Sweden’s Government Reveals Surplus Budget as Growth Stalls

(Bloomberg) --

Sweden’s Social Democrat-led government is sticking to a surplus regime even as the labor market is showing signs of a rapid deterioration and economic growth has stalled.

At the 2020 budget unveiling on Wednesday in Stockholm, Finance Minister Magdalena Andersson affirmed a budget outlook that counts on surpluses over the next three years. The budget included net initiatives and tax cuts of 24 billion kronor ($2.5 billion) next year.

Andersson said that given Sweden’s budget framework, which calls for the government to run a 0.33% percentage point surplus of GDP over an economic cycle, it’s “reasonable” to fill up the coffers now.

“Of course, if the economy should develop significantly worse than expected, we have ammunition,” she said at a press conference. “Automatic stabilizers would then also weigh on the budget balance moving us away from a surplus, but that remains to be seen.”

Sweden’s Government Reveals Surplus Budget as Growth Stalls

Economists were expecting the budget to be slightly expansionary, but far from stimulative enough to support the Swedish economy, which has stalled under the weight of a global trade dispute. On Tuesday, data showed unemployment in August climbed to 7.4%, the highest in four years, casting doubts over the government’s forecasts.

By contrast, the government forecast unemployment of 6.4% this year.

SEB AB welcomed the added “reforms” next year, but questioned whether they are enough.

“There is a risk that new spending initiatives are too scattered and unfocused to solve the social and economic challenges Sweden faces,” the bank said in a note.

Emil Kallstrom, the economic spokesman for the Center Party, which supports the government in parliament, said the budget is “well balanced” and that the group stands ready to do more if necessary. Another support partner, the Liberals, called the budget “expansionary.”

“It’s possible, in case the cycle worsens, that we might need to strengthen fiscal policy measures even more,” said Mats Persson, a key Liberal Party official.

As previously announced, the budget included an abolition of the top tax rate, cuts in income tax for pensioners and for people in sparsely populated areas. The spending side included additional outlays on justice, defense, education, green initiatives and health care. It also contained a small package with measures to stimulate employment following a rapid deterioration in the jobs market.

The main forecasts were unchanged from what was revealed in late August.

The about 13 billion kronor in tax cuts are mostly concessions to the government’s budget allies, the Center Party and the Liberals, agreed in the so-called January Agreement, which enabled the Prime Minister Stefan Lofven to form a government after the inconclusive 2018 elections.

With key interest rates below zero, calls have mounted for the government to boost borrowing and spending to make investments and support municipalities, struggling under mounting costs of growing welfare needs.

As the government had promised, an additional 5 billion kronor were earmarked for municipalities. The Swedish Association of Local Authorities and Regions had asked for at the least the double amount to cover the increased costs and on what has been described as a crisis situation.

©2019 Bloomberg L.P.

BQ Install

Bloomberg Quint

Add BloombergQuint App to Home screen.