Sweden’s Surplus Fetish Draws Rebuke as Deadweight to Growth
As the euro region tightens its belt to draw a line under its three-year debt crisis, the architect of Sweden’s budget framework says it’s time for the Scandinavian nation to go the other way.
Sweden’s target of achieving a 1 percent budget surplus of gross domestic product over an economic cycle is a relic from a different time that should be replaced, said Assar Lindbeck, a professor who headed the commission that in 1993 proposed the current fiscal framework as a way out of Sweden’s economic crisis. Now, Lindbeck says the government should focus more on investment and limit excessive wealth accumulation by the state.
“I see no reason to continue to have a surplus target since we already have such low public debt,” Lindbeck, a Stockholm University professor and former chairman of the Nobel economics prize committee, said in an interview. “It has become a fetish, the surplus target, to showcase accountability for public finances” as politicians are “fighting yesterday’s battles,” he said.
Finance Minister Anders Borg has cut debt levels to about 35 percent of GDP since taking office in 2006 and kept the budget close to balance throughout the financial crisis. He’s now turning on the stimulus spigots to protect Sweden against the deepening debt crisis in Europe, predicting a deficit next year. The approach has triggered accusations of fiscal recklessness from the opposition Social Democrats as budget restraint is held up as the ideal.
Lindbeck says a better target would be to create debt goals. He envisages a public debt target of 30 percent to 40 percent of GDP.
“That would correct the imbalances we see right now between savings and investments,” he said. “We’re using 7 percent of our GDP to accumulate assets abroad with likely small returns” instead of investing for growth, he said.
Sweden’s public debt will fall to 34.7 percent of GDP in 2014 from 38.4 percent last year, the government predicted last month. The country will post deficits of 0.3 percent and 0.6 percent of GDP in 2012 and 2013, after averaging a 1 percent surplus since the surplus rule’s introduction in 2000. The surplus has averaged 1.2 percent since the current government came to power in 2006.
“The surplus target serves us well,” Borg said in a Sept. 20 interview, even after the limit forced the government to cancel plans for a fifth round of income tax cuts since gaining power in 2006. “We’re about to get some type of re- interpretation where we every year, even in a weak economy, should tighten fiscal policy. That has never been how we’ve interpreted the surplus target.”
The government in its 2013 budget, unveiled last month, said it plans to spend 23 billion kronor ($3.5 billion), or 0.7 percent of output, on roads, railways, research and corporate tax cuts. The plan was slammed by the Social Democrats, who said the government will probably breach the surplus target. The opposition Left Party, the successor to the Communist Party, is alone among parliament’s eight groups in urging that the surplus rule be scrapped.
Borg last month stuck to his pledge to meet the fiscal target even as it’s based on a forecast for economic growth that’s higher than those of Sweden’s central bank, the nation’s four largest banks and the National Institute of Economic Research.
The government sees growth accelerating to 2.7 percent next year and 3.7 percent in 2014. The economy, which relies on exports for about half its output, is now at danger of contracting as demand from Europe stagnates. Surveys at the start of this month showed both manufacturing and the services economy shrinking in September as consumer confidence deteriorates amid rising unemployment.
A report today showed that unemployment, when including people in government labor programs, rose to 8.5 percent last month from 8.3 percent a year earlier.
Jesper Hansson, director of forecasting at NIER, said if the institute’s forecast for 1.8 percent growth in 2013 and 2.8 percent in 2014 are used, the government won’t have money for its initiatives. “It wouldn’t be so weird to change the surplus target for 2015 to 2025 to perhaps 0.5 percent instead, or perhaps zero” since one of the initial arguments was to save for when baby-boomers born in the 1940s retired, he said.
Swedish net wealth, which comprises state assets and pension savings adjusting for the value of debt, will increase to 18.6 percent of GDP in 2016 from an estimated 17.7 percent this year, after falling in 2013 and 2014, according to the government’s budget released last month.
The International Monetary Fund last month criticized Sweden for not doing its part to boost global growth by maintaining current account surpluses the fund said were too big. Sweden, which was ranked fourth on a list of perpetrators, has posted a current account surplus every quarter since 1998.
“There are quite a few good arguments in favor of a balanced budget,” said Lars Calmfors, a professor at Stockholm University and former head the Swedish Fiscal Policy Council, appointed by the government to assess its spending. “We don’t need to accumulate as much financial wealth, which would create room to lower taxes or increase public spending a bit more.”
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