sou · GWB3105EN · 2009-01-01 00:00:00 — The task of the Long-Term Survey is to provide a basis for economic policy decisions. As part of this basis, the Survey provides an overall assessment of macroeconomic development in in the long term. The scenarios, i.e. projections of possible long-term economic developments in , are an important aid in this assessment.14 The estimates in the scenarios are based on such factors as population projections, productivity trends, forward projections and forecasts of world market trends. The estimates stretch to 2030, with an extended look at the for public finances to 2050. The estimates in the scenarios serve as a starting point for highlighting trends and identifying important economic policy problems and analysing the effects of policy changes and changes elsewhere in the world in alternative scenarios. The base scenario should not be seen as a long-term forecast. The scenario provides a picture of production and consumption possibilities in the event that no major policy changes are imple- mented. the next few years, the effects of the policy already decided, but which have not yet been fully realised in the economy, will be observed in some measure. , for example, measures to stimulate the labour supply do have some impact in the scenarios. The scenarios are calculated using both a model that describes real economic flows between various business sectors, households, the public sector and international trade and a model that describes public finance developments in more detail. The estimates in the two models are based on the same assumptions and the results are 14 The scenarios and the assumptions used in the estimates are presented in more detail in appendix 1 to the Long-Term Survey 2008 (SOU 2008:108). The Long-Term Survey 2008 reconciled in order to provide as accurate and comprehensive a description of economic developments as possible. Among the developments described in the base scenario is the weak increase in the number of hours worked during the period despite more immigration of working-age people. At the same time economic growth is relatively good, largely thanks to a healthy growth in productivity. With an increasing number of elderly in the population, general government expenditure as a percentage of GDP will increase until 2030 even if the quality and the extent of public activities is unchanged on a per person basis. After 2030, the cost pressure from demography will decline. The public finances are sustainable in the long term, but for this to remain so, there can be no change in the standard of public activities. Economic growth in the form of GDP grows in the base scenario at the same pace in the future as it has since 1980, a growth of 2.2 per cent a year. This GDP growth is the result of the assump- tions made in the base scenario, including developments in world markets, labour supply and productivity. These factors are described in the following sections. The estimates do not take cyclical fluctuations into account. The development illustrated in the base scenario should therefore be viewed as the development of a potential GDP with a normal resource utilisation. In reality, cyclical fluctuations will occur that lead to actual production, unemployment and other components that are more or less than the potential. Table 2.1 shows a number of key indicators from the base scenario. The Long-Term Survey 2008 Table 2.1 indicators from the base scenario Note: Demand and output development in volume terms. Source: Appendix 1 to the Long-Term Survey 2008 (SOU 2008:108). 2.1.1Increasing importance of world trade There has been considerable economic integration in the past decade and this trend is likely to continue in the years ahead. Global GDP has grown an average of 3.6 per cent a year since 1980 at the same time that global trade has grown an average of 6.3 per cent a year. Underlying the increase in trade is a combination of falling trade barriers and lower transaction costs. Cooperation in the () has been among the factors contributing to lower customs duties and a number of free trade areas have been formed, resulting in increased trade. At the same time, information technology developments have lowered the cost The Long-Term Survey 2008 to business of acquiring, storing and transmitting information. Trade liberalisation and technological developments, together with reduced barriers to business investment, have made it easier for multinational companies to divide up production and locate it in different regions. In the base scenario, international trade grows at about the same pace as the trend in recent decades. Export growth is slower, but still relatively strong. All in all, trade surplus declines to about 2.5 per cent of GDP by 2030. This decline is due in part to an ageing Swedish population that saves less and buys more domestically produced services. The trade in services increases its share of both exports and imports between now and 2030. This does not mean that trade in manufactured goods declines, but rather that trade in services increases somewhat more rapidly. The increase occurs in several service industries but is expected to be greatest in leasing and busi- ness services industries. In the base scenario, the price of goods imported into rises somewhat faster than the price of exported goods, i.e. terms of trade worsen. This is due in part to rising prices for energy producing raw materials. It is also due to falling prices for manufactured goods, which have also caused a worsening in terms of trade before. 2.1.2Weak increase in the labour supply and a higher level of education Future growth are affected by how the employment rate and the number of hours worked develop. In recent decades the total number of hours worked in the economy has varied with the business cycle. They reached their highest level in 1990 and then fell sharply during the crisis in the 1990s (figure 2.1). In 2007 the number of hours worked had again reached the level that prevailed in 1990. Since the recession at the beginning of the 1990s, the number of hours worked per person of working age has been just over 1 200 hours a year compared with almost 1 340 a year in 1989 and 1990. The Long-Term Survey 2008 Figure 2.1 Number of hours worked 1980–2007 Total hours worked (left axis) Hours worked per person of working age (right axis) Source: Statistics [b] and [2008b]. In the base scenario, an in principle unchanged behaviour by labour is the basis for future trends in the labour market. This means that the employment rate, etc. by age, gender, and ethnic background is unchanged. Chapter 3 discusses various ways of increasing the employment rate by extending working life. The trend in the total number of hours worked in the economy is therefore governed primarily by population changes, which in the scenario are based on Statistics population projec- tions.15 According to Statistics projections, popula- tion will increase from the current 9.2 million to 10.1 million by 2030. By 2050 the population is expected to grow to 10.5 million. Most of the population increase is made up of people who are not of working age (figure 2.2). 15 Statistics [2008b]. The Long-Term Survey 2008 Figure 2.2 population increase 2008–2050 0–19 years 20–64 years Source: Statistics [2008b]. Immigration accounts for most of the population growth and is of crucial importance for the growth of the working-age population. People born outside the EU – a group that currently has an employment rate substantially below the average – account for by far the greatest number of immigrants. Consequently the number of people employed only increases weakly up to 2030. The number of hours worked is expected to increase by an average of 0.3 per cent per year during the same period. The Swedish labour force is becoming increasingly well educated and this trend is expected to continue in the future. Under the scenarios, the percentage of hours worked by people with a postsecondary education increases from 34 per cent in 2003 to 46 per cent of the total number of hours worked in the economy in 2030. The increase in the level of education is particularly strong in the private business sector. At the same time, skilled workers are in increasing demand in production, wage differences between highly educated and less highly educated labour relatively in the base scenario. The Long-Term Survey 2008 2.1.3Strong productivity growth continues Productivity growth, i.e. greater value added per hour worked, is of crucial importance for the growth of economic prosperity. Since the beginning of the 1990s, productivity in the business sector has increased by an average of almost 3 per cent a year. The high productivity growth, particularly in the second half of the 1990s, was largely due to good productivity development in the tele- communications products industry. In the base scenario, produc- tivity growth in the business sector continues to be healthy and is estimated at 2.3 per cent a year between 2005 and 2030. This is somewhat less than the growth rate between 1980 and 2005 of 2.5 per cent a year and considerably lower than the growth since 1990 (table 2.1). Productivity growth differs from one industry to another. The rate of increase in manufacturing, particularly that which is know- ledge-intensive, has been high while the productivity of certain service providers and the construction industry has grown more slowly. These differences remain in the base scenario where the average rate of growth in manufacturing is 3.8 per cent a year, while the productivity of service providers as a whole increases by 1.8 per cent a year between 2005 and 2030 (table 2.2). The highest rate of growth is still among the knowledge-intensive manufacturing sectors even though they do not reach the high rate experienced in the 1990s. Among service providers, productivity growth is low in education and health related services and business services in particular. The first-mentioned also have a relatively low level of productivity. The Long-Term Survey 2008 Table 2.2 Structural change and productivity in the business sector 2005–2030 Percentage of GDP and hours worked and annual percentage change in productivity (SNI 15–37) (SNI 50–95) (SNI 01–14, 40–45) Note: SNI means Svensk näringsgrensindelning (Swedish business sector classification) and is based on the EU NACE standard. Production units, such as companies and workplaces, are classified under the activity conducted. Source: Appendix 1 to the Long-Term Survey 2008 (SOU 2008:108). The structural change calculated in the base scenario, where the importance of service industries in particular increases, has a damp- ening effect on total productivity growth in the business sector. At the same time, the use of services as an input in other production is increasing and thus the impact on productivity in the economy as a whole is ambiguous. Chapter 4 discusses at greater length how productivity growth in different industries affects economic development. Productivity growth in the public sector is assumed to be zero.16 Structural change also occurs in public production since population trends to 2030 lead to an increase in the production of health care and social services, particularly elder care, and a reduction in the proportion of education services.17 In total, developments in the 16Previously productivity growth in the public sector by definition was zero in the national accounts. This principle has now been revised so that productivity in certain parts of the public sector can vary over time. However, the results reported up to now provide guidance and the assumption of productivity is therefore retained in the Long- Term Survey 2008. 17There may be an indirect effect of this development as the public sectors requisitioning of resources, for example, well educated and low-skilled labour, is changed in connection with the changes in the sectors production structure. The production of health and social services uses a lower percentage of highly educated people compared with education services. The structural change in public production thus frees up highly educated labour for production in the business sector. The Long-Term Survey 2008 business sector and in the public sector lead to a growth in productivity in the economy as a whole of 2 per cent a year between 2005 and 2030. 2.1.4Investment holds the capital ratio unchanged Investment is essential to maintain and expand the real capital stock. Investment can be classified as housing and the and machinery needed for production in the business and the public sectors. Most of capital stock consists of housing and , which together represent over 80 per cent of the total real capital value in . Investment growth in the base scenario is based on estimates of the rate at which the capital stock must grow in order for the assumptions about production and productivity growth to be valid. Between 1980 and 2005, the ratio of capital stock to GDP, i.e. the capital ratio, was about 2.3. In the base scenario, the capital stock grows so that this ratio is also valid in 2030. The annual growth in the public capital stock is assumed to follow general economic trends for the most part. The slow volume growth in public consumption has, however, some impact and the public capital stock will therefore grow marginally slower than GDP. Other investment needed to achieve this capital ratio in 2030 occurs in the private sector. The composition of various types of capital in different sectors and their respective depreciation rates are assumed to remain the same as they were from 1993 to 2005. In order for this growth in capital stock to come about, an average of 18 per cent of GDP needs to be used for investment. Total investment thus grows 2.1 per cent a year between 2005 and 2030. 2.1.5Uncertainty about energy prices and climate policy After almost two decades of relatively low and stable energy prices, world market energy prices have once again risen. Analysts are not united on energy price trends but many predict that (real) equilib- rium prices will be considerably higher in the long term than they were in the 1990s.18 Natural gas prices will rise in line with the oil 18 IEA [2007], Commission [2008a], [2008]. The Long-Term Survey 2008 price and the price of coal will grow somewhat more weakly. The base scenario assumes that the price of energy resources follows the EU Commissions forecast, which includes a crude oil price equivalent to just over a barrel in 2030.19 In addition to the price of energy resources, the uncertainty about the impact of future climate policy affects energy prices. Most likely climate policy will lead to higher fossil fuel prices for the end-user in the years ahead. The base scenario assumes that an internationally coordinated carbon dioxide market will be in place by 2030. The assumption is based on the policy recommendations for achieving an effective global reduction of carbon dioxide emis- sions that have been put forward in a number of studies.20 With long-term estimates as the basis, the Survey assumes a 2030 carbon dioxide price equivalent to about per ton,21 and an international market for emission reductions largely without trade barriers. According to many analysts, such an internationally harmonised climate policy has relatively impact on global economic growth. The estimates in the base scenario also show the same to be true of the Swedish economy. Chapter 6 discusses how an alternative climate policy formulation affects the Swedish economy. 2.2Public finances under pressure Public finances are decided by both public revenue, primarily tax revenue, and public expenditure, and how these develop over time. A further increase in the demand for publicly financed welfare services, together with limited opportunities to increase tax reve- nue as a percentage of GDP, puts public finances under pressure in the long term. 2.2.1Employment determines tax revenue Most tax revenues come from direct or indirect taxation of work. The bulk of household income taxes and the employers social security contributions are governed by the size of the payroll. 19In 2005 prices. European Commission [2008a]. 20Stern, N. [2007], [2008a], IPCC [2007]. 21In 2005 prices. [2008a]. The Long-Term Survey 2008 These taxes account for more than half of public revenue. Developments in the labour market also exert considerable influence on household consumption expenditure, which in turn provides tax revenue in the form of the value added tax and excise duties. In the base scenario, all tax rates are held in relation to the respective tax base. Table 2.3 Taxes and charges as a percentage of GDP 2005–2050 Direct taxes and charges on households Direct taxes on corporations Employers and self-employed persons Note: 1 Excluding wage-dependent indirect taxes. 2 Including wage-dependent indirect taxes. Source: Appendix 1 to the Long-Term Survey 2008 (SOU 2008:108). Even if tax rates are held in relation to each tax base, the total tax ratio, i.e. taxes and charges in relation to GDP, will change (table 2.3). As a result of changes in the composition of demand and output, several important tax bases grow more rapidly than GDP. This applies above all to household consumption expendi- ture, which grows when net exports decline. As there is a higher tax on consumption than on export, the tax ratio in the base scenario rises somewhat up to 2030. 2.2.2Unchanged quality and coverage in the welfare systems Public expenditure consists primarily of public consumption, i.e. tax-financed goods and services and transfers in such forms as social insurance and pensions. The Long-Term Survey 2008 Population changes govern public consumption The base scenario expects an increase in public consumption of almost 0.7 per cent a year between 2005 and 2030. The increase is due to the demographic trend since the basis for the scenario is that consumption by age and gender is . This is, of course, simplified since a large number of factors in addition to demo- graphy may possibly affect demand and consumption of public services. For example, better health, improved technology and changes in preferences may very well have a substantial impact on the growth in public consumption. In the scenario, it is prima- rily the consumption of health care and social services, particularly elder care, that grows. Table 2.4 shows the growth in public consumption as a percentage of GDP broken down by activity. Table 2.4 Public consumption growth by activity 2005–2050 Child and youth education Source: Appendix 1 to the Long-Term Survey 2008 (SOU 2008:108). The modest growth in public consumption of 0.7 per cent a year up to 2030 (table 2.1) may be seen in relation to the growth in house- hold private consumption expenditure. Private consumption is expected to grow by 3.1 per cent annually, partly as a result of the fall in the household savings ratio when total savings in the economy decline as the population ages. The Long-Term Survey 2008 Assumption of a standard guarantee in the transfer systems In the estimates it is assumed that public transfer systems stand- ards are maintained. A large part of the transfers are covered by regulations that automatically raise benefits in line with wage growth. This applies to pensions, which are adjusted upwards using an income index, and to some extent to transfers compensating for loss of income, such as sickness and parental insurance. Transfers lacking this type of automatic standard guarantee, such as child allowances and study support, increase in line with wages in the scenario estimates. Such a standard guarantee counters the erosion that would take place in the long term if the calculation was based strictly on unchanged regulations. The standard guarantee thus assumes that some reforms are carried out at the same pace as economic growth. The calculation of pension expenditure in the base scenario is based on demographic developments, the macroeconomic assump- tions and current regulations. In addition, the average retirement age is assumed to remain unchanged in the future, despite an increase in average life expectancy in the period. Section 3.3 reports the result of one of the Surveys alternative scenarios that assumes a gradual increase in the labour market exit age.22 Table 2.5 shows the growth in various transfers as a percentage of GDP. 22 The alternative scenario is described in more detail in Appendix 1 to the Long-Term Survey 2008 (SOU 2008:108). Long-Term Economic Development The Long-Term Survey 2008 Public transfers 2005–2050 Note: age = old-age pension, survivors pension, state and local authority occupational pensions and the housing supplement for pensioners. Ill health = sickness and work injury insurance, sickness and activity compensation and assistance allowance. Children/studies = child allowance, parental insurance, maintenance support and study.grants. Labour market = compensation when unemployed or in employment training as well as wage guarantee. Included in other is a technical adjustment in the form of a transfer from the central government to households resulting in general government net lending of 1 per cent of GDP in 2015. See appendix 1 for a more detailed description of the basis for this assumption. Source: Appendix 1 to the Long-Term Survey 2008 (SOU 2008:108). No change in the standard is crucial for sustainable public finances All in all, public expenditure on transfers, consumption and investment is expected to increase somewhat as a percentage of GDP until 2030 and decline thereafter. Assuming unchanged quality and scope in the welfare services per age and gender, it is population trends that cause the increase in public expenditure as a percentage of GDP until 2030. After 2030, the expenditure pres- sure from demography will decline. In order to decide if public finances are sustainable in the long term, the definition is usually that current policy, if maintained in the future, does not lead to uncontrolled debt growth. Under this criterion, public finances are sustainable in the long term in the base scenario. However, this development depends on several critical assumptions made in the scenario. The Long-Term Survey 2008 First, the surplus target (or the balance target), which means that general government net lending is to be 1 per cent of GDP over a business cycle, is met through 2015. Second, the quality and scope of public activities remains unchanged. Sensitivity calculations have shown that long-term sustainability is totally dependent on the assumption of an unchanged standard in publicly financed activities.23 As discussed in chapter 7, it is probable that the public will demand increased quality and scope for the services financed by the public sector when the overall standard of living rises. In the Long-Term Surveys base scenario, developments through 2030 result in an annual average GDP growth of 2.2 per cent. Such economic growth obviously increases economic prosperity. The growth is explained principally by higher productivity. However, the contribution to growth from the labour supply is limited owing to the modest growth in the working-age popula- tion. Under the base scenario, private consumption will increase much more rapidly than public consumption. In the long run, the scope for real wages grows more or less in line with productivity. Furthermore, with an ageing population, savings in the economy fall while consumption increases. At the same time, the demand for welfare services will increase and thus add to the pressure on public finances in the long term. Developments described in the base scenario should not be seen as a forecast but rather as a description of a possible course of events. Growth may be higher or lower, depending on labour supply and productivity growth.