Sweden’s New Government Lambasted for Abandoning Surplus

Sweden’s new government risks damaging the credibility of the fiscal framework in the largest Nordic economy after delaying reaching the surplus target to beyond 2018, the main budget oversight group said.

“Deviating from the goal for a number of years could hurt confidence that Sweden will manage to return to a surplus,” John Hassler, head of the Fiscal Policy Council, said today at a press conference in Stockholm. “It’s extremely important that confidence is maintained.”

The Social Democrat-led government, which took power this month, earlier this week postponed attaining the target, blaming the former government’s tax cuts for emptying state coffers. The ruling coalition that was ousted in September elections had forecast it would reach the 1 percent target in 2018.

While the economy will reach normal capacity in 2017 to 2018, the new government expects to only reach a 0.5 percent surplus in 2018, Finance Minister Magdalena Andersson forecast this week.

The council urged the government to stick to the budget framework as it prepares to present its first budget on Oct. 23.

“The important thing is what the government says in the budget proposition,” Hassler said. “If the government says in its budget that it is not aiming to reach a surplus of 1 percent when the economy is balanced, that would be an obvious breach of the framework.”

Guarding Recovery

Andersson said today in a phone interview that delaying a return to the surplus target is necessary to avoid hurting the economic recovery. To reach such a surplus in 2018, the government would need big savings programs in 2017 and 2018.

“This would be inappropriate considering the current economic situation, not least in Europe, where we see a quite weak recovery,” Andersson said. “To announce a big savings program would risk inhibiting the recovery we see now.”

The problem, according to Andersson, is that the former government left public finances with a 2 percent deficit, which means Sweden is currently breaching its budget rules.

“The question is how quickly we can return to the budget goal of one percent surplus,” she said. “It’s more appropriate if the target can be reached one or a few years later than 2018.”

The former four-party coalition had planned tax increases in 2017 and 2018 to reach the surplus target 2018.

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