Sweden’s Vanishing Debt Feeds Urgent Calls for a Spending Boom

(Bloomberg) -- Sweden now has so little debt that many are starting to wonder why the government isn’t spending a lot more.

The country’s biggest trade union group, LO, wants the Social Democrat-led administration to change its policy and channel a lot more money into the economy instead of worrying about protecting budget surpluses.

“Until Sweden has full employment, we could have a deficit target,” Karl-Petter Thorwaldsson, the president of LO, said in an interview. He wants investments to go up “for a number of years” and points to housing and infrastructure as areas where spending “should be carried out at a larger scale.”

The biggest Scandinavian economy, which relies on global trade for about half its output, is slowing down. But the government has so far appeared reluctant to use its fiscal leeway to fight that trend. That’s drawn criticism from analysts, with some even referring to the government’s penny pinching as a form of “insanity.”

Swedish government debt is at its lowest in 40 years and falling. According to the National Financial Management Authority, debt will sink below 35 percent of gross domestic product this year and breach 30 percent in 2021. At that point, the government will be required by law to explain to parliament why debt is so low.

The ruling Social Democrats of Prime Minister Stefan Lofven gathered over the weekend for their first big meeting since forming a government. The coalition that emerged four months after September elections will need to figure out how to combine demands for tax cuts with calls for more generous welfare. Lofven did his best to persuade attendees at the weekend event -- unions and the other parties that gave him their support -- that they made the right choice.

The government has made some concessions on the fiscal front and the target for a budget surplus has been lowered slightly. But LO, which has traditionally been a loyal supporter of the Social Democrats, wants to see it cut further.

“We know that there will be a slowdown in the economy, so every krona that the government and parliament can spend on investments the coming years will meet the downturn rather than us having to spend more on unemployment benefits,” Thorwaldsson said.

Finance minister Magdalena Andersson, who also attended the weekend conference, said there are plenty of reforms ahead that will require spending. She told those gathered not to blame their “stingy” finance minister but to look at the broader picture.

“It’s because there’s a right-wing majority in parliament,” she said.

The Swedish Social Democrats have a history of running a large welfare state, but also of cleaning up after financial crises. Every Swede of a certain age can recite the words of Goran Persson, finance minister during the crisis of the 1990s and then Prime Minister from 1996 to 2006, whose mantra was that “someone who’s indebted isn’t free.”

Speaking at the sidelines of the weekend congress, Persson lent some support to Andersson’s argument, and said that the fiscal situation can quickly sour.

“The interest rates on public debt are very low right now,” he said. “With debt at around 30 percent of GDP, that’s nothing compared to what we used to have. Imagine when we had a debt of 90 percent of GDP and interest rates of 8 percent.”

But frustration over fiscal conservatism inside the Social Democrats has fed rebellion. Daniel Suhonen, the founder of a Social Democratic leftist group called the Reformists, said that given the risk of an economic downturn, “and possibly a bursting property bubble, politicians need to have ideas about how to kickstart the economy.”

“The government doesn’t have any other ideas than to keep paying down government debt,” Suhonen said. “I think it’s surprising that I, as a leftist Social Democrat, more often agree with Annika Winsth, chief economist at Nordea, than Magdalena Andersson, on the need for investments, the size of government debt.”

To contact the reporters on this story: Amanda Billner in Stockholm at abillner@bloomberg.net;Rafaela Lindeberg in Stockholm at rlindeberg@bloomberg.net

To contact the editors responsible for this story: Jonas Bergman at jbergman@bloomberg.net, Tasneem Hanfi Brögger

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