Debate article
Dagens Nyheter 01 February 2010
Anders Borg, Minister for Finance

Strengthening budget targets to prepare for the next crisis

Unofficial translation

In many countries the focus is now shifting from how to manage the economic crisis to when and how the large government budget deficits are to be reduced. While Sweden has implemented one of the largest fiscal stimulus packages in response to the crisis, we have succeeded in maintaining stable public finances. The budget deficit is lower in Sweden than in virtually all other comparable countries.

The Ministry of Finance now assesses that we will meet the EU's deficit limit of 3 per cent both for 2009 and 2010. Sweden is thus one of few EU countries expected to meet the deficit limit under the Stability and Growth Pact.

In addition, our debt level is low, at around 45 per cent of GDP for 2010, compared with around 85 per cent of GDP in the euro countries.

According to the latest Ministry of Finance forecast, Sweden is expected to be back into balance and surplus during the next electoral period. Hence, unlike in other countries, we have been able to combine a vigorous policy to meet the crisis with a relatively small deficit. Of prime importance has been a clear focus on keeping public finances in good order and reforms to strengthen the work-first principle. To ensure a stable return to surplus and budgetary margins that will enable us to meet the next crisis without putting the welfare system at risk, it is essential to strengthen the budget policy framework that has laid the foundation for stable public finances.

Putting the budget back on a sound footing hits core welfare services hard: schools, health care, elderly care, the police. If Sweden had been forced to make savings in the order of magnitude that, for example, the UK now has to, this would have meant more than SEK 60 billion per year (1.75 per cent of GDP) in cutbacks over 2010-2014. That is almost as much as the annual general grants to local government. For Sweden, the annual savings requirements of France and Germany would have corresponded to SEK 35 billion and SEK 17 billion respectively (1 per cent and 0.5 per cent of GDP respectively). Such a rigorous policy would have had a clear negative effect on GDP, employment and unemployment.

Instead, thanks to Sweden's strong public finances, we are now entering a period of bright growth prospects. GDP is expected to increase at a fast pace and unemployment to drop to 6.6 per cent by 2014, which is close to the unemployment levels before the crisis. Employment is on the rise and is expected to be back at the same level as at the beginning of this electoral period by the end of 2010, despite the impact of the global financial crisis in Sweden. The Government has emphasised that future policy must focus on continuing to manage the crisis and the hardship the crisis has caused for certain groups, and to further ensure that unemployment will fall and that more people will find work and not get stuck in unemployment.

The fact that Sweden has managed the crisis well, compared with other countries, is not only the result of responsible policies during the crisis but also of responsible policies before the crisis. We chose to save in the good years. If the Government had heeded the calls of, for example, the Swedish Trade Union Confederation and the Confederation of Swedish Enterprise for generous reforms in the years before the crisis, the conditions for managing the crisis would have been considerably worse. Instead we chose to increase the margins and to move cautiously so as not to be forced to make spending cuts and increase taxes.

To be able to pursue responsible policies with sound public finances requires the essential support of a well-established budget policy framework in the form of surplus targets, expenditure ceilings, balanced-budget requirements for local governments and a rigorous budget process. Targets and rules for fiscal policy and a rigorous budget process reduce the risk of short-sighted fiscal policies. To ensure a fiscal policy that is sustainable in the long term, the Government has taken active steps throughout the electoral period to improve the fiscal policy framework. For example, we have set up a Fiscal Policy Council whose tasks include evaluating whether the fiscal policy targets are met.

The expenditure ceiling promotes budgetary discipline and enhances the credibility of economic policy. This is because the medium-term time frame makes it possible to prevent temporarily high income being used for permanently higher expenditure. Last year the Government presented a bill proposing that future governments must always include proposed expenditure ceilings for the third year ahead in their budget bills. The Riksdag decided to adopt the Government's proposal.

As a further step in improving the budget policy framework, the Ministry of Finance is today presenting a number of proposals aimed at strengthening the framework. The intention is to present a bill to the Riksdag in connection with the budget bill in the autumn. Among the proposals is that the surplus target, like the expenditure ceiling, be statutory.

A statutory target would further strengthen the restraining influence of the surplus target. The surplus target provides an anchor for fiscal policy and has played an important role in the sound development of public finances in the 2000s.

The level of the surplus target will ensure that we will have saved in the good years before a crisis. Without savings, those most likely to be hardest hit are the vulnerable groups in society, in other words the groups that are in most need of social protection systems and welfare services. We cannot accept this. For this reason we are creating favourable conditions for surpluses. Surpluses will also secure an even distribution of resources between generations and prevent cutbacks and tax increases that risk worsening growth and employment prospects.

The assessment by the Ministry of Finance shows that today's average surplus target of 1 per cent over a business cycle secures this.

Sweden therefore appears to be managing better than during previous crises and better than many other countries in Europe. Our growth and employment recovery is stronger and faster and our public finances are expected to return to surplus without tax increases or welfare cutbacks. This is largely due to the Government pursuing a responsible fiscal policy before and during the crisis, through saving during the boom years and subsequently pursuing a responsible stabilisation policy involving temporary measures during the crisis. A robust budget policy framework, which we are now proposing to strengthen even further, has provided important support.

During this electoral period and alongside the responsible management of public finances, the Government has implemented a range of reforms for increased growth, employment and welfare. The largest threat to the recovery now under way is the reversal of all those reforms that have laid the foundation for Sweden's strong growth prospects in the coming years.