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The long-run sustainability of
Swedish Fiscal Policy
Thomas Eisensee
Senior Economist
Net-contributions
to public finances
+
▬
Net-contributions to public finances 1999
Thousand
kronor
200
100
0
age
5 10 15 20 25 30 35 40 45 50 55 60 65 70 75 80 85 90 95
-100
-200
-300
-400
Source: Pettersson et al (2006)
Sustainability
present discounted value of income
= initial net debt + present discounted value of expenditures
S2=0
S2 negative → tax reduction/expenditure rise (and vice versa)
Dependency ratio 1900-2110
80
70
60
Dependency ratio
Old-age dependency
40
Child dependency
30
20
10
0
19
00
19
10
19
20
19
30
19
40
19
50
19
60
19
70
19
80
19
90
20
00
20
10
20
20
20
30
20
40
20
50
20
60
20
70
20
80
20
90
21
00
21
10
Percent
50
Source: Statistics Sweden
Calculations by the Ministry of Finance
• Tax rules and spending policies are held constant and
demography determines development
• Fiscal policy is sustainable since S2=0
• Pension reform of 1999/2000 reduced pension liabilities
• Transparency:
– Increase in expenditures from 2011 and onward by 5
percent of GDP through a technical adjustment
– Model is poorly documented
– Not much in terms of sensitivity analysis
Old-age pension per person 65+ relative to average
wage (percent)
65
60
55
50
45
40
35
30
25
20
2000
2010
2020
2030
2040
2050
2060
2070
Source: Ministry of Finance and Swedish Fiscal Policy Council
2080
2090
Public sector financial net-wealth (percent of GDP)
500
No technical adjustment
400
300
200
100
0
2000
-100
2010
2020
2030
2040
2050
2060
2070
2080
Budget bill 2008
Source: Ministry of Finance and the Swedish Fiscal Policy Council
2090
Sustainability indicator
and implicit
surplus
target
(percent
of GDP)
Hållbarhetsindikator
(S2) och implicit
överskottsmål
för olika
scenarier
(procent
av BNP)
S2
Minstasustainable
hållbara
Smallest
net lending
finansiella
sparande
år 2009
2009-2015
0,1
-
Budget
Bill teknisk
without technical
BP08
utan
justeringadjustment
-3,8
-0,7
Higherstandard
standard in
public sector
Högre
i offentlig
sektor
-0,4
3,8
Higherstandard
standard in
healthcare
Högre
i vård
och omsorg
-0,3
3,5
Larger effekt
effect of
policy
Större
avemployment
arbetsmarknadsreformer
-4,3
-1,1
Smallereffekt
effect av
of employment
policy
Mindre
arbetsmarknadsreformer
-3,3
-0,5
Reduction in
working hours
Minskning
avmean
arbetstid
-2,1
1,4
Later retirement
Ökning
av pensionsåldern
-5,0
-2,0
Budget Bill 2008
Budgetpropositionen
2008
Källa : Finanspolitiska rådet baserat på Finansdepartementets kalkyler i Budgetpropositionen för 2008.
The government should run large surpluses over
the coming years
• Large surplus today
• Large uncertainty in sustainability calculations gives
strong precautionary motive to have larger surplus than
one percent of GDP until 2015
• Net lending at around one percent of GDP is exactly
sufficient to keep financial wealth constant as a share of
GDP (at 20 percent)
• How large precautionary buffers should be is a political
question
• A natural adjustment is to increase the retirement age as
longevity rises
The surplus target should be revised
• Holds until 2015 according to the governments
calculations
• Subsequently the surplus gets smaller and
eventually turns into a deficit
• Surplus target was introduced when
consolidation of public finances was inevitable
• Today it is easier to fine-tune the surplus target