Swedish Budget Seen `Out of Whack' as Taxes Set to Increase

  • Government proposes about 45 billion kronor in new taxes
  • Business group concerned over falling incentives to work

Sweden’s government could be falling out of step with the central bank’s struggle to revive inflation as it unveils tax increases to cope with deficits and increased spending.

Next year, when including measures from the “spring budget,” taxes will increase 45 billion kronor ($5.4 billion), and there will be new spending measures of the same amount, the ruling coalition said in its 2016 budget release handed out in Stockholm Monday. Income tax increases, higher social fees for young workers and lower tax breaks on home repairs and household services could weigh on the labor market.

“The balance between monetary and fiscal policy in Sweden remains out of whack,” Anna Breman, a Swedbank economist, said by phone before the budget was released. “Monetary policy doesn’t get any help from fiscal policy.”

Prime Minister Stefan Loefven, who leads a minority coalition, says deficits left by the previous administration have forced it to raise taxes as it seeks to increase spending on labor market programs and education to drive down unemployment, currently at 7 percent. In his election campaign last year, Loefven promised to have the European Union’s lowest jobless rate by 2020.

Solving Unemployment

“We will not solve unemployment, low performance levels in schools or the challenge of climate change by making further cuts and short-sighted tax reductions,” Finance Minister Magdalena Andersson said in a statement. “To tackle these challenges, we need to invest in Sweden. In homes and infrastructure, in knowledge and competitiveness, in the transition to a sustainable society.”

The budget comes as the country’s central bank has unleashed unprecedented stimulus to prevent disinflation from taking hold. The central bank has cut its main rate to a record minus 0.35 percent and is also buying government bonds to revive price growth which has been below targets for almost five years.

The Swedish krona slid 0.3 percent to 9.349 per euro as of 3:35 p.m. in Stockholm.

Graph of Sweden's seasonally adjusted unemployment rate.
Graph of Sweden's seasonally adjusted unemployment rate.

According to Lennart Flood, professor emeritus at Gothenburg University School of Business, the income tax increases could backfire and raise far less than they are intended to.

“It’s an unfortunate signal,” he said. “If you want to finance the public sector, people need to work more, not less.”

Working Less

The government last month released a more upbeat assessment on growth, which it reiterated Monday. It predicted that the largest Nordic economy will expand 2.8 percent this year and next year with unemployment at 7.1 percent in 2016 and falling to 6.2 percent by 2018. It also predicted Sweden will remain in deficit until 2018.

“The tax increases are mainly done for groups with higher incomes,” Andersson said at a press conference. “It can affect the number of hours worked, but it’s not likely to affect the labor participation rate.”

The government said the budget will lead to lower disposable incomes for 60 percent of Swedes, although positive effects of spending on housing and education aren’t included in that estimate.

Nordea Bank said in a comment that the budget is a “traditional” Social Democratic plan.

“The budget is more focuses on redistribution of income than on employment and growth,” Bengt Rostroem and Lena Sellgren, analysts at Nordea, said in a note.

Business groups are also balking at higher taxes.

Sweden is already one of the countries with the world’s highest marginal taxes, Confederation of Swedish Enterprise economist Johan Fall said.

“Among our relevant competitor countries, we’re already on top of the list, and now we add further distance by raising it again,” Fall said. “This could for example mean it won’t be as interesting for employees to work a little bit extra or invest in additional education.”

Before it's here, it's on the Bloomberg Terminal. LEARN MORE