7164 619 4

The Economy Report.

ON SWEDISH MUNICIPAL AND COUNTY COUNCIL FINANCES – DECEMBER 2010

Information concerning the content of the report: Annika Wallenskog tel +46 8 452 77 46 Bo Legerius tel +46 8 452 77 34 Swedish Association of Local Authorities and Regions Department of Economy and Governance, Section for Economic Analysis SE-118 82 Stockholm | Visitors Hornsgatan 20 Phone +46 8 452 70 00 | Fax +46 8 452 70 50 www.skl.se Š Sveriges Kommuner och Landsting 1st edition, Januariy 2011 Graphic form & production Elisabet Jonsson Translation Ian MacArthur, Elisabet Jonsson Cover illustration Jan Olsson Form & Illustration AB Printers KLF Digitalttryck, Stockholm Fonts Chronicle and Whitney Paper Xerox Colotech 120 gr ISBN 978-91-7164-619-4 (Swedish edition: 978-91-7164-610-1, ISSN: 1653-0853)

Foreword The Economy Report illustrates the financial situation and conditions of county councils and municipalities and the development of the Swedish economy over the next few years. It is published twice yearly by the Swedish Association of Local Authorities and Regions (salar).

The calculations in this edition were closed on 2 December. They look forward to 2015. The levels of net income for the sector in both 2009 and 2010 were among the best for many years, despite the financial crisis, mainly as a result of temporary factors. Prospects are deteriorating ahead of 2011; one of the main causes is the phasing out of the cyclical support from central government in 2011 and 2012. Nevertheless the forecast for 2011 shows a surplus of sek 7 billion in the sector. For the years after 2011 we report a calculation showing how net income in the sector will develop if services grow in line with the historical trend and if central government grants grow in line with the tax base.

This is an abridged version of the report. It contains the Summary (supplemented with some tables and diagrams from the main report) and the Annex. It has been written by staff at the salar Section for Economic Analysis and has not been considered at political level within the Association. The people who can reply to questions are given on the inside cover page. Other salar staff have also contributed facts and valuable comments. The translation is by Ian MacArthur, following slight revisions by Elisabet Jonsson and Anna Kleen. We are very grateful to the municipalities and county councils that have contributed basic data to our report.

Stockholm, December 2010 Annika Wallenskog Section for Economic Analysis

The Economy Report. December 2010 On Swedish Municipal and County Council Finances 1

Contents 3 3 4 5 6 6 7 7 9 10

Summary Collapse... ...and bounce-back The world economy: A mixed picture The worst is over, but still a long way to go to normality The local government sector is reporting large surpluses... ...which helps increase net income in the future Deficits in county councils and municipalities pressed to break even until 2015 It is possible to run services more efficiently The sector’s finances in the longer term

11

Annex

2 The Economy Report. December 2010 On Swedish Municipal and County Council Finances

Summary – by the Chief Economist After two years of large surpluses, conditions in municipalities and county councils are deteriorating ahead of 2011 since prices and wages are rising more than revenue from taxes and grants.

But as a result of strong net income this year the sector is expected to be able to report positive net income up to and including 2013. However, it is not possible to disregard the risk that Sweden will be drawn into the weak development of the international economy with implications for tax revenue in the local government sector.

Developments in recent years have been extremely dramatic, both in the global economy and in Sweden. After the financial turmoil developed into a full-scale global financial crisis in connection with the collapse of the American investment bank Lehman Brothers in September 2008, the financial system came to a dead stop and, with it, world economic development. Never before in modern times, or at least since the Great Depression in the 1930s, has economic activity crashed as quickly and as deeply as in late 2008 and early 2009.

Collapse‌ A rapid deterioration of the situation in the labour market followed inevitably in the wake of the collapse of economic activity, and Sweden was no exception.

The Economy Report. December 2010 On Swedish Municipal and County Council Finances 3

Summary

When the forecasts were at their most negative in 2009, many forecasters , including the Swedish Association of Local Authorities and Regions (salar), the Government and others, believed that employment might fall by almost 300,000 and that unemployment might approach 11 per cent.

Diagram 12 • SALAR’s forecasts for 2008, 2009 and 2010

In 2008 relatively constant growth was expected in the number of hours worked until the end of 2010. The 2009 forecast expected the number of hours worked to fall in both 2009 and 2010. This year’s forecast shows that, while the number of hours worked did indeed fall from the end of 2008, it did not at all do so to the extent we had forecast. Moreover, in 2010 the number of hours worked has begun to increase again.

Per cent

Change in per cent in hours worked 2

Forecast 2010

1

Forecast 2009

0

Forecast 2008

–1 –2 –3 –4 Apr ’08 Oct ’08 Dec ’08 Feb ’09 Apr ’09 Oct ’09 Dec ’09 Feb ’10 Apr ’10 Sep ’10

Source: Swedish Association of Local Authorities and Regions.

As a result of the rapid turn-round in the economy and in expectations of employment growth, salar also drastically revised its forecasts for the financial development of the local government sector. After predictions of solid growth in the tax base and substantial surpluses, the swing of pendulum was rapid. In 2009 we expected that the sector would report red figures at the end of the year.

…and bounce-back If the fall in the economy was considerably more dramatic than expected by the great majority of forecasters, the same can, fortunately, also be said about the past year's recovery. Thus, instead of a protracted period of weak economic activity, most economies turned upwards in late 2009 and the recovery has continued in 2010. In this context, developments in Sweden, in particular, have been impressive. In the past year Swedish gdp has recouped the whole of its fall and is now back at its earlier level.

As a result of this rapid switch the labour market has developed much less weakly than feared. Since the turn-around in autumn 2009, employment has recouped more than half of its fall and unemployment has gone down from 9 per cent to 8 per cent since its peak in spring 2010. As employment is the key to the tax base, the rapid improvement in the labour market and the brightening prospects for coming years have led to substantial upward revisions of salar forecasts since last autumn.

4 The Economy Report. December 2010 On Swedish Municipal and County Council Finances

Summary

The world economy: A mixed picture The strongest potential for growth is in countries like China, India and Brazil, which will continue to make a substantial contribution to global growth in coming years.

Table 1 • International GDP growth, 2008–2011 Percentage change

US EU China World Export-weighted GDP* Sweden

2008

2009

2010

2011

0.0 0.7 9.1 3.0 0.8 –0.6

–2.6 –4.1 8.7 –0.8 –3.3 –5.3

2.6 1.9 10.5 4.6 2.5 5.5

2.2 1.8 9.5 4.0 2.5 3.9

Sweden’s greater dependence on ‘old’ industrialised countries is holding back export-weighted growth.

*GDP growth in a number of countries weighted by their importance as recipients of Swedish exports.

Sources: National Institute of Economic Research and Swedish Association of Local Authorities and Regions.

In the rest of the world the recovery has been much more sluggish. The traditional engine of the world economy, us private consumption, is lacking a large part of the necessary fuel. On our side of the Atlantic many countries are beset by deficit and debt problems in the wake of the financial crisis. Even if a new financial crisis is unlikely, there are grounds to expect a relatively weak recovery in many European countries – Sweden’s most important trading partners – since the necessary restructuring of public budgets will unavoidably entail weak growth in demand.

This picture featuring an unusually weak economic motor in both the us and most European economies, with the possible exception of Germany and the Nordic countries, is bad news for highly export-dependent economies like Sweden. At the same time, we are well-placed on the domestic front in relation to other comparable countries. Our public finances are in good order, at the same time as household savings are high compared with many other countries. Since there is strong confidence in Sweden’s central government finances, our economy does not suffer from the type of interest rate rises fuelled by lack of confidence currently besetting many European countries. This means that fiscal policy in Sweden does not need to be tightened, in contrast to the situation in many other countries. Swedish households and companies also have a bright view of the future. gdp growth in 2010 is impressive, more than 5 per cent, and is being driven by a strong export recovery and a sharp upturn in stock-building, along with a strong expansion among households and businesses and in the public sector. Even if we cannot expect the same force in the future, our assessment is still that the economy will grow by 3–4 per cent during the period covered by the calculation.

With such a strong recovery in the real economy, the labour market will also perform well. We now expect employment in terms of the number of pe-

The Economy Report. December 2010 On Swedish Municipal and County Council Finances 5

Summary

ople employed to continue to grow at a rate of about 1 per cent per year, while somewhat slower growth is expected in the number of hours worked. This means that unemployment will gradually be pressed down towards 6 per cent over the coming five years.

Diagram 7 • The labour market gap – hours worked and potential hours, 1993–2015 Billion hours worked and per cent of potential hours 2.0

Labour market gap (left)

12 10

1.9

Hours worked (right)

8

1.8

16 14

6 4

1.7

2 0

1.6

Potential hours

Billion hours

Per cent

We expect a relatively protracted process until the labour market gap closes 2015.

The difference between the curves is what is known as the labour market gap. A positive gap (hours worked higher than potential hours) signals a boom and possible overheating of the labour market. A negative gap signals a recession and high unemployment. The gap pays a major role in the analysis of pay growth.

–2 –4

1.5

–6 –8

1.4

1993:1 1995:1 1997:1 1999:1 2001:1 2003:1 2005:1 2007:1 2009:1 2011:1 2013:1 2015:1

Sources: Statistics Sweden and Swedish Association of Local Authorities and Regions.

The worst is over, but still a long way to go to normality Even if the economy can be expected to grow in coming years, resulting in employment and tax base growth, the situation is nowhere normality. According to salar forecasts, the Swedish economy will not achieve balance until 2015. Nor is it possible to disregard the risk of a deterioration of the ongoing international debt crisis, with repercussions that will also impact on us. So there is every reason to stay prepared!

The local government sector is reporting large surpluses...

2010 is the second successive year of large surpluses in the sector. In 2009 net income for municipalities and county councils was sek 13 billion and this year it looks like being as much as sek 19 billion, despite the effects of the financial crisis on the Swedish economy.

There are several reasons for these large surpluses. Municipalities and county councils succeeded in quickly building up crisis awareness, leading to restraint in consumption and new hires, while several temporary factors contributed to stronger net income. Taken together, the premium waiver from the Swedish Labour Market Insurance Company in 2009 and 2010, the refund from salar in 2009 and temporary cyclical support from central government have strengthened net income for these two years by almost sek 25 billion.

Another important factor is that the number of hours worked has not fallen as much as anticipated, leading in turn to an upward revision of tax base forecasts during 2009. Another effect of the economic downturn was that pri-

6 The Economy Report. December 2010 On Swedish Municipal and County Council Finances

Summary

ces and wages grew more slowly than expected, so municipalities and county councils got more for their money.

Diagram 10 • Real growth of the tax base and total revenue, showing as of 2012 total revenue with and without the upward adjustment of government grants Index 2002 = 100 Total revenue with unchanged government grants

120

Index

115

Total revenue Tax base

110

105

100

95 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

The cyclical support will be phased out in 2011–2012. Tax base growth in these years is not strong enough to compensate for the effect of reduced government grants, so the sector’s total revenue falls in real terms in 2011 and stays at the 2010 level in 2012.

Sources: Swedish Tax Agency and Swedish Association of Local Authorities and Regions.

…which helps increase net income in the future As a result of this good starting position, the sector is expected to be able to report a surplus of sek 7 billion in 2011, despite deteriorating conditions. In 2011 the phase-out of the temporary cyclical support will begin, while tax revenue is still growing weakly. This means that revenue from taxes and government grants will not be able to finance price and wage increases in 2011, far less cover the cost increases resulting from demographic change. The age structure of the population means that the county councils, primarily, will face relatively high cost pressure in the coming years. The county councils’ surplus is expected to shrink from sek 4.4 billion to sek 1.5 billion in 2011, which means that almost half the county councils will risk deficits. The municipalities’ finances are stronger and are expected to lead to a surplus of sek 5.5 billion in 2011; however, this does not match up to the level for healthy finances.

Deficits in county councils and municipalities pressed to break even until 2015 We have based our calculation for 2012 to 2015 on the assumption that costs will rise in line with the historical trend. Even though a cost increase in line with this trend entails a volume increase of more than 1 per cent per year, over and above the demands resulting from the change in population size and structure, the calculation shows that the sector’s share of gdp remains largely constant until 2015. The reason why volume increases in line with the trend is that local authorities are carrying out more and more tasks. Part of the explanation is a higher level of ambition in municipalities and county councils themselves, but another factor is increases in central government demands.

The Economy Report. December 2010 On Swedish Municipal and County Council Finances 7

Summary

Diagram 20 • Demographic trend in various municipal services, 2009–2015

An increase in births will result in higher volume growth in the next few years for preschool services, for example. Compulsory school and school-age child care services also face rising demand throughout the period. Upper secondary school draws down the volume change sharply in 2010–2015, which means that this service must adjust to a significantly lower number of pupils in the coming period.

Index

Index 2009 = 100 115

Total

110

Other services

105

Disability care

100

Elderly care Upper secondary school

95 90

Compulsory school incl. preschool class

85

Preschool and school age child care

80 2009

2010

2011

2012

2013

2014

2015

Source: Swedish Association of Local Authorities and Regions.

The sector’s tasks have been extended as a result of central government decisions. When central government assigns new tasks to municipalities and county councils, these have to be financed. So central government grants have risen successively, despite the model applied in Sweden in which government grants are not adjusted upwards automatically, thus eroding the value of the grants in the long term.

Our calculation assumes that government grants will rise at the same rate as the tax base as of 2012, which our calculations show that central governTable 17 • Cost increase for municipalities, showing various components, 2002–2015 Contribution in percentage points, constant prices

Demographic needs increase sharply in county councils throughout the period. In 2009 they increased by more than one percentage point while the cost volume rose by 2.6 per cent. This means that costs over and above demography rose by 1.5 percentage points. The costs of the pandemic explain 0.5 percentage points.

In 2010 the volume rises by 1.4 per cent.

Adjustment costs, etc. disappear, reducing the cost pressure by about 0.5 percentage points. But there are also large temporary costs. For example, Västra Götaland Region is writing off its co-financing (more than SEK 800 million) of investments for the Västlänken rail project against equity; this corresponds to more than 0.3 percentage points of the authority’s cost increase in 2010. The underlying growth in 2010 is slower than the longterm trend. In 2011 the scope for volume increases is limited.

Outcome 02–04 05–08 2009 Demographic needs Other components

Forecast 2010 2011

Calc. assuming trend 2012–2015

0.7 0.7

0.9 1.3

1.1 1.5

1.0 0.4

1.0 –0.6

0.9 1.2

Total volume change 1.4 Trend* incl quality adjustment 1.2

2.2 1.2

2.6 1.2

1.4 1.2

0.4 1.2

2.1 1.2

*Earlier analyses show that between 1985 and 2005 the costs of municipal services increased by about one per cent per year over and above wage and price increases and demographic needs.

This is due in part to a greater undertaking to provide services and a higher level of ambition.

The trend has been adjusted by 0.2 percentage points for effects due to the composition of the work force. See the fact box ”Price adjustments and changes in the volume of services” on page 40 of the Swedish report.

Source: Swedish Association of Local Authorities and Regions

8 The Economy Report. December 2010 On Swedish Municipal and County Council Finances

Summary

ment can afford. In 2015 general government net lending is calculated at 1.6 per cent of gdp, 0.6 percentage points above the surplus target, even though the local government sector shows negative net lending.

This calculation shows that the municipalities will be able to report modest net income, which is however well below the level for healthy finances, in every year up to and including 2015, while the county councils, whose finances are much more fragile, will already have deficits from 2012. The county councils will therefore be forced to take vigorous action as their net income will continue to deteriorate in coming years if nothing is done.

It is possible to run services more efficiently Conditions will thus be relatively tight in the coming years, especially for county councils. The situation for the sector in the form of revenue increases from taxes and grants and cost increases in the form of prices, wages, demography and the trend deteriorate by sek 18 billion in 2011 and 6 billion in 2012. However, we show in the report that it is possible to run services of high quality without having high costs. There are no correlations either in health care or in education showing that a municipality or county council that has high costs for a service also shows good results. However, the lack of a clear correlation does not necessarily mean that it is possible to implement reductions without this having implications for quality.

Diagram 23 • Correlation between resources and results in ”Open comparisons for compulsory school, 2009” Index and deviation from standard cost 100

Results index

80

60

40

20

0 –20

–10

0

10

20

30

Deviation from standard cost Source: Open comparisons for compulsory school, 2009 (Öppna jämförelser för grundskolan 2009), Swedish Association of Local Authorities and Regions.

The combined efficiency index is based in the proportion of pupils achieving the objectives in all subjects and an average grade value (incl. SALSA deviation 1), eligibility for upper secondary school and subject tests in year 9 (i.e. the final year of compulsory school). These results are then combined with the municipality’s cost in the form of its deviation from the standard cost, i.e. the cost a municipality is expected to have if its service is run with average efficiency and an average level of ambition, taking account of the municipality’s structure. This efficiency measure shows how well municipalities’ schools are succeeding in their task.

1. SALSA, Skolverkets Arbetsverktyg för Lokala SambandsAnalyser, a database from The Swedish National Agency for Education assembling background factors and actual grades. It includes the number of pupils with a foreign background, born abroad and in Sweden respectively; the educational level of parents; the number of boys; number of pupils that have reached the objective Pass or higher; the sum of the best grades in the final assessments of pupils.

The Economy Report. December 2010 On Swedish Municipal and County Council Finances 9

Summary

The sector’s finances in the longer term The costs of pensions in municipalities and county councils has been compared to a bomb that is about to explode. The costs of occupational pensions rise in the coming years when the brake in the public pension system comes into operation. The reason is that the occupational pensions of former local government employees cover the fall in the public pension. Another cause of the increase is that the sector suffers from double costs for pensions. First, the payments from the old pension liability which are handled on a ‘pay as you go’ basis are a cost burden for the sector, and, second, new pensions entitlements are recognised as a cost directly when earned. Even though the costs of the old pension debt are a difficulty for many municipalities and county councils, the rising cost burden is limited to a few tenths of one percentage point on the tax rate. Instead, the major problem in the future is how to finance welfare services in the long term.

This financing problem is based on the fact that it is more difficult to increase productivity in the production of services, which is the main activity of local authorities, than in the production of goods. An hour of nursing or care cannot be carried out in a shorter time than one hour and imparting knowledge takes time. The crucial problem is that demand is rising even though welfare services are becoming more expensive in relation to other production. The report of salar’s Committee on Welfare Funding (The challenge of the future (Framtidens utmaning), Swedish Association of Local Authorities and Regions, 2010) shows that in 25 years’ time this volume increase, along with demographic change, will result in a deficit corresponding to an increase of 13 percentage points in the tax rate. To avoid this we must find new solutions in good time.

10 The Economy Report. December 2010 On Swedish Municipal and County Council Finances

ANNE

X

This annex presents some key indicators and the overall income statements of

municipalities and of county councils, as well as an aggregate income statement for the sector to give an overall picture.

For diagrams showing the distribution of costs and revenue for municipalities and county councils separately, tables presenting overviews of central government grants and other data that we usually present in the Annex to the Economy Report, we refer to our website, where we are now building up a new area called Sektorn i siffror (The sector in figures). Go to www.skl.se, choose Vi arbetar med, Ekonomi, Sektorn i siffror.

An aggregate picture of municipalities and county councils Table 19 • Key indicators for municipalities and county councils, 2009–2015 Per cent and thousands of people

2009 Average tax rate, %

2010

2011

2012

2013

2014

2015

31.52

31.56

31.55

31.55

31.55

31.55

31.55

municipalities, incl Gotland county councils*, excl Gotland

20.72 10.86

20.74 10.87

20.73 10.88

20.73 10.88

20.73 10.88

20.73 10.88

20.73 10.88

No of employees**, thousands

1,065

1,055

1,055

1,068

1,081

1,095

1,110

Municipalities

802

795

798

808

820

831

844

County councils

263

260

257

259

262

264

266

*The tax base of Gotland is not included, which is why the totals do not add up. **Thousands; average number of people in employment according to the National Accounts.

Sources: Statistics Sweden and The Swedish Association of Local Authorities and Regions.

The Economy Report. December 2010 On Swedish Municipal and County Council Finances 11

Annex

Table 20 • Aggregate income statement for the sector, 2009–2015 SEK billion current prices, unless otherwise stated

Outcome Forecast 2009 2010

Calculation 2012 2013

2014

2015

144 –729 –22 –607

145 –751 –23 –628

148 –771 –23 –647

153 –802 –24 –673

158 –836 –24 –702

164 –873 –25 –734

171 –914 –26 –770

Tax revenue Gen gov grants & equalisation Net financial income Net income before extraordinary items

512 102 5

521 123 3

529 123 2

550 123 2

573 128 1

598 132 1

625 138 0

13

19

7

1

0

–3

–6

Share of taxes and grants, %

2.2

3.0

1.1

0.2

0.0

–0.4

–0.8

2014

2015

Income of activities Expenses of activities Depreciation Net expenses of activities

2011

Table 21 • Income statement for the municipalities, 2009–2015 SEK billion

Outcome Forecast 2009 2010 Income of activities Expenses of activities Depreciation Net expenses of activities

2011

Calculation 2012 2013

110 –487 –16 –392

110 –501 –16 –407

112 –516 –16 –421

115 –536 –17 –438

120 –558 –17 –456

124 –582 –17 –476

129 –610 –18 –499

336 61 5

343 76 3

347 76 3

362 76 3

377 79 3

393 82 3

411 86 3

11

15

6

3

3

3

2

2.7

3.5

1.3

0.6

0.7

0.5

0.3

Tax revenue Gen gov grants and equalisation Net financial income Net income before extraordinary items Share of taxes and grants, %

Table 22 • Income statement for the county councils, 2009–2015 SEK billion

Outcome Forecast 2009 2010 Income of activities Expenses of activities Depreciation Net expenses of activities

2011

Calculation 2012 2013

2014

2015

36 –244 –7 –214

38 –252 –7 –221

38 –257 –7 –226

40 –268 –7 –236

41 –280 –7 –246

43 –293 –8 –258

44 –307 –8 –271

176 41 0

179 47 0

181 47 –1

189 47 –1

197 49 –2

205 50 –2

214 51 –3

Tax revenue Gen gov grants and equalisation Net financial income Net income before extraordinary items Share of taxes and grants, %

3

4

1

–1

–3

–5

–8

1.3

1.9

0.6

–0.6

–1.1

–2.1

–3.0

Source: The Swedish Association of Local Authorities and Regions.

12 The Economy Report. December 2010 On Swedish Municipal and County Council Finances

The Economy Report. December 2010 On Swedish Municipal and County council finances is a series published twice yearly by the Swedish Association of Local Authorities and Regions (salar). In it we deal with the present economic situation and developments in municipalities and county councils. The calculations in this issue extend to 2015.

The local government sector shows very good net income for 2010. Next year revenue from taxes and government grants will rise less than the costs of price and wage increases. Taking account of cost increases due to demographic change and a higher level of ambition, this adds up to a significant deterioration in the conditions for local government. Despite this, a surplus is expected in 2011, thanks to the good starting position in 2010 and restraint in the sector. However, the calculations presented in the report indicate that it will be more difficult for municipalities and county councils to put together their budgets in the future.

The report can be downloaded at www.skl.se/publikationer.

ISBN 978-91-7164-619-4

Mail SE-118 82 Stockholm Visitors Hornsgatan 20 Phone +46-8-452 70 00 www.skl.se