Aug. 17 (Bloomberg) -- Sweden should cut taxes for wage earners and pensioners to stimulate demand in the export-reliant Nordic nation as economies slow abroad, Prime Minister Fredrik Reinfeldt said.
A reduction would cost 16 billion kronor ($2.5 billion) and mark the fifth cut to taxes for wage earners since the government came to power in 2006, Reinfeldt told reporters at a press conference today on a boat heading for his annual summer speech in the Stockholm archipelago.
“It’s the necessary thing to do,” he said. “We should use the strength of the Swedish economy to inject energy, to make sure that we protect the Swedish economy in a situation where demand for Swedish goods is weak.”
The government was re-elected in 2010 on a pledge to make more cuts to income taxes for workers in a bid to encourage people to come off benefits, enter employment and work longer. Sweden’s economy contracted for the first time in more than a year last quarter as accelerating domestic demand failed to make up for falling exports to debt-laden European countries.
Reinfeldt’s Moderate party wants to cut income taxes by 15 billion kronor and taxes on pensioners by 1 billion kronor next year. He needs the backing of the three smaller parties that are partners in the coalition government to pass the proposal.
Tax cuts are good for jobs, target the average person and strengthen Sweden at a time when the European economy remains weak, Reinfeldt said.
The economy shrank 0.1 percent in the three months through June from the prior period as exports fell an annual 3.2 percent, while private consumption rose 1.8 percent. Unemployment climbed to 8 percent as companies struggled to find workers with the right skills and spending cuts in Europe forced employers to pare workforces.
The government is trailing the three-party opposition, led by the Social Democrats, in polls ahead of Sweden’s next parliamentary elections, slated for September next year. Sweden sells about half its output abroad, of which about 70 percent goes to Europe. The euro zone emerged from a record-long recession last quarter, expanding for the first time since 2011.
Uncertainty in Europe has bolstered Sweden’s currency, viewed as a haven by some investors. The krona traded at 8.6815 to the euro as of 1:13 p.m. today in Stockholm, up 35 percent since May 3, 2011.
Reliance on Exports
“It has been a reflection of a strong Swedish economy, but it’s also a trial for very many export-reliant companies around Sweden,” Reinfeldt said of the currency’s advance. “We’ve shown that we understand that, because we have implemented other reforms that strengthen their competitiveness when it comes to the corporate tax, when it comes to lots of resources, to infrastructure and research.”
The government this year lowered the corporate tax for a second time to 22 percent to aid companies’ competitiveness. It has cut income taxes by about 70 billion kronor, or about 2 percent of gross domestic product, lowered unemployment and sick benefits, and abolished a levy on wealth.
The budget will be in deficit by 1.3 percent of GDP this year and 0.8 percent next year as the $540 billion economy expands at respective rates of 1.3 percent and 2.1 percent, according to state forecasts last month. The government is obliged under national law to post an average 1 percent surplus over an economic cycle.
The tax cuts proposed today don’t violate the surplus target, according to Reinfeldt.
“Once the Swedish economy picks up more pace, we will return to balance and surpluses,” he said.
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