EN Official Journal of the European Union C 49/16

COUNCIL OPINION

of 12 February 2008

on the updated convergence programme of Sweden, 2007-2010

(2008/C 49/05)

THE COUNCIL OF THE EUROPEAN UNION,

Having regard to the Treaty establishing the European Community,

Having regard to Council Regulation (EC) No 1466/97 of 7 July 1997 on the strengthening of the surveillance of budgetary positions and the surveillance and coordination of economic policies (1), and in particular Article 9(3) thereof,

Having regard to the recommendation of the Commission,

After consulting the Economic and Financial Committee,

HAS DELIVERED THIS OPINION:

(1) On 12 February 2008, the Council examined the updated convergence programme of Sweden, which covers the period 2007 to 2010.

(2) The Swedish economy has performed well in recent years. In 2007, the economy has entered into a more mature phase that is reflected by a solid domestic demand boosted by buoyant investment and private consumption growth. Against this background, Swedish public finances have also been strong with consistent and sizable general government surpluses. The healthy public finances have been supported by a stability-oriented macroeconomic framework, healthy economic growth and a national rules-based budgetary framework. While economic activity is forecast to decelerate gradually in coming years, both economic fundamentals and the fiscal situation are expected to remain favourable. Against this background it is important that the room for manoeuvre provided by strong public finances is not used to permanently increase public consumption expenditure. Notably if local governments were to increase expenditure in good times this could lead to permanently higher public expenditure in the future, which would interfere with the plans for a moderate reduction of the expenditure-to-GDP ratio over time and the government's strategy of lowering taxes aimed at enhancing incentives to work.

(3) The programme contains three different scenarios for the macroeconomic and budgetary projections: a ‘base’ scenario, a ‘low growth’ scenario and a ‘high growth’ scenario. The ‘base’ scenario is considered the reference scenario for assessing budgetary projections although, assessed against currently available information (2), it appears to be based on somewhat optimistic growth assumptions. It envisages that real GDP growth will slow down from 3,2 % in 2007 to 2,6 % on average over the rest of the programme period. The programme's projections for inflation, which foresee an increase above the 2 % Riksbank target, also appear realistic. Higher wage growth combined with weaker productivity growth than in recent years is predicted to raise unit labour costs, which could add to inflationary pressures.

(4) For 2007, the general government surplus is estimated at 3,0 % of GDP in the Commission services' autumn 2007 forecast, against a target of 1,2 % of GDP set in the previous update of the convergence programme. The better-than-targeted balance is notably due to a base effect (reflecting a stronger outturn in 2006 than projected in the previous programme) and to a stronger-than-anticipated labour market in 2007, which had a more favourable impact on revenue and, to a lesser extent, expenditure than anticipated. In line with the implicit policy invitation in the Council opinion of 27 February 2007 on the previous update of the convergence programme (3), the structural balance is estimated to improve significantly in 2007, indicating a counter-cyclical fiscal stance in 2007.

(5) The main goal of the medium-term budgetary strategy in the programme is to achieve a nominal budget surplus of 1 % of GDP on average over the business cycle, supported by multi-annual expenditure ceilings for the central government and a balanced budget requirement for local governments. This surplus target corresponds to Sweden's medium-term objective (MTO) for the budgetary position of a 1 % of GDP structural surplus (i.e. cyclically adjusted surplus net of one-off and temporary measures), which is foreseen to be respected with a good margin throughout the programme period. The MTO target has been revised downward from 2 % in the previous update, in response to the implementation of the March 2004 Eurostat decision on the recording of second-pillar pension funds outside the government sector as from April 2007 (4). This revision is purely technical and the new target confirms the same level of fiscal ambition. The general government surplus is estimated to decline slightly in 2008 to 2,8 %, from 3,0 % of GDP in 2007. Thereafter the balance is projected to recover progressively to 3,6 % in 2010. The weakening in 2008 reflects significant income tax cuts for low and middle income earners by means of a strengthened in-work tax credit, which are only partly financed through other revenue-increasing and expenditure-decreasing measures. For the rest of the programme period the projections are based on a no-policy-change assumption, according to which both revenue and expenditure ratios are on a gradually declining trend. In view of better-than-expected outturns in 2006 and 2007, these surplus projections are much higher than in the previous update against a broadly similar macroeconomic background. The primary balance and the structural balance show a path that is broadly similar to that of the headline balance.

(6) The risks to the budgetary projections in the programme appear broadly balanced. While GDP growth is projected, in the programme, to decelerate gradually over the programme period (5), the composition of growth still remains favourable from the point of view of public finances, notably given the solid private consumption growth. Moreover, the budget projections are supported by a good track record, owing partly to the above-mentioned expenditure ceilings, while tax revenue projections appear plausible.

(7) In view of this risk assessment, the budgetary stance in the programme allows meeting the MTO by a good margin throughout the programme period, as envisaged in the programme. The somewhat weaker budgetary position in 2008 goes along with continued structural reforms aimed at encouraging labour force participation by reducing the tax wedge which thus increases the growth potential of the economy. Most recent information indicating lower growth prospects imply that the risk of a pro-cyclical fiscal policy stance in 2008 is very limited. Moreover, the budgetary deterioration in 2008 would be temporary as it is not expected to spill over into subsequent years.

(8) Sweden appears to be at low risk with regard to the sustainability of public finances. The long-term budgetary impact of ageing is lower than the EU average, with pension expenditure projected to remain relatively stable as a share of GDP over the long term, influenced by the considerable expenditure-reducing impact of the reform of the pension system adopted in 1998. The budgetary position in 2007 as estimated in the programme with a high primary surplus contributes to the reduction of gross debt. Maintaining sound government finances with continued surpluses as planned in the programme would contribute to limiting risks to the sustainability of public finances.

(9) The convergence programme is fully consistent with the October 2007 implementation report of the national reform programme. In particular, both include fiscal measures aimed at increasing incentives to work and increasing labour supply. Focussing on the measures with a direct budgetary impact, income taxes are to be further reduced in 2008 and both the unemployment and the sickness insurance systems are to be reformed to better integrate people that currently stand outside the labour market. The updated convergence programme also describes in qualitative terms the overall impact of the National Reform Programme within the medium term fiscal strategy, in particular with regard to the increase in labour supply on the public finance position at large and the growth potential of the economy.

(10) As regards the data requirements specified in the code of conduct for stability and convergence programmes, the programme provides all required data and most optional data (6).

The overall conclusion is that the medium-term budgetary position is sound with high general government surpluses and Sweden is at low risk with regard to the sustainability of public finances. With GDP growth in 2008 possibly turning out lower than foreseen, the risk of pro-cyclical fiscal policy would be very limited. Moreover, the weakening of the structural budgetary position in 2008 goes along with continued structural reforms aimed at encouraging labour force participation and thus increasing growth potential and is not envisaged to spill over into subsequent years.

Comparison of key macroeconomic and budgetary projections

2006 2007 2008 2009 2010 Real GDP (% change) CP Nov 2007 4,2 3,2 3,2 2,5 2,2 COM Nov 2007 4,2 3,4 3,1 2,4 n.a. CP Dec 2006 4 3,3 3,1 2,7 n.a. HICP inflation (%) CP Nov 2007 1,4 1,7 2,7 2,5 2,1 COM Nov 2007 1,5 1,6 2 2 n.a. CP Dec 2006 1,9 2,2 1,5 1,9 n.a. Output gap (7) (% of potential GDP) CP Nov 2007 0,6 0,3 0,6 0,5 0,3 COM Nov 2007 (8) 0,5 0,6 0,8 0,5 n.a. CP Dec 2006 0 0,3 0,3 0,3 n.a. Net lending/borrowing vis-à-vis the rest of the world (% of GDP) CP Nov 2007 6,5 7,1 7,2 7,4 7,7 COM Nov 2007 6,3 7 6,9 7,2 n.a. CP Dec 2006 6,1 7,5 7,4 7,5 n.a. General government balance (% of GDP) CP Nov 2007 2,5 3 2,8 3,1 3,6 COM Nov 2007 2,5 3 2,8 3 n.a. CP Dec 2006 1,8 1,2 1,5 2 n.a. Primary balance (% of GDP) CP Nov 2007 4,2 4,6 4,4 4,5 4,8 COM Nov 2007 4,2 4,7 4,3 4,5 n.a. CP Dec 2006 3,5 3 3,1 3,5 n.a. Cyclically-adjusted balance (7) (% of GDP) CP Nov 2007 2,2 2,8 2,4 2,8 3,4 COM Nov 2007 2,1 2,7 2,3 2,8 n.a. CP Dec 2006 1,8 1 1,3 1,9 n.a. Structural balance (9) (% of GDP) CP Nov 2007 1,7 2,4 2,1 2,8 3,4 COM Nov 2007 2,1 2,7 2,3 2,6 n.a. CP Dec 2006 1,8 1 1,3 1,9 n.a. Government gross debt (% of GDP) CP Nov 2007 47 39,7 34,8 29,8 24,5 COM Nov 2007 47 41,1 35,7 30,5 n.a. CP Dec 2006 47 42 37,9 33,5 n.a. Convergence programme (CP); Commission services' autumn 2007 economic forecasts (COM); Commission services' calculations.

(1) OJ L 209, 2.8.1997, p. 1. Regulation as amended by Regulation (EC) No 1055/2005 (OJ L 174, 7.7.2005, p. 1). The documents referred to in this text can be found at the following website:

http://ec.europa.eu/economy_finance/about/activities/sgp/main_en.htm

(2) The assessment takes notably into account the Commission services' autumn forecast and the Commission assessment of the October 2007 implementation report of the national reform programme. Recent indicators would, however, point to somewhat lower growth in 2008.

(3) OJ C 72, 29.3.2007, p. 17.

(4) See Eurostat News Release No 30/2004 of 2 March 2004 and No 117/2004 of 23 September 2004.

(5) The most recent data indicate a somewhat weaker growth than forecast in the program, in particular in 2008.

(6) In particular, data for general government expenditure by function; breakdown of stock-flow adjustment; and potential GDP growth contributions, which have the effect of making the assessment objectively more difficult, are not provided.

(7) Output gaps and cyclically-adjusted balances according to the programmes as recalculated by Commission services on the basis of the information in the programmes.

(8) Based on estimated potential growth of 3,3 %, 3,4 %, 2,9 % and 2,7 % respectively in the period 2006-2009.

(9) Cyclically-adjusted balance excluding one-off and other temporary measures. One-off and other temporary measures are 0,5 % of GDP in 2006, 0,4 % in 2007 and 0,3 % in 2008; all deficit-reducing according to the most recent programme and 0,2 % of GDP in 2009; deficit-reducing in the Commission services' autumn forecast. The Commission services do not take into account the effect identified in the programme for 2006 and 2007 in its assessment as they are not considered as one-offs or other temporary measures.

Sources:

Convergence programme (CP); Commission services' autumn 2007 economic forecasts (COM); Commission services' calculations.