7164 381 0

The Economy Report.

On Swedish Municipal and County Council Finances – May 2008

Information concerning the content of the report: Maj-Lis Åkerlund tel +46 8 452 77 54 Bo Legerius tel. +46 8 452 77 34 Carl J Nordén tel. +46 8 452 77 72

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 info@skl.se, www.skl.se © Sveriges Kommuner och Landsting 1st edition, September 2008 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 Colotech 120 gr ISBN 978-91-7164-381-0 (edition in Swedish: 978-91-7164-355-1, 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 coming few years. It is published twice yearly by the Swedish Association of Local Authorities and Regions (salar).

This issue looks forward to 2011. We conclude that the situation today is pretty good. But there will be tougher times ahead that will require restrained cost growth with good adaptability and indexed government grants.

In a special chapter, we analyse what the consequences would be for municipalities and county councils if the number of hours worked was to fall in the same way as at the beginning of the decade. It turns out that readiness is needed to cope with a much weaker increase in tax revenue than if our tax base forecast is fulfilled.

This report has been written by staff at the salar Section for Economic Analysis. The people who have participated in the work and can reply to questions are given on the inside cover page. Other salar staff have also contributed facts and valuable comments. We are very grateful to the municipalities and county councils that have replied to our questionnaire.

Stockholm, May 2008 Maj-Lis Ă…kerlund Section for Economic Analysis

On Swedish Municipal and County Council Finances

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Contents Summary and conclusions ...................................................................................................... 3 The macroeconomic context .................................................................................................. 6 The economy will turn round sooner or later ................................................................ 8

A downturn in the economy .................................................................................................. 11 Effects of a recession – an alternative calculation ...................................................... 12

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The Economy Report. May 2008

Summary and conclusions There are tougher times ahead now with demands for continued efficiency gains and cost adjustments in municipalities and county councils. The rapid recovery in the labour market, which has resulted in very strong growth of the tax base, is now over. This means that net income will continue to deteriorate substantially compared with the good income reported in recent years. The municipalities can match up to the rule of thumb for healthy finances (i.e. 2 per cent of taxes and grants) on two conditions: restrained cost growth with good adaptability and indexed government grants. The situation of the county councils is more difficult, with relatively strong needs for costs increases in health care. Net income for the county councils will therefore deteriorate rapidly, even if government grants are indexed. At the same time, central government finances are better than for several decades and there are strong reasons for indexing government grants so as to give the local government sector better conditions for its planning.

The recovery on the labour market is over for now and the Swedish economy is entering a new phase. This year gdp growth will weaken, largely as a result of a certain slackening of the international economy.

Next year growth will pick up again when financial turmoil has subsided and inflation has shifted down to more normal levels. At the turn of the year the labour market was in balance. With a labour marker close to being in balance, the economy can grow in line with its own potential. Due to a high level of retirements, the workforce will grow at a much more moderate pace in the future – and this will also apply to the local government tax base. The increases made by the Riksbank in the key interest rate are assumed to bring inflation down and keep wage increases under control. However, if wage increases are higher than we have assumed, there is a risk of further increases in interest rates, weaker growth and, in the long term, the erosion of real wages.

As a whole, the local government sector has been favoured by the sharp recovery in recent years. Aggregate net income deteriorated slightly last year, but still achieved the rule of thumb for healthy finances, since net income exceeded 2 per cent of taxes and government grants. Healthy finances require a positive result for the local government sector for several reasons. There are costs that have been underestimated in the accounts, including future pension payments. Assets are also reported at cost while their replacement cost will be higher for several reasons. Finally, municipalities and county councils must always be prepared for unexpected events, which can be of a completely different nature. Environmental impacts are more likely to lead to unexpected costs now than in the past. As always, there is also uncertainty in economic assessments that affect the tax base. Given healthy finances, services do not have to be cut right away in such situations.

On Swedish Municipal and County Council Finances

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Summary and conclusions

Table 23 • Aggregate income statement 2007–2011 SEK billion, current prices, unless otherwise stated Outcome 2007

Forecast 2008 2009

Calculation 2010 2011

135 –676 –21 –562

139 –710 –22 –593

142 –743 –22 –624

147 –780 –23 –656

152 –818 –24 –689

Tax revenue 479 Gen government grants & equalisation 93 Net financial income/expense 3 Net income before extraordin. items 13

504 97 3 12

529 98 3 7

554 99 3 0

581 100 3 –5

2.0

Revenue of activities Expense of activities Depreciation Net expenses of activities

Share of taxes and grants, %

1.1

0.1

–0.7

General government grants adjusted upwards by tax base forecast Net income after tax base adjustment

2.3

3.8 11

7.5 8

11.3 6

Share of taxes and grants, %

1.7

1.2

0.9

–1.8 –0.3 0.11 13

–5.2 –0.7 0.29 13

–7.4 –0.9 0.40 14

2.0

2.0

2.0

Cost reduction to achieve 2 per cent, which corresponds to a volume change of (%) or a tax increase of (SEK) Net income for the year with the 2 per cent-target Share of taxes and grants, %

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

Table 24 • Income statement for the municipalities 2007–2011 SEK billion Outcome 2007

Forecast 2008 2009

Calculation 2010 2011

105 –455 –15 –365

108 –477 –15 –385

110 –500 –16 –405

114 –523 –16 –425

119 –547 –17 –445

Tax revenue 315 Gen government grants & equalisation 56 Net financial income/expense 4 Net income before extraordin. items 9

332 58 4 9

348 60 4 7

365 60 4 4

383 61 4 2

2.4

1.8

1.0

0.5

Revenue of activities Expense of activities Depreciation Net expense

Share of taxes and grants, %

2.6

Source: Swedish Association of Local Authorities and Regions.

Tables 23–25 Net income in the local government sector will deteriorate in the com-

ing years, mostly for county councils. The rule of thumb for healthy finances, corresponding to 2 per cent of taxes and government grants, will be met this year but not subsequently. However, the municipalities will have the possibility of fulfilling the requirement, if the Government indexes government grants. The information is based on rules already decided and therefore on nominally unchanged government grants.

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The Economy Report. May 2008

Summary and conclusions

Table 25 • Income statement for the county councils 2007–2011 SEK billion Outcome 2007

Revenue of activities Expense of activities Depreciation Net expense Tax revenue General government grants Net financial income/expense Net income before extraordin. items Share of taxes and grants, %

Forecast 2008 2009

Calculation 2010 2011

32 –223 –6 –197

34 –235 –7 –208

34 –246 –7 –219

35 –259 –7 –231

37 –273 –7 –244

164 38 0 4

172 39 –1 2

181 39 –1 –0

189 39 –1 –4

198 39 –1 –7

2.0

1.1

–0.1

–1.7

–3.1

Source: Swedish Association of Local Authorities and Regions.

With the same nominal level of government grants, net income deteriorates rapidly in the local government sector. Even with indexed government grants, tough challenges will be faced to conduct future activities with flexibility and cost control. For the municipalities this is possible – demand will not rise in the next few years and this means that it will be possible to handle their finances if government grants are adjusted in accordance with price increases.

In contrast, the county councils are facing worrying years, with a weakening of net income as a result of much higher needs-driven requirements. Deficits are in prospect if the efficiency of health care cannot be increased more rapidly than in recent years. Nevertheless our calculations, which assume restrained cost growth, still show that county council net income does not achieve the target of healthy finances.

Table 22 • Key indicators for municipalities and county councils, 2006–2011 Per cent and thousands

Average tax rate, % Municipalities, incl.

Gotland County councils*, excl.

Gotland

2006

2007

2008

2009

2010

2011

31.60

31.55

31.44

31.44

31.44

31.44

20.83

20.78

20.71

20.71

20.71

20.71

10.82

10.84

10.79

10.79

10.79

10.79

Number of persons employed**, thousands 1,108.3 1,115.7 1,123.7 1,136.0 1,148.7 1,161.4 Municipalities 838.5 843.7 848.9 858.0 866.4 874.2 County councils 269.8 272.0 274.8 278.0 282.3 287.2 *Gotland’s tax base is not included, so it is 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 and the Swedish Association of Local Authorities and Regions.

On Swedish Municipal and County Council Finances

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Summary and conclusions

Diagram 25 • Aggregate cost growth broken down by volume and price in municipalities and county councils Per cent Volume

Price

7 6

Per cent

5 4 3 2 1 0

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

Source: Swedish Association of Local Authorities and Regions.

Diagram 1 • Tax base and volume of services 2002–2011 Percentage change, constant prices Real tax base

Volume of services

2.5 2.0 1.5

Per cent

1.0 0.5 0.0

–0.5 –1.0 –1.5 –2.0

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

In the long-term municipal and county council services cannot grow faster than the tax base. The recovery in the labour market also led to a rapid upturn in the tax base, but in the future more normal growth is expected, placing a ceiling on how rapidly local government services can grow.

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

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The macroeconomic context The number of hours worked in the Swedish economy increased by 3½ per cent in 2007. Such substantial employment growth has never been measured before. Employment also increased sharply in 2006. More than 170 000 jobs were created between 2005 and 2007. At the same time unemployment has fallen and the supply of labour has increased.

The labour market situation is very important for the finances of the local government sector. More people in employment and more hours of work performed increase the base for municipal and county council taxation. The positive development on the labour market has contributed to the growth of the tax base by some two per cent per year in real terms.

Growth on this scale is not possible in a long-term perspective. The employment growth that has taken place should chiefly be viewed as a cyclical recovery, in which the economy has moved from a state with substantial reserves of unused labour to one characterised by better balance on the labour market. This shift has resulted in more rapid pay growth and rising inflation, but also in a tighter monetary policy with higher interest rates.

The financial turmoil and weakening of the economy in the United States mean that there is now a pause in the recovery on the labour market. The problems in the US are weakening the international economy, but are also restraining investment and consumption in our own country. Employment is calculated to remain largely unchanged during the year. The increase in 2008 is entirely a result of the strong development in the course of the previous year. Unemployment may increase slightly.

However, the weakening of the economy is expected to be short and limited. Next year demand will already gain pace and the situation on the labour market will improve again. The number of hours worked is calculated to increase slightly in 2009 (Table 1).

All in all, this will add up to stronger employment growth than previously assumed. This may appear paradoxical, as the international economy is weakening now and the employment prospects for this year are being revised downwards. The explanation for

The Economy Report. May 2008

Summary and conclusions

Table 1 • Key indicators for the development of the economy Percentage change on the previous year unless otherwise stated

gdp Employment. hours Open unemployment (level) Hourly pay Consumer prices Tax base

2007

2008

2009

2010

2011

2.6 3.5 6.2 3.3 2.2 5.4

1.8 1.0 6.2 4.9 3.0 5.5

2.6 0.2 6.2 4.4 2.4 4.8

2.4 0.3 6.0 4.4 2.0 4.8

2.2 0.2 5.7 4.5 2.0 4.8

The rapid growth in employment and the improvement of the tax base are largely manifestations of a cyclical recovery. Tax base growth will weaken gradually.

Source: Swedish Association of Local Authorities and Regions.

the eventual increase in employment is a more positive view of the possibilities of increasing the supply of labour. One sign that this potential exists is that wage growth has not really gained pace yet despite the substantial growth that has taken place in employment. Our interpretation is that there is still some way to go before the labour market comes into balance. For this reason, employment in 2011 is assumed to be higher than in the previous Economy Report. This leads to a higher level of the tax base.

The great bulk of local government sector revenue is tax-financed, either directly through local government taxation or indirectly through tax-financed government grants. This means that services in municipalities and county councils are wholly dependent on the development of the economy. The foundation is employment, how many hours of work are performed, which then determines that tax base.

The very rapid labour market recovery in recent years also led to a relatively sharp increase in the tax base. This recovery has now passed its peak and in the future the tax base will increase more slowly. This sets a ceiling for how rapidly services can grow. And in the coming years services will also grow at about the same rate as the tax base (Diagram 1 on page 6). What happens in the medium term is based on a labour market close to balance that makes low inflation possible.

There is always a risk of disturbances in the economy, which is something that municipalities and county councils must be prepared for.

Such disturbances may appear quickly and have serious consequences – in a special section we present a stylised example of how local government finances are affected. Aggregate net income would be weakened by sek 10 billion, compared with our base calculation, if employment fell in the same way as during the last recession at the start of the decade.

On Swedish Municipal and County Council Finances

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Summary and conclusions

The economy will turn round sooner or later This report does not contain an assessment of the situation of the economy beyond 2009, as this calculation is based on “normal economic conditions”, which means that the economy develops without any cyclical fluctuations. But what would happen if there was a significant downturn in the economy?

Why is breaking even not good enough?

During years with strong real growth of the tax base there is a danger of services growing more or less unintentionally. This can happen as a result of speed blindness, without well considered political priorities. In times of good net income, many stakeholders make claims on resources.

This may involve the authority’s political priorities, citizens demanding better services and trade unions demanding higher wages. There may also be unfunded central government reforms, i.e. occasions when the Riksdag chooses to deviate from the local government financing principle on the grounds that “there are resources in the sector”, despite having adopted legislation on healthy finances and despite knowing that there are sharp variations in financial conditions around the country. In other words, when times are good there is a risk of taking on too many commitments. With unnecessarily large commitments: What happens when the turn-round comes?

This means that in good years good net income is needed. The question is how good it needs to be. Does the requirement for healthy finances mean that net income for the year has to be 2 per cent of taxes and grants in every municipality and county council? No, the law says that every municipality and every county council has to adopt – in its own budget and based on its own conditions – objectives and guidelines for services and also financial objectives of importance for healthy finances. Services are the main objective, finances set the economic boundaries. Ultimately, healthy finances are about providing cost-effective and appropriate services for taxpayers’ money. If internal objectives are not achieved, nothing happens externally as long as the authority reports positive net income. In the event of a deficit the law comes into play and requires an action plan for how to restore the situation so that future generations will not suffer. This seems a reasonable procedure. How is this related to the Association’s long-applied financial rule of thumb of 2 per cent of taxes and transfers? Of course, it is hard to say that net income has to be exactly 2 per cent. But positive net income is needed in order, for example, to inflation-proof fixed assets, to generate funding for investments, to meet adjustments of pensions liabilities off the balance sheet, to build up a margin because some municipalities and county councils will have weak net income, and to have a buffer for unforeseen events. This is why a certain positive level of net income is needed for the municipalities and county councils as a who-

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The Economy Report. May 2008

Summary and conclusions

On Swedish Municipal and County Council Finances

Diagram 24 • Municipal and county council net income before extraordinary items Percentage of taxes and grants Total

Adjusted government grants

Municipalities

County councils

4 3 2 1

Per cent

le. Without a buffer: What happens when the turnround comes?

The Government has announced that general government grants will be unchanged in nominal terms for the next few years. Having nominally unchanged grants means that their real value will be eroded. As noted, external events outside the control of local decision-makers are hard to meet and parry. In this situation having to parry decisions and poor foresight on the part of central decision-makers is an added burden. Stable planning conditions and good foresight ought to be watchwords for every member of the Riksdag. This applies both to the development of government grants and decisions that affect services. The 2008 Fiscal Policy Bill marked a change of direction. The reply given to a direct question from the Association to the Minister for Finance concerning planning conditions was that “proposed reforms should be presented in as good time as possible so as to create good conditions for effective implementation”. At last municipalities and county councils have been given stable planning conditions! Or is this just political rhetoric?

The answer will come in September. If the answer is negative: What happens when the turn-round comes?

Even though government grants only account for a small part of the sector’s revenue, their erosion is of great importance. In 2011 this erosion corresponds to sek 11 billion, or almost 2 per cent of taxes and grants. With our assessment of the economy, the surpluses in central government finances will continue to be substantial. These surpluses are larger than is justified by the targeted surplus in public net lending. This means that central government is in a better position than for many years to guarantee the indexation of government grants to municipalities and county councils. In that situation, keeping government grants unchanged in nominal terms may seem particularly strange. Whatever the situation for central government finances, there are good grounds for central government to guarantee indexed government grants, but there is a clear risk that ad hoc solutions featuring grants called after particular ministers will continue. When the economy turns round and there are stabilization policy reasons for an expansive fiscal policy, all the re-

0 –1 –2 –3 –4 –5

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

Source: Swedish Association of Local Authorities and Regions.

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Summary and conclusions

sources available should not be used to stimulate demand in the private sector. Erosion of government grants: What happens when the turn-round comes? (Diagram 24 on page 9.)

The recurring question above is what will happen when the economy deteriorates strongly and how well will municipalities and county councils cope with such a turn-round. The answer that can be suspected is that this depends on many factors. It involves not least an authority leadership that keep local governments’ finances in good order when times are good and that keep up with the winds of change and is able to take the necessary decisions. But it also involves central government setting clear rules and breaking with the system of an unchanged nominal level of government grants as well as letting municipalities and county councils benefit from the surplus available in central government finances.

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The Economy Report. May 2008

A downturn in the economy The labour market situation has improved in recent years. The turn-round began in 2005, and the growth in employment accelerated in 2006 and was strongest last year. Then the labour market gap closed after having been as large as 4 per cent in 2004. Productivity growth was very good and business profits increased sharply in combination with a sharp increase in the value of shares and property. At the same time, inflation was very low in this period.

More people in jobs, fewer in ill health and unemployment and good real wage increases made a substantial increase possible in household consumption.

This also means that the tax base for the public sector grew quickly at the same time as expenditure was falling. So there have been substantial surpluses during this period. This has mainly benefited central government. The most important tax bases for central government – wages, household consumption, company profits and capital taxation – have all contributed to the unexpectedly rapid amortization of central government debt.

Local government finances have also been favoured – as a result of the steady increase in the number of hours worked – but not to the same extent as for central government. However, the local government sector has shared in the improved central government finances through increases in government grants.

This year the situation on the labour market is getting slightly weaker. However, our assessment is that the gap will decrease again next year.

No assessment of the business cycle is made for subsequent years and the gap is closed gradually up until the final year. It is not possible to make longer term cyclical forecasts for the economy. The linkages in the global and Swedish economies are too complex to be predicted.

Moreover, there are always unexpected events that affect the economy.

However, this does not mean that the cyclical fluctuations will end – just that we cannot say when they will take place.

It may therefore be worth recalling what happened the last time there was a downturn in the economy. Because the next recession is also highly likely to result in weaker tax base growth. Municipalities and county councils need to be prepared for what this may involve and how to deal with the consequences.

On Swedish Municipal and County Council Finances

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A downturn in the economy

Effects of a recession – an alternative calculation

Diagram 23 • The labour market in an alternative scenario Hours worked, percentage change Base

Alternative

3.5 3.0 2.5

Per cent

2.0 1.5 1.0 0.5 0.0 –0.5 –1.0 –1.5

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

In our alternative scenario domestic activity weakens with the result that the demand for labour falls for two successive years. The reduction is of the same size as in the recession at the start of the decade.

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

In order to show how a recession may affect the finances of the local government sector we have carried out a simulation of what happens if the number of hours worked falls in the same way as at the start of the decade. The simulation is schematic and does not cover all the dynamic effects. These effects can be both positive and negative, but overall our simplification probably underestimates the negative effects on local government finances. So we have been generous in the calculation, rather than exaggerating.

In our simulation, a sharp decline in demand leads to a reduction of the number of hours worked (Diagram 23). Normally there is a delay before the labour market is affected by a fall-off in demand. However, in our schematic example everything takes place at the same time.

The effects have been assumed to only affect the private part of the economy. What happens is that demand falls off, due to lower consumption by households and weaker investments in the business sector. The purpose is to show what happens to public sector finances if nothing is done. It is assumed that central government does not take any action either.* Nor have we assumed any changes in tax rates, at either central or local government level.

In 2011 there are a total of 170,000 fewer people in employment than in the base calculation. As a reaction to the deterioration of employment many individuals withdraw from the labour market – the supply of labour decreases, which means that unemployment does not increase to the same extent.

The previous time the economy weakened, considerable leakage from the labour market resulted in high rates of absence related to ill health. That valve has now to be regarded as closed. Lower levels

*If central government were to act promptly and with foresight instead, central government net lending would deteriorate more, and more quickly, than in our simple calculation, which might help to strengthen the state of the economy after some time.

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The Economy Report. May 2008

A downturn in the economy

of compensation and limits to the period of unemployment insurance benefit may increase the pressure on municipal social assisctance, but we have assumed that this will not happen.

The fall in employment means that the labour market gap will widen.

As a result, wage increases will not be as large as they would have been with a labour market in balance. We assume, just like in our base calculation, that wage increases are the same in all parts of the labour market, and lower wage increases result in lower costs for services in municipalities and county councils.

This also gives companies lower unit labour costs, which relieves the inflationary pressure. This also results in slower costs increases for local government services.

Times will be tough for households. Fewer people in employment and lower wage rises lead to lower income. To some extent the loss of income will be offset by unemployment benefits, and lower inflation is favourable for households’ finances. However, disposable income will only grow weakly in real terms.

The results are summarised in Table 20 below.

Table 20 • An alternative scenario for 2010–2011 Percentage change

Hours worked gdp volume Open unemployment, older definition Wage growth

cpi Wage sum Tax base Income, local government Municipalities County councils

Deviation from the base alternative 2010 2011

2008

2009

2010

2011

1.0 1.8

0.2 2.6

–1.4 1.1

–1.4 1.1

–1.7 –1.3

–1.6 –1.1

4.8 4.9 3.0 5.9 5.7 3.4 3.2 3.6

4.7 4.4 2.4 4.6 4.8 4.7 4.6 4.8

5.3 3.5 0.4 1.9 2.8 2.2 2.1 2.3

5.9 2.9 0.4 1.4 1.9 1.5 1.4 1.8

0.9 –0.9 –1.6 –2.9 –2.0 –2.0 –2.2 –1.8

1.6 –1.6 –1.5 –3.4 –2.9 –2.6 –2.7 –2.4

The decline in the number of hours worked quickly has quite substantial effects that weaken the finances of households, central government and the local government sector. To some extent the negative effects are countered by lower inflation and weaker wage increases.

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

The tax base is affected negatively – fewer hours worked, lower wages, slightly lower pensions and other taxable transfers (on account of the lower inflation) all contribute to weaken the tax base. The result is significantly lower tax income for the local government sector. Compared with the base calculation, the fall in income is almost twice as large as

On Swedish Municipal and County Council Finances

13

A downturn in the economy

the slackening of the expenditure level. Net income therefore deteriorates drastically, and both municipalities and county councils already report deficits in the first year. The situation then gets even worse, since the downturn in the economy continues at the same rate in the following year. For the whole of the local government sector the deficit in the first year is 1 per cent of taxes and grants, and in the second year it then grows to almost 3 per cent.

The conclusion of this calculation for municipalities and county councils is that they must take account of unavoidable fluctuations in the economy in their planning. At the same time, services in municipalities and county councils are largely needs-driven and can therefore hardly be changed to any great extent from one year to the next. Often it is not possible – and in many places not desirable either – to increase the tax rate when the tax base declines. Moreover, at the macroeconomic level increases in local government taxes in an economic slowdown are more likely to make the situation worse, as a result of the withdrawal of private purchasing power and demand that a tax increase entails.

Since a weakening of the economy affects central government more than it affects local government, it is not certain that central government will be able to increase government grants. In our calculation the central government budget is weakened by more than twice as much as net income for local government. When various kinds of dynamic effect are taken into account (relating to capital taxation, company taxes and dividend income, for example) – which we have left out – there is actually a risk of the central government budget surplus being wiped out or turning into a deficit. So the local government sector cannot count on central government being able to cover local government deficits.

At the same time, the target for general government net lending applies on average over a business cycle. In view of the major surpluses in central government finances in recent years, there should still be some scope for fiscal policy measures. However, we have not taken any such measures in our simplified alternative scenario.

Economic downturns differ, in terms both of causes and of effects and duration. However, we know that they come to an end, in the same way as economic upturns do not last either. After a weakening of the economy like the one we have described, the economy turns up again, with better incomes and rising tax income, but also with growing inflationary pressures and higher wage increases.

This calculation is not just a reminder to us that cyclical fluctuations will actually affect long-term developments as well. A highly important point for municipalities and county councils is that our assessment of the hours worked in the medium term is probably a maximum level, and that the actual change will probably turn out to be lower. The consequence will be lower tax income on average than when the labour

14

The Economy Report. May 2008

A downturn in the economy

market gap is closed. The crucial question for the development of the sector’s resources in the long term is whether or not the improved labour market situation in recent years can be retained – or even improved further.

So it is important to be aware that income declines in an economic downturn. One conclusion is therefore never to adapt the level of expenditure to temporary high income. Fluctuations in the economy are unavoidable – and perhaps not a bad thing either. After the rapid change in the economic situation in recent years, municipalities and county councils must be prepared that things can also get worse. We know from experience that such changes can come quickly.

On Swedish Municipal and County Council Finances

15

A downturn in the economy

16

The Economy Report. May 2008

.

The Economy Report. 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 2011.

Preliminary net income for 2007 for municipalities and county councils amounts to some sek 13 billion, or 2.3 per cent of taxes and general government grants. One explanation for the good outcome for net income is the strong growth of employment. This year net income will be slightly worse, but it is still at a good level. The coming years will be more difficult. Work to increase efficiency must continue and there is no scope for unfunded reforms.

In a special chapter, we analyse what the implications would be for municipalities and county councils if the number of hours worked was to fall in the same way as at the beginning of the decade.

The Economy Report. On Swedish Municipal and County Council Finances – May 2008 can be downloaded from our website at: www.skl.se.

ISBN 978-91-7164-381-0 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