Budget Bill for 2008 Putting Sweden to work – increasing opportunities

In the Budget Bill for 2008, the Government is presenting further reforms aimed at creating clearer incentives to work and more and better ways back for people who are now outside the labour market. The Bill proposes further reductions in income taxes, above all for low and middle income earners, by means of a strengthened in-work tax credit worth SEK 11 billion. This will give most income groups a thousand kronor more per month.

Sickness absence, which has grown in recent decades, will be reduced by an ambitious investment in rehabilitation. The return to work will be facilitated by means of a rehabilitation chain with checkpoints at pre-determined times. The incentives for employers to recruit people from groups that are now particularly detached from the labour market – such as the long-term sick – will be further strengthened by measures including new start jobs for the public sector and ‘well again jobs’.

“This is a budget to put more people in work and to find more and broader ways back for those who are outside the labour market. It is a budget for the future that will strengthen the foundations for welfare provision and secure pensions, health care and social services. While we are putting resources into initiatives, we are still making sure that the public finances remain healthy and that we do not push the economy in a direction that may give rise to imbalances,” says Minister for Finance Anders Borg.

The Government estimates that 175 000 fewer will be outside the labour market and at risk of social exclusion in the coming years. In the years until 2010, employment is expected to rise by nearly 200 000 and unemployment to fall by more than 90 000.

Despite good growth, much still remains to be done to make Sweden a country of full employment again. The Government is therefore presenting a number of reforms aimed at creating clearer incentives to work and more and better ways back for those who are now outside the labour market.

Keeping public finances in good order
All the Government’s reforms are being made within the framework of a responsible policy keeping public finances in good order and aiming towards long-term healthy economic growth. The target of a one per cent surplus in general government net lending will be exceeded by a broad margin in the coming years. Net lending will be 2.8 per cent of GDP in 2008 and 3.1 and 3.6 per cent of GDP respectively in 2009 and 2010. Central government debt is expected to fall sharply from 43 per cent of GDP in 2006 to 20 percent in 2010.

A strengthened in-work tax credit to make it more worthwhile to work
The Government proposes to boost the incomes of low and middle income earners in particular, by a total of SEK 11 billion. Strengthening the in-work tax credit will increase employment. It will be more worthwhile to start working and the incentives for people already working to increase their efforts will also improve. For most income groups the combined effect of two stages of the tax credit will be about SEK 1 000 more in take home pay every month.

More and better ways back for people on sick leave
The Government proposes a series of measures to provide more ways to return from sickness absence to work and workmates. Maintaining a close link to the labour market while on sick leave will reduce the risk of long-term absence. A rehabilitation chain will be introduced, with fixed points during a period of sick leave for reviewing a person’s capacity to work, and people on sick leave will receive better support in returning to the labour market. A rehabilitation guarantee will be introduced and occupational health services improved. Employers will be offered more favourable terms for recruiting people on long-term sick leave. Special new start jobs, called ‘well again jobs’, are being introduced. In most cases these mean that employers can deduct double employer’s social security contributions when they employ people who have been receiving sickness benefit, rehabilitation cash benefit or sickness or activity compensation for at least a year.

A well-functioning labour market for more jobs
The Government intends to extend the new start jobs scheme to include the entire public sector, which will benefit health and social care. A change in contributions to unemployment insurance funds is also proposed, replacing the increased financing contribution with an unemployment contribution. The Government wants to create a clearer connection between unemployment insurance contributions and unemployment, so as to improve the functioning of the labour market and increase employment. The contribution will therefore be raised or lowered depending on whether unemployment increases or decreases. Because of the fall in unemployment, a majority of the unemployment insurance funds will be able to reduce their contributions as a result of this proposal. However, just as is already the case for unemployed people, unemployed sick people will not need to pay this contribution.

New rules are proposed for part-time unemployment benefit. The number of benefit days that can be used in cases of part-time unemployment will be limited to 75 benefit days. The point of this is to reduce overuse and reduce the risk of people becoming permanently locked in into part-time work. The present rules make it possible to be part-time unemployed for a very long period, up to almost six years in the case of a person receiving benefit one day a week. For distributional reasons, however, lone parents responsible for the support of children under the age of 18 will be offered part-time employment under the job and development guarantee when they have used up their 75 days. In addition, in 2008 new start jobs will be introduced for people who have been part-time unemployed for at least two years.

To strengthen incentives for people in work who change jobs to do so without an interim period of unemployment, the Government is introducing a further two qualifying days for unemployment insurance.

A good business climate
The Government proposes increased resources for infrastructure to reduce transport costs, increase reliability of supply and contribute to an enlarged labour market that supports increased labour force participation.

The Government intends to simplify the rules for business tax status and reinforce priority rights for floating charges. The establishment of a regulatory council is announced as part of the work to limit administrative costs to businesses arising from government regulations.

Increased knowledge and quality in the educational system
Sweden must have an educational system of a high international standard. The Government proposes an extensive reading-writing-arithmetic initiative over the next three years to strengthen the promotion of knowledge in compulsory school. Establishing necessary reading, writing and arithmetic skills early can in the long run help reduce the number of compulsory school leavers with insufficient knowledge and incomplete grades. Increased resources to higher education are proposed to improve quality. Additionally, investments will be made in medical training.

Greater gender equality in everyday life
Lower tax on household services, lower tax in certain service sectors, the opportunity for new start jobs in the public sector and continued efforts to stimulate women’s entrepreneurship will strengthen and broaden the labour market for women. A gender equality bonus will increase the prospects of a gender-equal use of parental insurance and of women returning to work during a child’s first year of life. The option of reducing the workload at home, through household services and later a childcare voucher system, makes it possible to reduce women’s unpaid double workload, which is good both for women’s career opportunities and for the family’s various needs.

Greater freedom of choice for families
The Government is now announcing a four-part reform of family policy: a childcare voucher system, increased educational content in preschool, a gender equality bonus and a voluntary municipal child-raising allowance. The reform will be implemented in stages. The Government proposes the introduction of a gender equality bonus. The proposal will improve conditions for gender equality, counter unjustified pay differentials by making it more financially possible for families to share parental leave more equally, and strengthen incentives to return to work. In addition, the Government intends to open the way for municipalities to introduce child-raising allowances so as to increase opportunities for parents with children aged between one and three to be at home a little longer after the end of their parental leave.

More scope for welfare initiatives
The Government intends to continue its work for greater diversity in health care and will propose freedom of establishment in primary care services. Health care and social services must continue to be jointly financed and distributed according to need. The health care guarantee will be enhanced and the quality of psychiatric services and health care as a whole will be improved. The Government proposes a dental reform to give greater protection against high costs and provide good conditions for dental services. The social security systems will be protected and fraud prevented.

Measures to combat climate change
The Government proposes a climate package including tax increases in the energy area aimed at limiting carbon dioxide emissions, and presents the contents of the ‘climate billion’. The special condition (the ‘customs condition’) under which ethanol in a low-percentage blend with petrol qualifies for tax exemption, should be discontinued as soon as possible and at the latest by 1 January 2009. The Government intends to present a climate bill next year.

Real estate tax
The present real estate tax is unfair and lacks popular support and legitimacy. The Government has already announced that the national real estate tax on housing will be abolished and that it will be replaced by a low local government charge. In view of this, the Government considers that the current rules should be replaced by a local government charge of SEK 6 000 per single-family home, though no more than 0.75 per cent of the assessed value, and a charge of SEK 1 200 per housing unit in multi-dwelling buildings, though no more than 0.4 per cent of the assessed value, while the tax on capital gains from the sale of private homes should be raised from 20 to 22 per cent. Deferred capital gains will be subject to interest corresponding to 0.5 per cent of the amount deferred, with a ceiling of SEK 1.6 million on deferred capital gains. When the real estate tax is replaced by a local government charge, the present limitation rule, which normally limits real estate tax to 4 per cent of household income, will also disappear. However, an equivalent limitation rule will be retained for pensioners.

More effective defence
Sweden’s military defence is undergoing a transformation from defence against invasion to operational defence. As a further step in completing this transformation, and as an expression of the Government’s ambition to make the armed forces more effective and increase their ability to participate in international operations, certain defence equipment projects are now being reviewed. The Government believes that even after the review now described in the Budget Bill there is potential for improving effectiveness in the armed forces. It is estimated that overall reductions in expenditure of the order of SEK 3–4 billion will be possible, including the savings announced in this Bill. Some of the funds freed can be used to increase the ability of the Armed Forces to participate in international peace-support operations.

Responsible financing
The bulk of the expenditure and income reforms now being proposed are financed, which is important in view of the high level of resource use in the economy. The proposed reforms mainly include measures intended to increase the labour supply and reduce ill health. It has also been necessary to carefully review other expenditure areas, as in the case of defence equipment. In addition, to ensure that necessary supply-side reforms do not contribute to excessive growth in demand, certain tax changes are also required. Increased taxes on tobacco, alcohol and carbon dioxide, for example, have therefore been considered reasonable. These are taxes that are not considered to affect the underlying employment trend or willingness to invest. The attached pdf Table presents some major reforms and their financing. All in all the proposals mean that most of the measures will be financed via direct regulatory amendments that strengthen the budget.