Council opinion of 12 February 2008 on the updated convergence programme of Sweden, 2007-2010
Date: 2008-02-12
Institutions: Council of the European Union
Subjects: Sweden, budget estimate, economic convergence, economic forecasting, public finance, stability programme

C 49/16

EN

Official Journal of the European Union

22.2.2008

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 surveil-
lance 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)

(2)

(3)

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

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 situa-
tion 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 consump-
tion 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.

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 consid-
ered 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 envi-
sages 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 produc-
tivity growth than in recent years is predicted to raise unit labour costs, which could add to infla-
tionary pressures.

(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.

22.2.2008

EN

Official Journal of the European Union

C 49/17

(4)

(5)

(6)

(7)

(8)

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 (1), the structural balance is estimated to improve
significantly in 2007, indicating a counter-cyclical fiscal stance in 2007.

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 expendi-
ture 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 (2). 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.

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 (3), 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.

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 encoura-
ging 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.

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 expendi-
ture-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.

(1) OJ C 72, 29.3.2007, p. 17.
(2) See Eurostat News Release No 30/2004 of 2 March 2004 and No 117/2004 of 23 September 2004.
(3) The most recent data indicate a somewhat weaker growth than forecast in the program, in particular in 2008.

C 49/18

EN

Official Journal of the European Union

22.2.2008

(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 insur-
ance 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 (1).

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)

HICP inflation
(%)

CP Nov 2007

COM Nov 2007

CP Dec 2006

CP Nov 2007

COM Nov 2007

CP Dec 2006

Output gap (1)
(% of potential GDP)

CP Nov 2007

COM Nov 2007 (2)

Net lending/borrowing
vis-à-vis the rest of the
world
(% of GDP)

General government
balance
(% of GDP)

CP Dec 2006

CP Nov 2007

COM Nov 2007

CP Dec 2006

CP Nov 2007

COM Nov 2007

CP Dec 2006

4,2

4,2

4

1,4

1,5

1,9

0,6

0,5

0

6,5

6,3

6,1

2,5

2,5

1,8

3,2

3,4

3,3

1,7

1,6

2,2

0,3

0,6

0,3

7,1

7

7,5

3

3

1,2

3,2

3,1

3,1

2,7

2

1,5

0,6

0,8

0,3

7,2

6,9

7,4

2,8

2,8

1,5

2,5

2,4

2,7

2,5

2

1,9

0,5

0,5

0,3

7,4

7,2

7,5

3,1

3

2

2,2

n.a.

n.a.

2,1

n.a.

n.a.

0,3

n.a.

n.a.

7,7

n.a.

n.a.

3,6

n.a.

n.a.

(1) 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.

22.2.2008

EN

Official Journal of the European Union

C 49/19

Primary balance
(% of GDP)

Cyclically-adjusted
balance (1)
(% of GDP)

Structural balance (3)
(% of GDP)

Government gross debt
(% of GDP)

CP Nov 2007

COM Nov 2007

CP Dec 2006

CP Nov 2007

COM Nov 2007

CP Dec 2006

CP Nov 2007

COM Nov 2007

CP Dec 2006

CP Nov 2007

COM Nov 2007

CP Dec 2006

2006

2007

2008

2009

2010

4,2

4,2

3,5

2,2

2,1

1,8

1,7

2,1

1,8

47

47

47

4,6

4,7

3

2,8

2,7

1

2,4

2,7

1

39,7

41,1

42

4,4

4,3

3,1

2,4

2,3

1,3

2,1

2,3

1,3

34,8

35,7

37,9

4,5

4,5

3,5

2,8

2,8

1,9

2,8

2,6

1,9

29,8

30,5

33,5

4,8

n.a.

n.a.

3,4

n.a.

n.a.

3,4

n.a.

n.a.

24,5

n.a.

n.a.

Notes:
(1) Output gaps and cyclically-adjusted balances according to the programmes as recalculated by Commission services on the basis of the

information in the programmes.

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