Is an Unchanged Public Sector Commitment a Sustainable Commitment?

This report analyses the long-term sustainability of Sweden’s public finances. There is no universally accepted definition of long-term sustainability. One common and intuitive starting point for assessing the sustainability of public finances is that, over time, flows of expenditure should be matched by equal flows of income. If expenditure exceeds income, debt will inevitably increase. If this imbalance is large and persistent, debt levels will eventually become unmanageable, and public finances will not be longterm sustainable. In a sense, one can assume that public finances will always be longterm sustainable if political decisions continue to be made to correct any imbalances in public finances. In the event of deficits, taxes will be raised or spending curbed; and in the event of persistent surpluses, one can imagine taxes being lowered or unfunded reforms being introduced within the resulting fiscal space. The assessment of the long-term sustainability of public finances in the present report, as in other contexts, is based on the current scope of the welfare commitment and the tax system that is to finance it.2 The question analysed is whether future developments in government expenditure with an unchanged commitment are compatible with the income provided by the current design of the tax system.