Sweden: Budget Bill for 2013 fiscal policy becoming more expansionary

The turning point that we have for a long time waited for is finally here. The government has announced that the Budget Bill for 2013 will be more expansionary than indicated by earlier assessments of the room for reform. We expect more than the SEK 23 bn 2013 and SEK 4 bn 2014 announced in this budget to come. The Budget Bill for 2013 is focused mainly on structural issues such as research, investment, lower corporate tax and the labour market. We expect that next years budget (for the election year 2014) will be dedicated more to lower taxes and transfers to individuals.

THURSDAY 20 SEPTEMBER 2012

Economic outlook and reforms

Comparing the governments outlook today with the Spring Fiscal Policy Bill 2012, growth will be somewhat lower 2013. Unemployment has been more resilient than expected and is despite the downward revision to GDP also lowered. Taking into account proposed new reforms and macro revisions, it seems to us that the underlying development of public finances has improved somewhat. The governments GDP forecast for 2012 looks high after the downward revision to Q2 GDP last week, which has not been included in the calculations. However, what is most striking is the sharp rebound in growth already next year and a clearly above trend development in 2014. This is noticeably above consensus view. Another interesting feature is that the government has not taken the rate cut on Sep. 6 into account and predict an unchanged repo rate at 1.5% until the end of 2013. In its April forecast the government predicted the repo rate to be 1% at the end of 2012. Key data
Percentage change, per cent of labour force 2012 2013 2014 Government GDP Unemployment CPI Government net lending Government gross debt SEB GDP Unemployment CPI Government net lending Government gross debt 1.3 7.5 1.1 -0,2 37,3 1.5 7.8 0,8 -0,3 36,8 2.5 7.9 1.4 -0,1 35,2 1,6 7.6 1.0 -0,3 37,7 2,7 7.5 1.2 -0,6 36,9 3,7 6.7 1.7 0,3 34,7

Since last election in 2010, the focus of the governments fiscal policy has been to prepare for the worst and keep increased spending and tax cuts on hold. Reasons for pursuing that kind of policy have gradually weakened and the pressure has at the same time been mounting on the government to increase the dose of stimulus. At the government pre-budget Harpsund meeting in late August, SEK 23 billion was promised in new reforms for 2013 and this amount has now been confirmed in this budget bill Firstly, not taking the chance to stimulate when output is below potential and to launch growth enhancing reforms is becoming more and more illogical. Secondly, the three smaller parties in the Moderate led Alliance-government are struggling with low results in polls. Thirdly, FM Borg has managed to equate sound fiscal policy with not using more to reforms than the government wishes and by that made it difficult for the opposition to pursue their policy. Now when the assessment is that more can be spent, the government has managed to keep the initiative, giving them an opportunity to look more proactive than the opposition which can be said to have been lured into a political trap. There is also mounting international pressure on countries with current account surpluses and good order in public finances to shoulder part of the burden when deficitcountries save.

Source: Ministry of Finance/Budget Bill for 2013, SEB

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Economic Insights

The main reform, in terms of cost, is lowering the corporate tax rate from 26.3 to 22%. The total cost is SEK 16 bn, but the reform is partially financed by reducing the possibilities for tax deductions making the net cost approximately half of that. Infrastructure will get SEK 1.5 bn more 2013 and an additional SEK 3.5 bn 2014. Appropriations for research and innovation will rise by SEK 1.7 bn 2013 and by 2.7 2014. The budget also includes some small reforms directed towards individuals such as lower tax for retired and higher supplements for the poorest old. Reforms in Budget Bill 2014
SEK Billion 2013 2014 (selection of reforms) Infrastructure Research and innovation Support employment for youth Lower corporate tax 26,3 to 22% The justice system Lower tax for pensioners Total
Source: Budget Bill 2014

Next Budget Bill will be for the election year 2014 when we expect more reforms directed towards individuals, probably including further tax-cuts for both retired and workers. The government would probably like to introduce another step in the in-work tax credit, but the minority government might have problems getting that through parliament. A stimulus policy of this size is as we see it in line with the fiscal policy framework and the surplus target. If the economic development ends up worse than expected, proposed reforms will have a good timing in stimulating demand. A stricter policy can be pursued ahead when resource utilisation is more normal if the structural budget deficit should turn out to be below the long-term target. In addition, there are mounting arguments for adjusting the fiscal policy framework (the surplus target). With a record low, and falling, government debt as share of GDP it is becoming more difficult to motivate further debt reduction instead of reforms. This becomes more evident as the composition of surpluses between the government sectors has changed in the last 10 years. As the surplus in the pension system is dropping, from approximately 1% of GDP 10 years ago to just above zero today due to demographic reasons, the government have to make up for that with increasing surpluses a development that does not seem logical given the present debt level. The issue of what gross debt, or net asset, levels the government should target in the long run will have to put on the agenda in a not too distant future.

1.5 1.7 2.2 7.6 1.5 1.2 22.7

5.2 2.7 2.4 7.6 1.5 1.2 27.2

Conclusion
We expect the turnaround in fiscal policy to continue also 2014 and that reforms amount to SEK 25 billion both 2013 and 2014 (0.6-0.7% of GDP). One should not be surprised though that only marginally increased spending for 2014 was announced today reforms for that year will be the main issue in the Budget Bill for 2014. Focus in this budget bill is mainly on structural issues such as research, infrastructure, education and the labour market, but also lower taxes for retired and more support for the poorest old.
Daniel Bergvall + 46 8 763 85 94