Sweden’s Deficit Targets Slide as Job Losses Steal Election

Sweden’s largest opposition party, which polls show will lead a new government after next month’s election, says job creation must take precedence over a budget surplus target if Scandinavia’s biggest economy is to regain momentum.

Stefan Loefven, the leader of Sweden’s Social Democratic party and the man poised to replace Fredrik Reinfeldt as prime minister after Swedes vote on Sept. 14, says his government will only commit to policies that create jobs.

“The government has now put us in this situation,” he said yesterday in Stockholm. “We should get ourselves out of this, but we should do it in such a way that we don’t threaten jobs. We should create more jobs, we shouldn’t cut jobs.”

Reinfeldt’s government is lagging behind the opposition by as much as 15 points in some polls after Swedes started to question the wisdom of tax cuts in a nation addicted to state-funded welfare. Finance Minister Anders Borg over the weekend cut his estimate for economic growth for a second time in two months and said tax increases would be needed to meet the 1 percent surplus target by 2018.

Sweden, which kept its public debt load at less than half the average in the European Union during the region’s debt crisis, will probably run a budget deficit until 2017, Borg said over the weekend. A 1 percent surplus goal, as a percentage of gross domestic product, won’t be reached until 2018, he said.

No Promises

Yet those targets aren’t worth committing to if they don’t create jobs, according to Loefven.

“We won’t promise that it will be reached exactly in 2018,” he said. “It’s important to invest so that people will get jobs and children and youth get a good education and that also adults who are unemployed get an education.”

Robert Bergqvist, chief economist at SEB AB in Stockholm, said the comments are “a sign of the first steps toward that they’re prepared to abandon the surplus target” and replace it with a balanced budget target.

“It’s logical to abandon the surplus target given how public finances look,” Bergqvist said. “We have relatively high unemployment and the risk then is that the longer people remain unemployed, the bigger the risk that we will end up with permanently high unemployment, that cyclical unemployment becomes structural.”

Deficits Needed

The opposition is lambasting the government, which came into office in 2006 on a pledge to create jobs, for not doing enough to support the labor market. Reinfeldt’s government predicts unemployment will reach 7.9 percent this year and fall to 7.4 percent in 2015. The economy will grow 1.9 percent in 2014, below a July forecast of 2.5 percent, and 3 percent in 2015, Borg said over the weekend.

Budget deficits in 2015 and 2016 will be necessary to maintain growth momentum amid a sluggish expansion in Europe and the U.S., Borg also said.

Sweden’s export-led economy, home to some of Europe’s biggest companies including phone maker Ericsson AB, furniture retailer Ikea and appliance maker Electrolux AB, is at risk as the euro area stalls. Sweden sells half its output abroad, of which about 70 percent goes to Europe.

Tax Increases

Magdalena Andersson, economic spokeswoman for the Social Democrats and the person most likely to become finance minister after the election, sees no scope for unfinanced reforms “in the near-term,” she said in an interview this month. There may be room for initiatives at the end of the next four-year government term if the labor market develops better than forecast, she said.

The National Institute of Economic Research said this week that Sweden would need 100 billion kronor ($14 billion), or about 2.7 percent of gross domestic product, in new taxes to reach the surplus target by 2018. The idea was immediately shot down by both Loefven and Reinfeldt.

The NIER today said it sees a deficit of 2.2 percent this year and 1.3 percent next year, before the surplus target is reached in 2018.

Loefven wouldn’t comment on whether he wants to raise taxes further on top of the increases he has pledged to boost public sector investment and bigger unemployment benefits. He declined to say whether he was willing to scrap the surplus target, enacted in the 1990s to restore public finances following a home-brewed financial crisis.

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