Sweden is prepared to increase its budget deficit to as much as 3 percent of output to support its banks and stimulate economic growth should the European debt crisis escalate, Finance Minister Anders Borg said.
The government may spend between 0.5 percent and 1 percent of gross domestic product on demand-inducing measures, including household tax cuts and local government aid, and the same share in assistance to banks. Lower tax income and higher unemployment benefit payouts may sap public finances by another 0.5 percent to 1 percent, Borg said in a speech today at Swedbank AB in Stockholm.
Should Sweden have to implement such measures, the country will still have strong enough public finances so that interest rate spreads won’t rise in a “serious way,” Borg said. “We will then raise the deficit to perhaps 2 percent to 3 percent, but all other countries should have larger ones so that we still, in relative terms, are the stable country.”
Borg yesterday presented a stimulus budget for 2013 as eroding demand for its exports from Europe undermines growth in the economy, saying Sweden has “significant safety margins” should the economic crisis in deepen in Europe where countries are cutting spending to reduce debt. Sweden sells about half of its output abroad, of which about 70 percent go to Europe.
The Nordic country will post a 0.3 percent deficit of GDP this year and a shortfall of 0.6 percent in 2013, Borg said yesterday. He announced about 23 billion kronor ($3.5 billion) of spending mainly on roads, railways, research and lower company taxes to improve long-term competitiveness in the Swedish economy.
The government estimates next year’s budget initiatives will boost growth by 0.4 percentage points and raise employment by 17,000 jobs in 2014. Sweden’s central bank last week cut its main lending rate for a third time since December to 1.25 percent as the economy slowed more than estimated last quarter amid weakening European export demand.
Borg’s budget draft was criticized by the social democrat-led opposition for not being fiscally conservative enough because of the expected deficits this year and in 2013.
“When we have have low activity, we need to lean against the wind,” Borg said.