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Sweden has been lauded for the economic policies that have afforded the country a sizable budget surplus and robust economic growth at a time when large parts of Europe are dealing with recession and struggling to pay down huge levels of debt.Now, a notable Swedish economist says it’s time for the Swedish government to abandon that plan and start doing a little more borrowing and spending.
In fact, he calls Sweden’s surplus-targeting policies a “fetish.”
Sweden’s target of achieving a 1 per cent budget surplus of gross domestic product over an economic cycle is a relic from a different time that should be replaced, said Assar Lindbeck, a professor who headed the commission that in 1993 proposed the current fiscal framework as a way out of Sweden’s economic crisis. Now, Lindbeck says the government should focus more on investment and limit excessive wealth accumulation by the state.
“I see no reason to continue to have a surplus target since we already have such low public debt,” Lindbeck, a Stockholm University professor and former chairman of the Nobel economics prize committee, said in an interview. “It has become a fetish, the surplus target, to showcase accountability for public finances” as politicians are “fighting yesterday’s battles,” he said.
Instead, Lindbeck says Sweden should try to target debt-to-GDP levels. He told Bloomberg, “We’re using 7 per cent of our GDP to accumulate assets abroad with likely small returns.”
There are eight political parties that make up the current Swedish parliament, and only one – the opposition Left party – agrees that the budget surplus target should be abandoned. So, it’s not a very popular viewpoint at the moment in Sweden, which makes sense, given the country’s outperformance against all of its neighbours in Europe.
Furthermore, Swedes have seen how excessive government spending has really amplified the crisis in Europe as risk aversion has kept investors away from countries with high levels of public debt.
Carlstrom notes that current finance minister, Anders Borg, has tried to stimulate the Swedish economy to protect against a downturn caused by weakened trade with recession-plagued Europe. Even modest stimulus efforts have led others to call him out for irresponsible economic policy.
However, the Riksbank (Sweden’s central bank) said today that inflation was below 1 per cent again in September, well below the central bank’s target of 2 per cent.
According to Citi analyst Tina Mortensen, that should open the door for more monetary easing.
Mortensen wrote in a note to clients this morning:
Both headline and underlying inflation stayed below 1% Y/Y in September – for a third consecutive month – confirming the overall picture of very subdued price pressures in the Swedish economy with inflation markedly undershooting not only the Riksbank’s 2% inflation target (for CPI), but also the Bank’s inflation trajectory. With inflation expected to remain below the Central Bank’s forecast, this leaves room for further monetary policy easing.
Other factors such as weaker domestic growth, more expansionary policies from other central banks, a strong SEK (which is likely to stay strong ahead) and a gradual weakening of the labour market clearly support this view. At the upcoming October meeting, we expect the Riksbank to revise down its conditional interest rate path, opening up for a rate cut in December.
Even still, further stimulus in Sweden is likely to remain a political hot potato in Sweden unless the economic situation really starts to deteriorate quickly.