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Sweden Pledges to Keep Budget Balanced as Economy Slows

Sweden pledged to keep budget surpluses intact as Europe’s debt crisis and slowing U.S. growth threaten to stifle the largest Nordic economy’s expansion.

Sweden’s budget will be in balance next year after a surplus of 0.1 percent this year, Finance Minister Anders Borg said today at a presentation of the 2012 budget in Stockholm. The economy will grow 4.1 percent in 2011 and 1.3 percent in 2012, the same as estimated in August, he said.

“We now have the freedom to act and room to maneuver that we need if the situation deteriorates,” Borg said. “If we end up with a really serious downturn we should of course have some kind of deficit but those deficits should not be so big that they create uncertainty.”

Prime Minister Fredrik Reinfeldt said last week that his minority government will ensure the budget steers clear of deficits in case more stimulus is needed should the European debt crisis deepen and global growth slows. The government last month scrapped planned income tax cuts amid narrowing surpluses and opposition from a majority of parliament.

The krona weakened 0.2 percent to 9.1427 per euro as of 11:47 a.m. in Stockholm. The currency fell less than 0.1 percent to 6.6702 per dollar. Sweden’s two-year yield was little changed at 1.17 percent.

Spending Measures

While other governments are reducing spending to trim deficits, Sweden said today it has room to spend 15 billion kronor ($2.2 billion) on new measures next year and 17.3 billion kronor in 2013, in part on roads and railways and on support for the long-term jobless to “prevent a high level of unemployment becoming persistent.”

“There won’t be any more income tax cuts until we have big surpluses,” which is not the case in 2013, Borg said.

The government forecast growth will accelerate in 2013, expanding 3.5 percent, while the surplus will grow to 0.7 percent in 2013 and 2.1 percent in 2014. Unemployment will rise to an average 7.8 percent next year from 7.5 percent this year, before falling to 6.6 percent in 2014.

“The government is too optimistic on the recovery for 2013 and onwards,” Andreas Jonsson, an economist at Nordea Bank AB, said in an e-mailed note. “The global economic outlook is very uncertain also further out, which makes it precarious to plan economic policy based on a strong recovery.”

Rate Cuts

The Organization for Economic Cooperation and Development earlier this month cut growth forecasts for the U.S. and Japan and predicted the three-largest euro-area economies will shrink in the fourth quarter, saying it favors monetary stimulus as governments struggle with “limited fiscal space.”

Borg on Aug. 26 cut Swedish growth forecasts from 4.6 percent this year and 3.8 percent next year. The government had also earlier this year estimated the surplus would reach 1.8 percent of gross domestic product next year.

Sweden’s central bank kept its benchmark interest rate unchanged at 2 percent this month, citing deteriorating global growth prospects. Policy makers have raised rates seven times since July last year after the economy grew at the fastest pace in 40 years in 2010, helping to lower unemployment and boost inflation. The bank will keep its rate unchanged this year, according to the median estimate in a Bloomberg survey last month of 10 analysts.

The government forecasts the central bank will keep its benchmark interest rate unchanged this year and lower it to 1.5 percent in 2012, according to today’s budget.

Inflation will average 3 percent this year and 1.2 percent in 2012, it said. The central bank targets 2 percent inflation.

Tax Reductions

Reinfeldt next year plans to chop in half the value added tax on restaurant and catering services to create more service jobs, spend more on roads, railways, education and measures to support the jobless. It also wants to cut dividend taxes for small businesses and more tax breaks for investments in research and development.

“What we’re doing in the budget is diminishing the impact of the international crisis,” Borg said. “What we’re doing is temporary measures, mainly in 2012 and 2013, but which will probably then be withdrawn. We’re also doing quite a lot to strengthen long-term employment.”

After ending 12 years of Social Democratic rule in 2006, Reinfeldt has cut income taxes by about 70 billion kronor, or 2.1 percent of GDP, while also lowering unemployment benefits to move more people from welfare to work. The government has lowered corporate and real estate taxes and ended a wealth levy.

The opposition has threatened to oppose the minority-government’s income tax cuts, a move that could have provoked a new election and cut short a sitting government’s term for the first time since 1953.

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