About the fiscal policy framework
The fiscal policy framework is an instrument to ensure that fiscal policy is transparent and sustainable in the long term. Certain principles are regulated by law, while others are based on the practice that has gradually developed since the 1990s. In June 2016, a cross-party agreement was concluded on changes to the fiscal policy framework. These changes were presented by a cross-party committee of inquiry in autumn 2016.
The fiscal policy framework today
The fiscal policy framework comprises various parts involving budget policy and methods for follow-up, evaluation and transparency. The budget policy frameworks are a key element of the fiscal policy framework. They comprise:
• A surplus target for the entire general government sector
• A central government expenditure ceiling
• The requirement for the local government sector to maintain balanced budgets
• A disciplined budget process
Surplus target for the entire general government sector
Under the Budget Act, the Government must propose a net lending target for the public sector. In 2007, the Riksdag established that the surplus target for net lending is to amount to 1 per cent of GDP on average over a business cycle.
Central government expenditure ceiling
Under the Budget Act, the Government is obliged to propose a ceiling for central government and old-age pension system expenditures for the next three years. The ceiling is set by the Riksdag. Determining a ceiling makes clear the frameworks available for expenditures and tax levies in order to meet the surplus target.
Balanced budget requirement for the local government sector
To strengthen the budget process at local level, a balanced budget requirement for the local government sector has been in place since 2000. This requirement means that every municipality and county council must plan their budget to achieve balance. The balance requirement specifies the lowest acceptable level of net surplus or deficit. Since 1992, local governments have been required to exercise good financial management in their activities. They are to adopt guidelines for good financial management.
Disciplined budget process
The surplus target and the expenditure ceiling set the total economic scope in the budget process. The guiding principle is that expenditure increases within an area must be covered by expenditure cuts within the same area. The draft budget must include all revenues and expenditures, as well as other payments that affect the borrowing needs of the central government (the completeness principle). Expenditures are to be reported on the expenditure side of the budget, while revenues are to be reported on the revenue side of the budget.
Changes to the fiscal policy framework
The fiscal policy framework, with its broad parliamentary support, is and has been of great benefit to Sweden and the growth of the Swedish economy. Following a cross-party agreement in June 2016, a cross-party committee of inquiry proposed minor changes to the framework to the effect that a surplus target remains, but the target level and follow-up are reviewed.
The committee's proposals included the following:
• The surplus target would be adjusted to one third of a per cent of GDP on average over a business cycle.
• Public indebtedness would be given a more prominent role in the framework through the introduction of a debt anchor of 35 per cent of GDP for the Maastricht debt.
• A review of the surplus target and the debt anchor should be conducted every other electoral period to assess whether existing levels still support the overall targets for fiscal policy.
• The framework would be strengthened with more stringent follow-up of the surplus target and a clearer role for the Swedish Fiscal Policy Council in following up the fiscal policy framework.
In the 2017 Spring Fiscal Policy Bill, the Government supported all of the proposals submitted by the cross-party committee of inquiry in autumn 2016. In this Bill, the Government also described in greater detail the reasons for the assessments and the referral bodies' viewpoints. In the Budget Bill for 2018, the Government is now proposing the following:
• The target for general government net lending (the surplus target) will be set at one third of a per cent of GDP on average over a business cycle as of 2019.
• A benchmark for the level of general government consolidated gross debt (the Maastricht debt) will be set at 35 per cent of GDP as of 2019.
If the Riksdag adopts these proposals, the new frameworks will apply beginning in the fiscal year 2019 and onwards. The Government has also previously announced that it will present a new communication to the Riksdag on the fiscal policy framework.