Fiscal ‘Insanity’ Could Force Sweden Into Explanation Mode

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Sweden’s government could soon have to explain why it’s not spending more money.

After successive years of budget surpluses and now a reduction in currency reserves, the government is predicted to breach its own rules for how low its debt can go.

On Wednesday, the National Financial Management Authority predicted that debt will sink below 35 percent of gross domestic product this year and breach 30 percent in 2021. Fiscal rules stipulate than any deviation of more than 5 percentage points from the 35 percent anchor requires an explanation to parliament.

Andreas Wallstrom, an economist at Swedbank AB who has long advocated for more spending, said on Twitter that this “means that the government needs to explain to the parliament why they’re not spending enough and propose a way out of this insanity."

Fiscal ‘Insanity’ Could Force Sweden Into Explanation Mode

The Social Democratic-led government has run a tight fiscal ship over the past years, even as unemployment has remained elevated and inflation has posed little risk. At the same time, Sweden’s central bank has resorted to unprecedented stimulus in the wake of the financial crisis to lift inflation.

Wallstrom will likely be disappointed, however. In an interview last week, Finance Minister Magdalena Andersson said she has no plans for any fiscal fireworks.

In its latest forecasts from November, the finance ministry predicted a surplus of above 1 percent of GDP this year, while the fiscal framework calls for a 0.33 percent surplus.

To be sure, Andersson last year floated the idea that the target could need to be lowered if debt continues to sink.

Economists are questioning why the government isn’t spending more and borrowing more, especially since Sweden is in need of increased spending on everything from infrastructure and health care to jobs and welfare. Interest rates have also been at rock-bottom levels, with the central bank driving its benchmark below zero.

Knut Hallberg, another economist at Swedbank, said the ESV forecast indicates "it’s time for more expansionary fiscal policy."

Even so, with economic growth now slowing, the fiscal space is shrinking.

ESV on Wednesday lowered its budget surplus forecasts for this year and next, due to tax cuts and rising spending. It now sees a budget surplus of 0.2 percent of GDP in 2019 and 0.6 percent in 2020, down from a January estimate of surpluses of 0.3 percent in 2019 and 0.8 percent in 2020. The surplus was 0.7 percent last year.

ESV cautioned that not all the reforms proposed by the government have been included in its forecast and that the debt level may not actually shrink as fast as it estimates.

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