2014-04-07

Is an Unchanged Public Sector Commitment a Sustainable Commitment? An assessment of the long-term sustainability of Swedish public finances

An assessment of the long-term sustainability of Swedish public finances

Average life expectancy in Sweden is set to grow by at least four years over the next half a century. An ageing population raises questions about the future level and financing of welfare services. This report analyses the long-term sustainability of public finances in Sweden.

There is no universally accepted definition of long-term sustainability. One common and intuitive starting point for assessing the sustainability of public finances is that, over time, flows of expenditure should be matched by equal flows of income.

The assessment of the long-term sustainability of public finances in the present report, as in other contexts, is based on the current scope of the welfare commitment and the tax system that is to finance it.

The question analysed is whether future developments in government expenditure with an unchanged commitment are compatible with the income provided by the current design of the tax system.

Some tax increases needed

The analysis reveals that an unchanged personnel density in the production of welfare services leads to an increase in government consumption expenditure from around 27 per cent of GDP today to just over 30 per cent in 2060.

In the absence of tax increases, this results in a gradual deterioration in public finances, with negative net lending of around 2 per cent of GDP in the 2030s and 2040s, and 4 per cent in 2060.

A measure of the sustainability of public finances shows that tax revenue will need to be increased permanently by 1.5 to 2 per cent of GDP for an unchanged personnel density in the production of welfare services to be compatible with long-term sustainable public finances.

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