Sweden Is Heading Toward a More Expansionary Budget

(Bloomberg) -- Sweden’s political turmoil may end in a more expansionary budget, with the biggest income tax cuts since 2007.

That’s because the 2019 spending plan proposed by the conservative Moderates and the Christian Democrats will likely be backed by the nationalist Sweden Democrats, allowing it to pass in a vote on Wednesday in the deeply divided parliament.

The caretaker Social Democrat-led government proposed a neutral budget, with taxes and spending items largely unchanged. It even contains fresh cash to celebrate deceased filmmaker Ingmar Bergman’s centennial for a second year. But it will likely be voted down after bipartisan negotiations to form a new government broke down on Monday. The opposition Center and Liberal parties, who took part in the talks, made it clear that they will vote for their own plans and then abstain on other budgets.

So even if the Social Democrats should emerge as a winner in Sweden’s now three-month struggle to form a new government, they would have to live with a budget that contains large income tax cuts. They can adjust spending levels later, but taxes can only be changed once a year.

Read details on spending plan here

Economists at SEB AB estimated that the Moderates’ budget will add a fiscal impulse of 0.6 to 0.7 percentage point of GDP versus 0.1 to 0.2 percentage point for the transition budget.

That would be good news for the largest Nordic economy, where an expansion is now cooling and the central bank is preparing to raise interest rates as soon as next week.

“There’s very little to indicate that Sweden’s economy now, when it’s on its way toward a slowdown, would benefit from a significantly tighter fiscal policy,” the Moderates and Christian Democrats said in a budget document.

Sweden (Still No Government) Cuts Its Economic Forecast

Key budget points:

• The Moderates and Christian Democrats plan the “biggest income tax cuts since 2007” of almost 20 billion kronor, including 10 billion kronor in income tax cuts, 4 billion kronor by raising threshold for state income tax and pension tax reductions of 5.2 billion kronor.
• Budget contains 17 billion kronor more in spending than the government’s budget, including extra outlays on police and defense.
• The two parties want to remove subsidies for housing construction, raise tax subsidies for cleaning and childcare from the middle of next year, remove the aviation tax and lower the “over indexation” of the petrol tax.
• Budget estimates surplus of 0.9 percent, structural surplus of 0.5 percent.

To contact the reporter on this story: Amanda Billner in Stockholm at abillner@bloomberg.net

To contact the editors responsible for this story: Jonas Bergman at jbergman@bloomberg.net, Niklas Magnusson

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