The Economy Report. ON SWEDISH MUNICIPAL AND COUNTY COUNCIL FINANCES – MAY 2011
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, July 2011 Graphic form & production Elisabet Jonsson Translation Ian MacArthur, Elisabet Jonsson Cover illustration Jan Olsson Form & Illustration AB Printers ???, Stockholm Fonts Chronicle and Whitney Paper Xerox Colotech 120 gr ??? ISBN 978-91-7164-684-2 (Swedish edition: 978-91-7164-670-5, 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 19 April. They look forward to 2015. Despite the financial crisis, the levels of net income for the sector in both 2009 and 2010 are among the best for many years, mainly as a result of temporary factors. The 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 more than sek 15 billion in the sector; in 2012 we expect a surplus of more than sek 8 billion. For the years after 2012 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, May 2011 Annika Wallenskog Section for Economic Analysis
The Economy Report. May 2011 On Swedish Municipal and County Council Finances 1
Contents 3 5 5 7 8 9 9 10 11 12 13
The Chief Economist’s conclusions Strong Swedish recovery... ...leads to good finances for the municipal and county council sector The challenge of the future Municipal employment not just in-house Changing welfare Profits for private companies? Rise in business acquisitions Gains for citizens? Gains for municipalities? So what are the reasons why private sector services run at a profit?
15
Annex
2 The Economy Report. May 2011 On Swedish Municipal and County Council Finances
The Chief Economist’s conclusions Even though the Swedish economy was on its way out of a deep downturn, 2009 and 2010 were among the best years ever for municipalities and county councils in terms of net income. The main explanation is the sharp increase in government grants and restrained cost growth. But this pleasure will be short-lived. The calculations for coming years suggest limited financial scope. After the Swedish economy had shrunk by 5 per cent in 2009, we were able to register gdp growth of 5.5 per cent last year. 2011 has also opened with very strong economic data and forward-looking indicators such as industry and household barometers are pointing to continued good growth in the economy. While it is not realistic to expect equally strong growth figures in Table 3 • Balance of resources, 2009–2012 Percentage change
2009 Household consumption –0.4 General government consumption 1.7 Central government 1.2 Local authorities 1.9 Gross fixed capital formation –16.3 Changes in stocks** –1.5 Exports –13.4 Imports –13.7 GDP –5.3
2010
2011*
2012*
3.5 2.6 4.7 1.9 6.3 2.1 10.7 12.7 5.5
3.6 1.1 0.8 1.2 10.0 –0.2 11.2 9.9 4.8
4.2 0.8 0.0 1.1 11.0 0.3 5.5 8.7 3.5
Growth will remain high in 2011. The development of both exports and investments is expected to remain very strong.
*Refers to data adjusted for calendar effects. **Contribution to GDP growth, percentage points. Sources: Statistics Sweden and Swedish Association of Local Authorities and Regions.
The Economy Report. May 2011 On Swedish Municipal and County Council Finances 3
The Chief Economist’s conclusions
Diagram 8 • GDP and hours worked, seasonally adjusted figures, 2008–2012 Index, first quarter 2008 = 100 110
Hours worked
108
GDP
106
Index
104 102 100 98 96
The quickest phase in the cyclical recovery has passed. Only part of the productivity loss will be been regained.
94 92 2008:1 2008:3 2009:1 2009:3
2010:1
2010:3
2011:1
2011:3
2012:1
2012:3
Sources: Statistics Sweden and Swedish Association of Local Authorities and Regions.
the coming years, we do expect the economy to grow by almost 5 per cent in 2011 and by about 3 per cent per year in subsequent years. This means that the economy will grow at a rate that will generate employment growth strong enough to press unemployment down to less than 6 per cent in 2015.
Almost three years after the financial crisis entered its acute phase and drew the world economy down into its steepest economic decline since the depression of the 1930s, it is now increasingly clear that the global economy has entered a sustained recovery. So far most of the energy for the recovery has come from emerging economies such as China and India. Since these countries were not so strongly integrated into the international financial system, they were not hit as hard by the deep freeze on capital markets and have, instead, continued to be driven forward by a strong “catch-up force”. In recent months the traditional engine of the world economy, US consumers, now seems to have begun to build up steam, even though the US recovery is much weaker than usual. Table 2 • International GDP growth, 2009–2012 Percentage change
The prospects for Swedish exports are relatively good in the next few years, as GDP growth will be almost 3 per cent in our export market. However, world growth will be higher.
US EU China World Export-weighted GDP* Sweden
2009
2010
2011
2012
–2.6 –4.2 9.2 –0.5 –3.3 –5.3
2.8 1.9 10.3 5.0 2.7 5.5
3.2 2 9.2 4.5 2.9 4.8
3.1 1.8 9.0 4.5 2.8 3.5
* 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.
4 The Economy Report. May 2011 On Swedish Municipal and County Council Finances
The Chief Economist’s conclusions
Even though there are still risks, such as the debt crisis in Europe and geopolitical unrest in North Africa, most signs nevertheless point to a continuation of the healing process in the world economy. Several economies in the northern part of Europe, including Germany, Norway, the Netherlands and Finland, are growing at a relatively good pace. This is good news for us since they are some of Sweden’s most important trading partners. So far the problem children have been parts of southern Europe and the UK, which are suffering from high public indebtedness and will probably be forced to live with fiscal restraint and weak growth over the next few years. Strong Swedish recovery… In the same way as Sweden was one of the OECD countries to fall quickest and deepest in connection with the financial crisis, we are now one of the countries where the recovery has been most rapid. Apart from emerging economies like China, it has, on the whole, been export-intensive economies focused on investment and input goods and with relatively good government finances that have taken the lead in the recovery. …leads to good finances for the municipal and county council sector In connection with the sharp downturn in the Swedish economy at the end of 2008, bleak future perspectives were depicted for the finances of the municipal and county council sector. SALAR’s own forecasts showed that if no action was taken, the sector would report deficits in both 2009 and 2010 on account of weak employment and tax base growth.However, things turned out completely different in reality. Thanks to substantial temporary cyclical support, a number of other effects of a temporary nature, such as the repayment of charges from the Swedish Labour Market Insurance Company (AFA Försäkring AB), and the fact that the labour market did not at all develop as weakly as we and many others had feared, 2009–2010 were instead to be some of the very strongest years recorded for the sector in terms of net income.
Diagram 13 • Real growth of the tax base and total revenue, showingrevenue growth as of 2013 both including and excluding the upward adjustment of government grants
Index
Index 2002 = 100 120
Total revenue with unchanged government grants
115
Total revenue
110
Tax base
105
100
95 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
Even though real tax base growth is good in 2011–2012, total revenue only increases weakly. This is due to the phase-out of the temporary cyclical support.
Sources: Swedish Tax Agency and Swedish Association of Local Authorities and Regions.
The Economy Report. May 2011 On Swedish Municipal and County Council Finances 5
The Chief Economist’s conclusions
Diagram 1 • Tax base growth (lines) and contribution from certain components (bars) Per cent and percentage points 5
Other, pp
4
Employment, pp
Tax base growth will be stable at just over 4 per cent per year in 2011–2015, but its composition will change. During the period pay rises will gradually assume increasing importance for the increase in the tax base.
Per cent
3
Hourly wage, pp
2 Excl. regulartory effects, %
1
Total, %
0 -1 -2 2010
2011
2012
2013
2014
2015
Source: Swedish Association of Local Authorities and Regions.
Cost increases in the sector were also relatively modest in 2009–2010; the municipalities showed slightly more restraint in 2009. In the county councils, where the braking distance was slightly longer, it can be noted that the effects of the action programmes implemented were chiefly seen in 2010. Paradoxically, we cannot count on equally good conditions in the future even though we are looking forward to a couple of really good years for the Swedish economy as a whole. In 2011 and 2012 the government cyclical support is being phased out, so that, overall, revenue will only rise marginally despite a strong rise in the tax base. In subsequent years we expect moderate real increases in revenue despite relatively strong increases in tax revenue; in part this is because further into the future an increasing share of tax revenue comes from pay rises, which also results in higher costs for municipalities and county councils. A comparison with the period before 2010 shows that part of the increase in tax revenue then was due to tax increases. In 2011 net income for the sector is calculated as SEK 15.4 million, a very good level that is more than two per cent of taxes and government grants, which is viewed as the threshold for healthy finances. However, we expect net income to already decrease in 2012, falling below the level for healthy finances. For the period 2013 to 2015 we have carried out a calculation based on cost growth in line with the historical trend. Our assessment is that in the long term the sector will be unable to hold back cost increases.
Table 17 • The cost volume of municipalities divided up into demographic needs and other factors Percentage change on the previous year
Volume growth
Average
Outcome
2002–2004 2005–2008 2009
Demographic needs Other factors/Trend Total volume change
0.4 0.3 0.7
0.5 1.1 1.6
0.6 0.4 1.0
Prel.
Forecast 2011
2012
2013–2015
0.6 0.7 1.3*
0.5 0.6 1.1
0.5 0.5 1.0
0.5 1.1 1.6
*The volume increase in 2010 is excluding items affecting comparability. Source: Swedish Association of Local Authorities and Regions.
6 The Economy Report. May 2011 On Swedish Municipal and County Council Finances
Calculation
2010
The Chief Economist’s conclusions
Table 24 • Cost increase divided up into various components in 2002–2015 Contribution in percentage points, constant prices
Outcome 02–04 05–08 2009 Demographic needs Other factors/Trend Total volume change
0.7 0.8 1.5
0.9 1.5 2.4
1.1 1.5 2.6
2010 1.0 0.0 1.0
Forecast 2011 2012 1.0 0.1 1.0
Calculation* 2013–2015
0.9 0.6 1.6
0.9 1.2 2.1
*Assuming trend. Source: Swedish Association of Local Authorities and Regions.
If no action is taken, net income will weaken gradually until 2015 despite the assumption that, in the years included in the calculation, general government grants will rise in line with the tax base. It is primarily the county councils’ finances that will develop weakly and will already be in deficit in 2014. This is because the county councils essentially have weaker finances than the municipalities, but it is also a consequence of the greater impact of rising demographic pressure on county councils than on municipalities.
Needs due to demographic factors increase strongly until 2015. In 2010 volume of costs increased by 1.0 per cent, which corresponds to the level of demographic needs. However, the comparison is affected by costs for the new influenza in 2009 as well as temporary items in 2010. Costs also rise by 1 per cent in 2011. Here again the comparison is affected by the temporary items in the previous year. In 2012 costs rise by 1.6 per cent, which means that costs are again rising more than demographic needs but less than the historical trend.
Table 1 • Aggregate income statement for the sector, 2010–2015 SEK billion current prices, unless otherwise stated
Outcome 2010 Income of activities Expenses of activities Depreciation Net expenses of activities
Forecast 2011 2012
2013
Calculation 2014 2015
149 –755 –24 –629
151 –777 –24 –650
157 –806 –25 –674
163 –842 –25 –705
169 –881 –26 –738
176 –922 –27 –774
Tax revenue Gen gov grants & equalisation Net financial income Net income before extraordinary items
521 123 4
539 123 2
560 120 2
585 125 2
610 129 2
635 133 1
19
15
9
7
2
–4
Share of taxes and grants, %
3.0
2.3
1.3
1.0
0.3
–0.6
In our calculation, net income in the sector decreases gradually from a historically high level. The development of net income shown is not realistic and requires an adjustment. More years with substantial surpluses are required to achieve an average level of net income that corresponds to healthy finances over a business cycle.
Source: Swedish Association of Local Authorities and Regions.
The challenge of the future Even if we do not count on the strong financial trend of recent years continuing at the same pace, the tax base will still rise as a result of a relatively strong recovery on the labour market. It is natural to breathe out a little after coming out of a crisis with your heart in your mouth. At the same time, we must realise that a longed-for economic upturn does not mean that the long-term difficulties have been overcome. It is important to recall that the good tax base and labour market growth in 2011–2015 are linked to an economic recovery and do not represent the normal state of the Swedish economy. In the longer term the demographic situation means that we cannot expect any growth in the number of hours
The Economy Report. May 2011 On Swedish Municipal and County Council Finances 7
The Chief Economist’s conclusions
worked. There is even a risk of a weak fall in the average number of hours worked in the coming twenty-five years. Such a development would mean that the municipal and county council sector would no longer be able to rely on rising tax revenues driven by employment growth. We would, instead, be dependent on strong productivity growth in the sector to be able to fulfil our welfare role in the longer term. But here strong productivity growth means that it must be higher than in the past, otherwise it will not produce any additional effect. Without this, there is a risk of a growing financial gap in coming decades, and then more fundamental changes in the welfare system may be necessary. One dilemma in the welfare sector is that the resources released by productivity growth are immediately reassigned to new services. One example described in the county council chapter is childbirth care. There care times after a birth without complications have been reduced from a week to a few hours. The resources released are now being used instead in neonatal care and to look after mothers and children directly after complicated births. Many solutions have been proposed as ways of remedying the long-term problem. Some recommend a higher retirement age and other measures to increase the number of hours worked. Others build on self-financing of welfare services or improving the efficiency of the sector. Some commentators take the view that efficiency in the production of welfare services would be higher if the services were being run on a competitive market. More and more municipalities and county councils are using private organisers to operate services, either through procurement or as a result of patient choice in healthcare or customer choice in social care and schools, for example. In municipal services the number of hours produced by other providers increased from 7 per cent in 2002 to 12 per cent in 2010. In healthcare a tenth of all hours worked are provided by private providers. The reasons vary. The main aim of the choice reforms is primarily to increase choice for citizens and to make services compete in terms of quality. This may suggest that the problem of its long-term financing is not yet a reality for the sector, which is still, to a great extent, giving higher quality priority over lower costs.
Local government employment not just in-house The number of hours worked in municipal in-house services has largely remained at the same level since 2002, apart from the rise and decline in bonus jobs (diagram 9). At the same time, municipally financed services are increasingly being provided by private actors. The share of hours provided by private actors increased from 7 per cent in 2002 to almost 12 per cent in 2010. We expect the total number of municipally financed hours to have increased by just under 6 per cent between 2002 and 2012. In county councils the link between a higher volume of services and hours worked is not as strong as in municipalities. Nor has there been the same increase in the share of services provided by private providers there (diagram 10). This share is largely unchanged at around 10 per cent. We expect the number of hours worked in county council-financed services to increase by
8 The Economy Report. May 2011 On Swedish Municipal and County Council Finances
The Chief Economist’s conclusions
Diagram 9 • Municipally financed hours worked and in-house hours
116
8
Municipalities, total
114
7
112 110
6 5
Municipalities, in house (left)
108
4
106
3
104
2
102
1
100
0
98
-1
96
-2 -3
94
Per cent
Index
Index, 1998 = 100 and annual percentage change
Municipalities, total Municipalities, in house (right)
-4
92 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
A growing share of municipally financed employment is among private providers. The number of hours worked has increased gradually ever since 1998.
Sources: Statistics Sweden, National Institute of Economic Research and Swedish Association of Local Authorities and Regions.
Diagram 10 • County council financed hours worked and in-house hours
116
8
County councils, total
114
7
112 110
6 5
County councils, in house (left)
108
4
106
3
104
2
102
1
100
0
98
-1
96
-2 -3
94
Per cent
Index
Index, 1998 = 100 and annual percentage change
County councils, total County councils, in house (right)
-4
92 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
In county councils the share of hours worked in private providers is not increasing. Overall, the change in employment during the period is marginal.
Sources: Statistics Sweden, National Institute of Economic Research and Swedish Association of Local Authorities and Regions.
around 4 per cent between 2002 and 2012, which therefore means a weak decrease from 2010. Changing welfare One issue, which we also consider in the municipal and county council chapters, is the major change taking place in the sector with more and more services being produced by other providers. In the following this change is considered from another perspective. Profits for private companies? Several discussions are in progress about the size of the profits made by private companies in healthcare, school and social care services and what the reasons are for such profits. This chapter will look at that issue. Profits can be measured as the return on capital invested or as the operating margin (the profit for the year before tax and interest expenses). Profits for companies in the healthcare, school and social care sectors, measured
The Economy Report. May 2011 On Swedish Municipal and County Council Finances 9
The Chief Economist’s conclusions
Table 10 • Profit and operating margin for private companies in healthcare, schools and social care in 2007 and 2008 Per cent
Sector Return on total capital Education Healthcare Social care Total for the sector Whole business sector
2008 Operating margin
12.3 12.1 11.0 11.9 9.0
6.7 10.9 6.9 8.6 6.4
2007 Return on total capital 14.4 17.2 12.8 16.0 9.8
Operating margin 7.0 11.2 7.9 9.2 8.0
Source: Statistics Sweden.
both as return on total capital and as their operating margin, were slightly higher than in the business sector as a whole in 2007 and 2008 (table 10).1 In theoretical terms, the level of payment received depends on the risk that the capital invested will be lost. The greater the risk in a sector, the higher the return expected. The risk in local government sectors ought reasonably to be lower than for the business sector on average. However, companies in the healthcare, school and social care sectors have succeeded in obtaining a return that is slightly higher than the average in the business sector. But this is nothing to be surprised about. The profit level is usually high in new markets, especially when developments involve leaving a monopoly situation. The buyers are inexperienced, no clear market prices have been established, and so on. More and more companies are quickly entering these sectors. The hours provided in welfare services are increasingly being provided by other providers. Since 2002 their share of municipal services has increased from 7 to almost 12 per cent, and in the healthcare area a tenth of all hours worked are produced by non-county council providers. Since the introduction of patient choice in primary healthcare at the start of 2010, the number of companies has increased by 239, or 23 per cent. Almost all of this increase can be attributed to private healthcare providers. In all, about two thirds of the private healthcare clinics are run by small enterprises, i.e. companies with less than 50 employees. Three large companies own about one third of the privately run healthcare clinics. Rise in business acquisitions Current profits do not say everything about the possibilities of earning money. Another aspect is building up healthcare. If companies invest a lot and therefore have high depreciation costs, their value and therefore future profits can increase on a sale; however, the profits during the period when the company is being built up will be lower. As in the rest of the business sector, there are methods of reducing the profits reported. One method is shareholder loans at high interest rates. Instead of the owners providing a shareholder contribution with dividend requirements, this funding is designed as a loan and the interest rate can be set at a chosen level. Even non-profit associations or foundations can have various methods of withdrawing money from their 1. A review of the annual accounts of 16 randomly selected companies in the same sectors in 2009 shows that they had an operating margin of 7.4 per cent.
10 The Economy Report. May 2011 On Swedish Municipal and County Council Finances
The Chief Economist’s conclusions
business. One of the foundations we have looked at has had staff employed in a staffing agency, which is a limited company, and has rented its staff from the limited company. This makes it difficult to see what is a true and fair profit. Another difficulty in analysing profit margins is that there have been a large number of business acquisitions and reconstructions in the sector in recent years. Several of the large healthcare and school companies are now owned by private equity companies. A factor that also makes it difficult to assess profits is that many companies also operate in other segments, where only part of their revenue comes from municipalities and county councils, making it difficult to analyse profits solely for the parts of the companies that operate local governmentfinanced services in the healthcare, school and social care sectors. The conditions that private companies operate under depend on how the price of a contract has been set. In the case of procurement under the Public Procurement Act the price is often a result of the tenders submitted and the weight that the contracting entity has assigned to the price aspect. However, many of the procurements carried out in recent years have been based on a pre-determined price and the suppliers have then had to compete on quality. If the Act on Systems of Choice in the Public Sector is applied, the level of compensation is set in different ways so that the results are different. In the vast majority of cases municipalities or county councils have started from their historical costs, without any efficiency gains in the service. This means that the profit from any efficiency gain goes to the provider. In many municipalities and county councils this has been done with open eyes. The objective has not been to rationalise the service but to increase choice for citizens. The rationalisation potential has been seen as a carrot to attract new providers. A review made of the payments being made by different municipalities to different service providers shows that there are considerable differences. Broadly speaking, the payment in one municipality can be twice as high as the payment in another for almost the same service. Gains for citizens? The results of various interview surveys suggest that quality is largely unchanged or has improved since choice systems have been introduced. The quality improvement applies primarily to the perceived quality, for example how people are treated. In general it can be said that staffing levels in many of the services produced by independent organisers are lower than in corresponding municipal services. Historically there have been more children per yearly employee in independent preschools but this measure has evened out and was the same for both municipal and independent providers in 2009. In the school area it can be noted that independent organisers have a lower proportion of trained teachers. Despite this, a slightly higher proportion of parents in independent schools were satisfied with the service, and grades in schools run by independent organisers of schools are slightly higher. However, greater competition between schools seems to have led to some grade inflation.2 This tendency is particularly clear in upper secondary schools. 2. Docent Jonas Vlachos in a report written for the Swedish Competition Authority in 2011.
The Economy Report. May 2011 On Swedish Municipal and County Council Finances 11
The Chief Economist’s conclusions
Greater choice, but do people want to change?
One idea of the systems of child care vouchers and school vouchers and the Act on Systems of Choice in the Public Sector has been that anyone who is not satisfied with quality and service provided will be able to change to another preschool, school, elderly care home or home care company. This will eliminate the organisers that do not deliver good enough quality from the market. However, the ‘cost’ of changing, in the form of loss of continuity for children or older people, may turn out to make people stay put where they are. The quality may not be bad enough for them to subject their child or their old parent to a change. Also many people choose their preschool, school or health centre on the nearness principle, this means that they may choose not to change because the alternative is too far away. So it is important that municipalities do not just rely on market forces but also conduct active supervision and listen to the views of users. Having many suppliers leads to greater competition and greater choice for consumers. However, having many suppliers also means that it is more difficult for the municipality/county council to carry out checks and monitor the service. Overall, it can be noted that there is nothing to suggest that users are losing out in the reforms. Considering that slightly more think that they are satisfied with their service, the outcome is more likely to be that users have gained something. Gains for municipalities? So what is the outcome like for municipalities? Studies show that customer choice models in home care services have not driven up costs. The scope for efficiency gains in market testing depends on how well the public service was being run to begin with. In the case of services that have not previously been subjected to competitive tendering, work on formulating the conditions for the procurement has in many cases led to insights that have been able to form a basis for a review of the service (service level, etc.). Municipalities that produced all their services in-house before customer choice models were introduced also tend to get lower costs per home care hour produced. Research shows that the initial procurements of home care services using the Public Procurement Act have led to lower costs. However, in subsequent rounds of procurement of these services the tenders from different providers have moved closer to one another. When the Act on Systems of Choice in the Public Sector has been applied or school vouchers introduced, the primary aim has not been to reduce costs but to increase choice, which means that there has not always been pressure on payments. So what happens to in-house provision? Out of 30 municipalities polled that had introduced services under the Act on Systems of Choice in the Public Sector in 2010, sixteen expected their in-house service to report a deficit, seven expected it to break even and seven expected it to report a surplus. In preschools, studies show that municipal costs for preschool services from independent providers are lower than for in-house services. However,
12 The Economy Report. May 2011 On Swedish Municipal and County Council Finances
The Chief Economist’s conclusions
this may be due to the children’s length of stay in the preschool or to an expected cost on the basis of a standard cost or other factors. In patient choice in healthcare the purpose of introducing compulsory choice in primary care has been to strengthen choice for patients, stimulate diversity and shift power from the county councils to patients. In general, payment levels have not been a major issue. This means that many county councils have not expected lower costs for primary care as a result of the introduction of patient choice. It is more the case that they have increased the resources for primary care in the hope that minor complaints will be treated more frequently there and that this will relieve pressure on emergency medical care. However, one long-term risk is that this may lead to an over-consumption of healthcare. So what are the reasons why private services run at a profit? Take-over of a service
• The private company may have been given favourable terms for the takeover of production resources, i.e. the profit does not reflect the fact that the private company has been able to take over premises and other resources at a price that does not match up to the full value of the resources. Payment levels
• The payment made for the contract, the price, has been based on the costs of past, less efficient in-house provision, i.e. the profit reflects an excessive price that the municipality/county council has to pay when it does not have the cost picture under control and/or does not succeed in rationalising in-house services. The fact that the price of the same 'product’ varies so much between different municipalities suggests that in many cases the payment has been based on the individual municipality’s own costs. • In many cases the level of payment is higher for private than for municipal organisers. This is because the standardised VAT allowance that is paid as compensation for the fact that the private organisers are not liable for VAT may be too high. Under the Ordinance on Independent Schools and Certain Private Services in the School Area, municipalities must pay independent schools 6 per cent VAT compensation over and above the school voucher payment. In other services it is voluntary for the municipalities to compensate organisers for the loss of the right to deduct input VAT, but many municipalities and county councils still choose to pay 6 per cent.3 As an assignment from the Government, the Swedish Agency for Public Management has looked into this with the assistance of PWC. They have concluded that 6 per cent seems to be too high a level of compensation and that the true additional cost for the private organisers is 1 to 2 percentage points lower. Systematic advantages
• The private company may have systematic cost advantages that are linked to pay agreements, staff overhead costs, insurance policies, legislation, 3. Report, Swedish Agency for Public Management, April 2011.
The Economy Report. May 2011 On Swedish Municipal and County Council Finances 13
The Chief Economist’s conclusions
the possibility of deciding to admit a certain number of pupils and the possibility of focusing on a certain segment or area, i.e. the profit reflects the private company's competitive advantages. Efficiency differences
• Private companies can run their business more efficiently than municipal in-house services succeed in doing, i.e. the profit reflects the fact that the private company is good at finding efficient production solutions. • Many of the private companies are relatively newly started and have been able to build up their business from scratch. This has enabled them to gear their staff structure to current needs. • Many units run by municipalities and county councils feel that they do not have the same freedom as private providers. They are forced to help finance various IT systems that they have not chosen themselves, they must use the Act of Systems of Choice in the Public Sector or rely on the framework agreements procured by the municipality for goods and services and they must take over redundant staff from other services instead of recruiting their own staff. This is profitable for the municipality or county council as a whole, but for that small unit (a school, health centre or the elderly care home) it can be more expensive than if they had been able to decide on their own. • The drivers are completely different in municipalities and county councils. Making a profit has no intrinsic value in a municipality or county council. Most units aim to break even. If they have money left at the end of the year, it is often used to buy consumables for coming years. If some units (schools, health centres, elderly care homes) run deficits, this can impact on the whole service and the overall result for local authority production is affected. However, it is important at the same time to note that the local government sector as a whole has been in surplus in every year since 2004.
14 The Economy Report. May 2011 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 26 • Key indicators for municipalities and county councils, 2010–2015 Per cent and thousands of people
2010 Average tax rate, %
2011
2012
2013
2014
2015
31.56
31.55
31.55
31.55
31.55
31.55
municipalities, incl Gotland county councils*, excl Gotland
20.74 10.87
20.73 10.88
20.73 10.91
20.73 10.91
20.73 10.91
20.73 10.91
No of employees**, thousands
1,048
1,052
1,055
1,065
1,074
1,085
Municipalities
790
796
800
808
816
826
County councils
258
256
256
257
258
259
*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. May 2011 On Swedish Municipal and County Council Finances 15
Annex
Table 27 • Income statement for the municipalities, 2010–2015 SEK billion
Outcome 2010 Income of activities Expenses of activities Depreciation Net expenses of activities Tax revenue Gen gov grants and equalisation Net financial income Net income before extraordinary items Share of taxes and grants, %
Forecast 2011 2012
2013
Calculation 2014 2015
114 –505 –16 –408
114 –520 –17 –423
118 –539 –17 –438
123 –563 –18 –458
127 –588 –18 –479
133 –616 –19 –502
343 76 4
354 76 3
368 74 3
384 77 3
400 80 3
417 83 3
15
11
7
6
4
0
3.5
2.5
1.5
1.4
0.8
0.0
Table 28 • Income statement for the county councils, 2010–2015 SEK billion
Outcome 2010 Income of activities Expenses of activities Depreciation Net expenses of activities Tax revenue Gen gov grants and equalisation Net financial income Net income before extraordinary items Share of taxes and grants, %
Forecast 2011 2012
Calculation 2014 2015
38 –251 –7 –221
39 –259 –7 –227
41 –269 –7 –236
43 –282 –8 –247
44 –295 –8 –259
46 –309 –8 –272
179 47 0
185 47 –1
193 46 –1
201 48 –1
210 49 –1
218 51 –2
5
5
2
1
–2
–5
2.1
2.0
0.7
0.3
–0.6
–1.7
Source: The Swedish Association of Local Authorities and Regions.
16 The Economy Report. May 2011 On Swedish Municipal and County Council Finances
2013
The Economy Report. May 2011 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 has shown historically good net income for both 2009 and 2010. A surplus, in line with healthy finances, is also expected in 2011, even though cyclical support from central government is gradually being phased out now. In the coming years net income is expected to weaken, even though tax revennue will remain high. The main reason for this is that, in the long term, it is difficult to hold back cost increases.
The report can be downloaded at www.skl.se/publikationer. ISBN 978-91-7164-684-2
Mail SE-118 82 Stockholm Visitors Hornsgatan 20 Phone +46-8-452 70 00 www.skl.se