IHS Global Insight Perspective | |
Significance | The government has planned 13 billion kroner (US$1.94 billion) of measures to support the economic recovery. Its primary goal is to take Sweden back to full employment. |
Implications | Implications: The government also stressed in its statement that there are still risks that developments will be less favourable than expected, and it is therefore important that public finances are once again in surplus and a high level of unemployment does not become persistent. |
Outlook | IHS Global Insight believes the strain on fiscal balances could be somewhat greater than the government forecasts, as our outlook for growth in the rest of the world is weaker. Nevertheless, Swedish government finances will remain sound in the coming years. |
The new centre-right Swedish government yesterday presented its budget for 2011. Unlike other Europeans economies, where austerity measures have dominated the agenda and are likely to become more severe, Sweden continues with its stimulus measures. Specifically, the government has planned 13 billion kroner (US$1.94 billion) of measures to support the economic recovery. It also estimates that 25 billion kroner per year will be raised during the next mandate from selling state holdings in companies. The government stressed in the statement that its primary goal is to take Sweden back to full employment, because despite the fact that the economic recovery is happening sooner and faster than expected, Sweden is still in a period of low economic activity and high unemployment. Specifically, the unemployment rate averaged 8.8% in the first eight months of the year, and 8.3% in 2009. This compares with an average of 6.5% in the three years prior to the 2009 economic recession. The government also stressed in its statement that there are still risks that developments will be less favourable than expected, and it is therefore important that public finances are once again in surplus and that a high level of unemployment is prevented from becoming persistent. Consequently, the government believes that the years of high growth that lie ahead must be used to ensure that more people—including those who have had difficulty becoming established in the labour market—begin to work. Indeed, the government stressed in the statement that its primary goal is to take Sweden back to full employment.
Summary of Measures
The government's policy focuses mainly on supporting the recovery of the Swedish economy, promoting full employment by continuing to strengthen the work-first principle and reducing exclusion, and safeguarding publicly financed welfare. Specifically, the reforms receiving priority are:
- increasing employment and reducing exclusion
- increasing knowledge
- safeguarding core welfare services and reducing the effects of the crisis
- reducing emissions and climate impact
Another element of the government's strategy is to improve conditions for a dynamic business sector. For this the government proposes:
- an adaptation of labour-market policy to economic developments
- measures to promote integration in order to reduce exclusion
- measures to promote better conditions for entrepreneurs and a more vigorous innovation climate to improve conditions for growth
- a higher standard deduction for sub-letting to stimulate housing supply
The government continues to give priority to measures that will reduce the effects of the crisis and protect core welfare services. Its proposals for this are:
- a new, temporarily higher government grant to local governments to enable them to provide essential welfare services such as education, healthcare, and social services
- lower taxes for pensioners by raising the basic income tax allowance to counteract lower income-related and supplementary pensions
- measures to promote gender equality
- measures in health and medical services to increase availability and quality
- reforms in elderly policy to provide increased freedom of choice and quality care for the elderly
- measures for culture and sport
In addition, reforms have been announced in family policy, primarily for lone parents, in order to improve their economic standard. Finally, there is also the ambition of implementing a range of reforms during the electoral period, although this is subject to having met the public-finances-surplus target. In that case, the government's priorities will include:
- lower taxes for low- and medium-income earners by taking another step in the in-work tax credit and raising the threshold for state income tax
- halving value-added tax on restaurant and catering services
- compulsory unemployment insurance
Outlook and Implications
The government can afford a smug smile of satisfaction over its 2011 budget, because despite the economic recession in 2009, the Swedish government's finances remain in good shape, and there was little in the budget to criticise. The only charge could be that the 2011 budget is again unnecessarily cautious, although calls for higher government spending constitute the same criticism as in previous years. This concern is based on the belief that despite the speed of the economic recovery, there are many challenges ahead and the government's new GDP growth projections might look too optimistic. Indeed, the 2011 Swedish National Budget has been based on the government's forecast for GDP growth this year being raised to 4.8% in the budget proposal, from 2.5% in its spring forecast, while its projection for next year has been lowered to 3.7%, from 3.9%. Looking further ahead, the prime minister predicted growth of 3.4% in 2012, 3.3% in 2013, and 2.8% in 2014. This compares with IHS Global Insight's projections for GDP growth of 3.8% in 2010, 3.2% in 2011, 2.5% in both 2012 and 2013, and 2.6% in 2014. The positive news coming from other monthly figures and indicators from recent months continue to suggest that growth in 2010 will be stronger than previously anticipated, although 4.8% looks too optimistic. Moreover, we believe that the outlook for the global economy in 2011 and 2012 is becoming somewhat gloomier. The euro crisis has increased anxiety about a global double-dip outcome. Markets continue to be worried about the magnitude of sovereign-debt problems in the Eurozone and the extent of the exposure of banks. The U.S. economic outlook has somewhat deteriorated. Therefore, an overoptimistic view of the macroeconomic development has perhaps led to a budget that is too tight next year. However, it is fair to say that caution has been the main feature of the recent budgets, and that they have undoubtedly served the country well. Still, the government forecasts a budget deficit of 1.3% of GDP in 2011, 0.2 percentage points wider than previously forecast. It projects a surplus of 1.0% of GDP for 2012. However, we believe that the strain on fiscal balances could be somewhat greater than the government forecast, as our outlook for growth in the rest of the world is weaker than that perceived by the Swedish government. Nevertheless, Sweden's government finances will remain sound over the coming years, particularly in relation to other European economies.