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Spring Fiscal Policy Bill: Few concrete innovations,but rising tensions beneath the surface

WEDNESDAY

11 APRIL 2012

Swedens upcoming Spring Fiscal Policy Bill (SPFB) isnot expected to include any major new reforms.Instead it will focus on highlighting reform areas for

the upcoming autumn Budget Bill for 2013. We assumethere will be additional reforms totalling SEK 5 billionin the SPFB and SEK 15 billion in the Budget Bill. This

will result in a slightly expansive fiscal policy,

equivalent to 0.2% of GDP in 2012 and 0.3% in 2013.

Looking ahead, tensions surrounding fiscal policy

strategy will nevertheless increase. Withunemployment apparently stuck at a high level whilegovernment debt is moving towards a record low,

arguments in favour of a more aggressive policy aregaining strength. With the new Social Democratic

leadership enjoying a surge in popular support andrising credibility as a governing alternative, theAlliance government is under growing political

pressure. Some of the parties in the ruling coalition arealso struggling with declining popular support in the

opinion polls and risk falling below the threshold forparliamentary seats in the 2014 election. Given this

situation, they are likely to fight more and more

aggressively for enactment of their signature policies.

Since the 2010 parliamentary election, government

fiscal policy has been characterised by greatcaution. There are several reasons for this. TheAlliances reform agenda during its 2006-2010 term of

office was very ambitious, and partly as a result the

supply of new ideas may have tended to run short.

Recurring international financial crises have also

accentuated the need for a fiscal buffer. Emphasising the

governments sense of fiscal responsibility has also been

politically successful. This has blunted criticism of

Finance Minister Anders Borg, both from coalition

colleagues and the opposition. Also contributing to the

governments cautious strategy is that it has been

operating since late 2010 in a minority position.

Today a number of factors together will challenge the

fiscal policies of the finance minister and the dominant

Moderate Party to a greater extent. Since last

Septembers Budget Bill, the economic outlook has

deteriorated. The government will need to lower its growthforecasts both for 2012 and 2013 compared to the September

2011 Budget Bill. This will also mean higher unemployment

forecasts and a greater need for stimulus measures from astabilisation policy standpoint. The governments revisionsof its actual budget forecasts in a negative direction will

probably be relatively modest. In SEBs latest forecast update,we expect a smaller fiscal surplus in 2012 , but this calculation

also includes the extra stimulus measures discussed below.

Furthermore, the government is hardly likely to adjust its GDP

growth forecast downward to the 1.9% that we predict. It is

thus highly probable that the government will continue to

project a structural budget surplus. Combined with very lowcentral government debt, this implies substantial roomfor fiscal stimulus measures.

Macro economy and public financesPercentage change, per cent of labour force, per cent of GDP

2011 2012 2013

Government (September 2011)GDP 4.1 1.3 3.5

Unemployment 7.5 7.8 7.7Net lending (September 2010) 0.1 0.0 0.7

NIER (March 2012)

GDP 3.9 0.4 2.5Unemployment 7.5 7.7 7.7Net lending 0.2 -0.4 0.2

SEB (March 2012)GDP 3.9 0.7 1.9Unemployment 7.4 7.6 8.1Net lending 0.3 -0.4 -0.3

Source: Ministry of Finance, NIER, SEB

There are also political reasons for believing that thepressure to pursue a more active fiscal policy willincrease. All the parties in the red-green opposition are nowregrouping under new party leaders. Stefan Lfven has quickly

succeeded in boosting the credibility of the Social Democrats

as a governing alternative, judging from opinion poll figures.

Based on Lfvens own background as the leader of the

dominant trade union for industrial workers, and by appointing

a number of new party spokespersons in different policy areas,

the Social Democrats now seem to be trying to win back

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Economic Insights

middle-of-the-road voters with a more growth-oriented

strategy. The new SDP leadership has indicated its

openness to a discussion about adding new targets to

the existing fiscal policy framework, for example related

to employment. Although we believe that the

disadvantages of this are so great that in the end the

Sweden will abstain from launching new targets, there

will be an intensified debate on the effectiveness of thegovernments work principle its strategy of creating

incentives to get more people into the labour market.

Tensions within the governing Alliance are also building

up. The three smaller coalition parties (Christian

Democrats, Liberals and Centre) have gradually lost

ground against the Moderates in public opinion polls.

Since these three parties risk falling below the 4%

threshold and losing all their seats in Parliament, they

will need to fight more aggressively for their signature

policies in order to escape from the shadow of the

dominant Moderate Party. The smaller parties will thus

pursue issues leading to a more expansionary fiscal

policy direction, for example related to business and

education.

Yet we do not anticipate any major shift in fiscalpolicy in the SFPB. It is still too early before theSeptember 2014 election to force any decisive change of

course. Last Septembers Budget Bill identified a number

of reform areas. From that very broad menu, some areas

will need to be selected. We expect an additional SEK 5

billion worth of measures for 2012 to be unveiled in the

SFBP, followed by a further SEK 15 billion worth of

reform measures in the Budget Bill for 2013. The focus

will be on education, research and development, health

care and social services. On the tax front, the Alliance is

unlikely to propose further earned income deductions,

but will concentrate on easing the burden on businesses.

How expansionary is fiscal policy?

Total effect of discretionary fiscal policy, SEK billion

2011 2012 2013

Budget Bill 2012 -1.5 1.4 -4.9

SEB forecast of additional stimulus 5.0 15.0

Total -1.5 6.4 10.1Total, per cent of GDP 0.0 0.2 0.3

Note: Minus means that policy is contractive, plus that policy is

expansionary.

Source: Ministry of Finance, SEB

Given the measures so far announced, central government

discretionary policy is slightly expansive this year and will be

contractive in 2013. Based on our assumptions of additional

measures in the SFPB and the Budget Bill in September 2012,

fiscal policy will provide a positive impulse equivalent to 0.2%

of GDP in 2012 and to 0.3% in 2013.

Although the magnitude of concrete measures will not be solarge, the government faces the task of breathing new life into

its work principle, which has been the cornerstone of its

economic policy. To enable the finance minister and the

Moderates to succeed to maintaining this strategy without

resorting to large-scale general measures to stimulate

demand, fresh thinking will be needed in other areas. For

example, we can count on the government to focus more

intensively on the issue of how to ensure that more people

with no jobs can be made employable as well as how best to

combat unemployment among young people and immigrants.

More fundamental issues related to Swedens long-term

competitiveness will also become increasingly important. Thepolitical block that can generate the highest credibility in

these areas is likely to have a good chance of winning the2014 election.

Daniel Bergvall & Hkan Frisn