Fiscal rules and the budgetary framework in Sweden

Dr Mårten Blix

Director in Budget Department

MoF, Sweden

Outline of talk

• Fiscal rules – medium term framework

• Key features of how the budget

department works

• Recent improvements in framework

– Evaluation and transparency

Experience of national fiscal

frameworks • Keep your own house in order – prevents

need for stern consolidation later on

• Consolidation tends to be more successful

and long lasting with expenditure cuts

• Countries with rules, especially

expenditure targets, tend to achieve better

consolidation results

• Fiscal rules need muscle behind them

Two fiscal rules in Sweden

Expenditure ceiling t+3

The surplus target

1% of GDP over

an economic cycle

Expenditure ceiling for central

government (1) • A few beauty spots but has never been

exceeded

• Fixed 3 years in advance in nominal terms

• Main strength is that it is simple

• Includes all primary expenditure in the annual budget and the pension system outside the central government budget, but excludes expenditure of local governments

Expenditure ceiling for central

government (2)

• Current government decides ceiling for t+3 on the basis of: – The level should be in line with long term sustainable

public finances and the surplus target

– The level as GDP-ratio shall fall slightly

– The budget margin should be large enough on a 3-year horizon to cover uncertainties and forecast errors, currently estimated 3% of ceiling

Expenditure ceiling for central

government (3) - motivation

• Implicit anchor for revenues needed to

maintain sustainable public finances

• Mitigates common-pool problems

• Limits time inconsistency

• Reduces temptation to create permanent

expenditure from temporary revenue

boosts

• Transparency

Expenditure ceiling for central

government (4) - results

• Expenditure ceiling forces priorities between different spending areas;

• Trade-off between rules and discretion

– Freedom to let automatic stabilisers work

– Freedom to use discretionary fiscal policy: the medium term target need not imply pro-cyclicality

• Continuous evaluation

– internal, external by national audit authority, fiscal policy council.

Surplus target

• General government net lending 1% of GDP over the business cycle.

• Gives medium term perspective and avoids pro-cyclicality

• Pre-funding of the budgetary impact of ageing populations

Key fiscal figures at a glance

2008 2009 2010 2011 2012

Net lending 2,5 -2,2 -3,4 -2,1 -1,1

Average since 2000 1,6 1,2 0,8 0,5 0,4

Structural balance 2,3 1,4 0,2 0,7 0,6 GDP-gap 0 -6,4 -6,5 -5,0 -3,0

Average since 2000 0,6 -0,1 -0,6 -1,0 -1,2

General gov revenue ratio 52,7 51,9 51,7 51,6 51,3 General gov exp ratio 50,2 54,1 55,1 53,6 52,4 Public debt, consolidated 38,0 42,8 45,5 45,6 45,2

Current projections for 2009 and 2010 much

stronger

Objectives of the Budget Department

• Budget discipline

• Overall economic efficiency

• High quality and efficiency in the

administration

Strong role of MoF and Budget department –

all expenditures have to be assessed by

budget department

Fiscal discipline and economic efficiency

NO!

Notable features of how we work

• Strong delegation to staff and line managers

• Contact persons represent the Budget

department’s formalised connection with the

line ministries

• Frequent ‘informal’ contacts between

minister and staff

• Benefits of system: learning process for all

Improvements in fiscal framework

•Clearer motives for the surplus target and indicators for evaluation

•Expenditure ceilings – three year perspective re-introduced

•More transparency for the ceiling

•Outside evaluation

•Fiscal Policy Council (strong mandate)

•National Audit Office (indep)

Swedish finances have

strengthened substantially

• Deficits replaced by surpluses

• General government debt as percent of

GDP has fallen from 73 per cent of GDP in

1996 to less than 40 per cent in 2008

• In better position to face the present crises

compared to many EU countries

• Expenditure ceiling will be a key

instrument in our efforts for a fiscal exit

and beyond

Conclusions (1)

• Fiscal rules should be simple, measurable

and enforceable

• They need to be protected

• Informal aspects can sometimes be as

important as formal rules

• Rules also handle long term commitments

ageing population

Conclusions (2) expenditure ceiling

needs institutional support •Strong role of MoF

•Budget Dep as watchdog

•Top-down budget

•Complete budget

•Rules in parliament

•Outside monitoring

•Political will

Public debt, Sweden 1990-

2012

0

200

400

600

800

1000

1200

1400

1600

90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12

Billions of kronor

0

10

20

30

40

50

60

70

80

90

Percent of GDP

Billions ofkronor (LHS)

Percent ofGDP (RHS)

Very expansionary fiscal policy

2009-10 Source: OECD Economic Outlook 2009, June

-2,0

0,0

2,0

4,0

6,0

8,0

10,0

12,0

14,0

SE DK FI DE JPN ES UK IT FR PO USA

Automatiska stabilisatorer

Diskretionär finanspolitik

Percent of GDP

Automatic stabilisers

Discretionary fiscal policy

Public debt in Sweden compared

to EU - Gross Public Debt. Source: OECD.

0

20

40

60

80

100

120

140

LU DK CZ FI SK SE IE ES PL NL AT DE HU PT FR UK BE EL IT

2010

2008

Percent of GDP

Government revenues in Sweden - forecast revisions since Spring Bill 2008,

billions kronor

-300

-250

-200

-150

-100

-50

0

50

2007 2008 2009 2010 2011

2009 Budget B ill

Govt. B ill

2008/09:97

2009 Spring Fiscal

Policy B ill

2010 Budget B ill

GDP in Sweden Percentage change per year, 1920–2012

-15

-10

-5

0

5

10

15

1920

1924

1928

1932

1936

1940

1944

1948

1952

1956

1960

1964

1968

1972

1976

1980

1984

1988

1992

1996

2000

2004

2008

2012

Note: Time series before and after 1950 are not completely comparable. The quality of data from earlier years is more uncertain. Sources: Edvinsson (1920-1949) and Statistics Sweden (1950-2008); forecast fromMinistry of Finance (2009-2012)

GDP growth and forecast

-6

-4

-2

0

2

4

6

01 02 03 04 05 06 07 08 09 10 11 12

USA

Euro area

Sweden

Sources: Eurostat, US Dep. of Commerce, Statistics Sweden and Ministry of Finance.

Sustainable public finances in Sweden The S2 indicator shows the permanent improvement in surplus needed for sustainable

public finances. A negative number imples that the public finances are sustainable and can

withstand some weakening.

-6

-4

-2

0

2

4

6

8

10

12

14

DK SE PL FI IT NL DE AT FR PT GR SL BE HU CZ LU UK ES IE EU27

Percent of GDP

Source: European Commission 2009.