Sweden Expects Improved Public Finances on Back of Solid Growth

The outlook for Sweden’s public finances has improved since April thanks to solid growth and lower public spending amid a drastic reduction in projected migrant numbers.

While the government still expects budget deficits through 2018, Finance Minister Magdalena Andersson said its new forecasts show "the Swedish economy is performing very strongly."

"Public finances are improving and that’s a good starting point to now tackle the challenges that Sweden is facing," she told reporters in Harpsund, south of Stockholm.

According to the government’s latest forecasts, the largest economy in the Nordic region will between now and 2018 post lower budget deficits than it had anticipated in April. A larger surplus, of 0.7 percent of gross domestic product, is now expected in 2019.

Despite the improved outlook, the government said it would continue to pursue a prudent fiscal strategy.

"Although the outlook is in many ways positive, major challenges still remain," Andersson said in a statement accompanying the latest forecasts. "The government will present an austere budget with clear priorities."

Still, the government plans to budget 24 billion kronor ($2.85 billion) for reforms in 2017. The money, which includes 10 billion kronor that had already been pledged to municipalities, will be mainly spent on education, jobs and the environment.

Lower-than-anticipated spending on migration is partly responsible for the anticipated improvements to the state’s coffers.

Sweden has cut its forecast for asylum seekers twice this year, having revised its traditional open-doors policy following the arrival in 2015 of a record number of refugees from war torn countries like Syria and Afghanistan. The introduction of border controls and ID checks on buses, trains and ferries was partly in response to concerns that the unprecedented influx would strain its generous welfare state. The migration agency expects about 30,000 arrivals this year, compared to last year’s 163,000, which was the highest in the European Union on a per capita basis.

Higher tax revenue generated by solid economic growth, meanwhile, has helped on the supply side. Although the government has revised down its GDP estimate for this year, the economy is now expected to grow more than previously anticipated between 2017 and 2019.

Here is a summary of the government’s latest forecasts (April forecasts in brackets):

GDP3.5% (3.8%)2.3% (2.2%)1.9% (1.8%)2.3% (2.1%)2.7% (2.9%)
Budget (%GDP)-0.2% (-0.4%)-0.3% (-0.7%)-0.2% (-0.4%)+0.7% (+0.1%)+1.4% (+0.7%)
Unemployment6.8% (6.8%)6.3% (6.3%)6.3% (6.4%)6.3% (6.5%)6.2% (6.6%)
Inflation1.0% (0.9%)1.5% (1.6%)2.1% (2.3%)2.8% (3.2%)3.1% (3.2%)

Despite the fact that Sweden has been enjoying one of the fastest rates of economic growth in Europe, Sweden’s central bank has had to lower its main interest rate to below zero and embark on a bond purchasing program to boost inflation, which has now fallen short of the Riksbank’s 2 percent target for more than four years.

Since the government still doesn’t seen inflation exceeding 2 percent before 2018, it expects the Riksbank won’t increase its main lending rate -- now at minus 0.5 percent -- until then.

— With assistance by Niklas Magnusson

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