Sweden: A hefty lefty, but not so lofty, budget bill

A couple of hours ago, Sweden’s new Finance Minister Magdalena Andersson unveiled the complete budget bill for 2015 and, as most measures had already been leaked or announced, there were not many surprises.

To be honest, it is not so much the budget in itself that has been the issue but whether it is the government’s budget bill or the Alliance’s budget bill that will pass the parliament (due to the Sweden Democrats suggesting they could vote for ‘the less damaging alternative’). We will return to this subject over the coming weeks as the budget process progresses. Suffice to say that the risk of an extra election lingers on.

The fiscal reforms, amounting to SEK25.4bn, are fully financed through tax hikes (SEK22.8bn), expenditure cuts (SEK1.6bn) and ‘other measures’ (SEK1.1bn). Furthermore, Andersson’s calculations imply a (much ado) fiscal consolidation of an impressive SEK0.1bn.

Thus, general government financial savings are estimated to be -1.1% of GDP (2015), which translates into -0.4% of GDP in cyclically adjusted terms. At the end of the forecast horizon (2018), this measure falls short of the 1% surplus target, reaching only 0.5%. The consolidated government debt (Maastricht debt) is 39.5% of GDP (2015).

Due to the rather strict legal framework surrounding government finances and the broad parliament support for sound government finances, we believe that there are no apparent risks to the long-term sustainability of Swedish public finances.

However, despite revising the outlook down somewhat and becoming less optimistic on key variables, we still see large downside risks to the government’s macroeconomic forecasts, both in the near and medium term.

All-in-all, the red-green government has clearly opted for measures that increase margin effects in the tax system and has replaced employment incentives for all employers with targeted government-sponsored work training. From that perspective, the budget has a clear tilt to traditional left-wing policies.

As many (at least nominally) independent institutions have already discussed, it would probably be more beneficial for the long-term development of the Swedish economy, and thus government finances, to reduce margin effects of the tax system, lower the average tax rate and broaden/strengthen the tax base via other measures, such as a uniform VAT-rate, reintroduce property taxes etc.