5.5.2 The individual moves or changes occupation or 5.5.3 The policy must take a broad approach to Energy, Climate and Economic Growth ....................... An integrated climate and energy policy.............................. 6.1.1 The international framework is now in place............ 6.1.2 Many regional and national targets and policy Economic growth has increased more than energy consumption and carbon dioxide emissions ........................ 6.2.1 The composition of energy consumption is of crucial importance to carbon dioxide emissions....... 6.2.2 Increasing importance of structural change in changing energy consumption................................... 6.2.3 A global increase in energy consumption and carbon dioxide emissions is expected........................ The Long-Term Survey 2008 Climate policy affects economic development..................... 6.3.1 The costs of limiting carbon dioxide emissions need not be high.......................................................... 6.3.2 An effective Swedish climate policy .......................... 7.1Limited possibilities for tax financing the growth of Unchanged tax rates mean an unchanged Tax financing limits additional resources .................. 7.2Costs will probably increase more than in the base 7.2.1 Weak historical link between the cost of welfare service and demography ............................................. 7.2.2 opportunity for productivity 7.2.3 The health of the population affects cost trends ...... Internationalisation affects the welfare sector ..................... 7.3.1 The enduring basis of the welfare sector................... 7.3.2 New opportunities for increasing international Further development of welfare services requires change... 7.4.1 An increase in the labour supply may help in the 7.4.2 Public sector surplus creates a buffer ........................ 7.4.3 Long-term financing requires other solutions .......... A Policy for the Future .............................................. 8.1.1 The composition of the population affects the labour supply and the demand for welfare 8.1.2 Changes in demand patterns may dampen growth... The Long-Term Survey 2008 8.1.3 Internationalisation requires economic 8.2 Policy recommendations ....................................................... 8.2.1 Encouraging a longer working life............................. 8.2.2 Work for good adaptability in the economy and 8.2.3 Exploring possible arrangements for more private financing of welfare services ...................................... 8.2.4 Working towards a global climate policy based on effective policy instruments....................................... The aim of the Long-Term Survey is to provide a basis for economic policy and initiate a debate about economic policy formulation. It should also provide an overall picture of economic developments in the long term. The Survey is prepared by officials at the and the political leadership of the Ministry has not taken a position on the contents. The Long-Term Survey 2008 consists of a main report and eight separate appendices. The main conclusions in the Long-Term Survey 2008 are that in order to create good conditions for growth, economic policy should focus on the following: Encouraging a longer working life. Efforts should focus on making the educational system more effective and promoting a later exit age from the labour market, in addition to the work already being conducted to reduce exclusion. Working for good adaptability in the economy and more competition. The policy should take a broad approach to improve adaptability. Competition, not least international competition, should be fostered. This is particularly important in those parts of the service sector where competition is currently limited. Exploring possible arrangements for more private financing of welfare services. An increased demand for better quality in the welfare services cannot be met within the framework of the existing system. A broad-based inquiry should be appointed to submit proposals for a long-term, stable system for financing welfare services. Working for an international climate policy based on cost- effective policy instruments. Making use of the opportunities that exist within the framework of the Kyoto Protocol with its flexible mechanisms and working at the international level for an extension of the system. The Long-Term Survey 2008 The central theme of the Long-Term Survey 2008 is the possi- bilities for promoting healthy growth and a good standard of living. There are a number of trends that can be expected to characterise growth over the next 15–20 years. In particular, the Survey thinks that the changes in the composition of the population with an ageing population, changes in demand patterns in the direction of greater service content and continued internationalisa- tion will influence economic development and policy formulation in the years ahead. To differing extents, these trends have an impact on various parts of the report. The Survey identifies a number of core areas on which policy should focus in order to better equip to meet the future. The following need to be achieved: A plentiful labour supply A good ability to adapt and change A cost-effective climate policy Stable welfare systems. Economic development up to 2030 is described in a base scenario, which in principle is based on the continuation of the development patterns of recent decades. The aim of the estimates in the Long- Term Survey 2008 is not to try to forecast the development of the Swedish economy in the long term but rather to illustrate one possible path in a structured way. The base scenario serves as a starting point for analysing and discussing the effects of policy and external changes. The basic factors for growth to take place are labour supply and productivity. The Surveys starting point for assessing labour supply development is Statistic latest population forecast, according to which the number of people of working age increases weakly until 2030. In the base scenario, there is also a weak increase in the number of hours worked, due in part to the assumption that in principle, employment patterns do not change. At the same time the labour force becomes increasingly well educated, which means The Long-Term Survey 2008 Summary an increase in the share of hours worked by people with a postsecondary education. The scenario also assumes that productivity growth in the business sector continues to be strong even though it is somewhat lower than the average rate of growth between 1980 and 2005 and considerably lower than the relatively rapid growth since 1990. In addition, climate policy is assumed to be cost-effective. The basis of the scenario is that tax rates are unchanged in relation to the respective tax base, which is sufficient to finance an unchanged standard in public sector activities. The main results of the estimates are: Gross domestic product (GDP) grows an average of 2.2 per cent a year between 2005 and 2030. This is the same as the average rate of growth between 1980 and 2005. The structural change calculated in the base scenario, where the importance of the service sector in particular increases, has a dampening effect on total productivity growth in the business sector. Household private consumption expenditure grows more rapidly than GDP, at 3.1 per cent annually. Public consumption grows weakly during this period, at not quite 0.7 per cent a year. Public finances are sustainable in the long term under the base scenario. One prerequisite for this to be realised is that the estimates assumption of unchanged coverage and quality in public sector activities is fulfilled. Favourable developments in the labour supply create the conditions for economic growth. Development of the labour supply is also key for financing the public welfare systems. In the Survey, the discussion on the number of hours worked in the economy centres on how labour market entry and exit ages have developed and how they can be influenced. Relatively small changes in the entry age and the exit age would have a substantial impact on the labour supply. Labour market entry today takes place late. This is largely due to more people getting a longer education, but it is also due to the The Long-Term Survey 2008 long time it takes to go through the education system and to more young peoples postponement of their university studies. The Survey draws the following conclusions on the level of education among young people and how student throughput in the education system can be improved: There are two divergent trends in young peoples level of education. The percentage of young people with a higher education is growing but at the same time the percentage of young people with less than an upper secondary education is persistently high. than a quarter of the nations twenty year olds have not completed upper secondary school and just over a third lack basic entrance requirements for university studies. Information needs to be improved on such matters as average income and risk of unemployment after various education alternatives so that people choosing an education can make a well considered decision. Greater economic incentives for more rapid throughput to getting a degree or diploma should be considered, for example, via fees for university studies and premiums in the study support system. Currently just over a half of Swedish university entrants get their degree within seven years. The number of hours worked in the economy can also increase by a later exit age from working life. Even though the exit age from the labour market has risen somewhat in recent years, average life expectancy has increased more than working life has, i.e. retirement time has increased. The new pension system may have a positive effect on the labour supply but it also includes an option to retire earlier if desired. The old-age pension system, at least for large groups, rewards staying in the labour force. However, the system gives certain groups weaker economic incentives to keep on working when they are older. This is the case for people with high incomes, as incomes over 7.5 base amounts do not give public pension rights even though pension contributions are deducted. This is also the case for people with low incomes as the guarantee pension, often combined with the housing supplement for pensioners, does not create incentives to continue working. The Long-Term Survey 2008 The average exit age is still under 65 years and exit generally takes place via benefit systems other than the state old-age pension. It takes place foremost via supplementary pension schemes and via sickness and activity compensation. The chapter in which this is discussed concludes that there is no simple solution for bringing about a later exit age. Some con- clusions are: The starting time for taking the old age pension varies increasingly. people are taking the state old age pension later, but there are also more who are taking it earlier. It may be a sign that the norm of a pension at age 65 is beginning to loosen. A later exit age would require tightening the different available exit options for leaving working life. Consideration needs to be given to how the age limits in the old age pension system can be tailored to the change in life expectancy. This also applies to private and collective pension savings, which often have a substantially lower age limit for retirement than the state old age pension system. There has been strong productivity growth in the Swedish business sector since the beginning of the 1990s, which an international comparison also shows. The recent slowdown in productivity does not affect this assessment. The increase in total factor productivity explains a substantial part of the productivity growth in the economy during this period. Total factor productivity can be described as the contribution from technological developments in a broad sense. The contribution of total factor productivity from telecommunications products in particular has been substantial in the latter part of the 1990s. It is difficult to estimate precisely how much a particular factor affects productivity development. Structural changes greater macroeconomic stability, training programmes, deregulation and developments in information technology are important general factors that may help explain the strong productivity growth in recent decades. The Long-Term Survey 2008 Productivity differs considerably from sector to sector. The increased demand for services has led to a shift in employment to the service sector, a sector that has historically had a lower productivity growth than manufacturing. The service sectors growing role as an input factor in manufacturing is the main explanation for the growth of the service sector, although demand by the end-user has also increased somewhat. With a growing service sector, productivity development in the sector is clearly of increasing importance to the whole economy. Competition, not least international competition, in the service sector is currently limited to a considerable extent by regulatory regimes in and other countries. To some extent, the low level of competition can be attributed to the nature of services; for example, some services have to be consumed in connection with production. But technological developments also make it possible to purchase a greater percentage of the production of services internationally. In the chapter on productivity developments we come to the following conclusions: The impact of the increased service input in production on productivity developments in the economy as a whole is not obvious. A greater use of services in a sector may lead to productivity improvements. Measures promoting competition in the economy are urgent since they can contribute to better productivity development. Such measures are particularly urgent in the service sector, where competition is limited compared with competition in the production of goods. A policy aimed at promoting strong productivity growth must take a broad approach and have a general orientation. The policy should focus on creating good and equal conditions for enterprise and entrepreneurs in all sectors. This is important since productivity developments are decided by a number of different factors, which in addition, often interact. Transformation and adaptability of the economy From a long-term perspective, there has been a substantial transformation of the Swedish economy. The Long-Term Survey 2008 tion of the economy has spread, it is often asserted that the pace of change in the economy has increased. The concept of change has no clear-cut definition and it is relevant to study changes both between sectors and within sectors. There are therefore a number of different measures of change. Both companies and workers must constantly adapt to new conditions. Workers adapt to change primarily by changing occupation or employer, while geographic mobility is less common. To increase individual adaptability, both geographic and occupational mobility need to increase. The effects of change on the Swedish economy are difficult to foresee. The adjustment of production in recent decades has not meant a change in areas of specialisation. Likewise in the future will still have the natural resources and the relatively well educated labour force on which current comparative advantages are based. But technological development now makes it more possible to separate stages in the production process and thus increases the possibilities of moving more parts of the production to other countries. The chapters main conclusions are that: The pace of change has no clear-cut definition and thus change can be measured in various ways. There are many indications that the pace of structural change has been higher, but has not been increasing, in the 1990s and 2000s compared with the 1980s. A well-functioning policy for improving adaptability in the economy must take a broad approach and include several policy areas: the labour market, housing, research, infrastructure, taxes, education, etc. There is no simple individual measure that improves adaptability in the economy. The policy neither can nor should aim at preventing job oppor- tunities from disappearing but rather at creating conditions for new job opportunities. Energy, climate and economic growth A well-functioning energy supply is essential for the economy. According to estimates, total energy use is expected to increase sharply, both in and in other countries. There is a clear The Long-Term Survey 2008 connection between energy use and economic growth that has not changed appreciably in the last few decades. Energy intensity, i.e. energy use in relation to GDP, does indeed decline continuously, but any reversal of the trend in the form of a more rapid reduction has not been established. Energy use in the form of burning fossil fuels gives rise to carbon dioxide and other emissions that are probably a strong contributing factor to climate change. The Survey looks at the connection between carbon dioxide emissions and economic growth. In the 1970s and 1980s, emissions of carbon dioxide in relation to GDP (carbon dioxide intensity) declined more rapidly in than in the rest of the world. This was due to a change in the composition of energy rather than to more efficient use of energy. Since 1990, carbon dioxide intensity has declined at approximately the same pace in as in countries in general. The reduction has been largely the result of ongoing structural change in the economy. In order to achieve national commitments on emission limitations in the most cost-effective possible, flexible mechanisms have been established under the Kyoto Protocol. When countries have the opportunity to participate in emissions trading or implement measures to reduce emissions in joint projects with other countries, emission reductions can be accomplished at a lower cost. The Surveys base scenario assumes that this policy will extend over an increasingly large part of the economy between now and 2030. If chooses to make full use of international emissions trading possibilities, the cost of reducing emissions affecting the environment to a level equivalent to about 70 per cent of 2005 emissions by 2030 would be relatively limited. In an alternative scenario, the Survey calculates the costs of a climate policy that instead focuses solely on national emissions, and limits the possibility of using flexible mechanisms.