Forecasts of the Central Government budget and public finances November 2025

The business cycle in Sweden remains weak, but there are signs that recovery has begun. The recovery is expected to continue next year, further boosted by expansionary fiscal policy – including, among other things, an expanded earned income tax credit, a temporary reduction of VAT on food, and a reduced energy tax. It also includes substantial increases in expenditure for defence and infrastructure. The recovery is driven in particular by household consumption. Households benefit from rising real incomes and greater optimism about the future. However, the effects of the tax cuts on household consumption will be spread over several years. Investments, which are decreasing year-on-year in 2025, are expected to rise sharply in 2026, with broad-based growth. Although the labour market remains weak, unemployment will decline as the economy strengthens. Inflation is temporarily high in 2025 but falls below the inflation target in 2026, mainly due to tax cuts. Growth is expected to be strong in 2027, and the GDP gap closes. The repo rate is expected to be raised at the end of 2026 and in 2027 as the recovery strengthens. Since the VAT reduction on food is temporary, inflation is expected to exceed the target in 2028 when the tax is restored to its previous level.

Tax revenue in the general government sector is subdued this year due to the economic downturn and tax cuts. In particular, taxes on labour and taxes on capital are growing more slowly than last year. In 2026, tax revenue is expected to grow more rapidly as the economy strengthens. However, the tax cuts in the Budget Bill for 2026 dampen this increase. In total, the measures in the budget reduce tax revenue by SEK 52 billion in 2026 and by an additional SEK 7 billion in 2027. Tax revenue increases significantly in 2027 as the recovery continues and the extent of tax cuts is reduced. In 2028, tax bases grow more slowly, but revenue increases more than in 2027, as the temporary tax cuts expire and a new emissions trading system enters into force.

Ceiling-restricted expenditure rise substantially this year and even more next year. The increase is largely due to major increases in expenditure for defence and increased support to Ukraine, both in previous bills and in the Budget Bill for 2026. But expenditure on Transport and Communications and the Judicial system also increases significantly in both years, as does the EU contribution. Next year, expenditure for health care, medical services, and social care will also rise considerably, primarily due to proposals in the Budget Bill. Total central government budget expenditure increases significantly less than ceiling-restricted expenditure this year, mainly because it was temporarily high last year due to a capital injection to the Riksbank. Next year, total expenditure increases more than this year and more than ceiling-restricted expenditure. National Debt Office net lending, which is not included in the ceiling-restricted expenditure, rises sharply, as the balance on Svenska kraftnät’s account in the National Debt Office is no longer expected to increase.

General government net lending deteriorates by SEK 67 billion in 2026, resulting in a deficit of SEK 154 billion. The deterioration occurs in the central government sector. The proposals in the Budget Bill for 2026 worsen the central government's net lending by almost SEK 80 billion compared with 2025. In contrast, net lending in the local government sector improves in 2026. Increased economic activity contributes to faster growth in tax revenue than this year, while expenditure does not rise to the same extent. Net lending in the old-age pension system also improves next year. In 2027, the public sector deficit is smaller but remains substantial. In 2028, central government net lending improves significantly, primarily due to the expiry of temporary tax cuts. Meanwhile, net lending in the local government sector deteriorates slightly because income grows more slowly than in 2026 and 2027. Net lending in the old-age pension system improves every year. Overall, the public sector posts a deficit throughout the entire forecast period.

Structural net lending – that is, net lending adjusted for the effects of the business cycle and one-off effects – remains close to -2 per cent of potential GDP in both 2026 and 2027. This represents a significant deviation from the target for public finances. According to a broad parliamentary agreement, new defence expenditure and support to Ukraine may justify a deviation from the net lending target during the period 2026–2034. However, even excluding these expenditures, structural net lending amount to 0.7 per cent of potential GDP in both 2026 and 2027. Given that there already is an upturn in the economy, ESV considers this to be too large a deficit – at least in 2027. ESV also believes there is a risk that prolonged deviation from the target could undermine confidence in the fiscal policy framework and that the framework could lose its role as a guiding instrument for public finances. It is therefore important that the government presents a clear plan for when and how defence spending will be included in the fiscal framework again.

The Maastricht debt increases this year as both the central government and local government sector post deficits. Despite strong economic growth in 2026 and 2027, the debt-to-GDP ratio continues to rise in those years. In nominal terms, the debt continues to grow in 2028 and 2029, but relative to GDP it remains essentially unchanged. This year, the Maastricht debt slightly exceeds the debt anchor. From 2026 onwards, the debt clearly exceeds the anchor, although it remains within the tolerance interval.

Compared with ESV’s previous forecast, GDP growth has been revised upwards for 2025–2027. This is partly due to slightly stronger outcomes than expected and partly because the proposals in the Budget Bill for 2026 provide a boost to growth. Employment increases more in 2026 as economic activity is higher, but unemployment remains largely unchanged. Tax revenue has been revised up slightly for 2025 but revised down significantly for 2026–2027 due to tax cuts in the budget. Expenditure has been revised down slightly for 2025 but significantly upwards for the remaining forecast years because of budget proposals. Public sector net lending has been revised down in all forecast years except 2025. The increased deficits in 2026–2028 are mainly in the central government sector, due to the large increases in expenditure and tax cuts in the budget. However, net lending has been revised up for 2025.

Compared with the government, ESV expects the deficit in general government net lending to be SEK 6–18 billion lower between 2025 and 2028. The central government deficit is expected to be smaller. Central government revenue is roughly the same in ESV’s forecast as in the government’s, but ESV forecasts lower expenditure.

Table: The forecast in figures

Sources: ESV and Statistics Sweden.