Sweden Seen Leaving Difficult Choices for Later as Economy Booms

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Sweden’s Finance Minister Magdalena Andersson is expected to paint a rosy picture of the economy when she presents her spring budget -- and kick the difficult decisions down the road.

The government on Wednesday may forecast that the $570 billion economy, powered by record low interest rates and spending on refugees, will grow by about 4 percent this year, according to Nordea Bank. While Sweden’s generosity in accepting migrants has led to rising costs, fast growth in revenue is partly helping the nation to cope the with record influx.

“There seems to be a clear underlying trend that tax income is increasing more than expected because the economy is doing well,” said Michael Grahn, an economist at Danske Bank. “As long as the strong trend in the labor market continues, that’s more important for the fiscal balance.”

The country erected border controls late last year as the stream of refugees from Syria, Afghanistan and other trouble spots was overwhelming welcome services and threatening budget stability. Debate is now swirling over what changes need to be made to Sweden’s tightly regulated labor and housing markets to help absorb the about 250,000 people that have sought refuge since 2014.

Swedbank economists Anna Breman and Cathrine Danin say that while measures presented so far, including increased spending, will help economic growth, they don’t permanently boost the pace of expansion. While the budget will likely be in balance for 2016, longer term public finances may be undermined and changes are in particular needed in the labor market to make sure refugees find jobs, they said.

“Social exclusion creates long-term costs for individuals and society as a whole, which weighs on the Swedish economy,” Breman and Danin said.

The supplemental budget, which will be revealed on Wednesday at 8 a.m. in Stockholm, already includes more tax increases that were promised in the main budget unveiled last year. Prime Minister Stefan Loefven has said raising taxes was necessary to increase spending on labor market programs and education to drive down unemployment.

While the total number of unemployed is falling amid strong demand for labor, there’s a large inflow of job seekers in the establishment program for refugees. More than half of the country’s unemployed are now born abroad, monthly data from Public Employment Service showed on Tuesday.

The biggest measure announced so far by the Social Democratic and Green Party coalition is 10 billion kronor ($1.23 billion) in extra funding a year to municipalities to compensate for refugee-related costs. While it’s up in the air how this will be financed -- by borrowing or by raising taxes -- it’s not a sum that will break the bank, economists say. 

Danske Bank’s Grahn said 10 billion kronor is a “rounding error.”

Labor Market Minister Ylva Johansson on Friday preempted the budget, revealing that the government sees unemployment falling to 6.6 percent in 2020 from about 7 percent. More labor reforms will be announced in the second half of the year to fulfill a 2014 election pledge of having the lowest unemployment in the EU in 2020, according to Johansson. 

Torbjoern Isaksson, an economist at Nordea, expects the government will have to make some tough choices, including potentially reaching into the labor market where most rules are set between labor unions -- key Social Democratic allies -- and employer groups.

“These are politically sensitive issues, but they probably need to consider lowering labor market thresholds in terms of hiring costs, or through subsidizes,” he said. “If you get this kind of supply chock of labor with low productivity you need to come up with some new ideas.”