Sweden’s fiscal watchdog warned that plans by Finance Minister Magdalena Andersson to abandon the country’s krona-for-krona budget principle risk driving up debt.
The Social Democrat-led minority government has for some time been discussing whether to relax the country’s strict fiscal rules in a bid to push unemployment down to the lowest levels in the European Union by 2020. One idea is to aim for balanced budgets rather than stick with the current target of a 1 percent surplus over a business cycle.
Scandinavia’s biggest economy is now struggling to deal with the costs of an unprecedented wave of asylum seekers from Syria and the Middle East, making the fiscal debate even more topical.
“Even if the surplus target was changed to a balanced budget target, there’d be a need to keep krona-for-krona,” John Hassler, the chairman of the Swedish Fiscal Policy Council, said in a telephone interview on Monday. Otherwise there’s “an obvious risk that Sweden’s debt starts growing again."
Andersson last week said there was no binding requirement for budgets always to be fully financed. What’s more, the krona-for-krona policy, where any additional expenditure must be matched by a corresponding spending cut or tax increase, “isn’t a sacred cow, and has never been a sacred cow,” Andersson said at the time.
Her comments came in response to a prominent economist at one of Sweden’s biggest banks, who characterized the government’s approach as “slaughtering the sacred cows” of fiscal policy.
According to Andersson, the government may decide to put forward unfinanced reforms once the economy improves, irrespective of the refugee crisis.
“There’s no value in keeping the krona-for-krona principle when public finances improve,” she said.
While Sweden’s debt level is currently about 44 percent of gross domestic product, the National Financial Management Authority had expected it to reach 37.8 percent at the end of 2019. The authority’s report was published in September, before the full magnitude of the refugee crisis had become apparent.
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