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

Swedens upcoming Spring Fiscal Policy Bill (SPFB) is not expected to include any major new reforms. Instead it will focus on highlighting reform areas for the upcoming autumn Budget Bill for 2013. We assume there will be additional reforms totalling SEK 5 billion in 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. With unemployment apparently stuck at a high level while government debt is moving towards a record low, arguments in favour of a more aggressive policy are gaining strength. With the new Social Democratic leadership enjoying a surge in popular support and rising credibility as a governing alternative, the Alliance government is under growing political pressure. Some of the parties in the ruling coalition are also struggling with declining popular support in the opinion polls and risk falling below the threshold for parliamentary seats in the 2014 election. Given this situation, they are likely to fight more and more aggressively for enactment of their signature policies.

WEDNESDAY 11 APRIL 2012

Septembers Budget Bill, the economic outlook has deteriorated. The government will need to lower its growth forecasts 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 a stabilisation policy standpoint. The governments revisions of 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 low central government debt, this implies substantial room for fiscal stimulus measures. Macro economy and public finances
Percentage change, per cent of labour force, per cent of GDP 2011 Government (September 2011) GDP Unemployment Net lending (September 2010) NIER (March 2012) GDP Unemployment Net lending SEB (March 2012) GDP Unemployment Net lending
Source: Ministry of Finance, NIER, SEB

2012 1.3 7.8 0.0 0.4 7.7 -0.4 0.7 7.6 -0.4

2013 3.5 7.7 0.7 2.5 7.7 0.2 1.9 8.1 -0.3

4.1 7.5 0.1 3.9 7.5 0.2 3.9 7.4 0.3

Since the 2010 parliamentary election, government fiscal policy has been characterised by great caution. There are several reasons for this. The Alliances 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

There are also political reasons for believing that the pressure to pursue a more active fiscal policy will increase. All the parties in the red-green opposition are now regrouping 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 the governments work principle its strategy of creating incentives to get more people into the labour market.

How expansionary is fiscal policy?

Total effect of discretionary fiscal policy, SEK billion 2011 Budget Bill 2012 SEB forecast of additional stimulus Total Total, per cent of GDP -1.5 0.0 -1.5 2012 1.4 5.0 6.4 0.2 2013 -4.9 15.0 10.1 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 so large, 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. The political block that can generate the highest credibility in these areas is likely to have a good chance of winning the 2014 election.

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 fiscal policy in the SFPB. It is still too early before the September 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.

Daniel Bergvall & Hkan Frisn