allocated equally to all household members and likewise for public consumption. If, for instance, a child goes to a public daycare center at a cost for the tax payers of say 100 000 SEK per year, these 100 000 are split equally between all family members.

SESIM only simulates the household sector - incomes, taxes and transfer payments. The share of the public sector not covered by SESIM was simulated using a macro model called FIMO, and the result was distributed to the individuals in the household sector. It is a model based on the national accounts which simulates annual public incomes and expenditures at a rather detailed level for the government, local governments and the pension system. It also includes the most important macro economic variables such as GDP, the labor force, prices, interest rates etc. and the population by gender and age groups. The core of FIMO is an aggregate representation of the rules for taxes and transfers. The model does not allow the population to adjust endogenously to changes in taxes and benefits, but such changes have to be imposed on the model exogenously. SESIM and FIMO were run in parallel using the same exogenous assumptions about population changes, productivity, prices and interest rates. For instance, the real wage rate was assumed to increase by 2 per cent annually, the labor force participation rate was set to 80 per cent in the age bracket 16-64, consumer prices were assumed to increase by 2 per cent annually and the interest rate on financial assets was 3 per cent. The sum of all individual taxes and transfer payments simulated in SESIM did not always agree exactly with the corresponding items in the national accounts and in FIMO. The difference was then distributed equally across all adults.

All simulations assumed unchanged policy, i.e., the tax system and the rules for transfer payments that applied in the beginning of the current century were assumed to remain unchanged. However, some transfers are not indexed and some are only indexed by the CPI. In order not to decrease the welfare state all transfers and benefits were indexed by the annual average change in wage rates.

The simulations also assumed that the public finances were stable throughout the entire simulation period, i.e., the public debt as a share of GDP should be about the same at the end of the simulation period as at the beginning. The budget target of a surplus of 2 per cent over a business cycle was also enforced. Real welfare expenditures per capita were assumed unchanged while the effects of the demographic changes were allowed to go through fully. The budget target was maintained through the tax changes.

The welfare state has grown and the expenditures for transfer payments and for public consumption have increased. To finance the growth of the welfare state taxes have increased from about 10 per cent of GDP in the 1930s to about 50 per cent in the 1980s. After that and in the simulated future the GDP shares of taxes, transfers and public consumption stay approximately constant.

Both transfer payments and public consumption primarily benefit the elderly. The public pension system has expanded and become more generous and health care and old age care has also increased. Most of the tax burden is, however, carried by the working population, in particular those in the age bracket 40-65.