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Loans to Swedish local governments carry extraordinary low risk, the credit exposure is 0 percent risk weighted from a capital requirements perspective. This high creditworthiness builds on a number of factors: |
No Swedish local government has ever failed to fulfill a lending agreement.
A Swedish local government cannot go bankrupt, due to the particular position of the local governments in the constitution and their right to levy taxes. |
| Swedish local governments are not allowed to pledge property as security. Local governments are liable for all obligations they enter into, with all their tax power and total assets. |
| Swedish local governments cannot cease to exist. Only the Riksdag can decide on mergers of local governments. In the event of such a merger, responsibility for assets and liabilities is transferred to another local government. The same applies to the division of local governments. |
Long tradition of self-governing and power of taxation Swedish constitution has since many years granted municipalities and county councils considerable autonomy and independent powers of taxation. The right to levy taxes has for example been established in local government ordinances since 1862.
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| Taxes are levied as a percentage of inhabitants’ income, with rates individually decided by municipalities and county councils respectively. On average, the total tax rate is 30 percent, of which roughly 20 percent is municipality tax and 10 percent county council tax. |
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| Structure of Swedish public finance. |
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Balanced budget requirement
According to law introduced in 2000, local governments are each year required to adopt a balanced budget and a three-year financial plan. Should the council decide to introduce new expenditures during the current budget year, this decision must be completed with details of how the expenditure is to be funded. |
If a deficit is reported for a particular financial year, the general rule is that the council, after looking into the balance requirement, is required to adopt an action plan for restoring the deficit in no more than three years. This principle of good economic management and balanced budget requirement apply to all individual entities of the sub-national government sector. |
Powerful system for financial equalization To ensure that all local governments, irrespective of tax base and structural conditions, have equal conditions for providing services, Sweden has a system of balancing incomes and costs known as ‘local government financial equalization’. In principle, the system comprises an income equalization scheme and a cost equalization scheme. Income equalization evens out differences in the tax base and is primarily state-funded. Cost equalization evens out differences in structural costs and does not affect state finances. Local governments with an unfavorable cost structure are paid a cost equalization grant, while those with a favorable structure pay a charge. |
The Swedish State supports financial stability in local government
The Swedish State has ultimate responsibility for ensuring that public services as a whole develop in balance. The State therefore closely monitors local governments’ financial development and has access to a number of supportive instruments in times of short-term difficulties due to special circumstances. |
| As under-secretary of finance, Mr. Sören Häggroth, phrased it in a statement in 2000: |
"From a national perspective it would not be acceptable if local government were weakened leaving them unable to supply basic services to their inhabitants. The State in other words, while rarely providing any formal guarantees, does nevertheless assume ultimate responsibility for local government operations."
(Mr. Sören Häggroth, Swedish under-secretary of Finance, quoted from article in Kommuninvest annual report 2000) |
Another important feature in the relation between the State and local governments is ‘the local government financing principle’. This principle, approved by the Riksdag, holds that if the State decides on measures that directly affect the activities of the local governments, altering the level of the state grant should neutralize the financial effects of that decision.
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Local governments’ financial position
The table below presents the aggregated income statement for Swedish municipalities and county councils. Tax revenues account for approximately two-thirds of the total income. Property taxes are levied by the State and thus fall outside of municipal or county council revenues. |
| Income statement for Swedish municipalities and county councils 2007 |
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Government grants and equalization |
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Net financial income/expense |
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Net income before extraordinary items |
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Share of taxes and grants (%) |
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| Source: The Swedish Association of Local Authorities and Regions. |
Municipalities (including municipality-owned companies) and county councils have external debt amounting to app. SEK 350 billions (roughly SEK 38,000 per inhabitant). |
Local government sector continuing to meet balanced budget requirement
Given the challenging economic environment, Swedish municipalities and county councils will struggle to maintain these results in the coming years, as the May 2008 forecast by the Swedish Association of Local Authorities and Regions shows (below). |
Aggregate income statement 2007-2011
SEKbn, current prices unless otherwise stated |
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| Net expense of activities |
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| General government grants and equalization |
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| Net financial income/expense |
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| Net income before extraordinary items |
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| Share of taxes and grants (%) |
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General government grants adjusted
upwards by tax base forecast |
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| Net income after tax base adjustment |
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| Share of taxes and grants (%) |
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| Cost reduction to achieve 2 percent |
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Corresponding to: Volume change of (%) |
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Tax rate increase of (percentage unit) |
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| Net income for the year (with 2-percent target) |
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| Share of taxes and grants (%) |
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| Sources: Statistics Sweden and The Swedish Association of Local Authorities and Regions. |
| According to the forecast, the local government sector will show a minor deficit in 2011. It is however expected that expansionary fiscal policy will entail higher central government subsidies to municipalities and county councils, thus assuring balanced budget requirement continue to be met. |
| At year-end 2007, Swedish local governments had debt obligations corresponding to roughly 40 percent of operating revenues. This includes on-lending to municipality-owned companies that are generally self-supporting, in sound financial health, and in many cases hold significant surplus values. |
Solid ratings for Swedish local governments
As of February 2008, twelve municipalities and county councils have been independently rated by Standard & Poor’s, all posting upper investment-grade ratings (AAA to AA-). Strong system support and institutional stability, including an extensive revenue and expenditure equalization scheme, dynamic or stable local economies, robust financial performance and low to moderate debt levels were key factors supporting the ratings. |
