markets

There’s Too Much Austerity for the Guardian of Sweden’s Debt

Updated on
  • Swedish debt office says there’s room for fiscal expansion
  • Swedish government debt level sinking toward 35% anchor

Spooked by a past that saw interest rates surge to 500 percent in the 1990s and foreign investors abandon the country, Swedish politicians tend to keep the purse strings tight.

Former Prime Minister Goran Persson famously reiterated that “those that are in debt aren’t free” as he dug Sweden out of its fiscal meltdown more than 20 years ago.

By that notion, the country is now breaking loose. Surpluses are ballooning and government debt is rapidly shrinking. But enough is enough, says the head of the Swedish debt office who’s overseeing a deteriorating situation in the nation’s bond market.

“There’s room for a more expansionary fiscal policy, with more investments,” Hans Lindblad, the director general of the National Debt Office, said in an interview on Tuesday. “I’m not impressed by the competition in austerity between the two blocs."

Sweden's Breaking Free

Debt level seen falling below 35% anchor next year

Source: National Financial Management Authority (ESV)

Note: Government debt as a percentage of GDP

Austerity has become a dirty word for some in the global debate, who hold it responsible for the rise of populism across Europe and the U.S., and even the U.K.’s decision to exit the European Union. But Swedish politicians say a close eye on the state coffers helped the country withstand the financial and European debt crises largely unscathed and that such vigilance can never be abandoned.

Finance Minister Magdalena Andersson says that prudence is in the DNA of her Social Democratic party, and points to the fact that Sweden has been enjoying rapid economic growth even as surpluses have built up. The opposition wants to be seen no less vigilant, attacking the government ahead of the elections in September for not amassing the buffers that will be needed in the years ahead to handle an rapidly aging population.

Swedish Austerity

Surpluses predicted through 2021

Source: National Financial Management Authority

Note: Budget surplus as percentage of GDP

Sweden will lower its surplus target next year from 1 percent to 0.33 percent, in part to free up more investments. Andersson signaled this month that the government could also reassess whether a lower budget surplus target is needed if the debt anchor is breached.

Read our latest interview with the Swedish finance minister here

Lindblad, who was a state secretary to Anders Borg when he ran the Finance Ministry, says both sides could be underestimating the fiscal strength of the economy by not taking into account the series of “positive supply side” shocks stemming from a strong inflow of labor, digitalization and globalization.

That means Sweden can afford to invest more, in particular in education as long as the investments are economically beneficial, according to Lindblad.

Others also have grand plans. Nordea Bank AB in a report earlier this year urged the government to kick off a $28 billion project to build speed trains to help the beleaguered bond market. But the finance minister has batted back those suggestions, saying domestic and European Union fiscal rules don’t allow such borrowing.

Read more on the speed train hopes here

Lindblad says that’s wrong. “It’s a myth that the budget rules are a constraint,” he said. “It’s up to parliament to lift the budget ceiling, there’s no drama associated with that."

Using the fear of another crisis down the road is also not a valid excuse for not investing in the economy, according to Lindblad.

“A crisis will come, of course, not only a downturn, but also a financial crisis,” he said. “But with this low public debt and public anchor level we can feel, maybe not home free, but pretty safe at least."

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