COUNCIL OPINION

of 18 January 2005

on the updated convergence programme of Sweden, 2004-2007

(2005/C 79/04)

THE COUNCIL OF THE EUROPEAN UNION,

Having regard to the Treaty establishing the European Community,

Having regard to Council Regulation (EC) No 1466/97 of 7 July 1997 on the strengthening of the surveillance of budgetary positions and the surveillance and co-ordination of economic policies(1), and in particular Article 9(3) thereof,

Having regard to the recommendation of the Commission,

After consulting the Economic and Financial Committee,

HAS DELIVERED THIS OPINION:

On 18 January 2005 the Council examined the updated convergence programme of Sweden, which covers the period 2004 to 2007. The programme broadly complies with the data requirements of the revised ‘code of conduct on the content and format of stability and convergence programmes’. In particular, some data are not fully in line with ESA95 standards. Accordingly, Sweden is invited to achieve full compliance with data requirements.

The macroeconomic scenario underlying the programme envisages real GDP growth moderating from a strong 3,5 % in 2004 to 3,0 % in 2005 and an average 2,4 % in 2006-07. On the basis of currently available information, this scenario seems to reflect plausible growth assumptions. The programme's projections for inflation appear realistic.

The budgetary framework 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 balance requirement for local governments. The update foresees general government surpluses 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, despite a substantial discretionary stimulus in 2005, reflecting the government's concern with the weak labour market situation. As a result, the general government surplus will not reach 2 % during the projection period. While the pension system and the local government sub-sector are expected to show surpluses, the central government deficit is increasing in 2005 and 2006. Compared to the previous update, the current update presents budgeting targets that are worse on average against macroeconomic developments that are more favourable than earlier projected.

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, taxes have shown to be quite volatile over the last few years and continuing to respect prudent expenditure ceilings will be important.

In view of this risk assessment, the budgetary stance in the programme seems sufficient to maintain the achievement of surpluses over the 2004 to 2007 period in line with the Stability and Growth Pact's medium-term objective of a position of close to balance or surplus. It also provides a sufficient safety margin against breaching the 3 % of GDP deficit threshold with normal macroeconomic fluctuations throughout the programme period.

The debt ratio is estimated to have reached 51,7 % of GDP in 2004, well below the 60 % of GDP Treaty reference value. The programme projects the debt ratio to decline to 49,0 % of GDP by 2007.

Sweden appears to be in a relatively favourable position with regard to the long-term sustainability of the public finances, despite important projected budgetary costs of an ageing population. However, a risk to long-term sustainability may emerge in the long run. This is based on the projected increase in the old-age dependency ratio and existing trends in healthcare-related expenditures, labour force participation and employment. Without further reforms modifying these trends, aiming at a budgetary surplus over the next 10 years of 2 % of GDP, in line with the government's budgetary target, becomes a key factor to address sustainability over the longer term.

Comparison of key macroeconomic and budgetary projections

		2004	2005	2006	2007
Real GDP (% change)	CP Nov 2004	3,5	3,0	2,5	2,3
	COM autumn 2004	3,7	3,1	2,9	n.a.
	CP Nov 2003	2,0	2,6	2,5	n.a.
HICP inflation (%)	CP Nov 2004(3)	1,3	1,5	n.a.	n.a.
	COM autumn 2004	1,1	1,5	1,9	n.a.
	CP Nov 2003(3)	1,7	n.a.	n.a.	n.a.
General government balance (% of GDP)	CP Nov 2004	0,7	0,6	0,4	0,9
	COM autumn 2004	0,6	0,6	0,8	n.a.
	CP Nov 2003(4)	0,6	1,4	1,9	n.a.
Primary balance (% of GDP)	CP Nov 2004(2)	2,8	2,8	2,7	3,3
	COM autumn 2004	2,7	2,8	3,0	n.a.
	CP Nov 2003	0,9	1,7	2,1	n.a.
Cyclically-adjusted balance (% of GDP)	CP Nov 2004(5)	0,8	0,5	0,5	1,2
	COM autumn 2004	0,7	0,4	0,6	n.a.
	CP Nov 2003(5)	1,3	1,8	2,0	n.a.
Government gross debt (% of GDP)	CP Nov 2004	51,7	50,5	50,0	49,0
	COM autumn 2004	51,6	50,6	49,7	n.a.
	CP Nov 2003	51,5	50,0	48,3	n.a.
Sources: Updated Swedish Convergence Programme, November 2003 and November 2004 (CP); Commission services economic forecasts (COM); Commission services calculations

(1)

OJ L 209, 2.8.1997, p. 1

(2) In the update, the Swedish authorities provide primary balances excluding net interest and not the conventional gross interest. However, in the table, primary balances are given excluding gross interest using data from the update.

(3) % change Dec-Dec

(4) For comparability, net lending reported for the 2002 and 2003 updates refers to figures calculated taking into account the full periodisation of taxes (while this accounting change was not formally introduced until 2004).

(5) Commission services calculations on the basis of information in the programme.

Sources:

Updated Swedish Convergence Programme, November 2003 and November 2004 (CP); Commission services economic forecasts (COM); Commission services calculations