This improvement is due to increasing tax revenue ensuing from a cyclical upswing and to lower interest payments on central government debt. The reduction in interest payments - from SEK 49 billion in 2004 to SEK 37 billion in 2005 - is due to exchange rate gains on maturing dollar loans and is thus largely nonrecurring.
According to the Debt Office's forecasts, central government debt will be SEK 1,289 billion at the end of 2004 and SEK 1,332 billion at the end of 2005. This is equivalent for both years to approximately 50 per cent of gross domestic product.
Compared with the Debt Office's forecast of the borrowing requirement in February, the forecast for 2004 has been reduced by SEK 4 billion. The main reason is that dividends from state-owned companies in the spring have been larger than anticipated.
Funding
Issue volumes of nominal government bonds will be unchanged at SEK 4 billion per auction. The Debt Office considers that inflation-linked bonds can be issued at an annual pace of SEK 20 billion. The National Debt Office is amortising the foreign exchange debt at SEK 25 billion per year. Due to the high level of foreign currency debt that has to be refinanced, foreign currency borrowing is expected to increase from SEK 11 billion this year to SEK 30 billion in 2005.
A new seven-year inflation-linked bond maturing in 2012 will be introduced during the autumn 2005. The loan will be introduced with an exchange for 3101.
On September 1, 2004 a new-ten year government bond will be introduced maturing on August 12, 2015. During 2004, issues will be allocated relatively evenly among the two, five, ten and sixteen-year loans. In 2005, issues are planned to take place primarily in five and ten-year bonds.
The Debt Office expects to make interest-rate swaps for approximately SEK 30 billion during 2004 and 2005. In 2004, interest-rate swaps will mainly replace borrowing with T-bills.
Loans with credit risk
In the new report Central Government Borrowing - Forecast and Analysis 2004:2, which is being published today, the National Debt Office indicates the need to regulate government lending with a credit risk more clearly. At present, it amounts to over SEK 170 billion and is principle unregulated. This can lead to central government providing loans on terms that do not reflect the government's risk. The lack of rules also leads to lack of uncertainty as to how future loan losses are to be dealt with in the central government budget. Are the losses to be charged to appropriations under the central government expenditure ceiling or not?
A more clearly regulated provision of loans, with clear requirements for valuation and pricing, is important for the Swedish Parliament, the Riksdag, and the Government to be able to compare the cost of providing the loan with the costs of other activity such as the judicial system and education.
It is furthermore important that central government loans and guarantees are treated in the same way since central government in both cases bears the same risk. Despite this, only the provision of guarantees is regulated in the Budget Act.
According to the guarantee model, agencies that provide government guarantees are to evaluate and set a price on the risk. This fee is to be paid by the company that receives the guarantee, or, if the Riksdag decides to subsidise the fee, by money from the central government budget. The fees can also be used to cover any redemption costs. The Debt Office is proposing equivalent rules for loans with a credit risk.
The Ministry of Finance has recently proposed amendments to the Budget Act. However, the proposal still lacks rules for valuation and pricing of loans with a credit risk.
New budget target for the central government budget
The report also analyses the budget target, which means that public finances over a business cycle are to have a surplus of 2 per cent of GDP. The target refers to the public sector as a whole, including the old-age pension system. However, there are no direct targets for the central government budget as such. The current surpluses in the pension system, which are designed to meet future strains, can thus conceal deficits in the central government budget. This can give the appearance that public finances are well prepared when, in fact, this only applies to the pension system. The Debt Office is recommending a balance target specifically for the central government budget. It would also increase the ability to prepare central government finances to meet future strains.
The Swedish National Debt Office will present the new report Central Government Borrowing: Forecast and Analysis at a press conference today on June 16th 2004, at 10.30 a.m. on Norrlandsgatan 15, Stockholm.
For additional information, please contact:
Erik Thedéen, Deputy Director General,
tel: +46-8-613 46 46
Lars Hörngren, Chief Economist,
tel: +46-8-613 47 36
Charlotte Lundberg, Head of Debt Management,
tel: +46-8-613 46 47.
The whole report is available as a pdf-file at www.rgk.se in Swedish and English.
The whole report is available as a pdf-file at www.rgk.se in Swedish and English.
The report can also be ordered as a hard copy on tel: +46 8 613 46 55.
