The Economy Report. On Swedish Municipal and County Council Finances – May 2007
Information concerning the content of the report: Maj-Lis Ă…kerlund tel +46 8 452 77 54 Per Sedigh tel +46 8 452 7743
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 7747 | Fax +46 8 452 72 26 info@skl.se, www.skl.se Š Sveriges Kommuner och Landsting 1st edition, July 2007 Graphic form & production: Elisabet Jonsson Translation: Ian MacArthur, Elisabet Jonsson, Anders Brunstedt. Cover illustration: Jan Olsson Form & Illustration AB. Printers: KLF Digitalttryck, Stockholm. Fonts: BerlingNova och Charlotte Sans SKL. Paper: Xerox Colortech Natural White 100 & 200 gr (cover). ISBN: 978-91-7164-266-0 (edition in Swedish: 978-91-7164-240-0, ISSN: 1653-0853 )
Foreword The Economy Report deals with the financial situation and conditions of county councils and municipalities and the development of the Swedish economy over the coming few years. It is published twice a year by the Swedish Association of Local Authorities and Regions (salar). In this issue, which looks forward to 2010, we stress the importance of employment for financing welfare provision. At present we are experiencing a favourable trend on the labour market, but this cannot go on for ever. By the end of the period the scope for increases in services will already be very limited. Where possible we have taken account of the financial implications of the 2007 Spring Fiscal Policy Bill in our calculations. However, further analyses of it will be necessary. The present report has been written by economists at the salar Section for Economic Analysis. The Summary (supplemented with some tables and diagrams from the main report) and the Annex are published here as a separate English document. Ian MacArthur has translated the Summary, following slight revisions by Anders Brunstedt and Elisabet Jonsson. June, 2007 Maj-Lis Ă…kerlund Section for Economic Analysis, Swedish Association of Local Authorities and Regions
On Swedish Municipal and County Council Finances
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Contents Summary and conclusions ...................................................................................... 3 Municipalities – moderate but diverse volume growth ............................ 4 County councils – demography is fuelling greater needs ........................ 5 Local government financing principle always applicable ...................... 6 The employment upturn is not for ever .......................................................... 6 Annex ................................................................................................................................ 8
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The Economy Report. May 2007
Summary and conclusions
SEK billion
The next few years will be a short period of recovery for municipalities and county councils. This is partly explained by the present strong development of the economy. Another important explanation is an increased focus on healthy finances and rationalisation, resulting in relatively restrained cost growth. Over the next few years the positive employment trend will contribute to the continuation of the favourable development of the tax base and the reinforcement of tax revenue in real terms. However, the growth of the number of hours wor- Diagram 15 • Net income for municipalities and county councils ked will slacken gradually and return to more nor- excluding extraordinary items mal levels at the end of the period. A broad-brush SEK billion Total Adjusted govMunicipalCounty calculation shows that the whole of the 2010s will be ernment grants ities councils characterised by weak growth of the number of 20 18 hours worked. Municipalities and county councils 16 14 will have to have a well-tailored suit so that it does 12 not have to be sewn in by too many sizes when the 10 8 good years are over. Work to increase efficiency must 6 4 therefore continue.
Table 20 • Supply and use of resources Volume change, per cent, on previous year
2 0 –2 –4 –6 –8 –10
1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
2005 2006 2007 2008 2009 2010
2.9 6.9 4.0
4.4 7.8 5.4
3.6 8.9 5.2
2.9 7.1 4.2
2.3 5.7 3.4
2.0 4.7 3.0
2.4 0.3 –2.0 1.2 0.8 1.9 Gross fix’d capital formation 8.1 Changes in stocks* –0.1 Exports 6.6 Demand 4.0
2.8 1.8 1.0 2.0 1.9 2.3 8.2 0.0 9.1 5.4
4.4 1.1 0.3 1.3 1.1 1.6 6.0 0.1 7.5 5.2
3.9 0.8 0.3 0.7 0.4 1.4 5.2 0.0 6.0 4.2
2.8 0.6 0.2 0.6 0.4 1.1 4.2 0.0 5.0 3.4
1.9 0.6 0.1 0.8 0.5 1.5 4.0 0.0 4.5 3.0
GDP
Imports Supply Household consumption Public consumption Central govt Local govt Municipalities County councils
Source: Swedish Association of Local Authorities and Regions.
*Change expressed as a percentage of previous year’s gdp. The outcome figures för 2005 and 2006 are the actual numbers, while the figures for the period 2007–2010 are adjusted for calendar effects. Source: Statistics Sweden, National Institute of Economic Research and own calculations.
On Swedish Municipal and County Council Finances
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Summary and conclusions
Table 26 • Important factors for calculations of the local government tax base Volume change, per cent, on previous year unless otherwise stated 2006
Hourly pay, whole labour market 3.4 Hours worked 2.0 Taxable payroll 5.5 Open unemployment, share of labour force 5.4 Training programmes, share of labour force 1.8 Income base amount, level, sek 44,500 Price base amount, 39,700 level, sek Sickness benefit days, net –8.9
2007
2008
2009
2010
4.1 2.0 6.2
4.3 1.1 5.4
4.3 0.5 4.8
4.3 0.0 4.3
4.8
4.3
4.3
4.3
1.2
1.6
1.7
1.6
45,900
47,700
49,800
52,000
40,300 –5.8
41,200 –3.7
41,900 –2.4
42,700 –1.8
Source: The Swedish Social Insurance Agency, central government, Statistics Sweden and own calculations.
Diagram 1 • Net income before extraordinary items, municipalities ranked by net income as a percentage of tax revenue and government grants 2004
15
2005
2006
12 9 Per cent
6 3 0 –3 –6 –9 –12
1
50
100
150
200
250
290
Number of municipalities
Municipalities – moderate but diverse volume growth In 2006 the preliminary net income for municipalities amounted sek 13.4 billion – an improvement of sek 4.4 billion on 2005. However, the underlying level of net income (adjusted for accruals and deferrals, etc.) presents a different picture: a reduction of sek 2.5 billion. There are good prospects throughout the period of achieving a financial outcome that meets the requirements for healthy finances*, at the same time as the volume of services can increase by 1 per cent per year on average. But for 2010 this presupposes that central government grants are adjusted upwards in line with the tax base. There is no aggregate demographic pressure on services during the period. But this overall picture conceals differences in the development of services. For instance, compulsory school decreases in volume throughout the period, while upper secondary school first increases and then decreases. This makes great demands on adaptation and on the redistribution of financial resources and of staff, in particular. Another service that has grown a lot in the past ten years and is expected to continue its growth is disability care. In view of this together with the good economic conditions we make the assessment that volume growth of 1 per cent per year is reasonable.
Source: Statistics Sweden.
Diagram 3 • Volume growth in tax-financed activities Index 2006=100 Compulsory school 112
Upper secondary school
Childcare
Elderly care
Disability care
Other Total
110 108
Index
106 104 102 100 98 96 94 92
2006
2007
2008
2009
2010
Source: Swedish Association of Local Authorities and Regions.
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The Economy Report. May 2007
Summary and conclusions
Diagram 4 • Net income for municipalities Percentage of tax revenue and general government grants Calculation
Adjusted government grant 2009 and 2010
4.0 3.5
Per cent
3.0 2.5 2.0 1.5 1.0 0.5 0.0 2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
Source: Swedish Association of Local Authorities and Regions.
County councils – demography is fuelling greater needs In 2006 net income for county councils amounted sek 1.9 billion – a deterioration of sek 2.3 billion on 2005. The underlying level of net income gives a decrease of sek 1 billion instead. At the beginning of the period county councils will report positive net income in line with healthy finances*, but after this net income will decline gradually. Unlike the municipalities, the demographic pressure on services during the period is relatively large for county councils. With an assumed growth in the volume of services of 1.4 per cent per
Table 15 • Cost increase due to demography, central government reforms and trend, fixed prices Average 2007 2002–2006
2008
Contribution to changes, percentage points Demography 0.7 0.7 0.7 Central govt reforms 0.4 0.5 –0.1 Long-term trend 0.7 0.7 0.7 of which pharmaceuticals in excess of demographic trend 0.3 0.2 0.2 Total cost pressure, % 1.9 2.0 1.4 Initiatives/savings, % Total volume change, %
–0.2 1.7
–0.4* 1.6
0.0 1.4
2009
2010
Average 2007–2010
0.6 –0.3 0.7
0.8 0.0 0.7
0.7 0.1 0.7
0.2 1.1
0.2 1.5
0.2 1.5
0.0 1.1
0.0 1.5
–0.1 1.4
*In 2007 adjustment costs disappear, reducing the cost pressure by 0.4 percentage points. The gross volume of the initiatives amount to +/– 0 percentage points. Source: Source: Swedish Association of Local Authorities and Regions. *For municipalities and for county councils as a whole we generally use the rule of thumb that net income has to amount to 2 per cent of tax revenue and general government grants for it to be considered that healthy finances have been achieved.
On Swedish Municipal and County Council Finances
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Summary and conclusions
Diagram 5 • Net income for county councils Percentage of tax revenue and general government grants Adjusted government grant 2008–2010
Calculation
3 2
Per cent
1 0 –1 –2 –3 –4 –5 2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
year, county councils will report negative net income, a deficit, in 2010, unless government grants are adjusted upwards in line with the tax base. But even if government grants are adjusted upwards, the county councils will not achieve the rule of thumb for healthy finances. Health care is being developed constantly with new methods, forms of treatment and pharmaceuticals that save lives and improve people's quality of life. Developments in medical technology affect costs in two directions. First, the new methods are more cost-effective and, second, more patients will be considered for treatment. On many occasions this has led to an increase in aggregate costs.
Source: Swedish Association of Local Authorities and Regions.
Local government financing principle always applicable The principle that central government always has to provide money for decisions that affect the activities of municipalities and county councils is at the core of inter-governmental relations. Because the local government financing principle is applicable irrespective of whether times are good or bad and because stable conditions are provided for planning, it is possible to dimension the production of welfare services in the best possible way. In the 2007 Spring Fiscal Policy Bill the Government stresses once again that the local government financing principle is applicable – for instance, representatives of the Government Offices have to prepare government proposals with salar and give an account of their economic and financial effects when they do so.
The employment upturn is not for ever We believe that the improvement in the economy will continue and that income for municipalities and county councils will develop favourably in coming years. After several years of largely unchanged employment the situation on the labour market turned round in 2005. The number of hours worked increased by as much as 2 per cent in 2006. This rapid expansion of the foundation for the local government tax base is also expected to continue in 2008 and then to slow down. Despite this we still make the assessment that there is more additional scope in 2009–2010 for continued employment growth, on condition that demand remains sufficiently high. The employment upturn will lead to a considerable real increase in tax revenue, which, given unchanged
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The Economy Report. May 2007
Summary and conclusions
tax rates, will create scope for a higher volume of activities and more local government employees. With the expected real growth of tax revenue and our assessments of the development of activities, municipalities and county councils will report aggregate positive net income in 2010. In spite of this positive development, net income for both municipalities and county councils will still weaken towards the end of the period. This is partly because the nominal level of general government grants is unchanged in the calculation for 2009–2010. If it is assumed instead that government grants will grow at the same rate as the tax base, the weakening of revenue is moderated considerably. Assuming that employment and unemployment are characterised by the state of equilibrium on the labour market, corresponding tax base growth cannot be expected in the period after 2010. For example, based on the number of people of working age, potential employment is expected to remain more or less unchanged throughout the 2010s. Table 24 • Number of people in employment per sector Thousands and annual percentage change 2006 level
Business and industry 3 076.0 Municipalities 846.4 County councils 268.9 Central government 244.1 Total 4 435.3
2007
2008
2009
2010
2007 –2010
2.1 1.8 1.7 0.8 2.0
1.6 0.2 1.4 0.0 1.2
0.9 0.4 1.3 0.0 0.8
–0.1 0.7 1.7 0.0 0.2
1.1 0.8 1.5 0.2 1.0
Source: National accounts and own calculations.
On Swedish Municipal and County Council Finances
Diagram 14 • Dependency ratio Number of older and young people per 100 people of working age* 88
83
Ratio
It is well established that, in the future, demography will result in fewer people of working age having to support more and more people outside working age, not least more elderly people. The demographic dependency ratio – i.e. the ratio of the population outside the working-age population to the working-age population – is now beginning to rise after a long period of favourable development. Demographic developments after 2010 suggest potentially lower work income available for taxation at the same time as the demand for publicly financed services can lead to a steady increase in expenditure not least for the services provided by municipalities and county councils. All in all, net lending (financial income) in the public sector will probably decrease substantially.
78
73
68 1970
1980
1990
2000
2010
2020
2030
2040
2050
*Number of people younger than 20 years and people older than 64 years in relation to the number of people aged between 20 and 64 years. Source: Statistics Sweden.
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Annex This annex reports some key indicators along with a number of tables and diagrams taken from the municipality and county council sections that have been summed here to give an overall picture.
An aggregate picture of municipalities and county councils Table 28 • Key indicators for municipalities and county councils 2001–2007 Per cent and thousands
Average tax rate, % municipalities, incl. Gotland county councils*, excl. Gotland Number of employees**, thousands municipalities county councils
2005
2006
2007
2008
2009
2010
31.60 20.84 10.81
31.60 20.83 10.82
31.55 20.78 10.84
31.55 20.78 10.84
31.55 20.78 10.84
31.55 20.78 10.84
1,090.1 1,115.2 1,135.1 1,140.7 1,148.0 1,158.9 827.3 846.4 861.7 863.6 867.3 873.5 262.8 268.9 273.4 277.2 280.6 285.4
*Gotland's tax base is not included so that it’s not possible to add up the figures to make the total. **Average number of people in employment according to the National Accounts. Source: Statistics Sweden.
Table 29 • Aggregate income statement SEK billion, current prices, unless otherwise stated Outcome Prel. outc.
Income of activities Expenses of activities Depreciation Net expenses of activities
Forecast
Calculation
2005
2006
2007
2008
2009
2010
124 –610 –19 –505
133 –646 –20 –533
135 –674 –21 –560
137 –703 –21 –588
139 –734 –22 –617
144 –768 –23 –648
432 82 82 13
458 86 86 15
475 93 93 12
502 97 97 14
527 97 97 9
551 97 97 3
2.6
2.8
2.0
2.4
1.5
0.5
1.1
6.0
11.0
Tax revenue General govt grants and equalisation Net financial income Net income excl. extraordinary items Share of taxes and grants, % General government grants adjusted upwards by tax base forecast Net income for the year after tax base adjustment
13
15
12
15
15
14
Share of taxes and grants, %
2.6
2.8
2.0
2.6
2.4
2.2
+3.4 +2.8 +0.6% +0.6% –21 öre –17 öre
+1.3 +0.3% –7 öre
Cost reduction to achieve 2 per cent which corresponds to a volume decrease of or a tax increase of Net income for the year with the 2 per cent target Share of taxes and grants, %
12
13
13
2.0
2.0
2.0
Source: Statistics Sweden and Swedish Association of Local Authorities and Regions.
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The Economy Report. May 2007
Annex
Diagram 16 • Aggregate cost growth broken down by volume and price in municipalities and county councils 2002–2010 Per cent Volume
Price
7 6
Per cent
5 4 3 2 1 0 –1
2002
2003
2004
2005
2006
2007
2008
2009
2010
Source: Swedish Association of Local Authorities and Regions.
For the aggregate net income of municipalities and county councils, see diagram 15 on page 3. Reference is made to the autumn issue of this publication, The Economy Report. November 2006, for the distribution of costs and revenue between municipalities and county councils and for tables showing the development of central government grants.
On Swedish Municipal and County Council Finances
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The Economy Report. On Swedish Municipal and County Council Finances is a series published by the Swedish Association of Local Authorities and Regions and it appears twice a year. In it we deal with the present economic situation and developments in municipalities and county councils. This issue covers the period until 2010. Preliminary net income for 2006 for municipalities and county councils amounts to some SEK 15 billion, or 2.8 per cent of taxes and general government grants. One explanation of the good outcome for net income is the strong growth of the Swedish economy. Another is a greater focus on healthy finances. This year, 2007, will also be characterised by strong growth in the number of hours worked, which will decline gradually thereafter. In order to retain the good financial posiiton it is necessary for efficiency to continue to improve and for no unfunded reforms to be implemented. The Economy Report. On Swedish Municipal and County Council Finances – May 2007 can be downloaded from our website: www.skl.se.
ISBN 978-91-7164-266-0 ISSN 1653-0853
Swedish Association of Local Authorities and Regions SE-118 82 Stockholm Visitors Hornsgatan 20 Tel +46 8 452 70 00 Fax +46 8 452 70 50 info@skl.se, www.skl.se