Sweden Eases Budget Surplus Rule to Open for Fiscal Stimulus

Sweden’s government and main opposition parties agreed to ease the country’s budget-surplus target, giving the Nordic region’s largest economy more fiscal power to stoke economic growth.

A bipartisan agreement was struck to lower the surplus target, as measured over an economic cycle, to 0.33 percent of gross domestic product, from the current 1 percent. The accord includes anchoring state debt at 35 percent of GDP, with the government having to explain to lawmakers and come up with an action plan if the level strays five percentage points or more in either direction. The new target will apply from 2019.

“It’s very good for the Swedish economy that there’s stability around fiscal policy,” Finance Minister Magdalena Andersson said at a press conference. “It doesn’t mean anything in the near future in terms of extra money in the budget, but in a few years time it’ll mean that we can spend more money on health-care, infrastructure, housing, railways.” 

The fiscal rules that were put in place in the late 1990s have come under increased scrutiny as the current and former governments have struggled to live up to targets in the aftermath of the global financial crisis. Many economists have said demographic changes means the target could be loosened, criticizing the framework for restricting the government’s scope to invest in things such as infrastructure and education.

Even so, Nordea Bank, the largest Nordic lender, questioned the low level of the debt anchor, arguing that it could be higher given Sweden’s already limited debt and the challenge of absorbing hundreds of thousands of refugees.

“There’s a risk that politicians are foolishly penny-pinching,” Andreas Wallstrom, chief analyst at the bank, said by phone. “I think they could allow themselves a higher debt level target. Sweden could allow itself to run a deficit over the next 5-10 years in order to become a better functioning economy in the 10 year horizon.”

The economy is now surging ahead amid record low interest rates and an immigration-fueled bump in spending. The nation in 2015 received the highest number of immigrants per capita in the European Union -- 163,000 asylum seekers. Such high volumes have pushed up public spending, with the government in April expecting to balance its budget in 2019. It has also said it won’t reach its target of a 1 percent surplus until after 2020.

The lower surplus target level won’t matter that much for the budget in the near term, according to Erik Hoeglin, head of fiscal policy at the National Institute of Economic Research. Later on, it could mean extra scope for spending amounting to a bit less than 25 billion kronor a year, he said, based on calculations in a NIER study commissioned by the government last year.

All groups but the Sweden Democrats, which wants to severely limit immigration to reduce government spending, agreed on the new budget rules.

According to Ulf Kristersson, economic spokesman at the largest opposition party, the main reason for lowering the target are changing demographics and that Sweden has reduced public debt from more than 70 percent of GDP in the 1990s to just above 40 percent now.

”We should have a lower state debt than what we have today,” Kristersson said. ”It was important, not the least in these times, with Brexit and shakiness in the financial markets, to be able to show that we have this broad political agreement.”

The government and opposition also agreed that a majority in parliament can’t cherry pick single issues to kill in a budget, setting the stage for a smoother process. While in opposition, the current government parties broke with a tradition and managed to kill planned income tax cuts with help from the Sweden Democrats.

“The important thing is that there’s an agreement on a new target level, and that it also gives a more prominent role to the level of public debt,” said Hoeglin at the NIER.

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