May 30 2024: While much of Europe grapples with difficult decisions on budget cuts to reduce soaring debt, Sweden finds itself in a more fortunate position: deciding how to leverage its strong public finances to address upcoming challenges.
Decades of fiscal prudence have left Sweden with public finances that are the envy of the continent, sparking a debate on whether the strict budget rules—credited with rescuing Sweden after a financial crisis in the early 1990s—should be relaxed.
In the 1990s, the Swedish government reduced spending by about 8% of GDP and raised taxes following a real estate bubble burst. The measures were costly, leading to 200,000 public sector job cuts, a downsized welfare state, and an economy that contracted for three consecutive years.
The memory of those hardships has kept Swedish finance ministers’ budgets conservative ever since. Now, with debt around 30% of GDP—compared to the European average of 90%—there are increasing calls for a rethink to support a “green” industrial revolution that could be hindered by inadequate clean electricity, housing, and poor infrastructure.
“If we don’t act now, we risk missing out on leading green industrial development,” said Fredrik Lundh Sammeli, an opposition Social Democrat MP. “This poses a threat to Sweden as an industrial nation.”
A government commission, due to report this autumn, is considering whether to ease the current budget surplus target of 0.33% of GDP to free up additional funds.
Even the International Monetary Fund (IMF), known for advocating fiscal discipline, suggested in its March report on Sweden that a “small deviation” from the surplus target could support public investment and social spending needs.
The need for more investment is evident. According to a May report by consultants McKinsey, some of the 200 billion Swedish crowns ($19 billion) in new private investments planned in northern Sweden—enough to boost GDP by 2-3%—are at risk if the government does not allocate 60-80 billion crowns for infrastructure.
For instance, SSAB’s planned fossil-free plant in Lulea, Norbotten, could reduce Sweden’s total CO2 emissions by 7%. Similarly, iron ore miner LKAB must choose between planning for fossil-free production or “planning for a shutdown,” said Niklas Johansson, head of communications at LKAB.
Multiple Priorities Ahead
Other priorities are also emerging. The IMF highlighted the need for more funding in education, training, integration, and resolving Sweden’s housing issues. Additionally, defense spending will need to increase following Sweden’s NATO membership, and tougher anti-gang measures require thousands of new prison places.
Deputy Prime Minister Ebba Busch has proposed a deficit of around 0.5% until debt reaches approximately 45% of GDP, increasing the budget by 50 billion crowns annually. Debt could rise to as much as 50% of GDP, according to a recent government-commissioned report.
“That would still give us a large safety margin if we face a deep crisis,” said Lars Calmfors, Professor of Economics at Stockholm University and one of the report’s authors.
Debate Over Fiscal Policy
However, there is skepticism within Sweden’s governing coalition about running deficits and whether additional spending would achieve the desired outcomes. Finance Minister Elisabeth Svantesson of the pro-business Moderate Party argued that income tax cuts and benefit reforms would better boost tax revenues and long-term growth than relaxing fiscal rules.
“Some suggest we should maintain a deficit for a long time, but that would leave our debts to the next generation,” she said.
The Debt Office also warned that increased spending might become permanent, reducing buffers to manage future crises. The pandemic and recent global inflation, which topped 10% in Sweden, highlight the benefits of having significant fiscal reserves.
“These reserves saved companies, saved jobs, and enabled a quick recovery,” said Nordea chief economist Annika Winsth.
Many European nations face painful budget cuts due to increased deficits and debt levels in recent years, a situation Sweden aims to avoid.
“I believe we will likely end up with a balanced-budget target,” said Mattias Persson, chief economist at Swedbank, suggesting an outcome that would allow increased spending from current levels. “But we can’t just spend money on things that won’t generate value for future generations,” he added.
($1 = 10.5978 Swedish crowns)
