Election 2006: Economy Buoyant but Swedes Keen on Change as Close Election Race Heads for Tense Showdown

A Close Race to the Finish

The people of Sweden will vote to elect their government on Sunday (17 September), in an election which is proving to be a tense race to the finish between the governing Social Democrats and its junior coalition partners, and the four parties making up the Opposition Alliance (The Moderate Party, The Centre Party, the Liberal Party and the Christian Democrats). There are 349 seats in the Swedish parliament and a party must win at least 4% of the vote in order to be eligible for parliamentary representation.

Pre-election polls predict a victory for the centre-right Opposition Alliance, which has deftly managed to iron out differences between the four parties in order to present a joint front for the elections. Reinfeldt, who holds bitter memories of the last election in 2002, is seen as the most likely candidate for the premiership should the opposition win. The Moderate Party, which is the largest opposition party, holds 55 seats in parliament, but gained only 15% of votes in 2002. It was written off as a racist party then, but is currently presenting itself as a fresh, youthful alternative to the established left; indeed, the Social Democrats have governed Sweden for 65 of the last 74 years, and will be difficult to shift. However, many believe that now is the time for the centre-right to strike.

The Challengers: Göran Persson vs. Fredrik Reinfeldt

Persson: A Master of Political Longevity

Persson is seeking his third term in office. He became prime minister in 1996, when the Social Democrats elected him as leader after then-prime minister Ingvar Carlsson stepped down. He was directly elected in the 1998 legislative elections and again four years later. During these two terms he led minority governments with the support of the Left Party and the Green Party. Sometimes described as arrogant and power hungry, Persson’s leadership style is often considered more presidential than that of a government leader. However, there is no denying the respect he has earned throughout the country, having ascended to the highest political office from humble working-class roots. He is a champion of maintaining Swedens’ generous welfare model, which has remained intact despite structural changes to the country’s industrial heartland. However, Persson’s popularity has dipped significantly since 2004, after the government’s handling of the Tsunami disaster, which claimed well over 500 Swedish lives. The resignation of ally Leila Freivalds as Foreign Minister in the aftermath of a damning independent report further fuelled domestic fury. If re-elected, it is doubtful that the 57-year old Persson will serve a full four-year term in office.

Reinfeldt: Modernising Challenger Banking on Youth and Desire for Change

Leader of the conservative “New Moderates”, Reinfeldt had his job cut out after the disappointment of 2002, and has performed impressively in a bid to remodel the party as the biggest and most credible opposition challenger to the Social Democrats for decades. Reinfeldt, attempting to make the Moderates a catch-all party, has shifted his party away from its right-wing upper class roots to appeal to a larger share of voters near the centre, where the majority of Swedes place themselves. Now that the party has tapped into public discontent for the ruling party, phase two of the centre-right’s reclaim of political power is under way. Reinfeldt has managed to prove himself a worthy figure to re-unite his centre-right allies, traditionally dividing up the right-wing vote in Sweden. Though divisions invariably still exist, leaders of the Opposition Alliance have realised they have more chances of winning as part of a united coalition. Simultaneously, the Alliance has sought to capitalise on falling public support for the so-called "Swedish model", in particular regarding employment. Reinfeldt has therefore made unemployment the main theme of his election campaign. He has cited experts' statistics, claiming that as many as 20% of people of working age live off state subsidies, either as unemployed or on sick leave, early retirement or in government retraining schemes. He has also exposed Persson’s penchant for seemingly “making up statistics” in live debates to boost the ruling party’s credentials. Finally, while previous Moderate leaders such as Carl Bildt called for major tax cuts which would slash funding for the welfare state, Reinfeldt has not.

Instead, he has defended the existing system but called for changes to bring it into line with the reality of today’s Sweden. The 41-year old is banking on his youthful appeal and modernising approach in the hopes of victory on Sunday.

What Issues for Election 2006?

Economic Boom May Not Be Sufficient

From the perspective of the economy, legislative elections could not have come at a more opportune moment. GDP growth advanced at breakneck speed in the first half of 2006, helped by a heady combination of low interest rates and a cautious, but nonetheless politically motivated, increase in fiscal spending and tax reductions. In fact, GDP growth in the first quarter, at a year-on-year (y/y) rate of 7.4%, was at its fastest rate in over a decade, while the second-quarter performance was only marginally less impressive with growth having reached 5.4%. Sweden has benefited from the confluence of a sharp acceleration in domestic demand and the recovery of growth across the Eurozone.

For an electorate apparently intent on a change in government, consumers have remained remarkably upbeat in recent months, with private consumption activity and retail sales emerging as one of the main supports to buoyant growth conditions. Their exuberance has been oiled by interest rates, which, despite returning to an upward trajectory since the beginning of the year, remain close to record lows. Moreover, recent interest-rate increases have merely followed the gradual re-acceleration of inflation, ensuring that real interest rates have remained broadly stable. With interest rates having remained below their long-term average for some time, Swedish households are also feeling the wealth effects of a very strong housing market that has emerged on the back of access to fairly cheap credit. They have also benefited from the government's decision to release the purse strings ahead of the election with a package of tax cuts and expenditure increases. This saw payroll and real-estate taxes fall and spending on social welfare programmes increase sharply.

But therein lies the rub. High taxes support a large fiscal surplus of as much as 2.0% of GDP designed to generate the assets needed for financing Sweden's future pension liabilities. But high taxes also support a large public sector that plays an overarching role within the economy, while simultaneously granting the government the flexibility by which to prime the economy ahead of an election. The 2006 budget demonstrated as much, with the fiscal surplus expected to fall sharply this year as it did ahead of the last legislative elections in 2002. This may be a reflection of political expediency, but not necessarily that of a dynamic economy. Welfare spending in the 2006 budget focused significantly on Sweden's famed state-financed active labour-market programmes. While official unemployment stood at just under 6.0% in July, the numbers are heavily massaged, with real unemployment running at around 14%.

Although there is still considerable cross-party consensus on the importance of the social welfare model, Swedes are increasingly aware that some reform of the system may be necessary if they are to sustain a dynamic economy that can maintain a generous social welfare system in the longer term. With the Social Democrats seemingly content with the status quo, the opposition's proposals for modest reform may offer the only alternative

Outlook and Implications

Elections on Sunday are going to be close, although polls are often misleading in the run-up to election day, not least because the numbers of undecided voters, thought to be 20%, can easily swing the vote in favour of one bloc or the other. Nonetheless, the campaigns fronted by both sides, coupled with a more or less even number of criticisms and scandals affecting the main parties, does indeed point to a close election. If the ruling Social Democrats win a parliamentary majority, things will continue largely as they are. Göran Persson would not need to resign and be re-appointed, but would simply continue as premier. In the likely event of the Social Democrats not winning an overall majority, a coalition with the Left and Green parties is likely.

If the opposition Alliance gains over 50% of total votes, the current government will resign, but will be reappointed as a transitional government until a new government has been formed.

Of course, what is most interesting is whether the predicted close election will be too close to call, and no majority emerges. Although this is unlikely, it is quite possible. The scenario could arise, if a small, independent party, many of whom are running in the election, were to obtain the 4% threshold required for parliament, holding the balance of power between the major blocs. In this case, either a grand-coalition government would be formed, or a minority government in the short term, before early elections.

Despite such extravagant hype, and admittedly, despite the fact that this year’s elections are generating more excitement in the Scandinavian nation than previous polls, an impasse is not likely. The Social Democrats have come back from the brink of damaging scandals and unpopularity before, but this time, even they must be questioning whether their time has come and whether the Swedes want change.