Aug. 16 (Bloomberg) -- Sweden’s ruling party and opposition are stepping up pledges to increase spending and cut taxes as they take advantage of the European Union’s smallest budget deficit to attract voters before next month’s election.
Prime Minister Fredrik Reinfeldt on Aug. 14 pledged 20 billion kronor ($2.7 billion), or 0.7 percent of economic output, in personal tax cuts. Opposition leader Mona Sahlin said yesterday her Social Democratic party, which has set aside 17 billion kronor more than the government on welfare spending and job creation measures, will provide 17.5 billion kronor in tax cuts for pensioners if it wins the Sept. 19 vote.
The election pledges are in stark contrast to austerity measures being thrust on much of the EU as the region struggles to overcome a fiscal crisis that sent the euro tumbling 20 percent against the dollar from a November peak to a June trough. Sweden’s government deficit was 0.5 percent of gross domestic product last year, compared with an EU average of 6.8 percent, the European Commission estimates.
“The Swedish economy is in a good state with surprisingly strong public finances,” said Torbjoern Isaksson, an economist at Nordea Bank AB in Stockholm, in an interview. “We’d expected more financial political reforms than have been announced so far.”
Sweden entered the financial crisis with its public finances in a “strong starting position,” Fitch Ratings said on Aug. 13, adding it expects the government’s debt burden to remain below the AAA median “in the medium term.” Government debt was 42 percent of GDP at the end of last year, compared with a median of 52 percent for AAA-rated sovereigns, Fitch said.
Finance Minister Anders Borg said on Aug. 14 the government wants to run a fiscal surplus before implementing more tax cuts.
“Both the government coalition and the Social Democrats have a fundamentally good reputation on the market because they take good care of public finances,” said Par Magnusson, chief Nordic economist at Royal Bank of Scotland Group Plc, in an interview. “The tradition that has developed since the mid-90s, of keeping public finances under control, is something that’s deeply entrenched in both blocs.”
Swedish government bonds with maturities of 10 years and above are the second-best performers of European Union sovereigns in the last five days, measured in local currencies, Bloomberg data show. Only Czech debt offered better returns in the period. The yield on Sweden’s 5 percent bond due 2020 slipped 4 basis points today, sending the benchmark note to the highest in at least a year.
GDP grew an annual 3.7 percent last quarter and may expand 3.8 percent this year, putting the largest Nordic economic on track to deliver the biggest rebound in the EU after last year’s 5.1 percent contraction.
Reinfeldt’s four-party coalition is leading in most polls. The government had 48.6 percent support compared with 45 percent for the three-party opposition bloc in a Sifo poll published in newspaper Svenska Dagbladet yesterday. That compares with a 3.3 percentage point lead in an Aug. 8 Sifo poll.
Tax cuts would “create jobs and increase the incentive to work,” Reinfeldt said Aug. 14. The measure will “improve the will to work longer hours and this strengthens public finances.”
Both the government and the three-party opposition bloc have made job creation the centerpiece of their campaigns. The jobless rate rose to 9.5 percent in June as students off for the summer holidays went looking for work, making youth unemployment a key election issue.
“It’s our ambition to carry out these initiatives during the next parliamentary term, but we will never sacrifice the strength of public finances,” Reinfeldt said.
Swedish companies including Ericsson AB, the world’s largest maker of wireless networks, and Assa Abloy AB, the world’s biggest lockmaker, have cut thousands of jobs since the outbreak of the global financial crisis in 2008.
The government is spending 1.2 percent of gross domestic product this year to boost growth and reduce unemployment after the economic crisis cut demand for exports, which generate about half the country’s total output. Last year’s economic contraction was the deepest since World War II.
Recent jobs data indicate the labor market is improving. The seasonally-adjusted jobless rate fell to 8.1 percent in June from 8.7 percent the previous month, Statistics Sweden said on Aug. 5.
The country’s exports rose for a seventh month in June on an annual basis as most of the largest industrial companies including Atlas Copco AB, the world’s biggest maker of air compressors, and SKF AB, the world’s largest manufacturer of ball bearings, reported better-than-expected second-quarter results.
“We’re now seeing much higher growth than we predicted at the start of the summer and a significantly stronger labor market,” Borg said on Aug. 5, adding the government will later this month probably cut its unemployment forecast, as measured by Statistics Sweden, for an average 8.9 percent this year. It may also raise its growth forecast from 3.3 percent for this year, he said.
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