2015-05-05

The long-term sustainability of Sweden's public finances

Longer working life and improved health strengthens the sustainability of public finances

The proportion of elderly in the population increases in the coming decades, which is expected to result in an increased need for welfare services. This year's fiscal sustainability analysis highlights the importance of an extended working life and healthy aging to achieve balance in public finances ahead.

Welfare services growing as share of GDP when the proportion of older people increases

Since 2005 the demographic dependency ratio has started to increase. This partly coincides with the fact that the large group of individuals born in the 1940s have reached retirement age. The dependency ratio will continue to increase to the mid-2030s, as the proportion of elderly in the population rises.

A contributing factor to the increasing proportion of older people is that the average life expectancy is expected to continue to rise. The expected remaining life expectancy for a 65-year-old today is about 20 years; 2050 it is expected to be almost 24 years, and in 2100 about 27 years.

Alternative scenarios highlight the importance of improved health

The report studies four scenarios. In the baseline scenario the average retirement age is assumed to remain the same as today, while the need for welfare services in different age groups remains unchanged at current levels.

In three alternative scenarios, the effects on the public finances of raised retirement age and reduced dependence on welfare services in the future are studied.

Fiscal policy needs to adapt to changing demographic conditions

None of the scenarios in the report presents — in strict sense — balanced public finances in the long term.

In the scenarios, government consumption relative to GDP increases by about 3 percentage points until the mid-2030s, given that the public sector commitment remains unchanged. Such a development, in combination with unchanged taxes, would increase today´s structural budget deficit.

Calculations are made in the report of the tax increases needed to finance a maintained public sector commitment at its current level while keeping a balanced budget. To accomplish this, an immediate tax increase of about 1.5 percent of GDP would be needed to adjust the current deficit.

In the most optimistic scenario taxes thereafter would need to be increased gradually by about 2 per cent of GDP until the mid-2030s. At the end of the projection, in 2099, the tax ratio in the most optimistic alternative scenario is just over 43 per cent, only marginally higher than today.

In the more pessimistic baseline scenario, on the other hand, taxes would need to be raised even after the 2030s. At the end of the projection period, the tax ratio is nearly 50 percent in the baseline scenario, about 7 percentage points higher than today.

About the report

One of the NIER's recurring tasks is to evaluate the long-term sustainability of public finances. Long-term sustainability of public finances is achieved when public revenue and spending over time are balanced in a way that they do not cause long-term structural deficits.

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