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 7746Bo Legerius tel +46 8 452 77 34

Swedish Association of Local Authorities and RegionsDepartment of Economy and Governance, Section for Economic AnalysisSE-118 82 Stockholm | Visitors Hornsgatan 20

Phone +46 8 452 70 00 | Fax +46 8 452 70 50

www.skl.se

© Sveriges Kommuner och Landsting1st edition, Januariy 2011

Graphic form & production Elisabet JonssonTranslation Ian MacArthur, Elisabet JonssonCover illustration Jan Olsson Form & Illustration ABPrinters KLF Digitalttryck, StockholmFonts Chronicle and WhitneyPaper Xerox Colotech 120 gr

ISBN 978-91-7164-619-4

(Swedish edition: 978-91-7164-610-1, ISSN: 1653-0853)

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

Foreword

The Economy Report illustrates the financial situation and conditions of coun-ty councils and municipalities and the development of the Swedish economyover the next few years. It is published twice yearly by the Swedish Associa-tion of Local Authorities and Regions (salar).

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

This is an abridged version of the report. It contains the Summary (sup-plemented with some tables and diagrams from the main report) and theAnnex. It has been written by staff at the salar Section for Economic Ana-lysis and has not been considered at political level within the Association. Thepeo p le who can reply to questions are given on the inside cover page. Othersalar staff have also contributed facts and valuable comments. The trans -lation is by Ian MacArthur, following slight revisions by Elisabet Jonsson andAnna Kleen. We are very grateful to the municipalities and county councilsthat have contributed basic data to our report.

Stockholm, December 2010

Annika WallenskogSection for Economic Analysis

Contents

3 Summary3 Collapse... 4 ...and bounce-back 5 The world economy: A mixed picture 6 The worst is over, but still a long way to go to normality6 The local government sector is reporting large surpluses...7 ...which helps increase net income in the future7 Deficits in county councils and municipalities pressed to break even until 2015

9 It is possible to run services more efficiently10 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 municipalitiesand county councils are deteriorating ahead of 2011 since pricesand wages are rising more than revenue from taxes and grants.But as a result of strong net income this year the sector is expec-ted to be able to report positive net income up to and including2013. However, it is not possible to disregard the risk that Swe-den will be drawn into the weak development of the internatio-nal economy with implications for tax revenue in the local go-vernment sector.

Developments in recent years have been extremely dramatic,both in the global economy and in Sweden. After the financialturmoil developed into a full-scale global financial crisis in con-nection with the collapse of the American investment bank Leh -man Brothers in September 2008, the financial system came toa dead stop and, with it, world economic development. Never be-fore in modern times, or at least since the Great Depression inthe 1930s, has economic activity crashed as quickly and as deeplyas in late 2008 and early 2009.

Collapse…

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


When the forecasts were at their most negative in 2009, many forecasters , in-cluding the Swedish Association of Local Authorities and Regions (salar),the Government and others, believed that employment might fall by almost300,000 and that unemployment might approach 11 per cent.

As a result of the rapid turn-round in the economy and in expectations ofemployment growth, salar also drastically revised its forecasts for the fi-nancial development of the local government sector. After predictions of so-lid growth in the tax base and substantial surpluses, the swing of pendulumwas rapid. In 2009 we expected that the sector would report red figures at theend of the year.

…and bounce-back

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

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


Summary

Diagram 12 • SALAR’s forecasts for 2008, 2009 and 2010Change in per cent in hours worked

–4

–3

–2

–1

0

1

2 Forecast 2010

Forecast 2009

Forecast 2008

Sep ’10Apr ’10Feb ’10Dec ’09Oct ’09Apr ’09Feb ’09Dec ’08Oct ’08Apr ’08

Per c

ent

In 2008 relatively constant growth wasexpected in the number of hours workeduntil the end of 2010. The 2009 forecastexpected the number of hours worked tofall in both 2009 and 2010. This year’sforecast shows that, while the number ofhours worked did indeed fall from the endof 2008, it did not at all do so to the extentwe had forecast. Moreover, in 2010 thenumber of hours worked has begun to inc-rease again.

Source: Swedish Association of Local Authorities and Regions.

The world economy: A mixed picture

The strongest potential for growth is in countries like China, India and Bra-zil, which will continue to make a substantial contribution to global growth incoming years.

In the rest of the world the recovery has been much more sluggish. The tradi-tional engine of the world economy, us private consumption, is lacking a lar-ge part of the necessary fuel. On our side of the Atlantic many countries arebeset by deficit and debt problems in the wake of the financial crisis. Even ifa new financial crisis is unlikely, there are grounds to expect a relatively weakrecovery in many European countries – Sweden’s most important tradingpartners – since the necessary restructuring of public budgets will unavoi-dably entail weak growth in demand.

This picture featuring an unusually weak economic motor in both the usand most European economies, with the possible exception of Germany andthe Nordic countries, is bad news for highly export-dependent economies likeSweden. At the same time, we are well-placed on the domestic front in rela-tion to other comparable countries. Our public finances are in good order, atthe same time as household savings are high compared with many othercountries. Since there is strong confidence in Sweden’s central government fi-nances, our economy does not suffer from the type of interest rate rises fuel-led by lack of confidence currently besetting many European countries. Thismeans that fiscal policy in Sweden does not need to be tightened, in contrastto the situation in many other countries. Swedish households and compani-es also have a bright view of the future.

gdp growth in 2010 is impressive, more than 5 per cent, and is being drivenby a strong export recovery and a sharp upturn in stock-building, along witha strong expansion among households and businesses and in the public sec-tor. Even if we cannot expect the same force in the future, our assessment isstill that the economy will grow by 3–4 per cent during the period covered bythe calculation.

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


Summary

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

2008 2009 2010 2011

US 0.0 –2.6 2.6 2.2EU 0.7 –4.1 1.9 1.8China 9.1 8.7 10.5 9.5World 3.0 –0.8 4.6 4.0Export-weighted GDP* 0.8 –3.3 2.5 2.5Sweden –0.6 –5.3 5.5 3.9

*GDP growth in a number of countries weighted by their importance as recipients of Swedishexports.Sources: National Institute of Economic Research and Swedish Association of Local Authorities and Regions.

Sweden’s greater dependence on ‘old’ in-dustrialised countries is holding back ex-port-weighted growth.

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

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 inemployment and tax base growth, the situation is nowhere normality. Accor-ding to salar forecasts, the Swedish economy will not achieve balance until2015. Nor is it possible to disregard the risk of a deterioration of the ongoinginternational debt crisis, with repercussions that will also impact on us. Sothere 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 netincome for municipalities and county councils was sek 13 billion and thisyear it looks like being as much as sek 19 billion, despite the effects of the fi-nancial crisis on the Swedish economy.

There are several reasons for these large surpluses. Municipalities andcounty councils succeeded in quickly building up crisis awareness, leading torestraint in consumption and new hires, while several temporary factors con-tributed to stronger net income. Taken together, the premium waiver fromthe Swedish Labour Market Insurance Company in 2009 and 2010, the re-fund from salar in 2009 and temporary cyclical support from central go-vernment have strengthened net income for these two years by almost sek 25billion.

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


Summary

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

Per c

ent

–8

–6

–4

–2

02

4

6

8

1012

14

16Labour market gap(left)

2015:12013:12011:12009:12007:12005:12003:12001:11999:11997:11995:11993:11.4

1.5

1.6

1.7

1.8

1.9

2.0

Potential hours

Hours worked (right)

Billi

on h

ours

We expect a relatively protracted processuntil the labour market gap closes 2015.The difference between the curves is whatis known as the labour market gap. A po-sitive gap (hours worked higher than po-tential hours) signals a boom and possibleoverheating of the labour market. A nega-tive gap signals a recession and highunemployment. The gap pays a major rolein the analysis of pay growth.

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

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

…which helps increase net income in the future

As a result of this good starting position, the sector is expected to be able to re-port a surplus of sek 7 billion in 2011, despite deteriorating conditions. In2011 the phase-out of the temporary cyclical support will begin, while tax re-venue is still growing weakly. This means that revenue from taxes and go-vernment grants will not be able to finance price and wage increases in 2011,far less cover the cost increases resulting from demographic change. The agestructure of the population means that the county councils, primarily, willface 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 mu-nicipalities’ finances are stronger and are expected to lead to a surplus of sek5.5 billion in 2011; however, this does not match up to the level for healthy fi-nances.

Deficits in county councils and municipalities pressed tobreak even until 2015

We have based our calculation for 2012 to 2015 on the assumption that costswill rise in line with the historical trend. Even though a cost increase in linewith this trend entails a volume increase of more than 1 per cent per year, overand above the demands resulting from the change in population size andstructure, the calculation shows that the sector’s share of gdp remains large -ly constant until 2015. The reason why volume increases in line with the trendis that local authorities are carrying out more and more tasks. Part of the ex-planation is a higher level of ambition in municipalities and county councilsthemselves, but another factor is increases in central government demands.


Summary

Diagram 10 • Real growth of the tax base and total revenue, showing as of 2012 total revenue withand without the upward adjustment of government grantsIndex 2002 = 100

95

100

105

110

115

120 Total revenue with un-changed government grants

Total revenue

Tax base

20152014201320122011201020092008200720062005200420032002

Inde

x The cyclical support will be phased out in2011–2012. Tax base growth in these yearsis not strong enough to compensate forthe effect of reduced government grants,so the sector’s total revenue falls in realterms in 2011 and stays at the 2010 level in2012.

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

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

Our calculation assumes that government grants will rise at the same rateas the tax base as of 2012, which our calculations show that central govern-


Summary

Diagram 20 • Demographic trend in various municipal services, 2009–2015Index 2009 = 100

80

85

90

95

100

105

110

115 Total

Other services

Disability care

Elderly care

Upper secondary school

Compulsory school incl.preschool class

Preschool and schoolage child care

2015201420132012201120102009

Inde

x

An increase in births will result in highervolume growth in the next few years forpreschool services, for example. Compul-sory school and school-age child care ser-vices also face rising demand throughoutthe period. Upper secondary school drawsdown the volume change sharply in2010–2015, which means that this servicemust adjust to a significantly lower num-ber of pupils in the coming period.

Source: Swedish Association of Local Authorities and Regions.

Table 17 • Cost increase for municipalities, showing various components, 2002–2015Contribution in percentage points, constant prices

Outcome Forecast Calc. assuming trend02–04 05–08 2009 2010 2011 2012–2015

Demographic needs 0.7 0.9 1.1 1.0 1.0 0.9Other components 0.7 1.3 1.5 0.4 –0.6 1.2Total volume change 1.4 2.2 2.6 1.4 0.4 2.1Trend* incl quality adjustment 1.2 1.2 1.2 1.2 1.2 1.2

*Earlier analyses show that between 1985 and 2005 the costs of municipal services increased byabout 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 thework force. See the fact box ”Price adjustments and changes in the volume of services” on page40 of the Swedish report.Source: Swedish Association of Local Authorities and Regions

Demographic needs increase sharply incounty councils throughout the period. In2009 they increased by more than onepercentage point while the cost volumerose by 2.6 per cent. This means thatcosts over and above demography rose by1.5 percentage points. The costs of thepandemic explain 0.5 percentage points.In 2010 the volume rises by 1.4 per cent.Adjustment costs, etc. disappear, redu-cing the cost pressure by about 0.5 per-centage points. But there are also largetemporary costs. For example, Västra Gö-taland Region is writing off its co-finan-cing (more than SEK 800 million) of inve-stments for the Västlänken rail projectagainst equity; this corresponds to morethan 0.3 percentage points of the authori-ty’s cost increase in 2010. The underlyinggrowth in 2010 is slower than the long-term trend. In 2011 the scope for volumeincreases is limited.

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

This calculation shows that the municipalities will be able to report modestnet income, which is however well below the level for healthy finances, in eve-ry year up to and including 2015, while the county councils, whose financesare much more fragile, will already have deficits from 2012. The county coun-cils will therefore be forced to take vigorous action as their net income willcontinue 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 forcounty councils. The situation for the sector in the form of revenue increasesfrom taxes and grants and cost increases in the form of prices, wages, demo-graphy and the trend deteriorate by sek 18 billion in 2011 and 6 billion in2012. However, we show in the report that it is possible to run services of highquality without having high costs. There are no correlations either in healthcare or in education showing that a municipality or county council that hashigh costs for a service also shows good results. However, the lack of a clearcorrelation does not necessarily mean that it is possible to implement reduc-tions without this having implications for quality.


Summary

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

Deviation from standard cost

Resu

lts in

dex

–20 –10 0 10 20 300

20

40

60

80

100The combined efficiency index is based inthe proportion of pupils achieving the ob-jectives in all subjects and an average gra-de value (incl. SALSA deviation1), eligibili-ty for upper secondary school and subjecttests in year 9 (i.e. the final year of com-pulsory school). These results are thencombined with the municipality’s cost inthe form of its deviation from the stan-dard cost, i.e. the cost a municipality is ex-pected to have if its service is run withaverage efficiency and an average level ofambition, taking account of the municipa-lity’s structure. This efficiency measureshows how well municipalities’ schoolsare succeeding in their task.

Source: Open comparisons for compulsory school, 2009 (Öppna jämförelser för grundskolan 2009), Swedish Association of Local Autho-

rities and Regions.

1. SALSA, Skolverkets Arbetsverktyg för Lokala SambandsAnalyser, a database from The Swedish Natio-nal Agency for Education assembling background factors and actual grades. It includes the number of pu-pils 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 bestgrades in the final assessments of pupils.

The sector’s finances in the longer term

The costs of pensions in municipalities and county councils has been compa-red to a bomb that is about to explode. The costs of occupational pensions risein the coming years when the brake in the public pension system comes intooperation. The reason is that the occupational pensions of former local go-vernment employees cover the fall in the public pension. Another cause of theincrease is that the sector suffers from double costs for pensions. First, thepayments 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 entitlementsare recognised as a cost directly when earned. Even though the costs of the oldpension debt are a difficulty for many municipalities and county councils, therising cost burden is limited to a few tenths of one percentage point on the taxrate. Instead, the major problem in the future is how to finance welfare servi-ces in the long term.

This financing problem is based on the fact that it is more difficult to inc-rease productivity in the production of services, which is the main activity oflocal authorities, than in the production of goods. An hour of nursing or carecannot be carried out in a shorter time than one hour and imparting know-ledge takes time. The crucial problem is that demand is rising even thoughwelfare services are becoming more expensive in relation to other produc-tion. The report of salar’s Committee on Welfare Funding (The challenge ofthe future (Framtidens utmaning), Swedish Association of Local Authoritiesand Regions, 2010) shows that in 25 years’ time this volume increase, alongwith demographic change, will result in a deficit corresponding to an increa-se of 13 percentage points in the tax rate. To avoid this we must find new so-lutions in good time.


Summary

This annex presents some key indicators and the overall income statements ofmunicipalities and of county councils, as well as an aggregate income state-ment for the sector to give an overall picture.

For diagrams showing the distribution of costs and revenue for municipa-lities and county councils separately, tables presenting overviews of centralgovernment grants and other data that we usually present in the Annex to theEconomy Report, we refer to our website, where we are now building up a newarea called Sektorn i siffror (The sector in figures). Go to www.skl.se, chooseVi arbetar med, Ekonomi, Sektorn i siffror.

An aggregate picture of municipalities and county councils


ANNEX

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

2009 2010 2011 2012 2013 2014 2015

Average tax rate, % 31.52 31.56 31.55 31.55 31.55 31.55 31.55

municipalities, incl Gotland 20.72 20.74 20.73 20.73 20.73 20.73 20.73county councils*, excl Gotland 10.86 10.87 10.88 10.88 10.88 10.88 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 844County 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.


Annex

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

Outcome Forecast Calculation2009 2010 2011 2012 2013 2014 2015

Income of activities 144 145 148 153 158 164 171Expenses of activities –729 –751 –771 –802 –836 –873 –914Depreciation –22 –23 –23 –24 –24 –25 –26Net expenses of activities –607 –628 –647 –673 –702 –734 –770

Tax revenue 512 521 529 550 573 598 625Gen gov grants & equalisation 102 123 123 123 128 132 138Net financial income 5 3 2 2 1 1 0Net income before extra-ordinary items 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

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



Tax revenue 336 343 347 362 377 393 411Gen gov grants and equalisation 61 76 76 76 79 82 86Net financial income 5 3 3 3 3 3 3Net income before extra-ordinary items 11 15 6 3 3 3 2

Share of taxes and grants, % 2.7 3.5 1.3 0.6 0.7 0.5 0.3

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



Tax revenue 176 179 181 189 197 205 214Gen gov grants and equalisation 41 47 47 47 49 50 51Net financial income 0 0 –1 –1 –2 –2 –3Net income before extra-ordinary items 3 4 1 –1 –3 –5 –8

Share of taxes and grants, % 1.3 1.9 0.6 –0.6 –1.1 –2.1 –3.0

Source: The Swedish Association of Local Authorities and Regions.

The Economy Report. December 2010

On Swedish Municipal and County council finances

is a series published twice yearly by the Swedish Association ofLocal Authorities and Regions (salar). In it we deal with the pre-sent economic situ ation and developments in municipalities andcounty councils. The calculations in this issue extend to 2015.

The local government sector shows very good net income for2010. Next year revenue from taxes and government grants willrise less than the costs of price and wage increases. Taking ac-count of cost increases due to demographic change and a higherlevel of ambition, this adds up to a significant deterioration in theconditions for local government. Despite this, a surplus is expec-ted in 2011, thanks to the good starting position in 2010 and re-straint in the sector. However, the calculations presented in thereport indicate that it will be more difficult for municipalities andcounty 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 StockholmVisitors Hornsgatan 20

Phone +46-8-452 70 00

www.skl.se

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