EUROPEAN COMMISSION DIRECTORATE GENERAL ECONOMIC AND FINANCIAL AFFAIRS Brussels 25 01 05 ECFIN 2004 50767 EN NOVEMBER 2004 UPDATE OF THE CONVERGENCE PROGRAMME OF SWEDEN 2004 2007 AN ASSESSMENT Table of contents SUMMARY AND CONCLUSIONS 3 1 INTRODUCTION 6 2 MACROECONOMIC DEVELOPMENTS 6 3 MEDIUM TERM MONETARY POLICY OBJECTIVES AND THEIR RELATIONSHIP TO PRICE AND EXCHANGE RATE STABILITY 8 4 BUDGETARY IMPLEMENTATION IN 2004 9 5 BUDGETARY TARGETS AND THE MEDIUM TERM PATH OF THE PUBLIC FINANCES 10 5 1 Evolution of budgetary targets in successive programmes 10 5 2 Budgetary targets in the updated programme 11 5 3 Sensitivity analysis 15 6 EVOLUTION OF THE DEBT RATIO 15 7 STRUCTURAL REFORM AND THE QUALITY OF PUBLIC FINANCES 16 8 THE SUSTAINABILITY OF THE PUBLIC FINANCES 18 Annex 1 Summary tables from the stability convergence programme update 21 Annex 2 Long term sustainability of public finances in Sweden quantitative scenarios 25 2 SUMMARY AND CONCLUSIONS1 The sixth updated Swedish convergence programme was sent to the Commission on 18 November and covers the period 2004 to 2007 The programme is based on the Budget Bill for 2005 adopted by Parliament on 16 December 2004 The programme broadly complies with the data requirements of the code of conduct on the content and format of stability and convergence programmes 2 with some data not fully in line with ESA95 standards3 The 2004 update projects GDP growth of 3 5 in 2004 3 0 in 2005 2 5 in 2006 and 2 3 in 2007 Despite high growth in 2004 employment growth was negative but is expected to recover in the coming years Overall on the basis of currently available information the macroeconomic scenario underlying the update seems plausible and is broadly in line with the Commission services evaluation including the autumn 2004 forecast Moreover for the later years the growth assumptions appear cautious and below estimated potential growth rates Inflation in Sweden has fallen gradually since the beginning of 2003 partly as a result of earlier energy price increases falling outside the base reference period and is currently clearly below the Riksbank 2 target level The krona has been relatively stable vis vis the euro in 2003 and 2004 but has appreciated recently reflecting Sweden s stable macroeconomic environment and solid growth outlook large current account surpluses and market expectations of relatively higher policy rates in the course of 2005 Over the past year developments in Swedish bond yields have been in line with trends in major bond markets The positive yield differential between long term government bonds in Sweden and the euro area fluctuated around 50 basis points over recent years but declined in the course of 2004 The budgetary framework in Sweden includes a general government surplus objective of 2 of GDP on average over the cycle multi annual nominal ceilings for central government expenditures and a balanced budget requirement for local governments The update foresees a general government surplus of 0 7 in 2004 0 6 in 2005 0 4 in 2006 and 0 9 in the final year 2007 Both expenditure and revenue ratios are on a gradually declining trend over the projection period Adjusting for the estimated impact of the cycle using the common methodology the cyclically adjusted budget balance is in surplus throughout the projection period Compared to previous updates budget targets 1 This technical analysis which is based on information available up to 22 December 2004 accompanies the recommendation by the Commission for a Council opinion on the update of the convergence programme which the College adopted on 11 January 2005 It has been carried out by the staff of and under the responsibility of the Directorate General for Economic and Financial Affairs of the European Commission Comments should be sent to Jonas Fischer jonas fischer cec eu int 2 Revised Opinion of the Economic and Financial Committee on the content and format of stability and convergence programmes document EFC ECFIN 404 01 REV 1 of 27 06 2001 endorsed by the ECOFIN Council of 10 07 2001 3 Compared to the Commission assessment available at the http europa eu int comm economy finance about activities sgp year year20042005 en htm evaluation of compliance follows a reclassification of the degree of compliance into four categories namely fully complies complies broadly complies and partly complies replacing the previous three way classification complies largely complies and partly complies 3 for 2005 and 2006 have been revised downwards despite growth assumptions now being significantly higher This can partly be explained by lower projected tax revenues in line with recent outturns Tax reductions introduced in the 2004 Spring Bill and the 2005 budget also contribute to the projected slight weakening in 2005 and 2006 While the pension system and the local government sub sector are expected to show stable surpluses the central government deficit is increasing in 2005 and 2006 thus driving the deterioration in the general government position in these years The risks to the budgetary projections in the programme appear broadly balanced On the one hand the budgetary projections seem plausible and Sweden has a very good track record in not exceeding set expenditure ceilings In addition the financial situation at local government level seems to be improving On the other hand tax revenues have been quite volatile over the last few years In addition the budgetary margin against the central government expenditure ceilings is very narrow not only for 2004 but according to the 2005 budget also for 2005 and 2006 Furthermore elections scheduled for 2006 might influence the budget for that year In view of this risk assessment the budgetary stance in the programmes seems sufficient to maintain a medium term budgetary position of close to balance or in surplus as required by the Stability and Growth Pact throughout the programme period It also provides a sufficient safety margin against breaching the 3 of GDP deficit threshold with normal macroeconomic fluctuations However cyclically adjusted budget positions as well as average surpluses over the programme period remain below the domestic objective of a surplus of 2 of GDP The gross debt ratio below 60 of GDP since 2000 is projected to continue to decline and reach 49 of GDP in 2007 Debt is mainly issued by the central government sector which runs budget deficits and the surplus in the pension system is mainly invested in non government assets
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