Sweden

   

Economic Policies

#1
Key Findings
Having fared well in both the crisis and post-crisis periods, Sweden shares the SGI 2018’s top position (rank 1) with respect to economic policies. Its score on this measure has improved by 0.4 points relative to 2014.

The country has been on a positive, stable economic-development track for years. Growth has been consistently robust. Interest rates have been lowered to sub-zero levels to fend off deflation, and housing-bubble fears are emerging. Political commitment to budgetary surpluses has diminished somewhat. Nevertheless, economic regulation is considered efficient and sound overall.

The unemployment rate is moderate by EU standards. The government has pledged to halve this by 2020. The influx of refugees has not significantly increased unemployment rates, although long-term labor-market integration remains a challenge. A policy of work incentives has been replaced by more government-sponsored employment as a means of providing labor-market access.

The government has set modestly higher tax-rate and spending goals. As business taxes are today relatively low, competitiveness is not a pressing issue. Parliament set a revised budget-surplus goal of 0.33% in 2016, with a long-term commitment to public-debt reduction. The country invests strongly in R&D, and is emerging as a global center of digital innovation.

Economy

#6

How successful has economic policy been in providing a reliable economic framework and in fostering international competitiveness?

10
 9

Economic policy fully succeeds in providing a coherent set-up of different institutional spheres and regimes, thus stabilizing the economic environment. It largely contributes to the objectives of fostering a country’s competitive capabilities and attractiveness as an economic location.
 8
 7
 6


Economic policy largely provides a reliable economic environment and supports the objectives of fostering a country’s competitive capabilities and attractiveness as an economic location.
 5
 4
 3


Economic policy somewhat contributes to providing a reliable economic environment and helps to a certain degree in fostering a country’s competitive capabilities and attractiveness as an economic location.
 2
 1

Economic policy mainly acts in discretionary ways essentially destabilizing the economic environment. There is little coordination in the set-up of economic policy institutions. Economic policy generally fails in fostering a country’s competitive capabilities and attractiveness as an economic location.
Economic Policy
8
The international financial press painted a positive picture of Sweden’s economic policy and development during the first decade of the 2000s, and for good reason. Overall, the Swedish economy has fared comparatively well both during and after the global financial crisis, and Swedish crisis management seems to have been extraordinarily successful. The positive trajectory of economic development has continued in recent years.

Sweden has received numerous accolades for its financial management. The Financial Times named former (2006 – 2014) Finance Minister Anders Borg “Best Finance Minister in Europe,” and The Economist has urged the rest of the world to look at the “New Nordic Model” as a leading example of economic policy. International institutions like the OECD and the European Union have likewise praised the Swedish trajectory of economic development and the role of government in securing and fostering that development. The government has implemented a series of reforms that have provided long-term economic stability. Also, and equally important, previous governments chose not to alter regulatory frameworks (e.g., important labor market regulations) which might jeopardize stability. Most long-term economic indicators on Sweden look good. This is particularly the case with regard to international competitiveness. Thus, it is fair to say that the institutional and regulatory framework of the Swedish economy provides basic stability and predictability.

Most indicators suggest that the economy is doing quite well; the finance ministry expects GDP growth in 2017 to be 3.1% and 2.5% in 2018. However, there are some challenges. The National Bank of Sweden, fearing deflationist tendencies in the economy, lowered its “steering interest rate” to an unprecedented zero percent in late October 2014, then to -0.35% in September 2015. By November 2016, the interest rate had fallen to -0.5%.

Another concern is household debt, which continues to increase. There are also growing fears (as mentioned in an IMF report) of an emerging bubble in the real-estate market. In an attempt to cool the market, the government has introduced mandatory mortgage repayment rules, and there is some discussion on phasing out tax deductions for interest rate payments. Together with increasing construction, these measures would help cool off the real-estate market in metropolitan regions in the longer term. However, the current housing shortage in metropolitan areas that is driving real-estate prices up increases the short-term risk of a bubble in the real-estate market. In November 2017, the government announced plans to introduce a mortgage requirement beginning in 2018 (the exact date is yet to be decided) to help cool the real-estate market and curb household debt.

Economic growth and international competitiveness are closely linked to unemployment and the dynamics of the labor market. The red-green government is committed to halving the country’s unemployment rate (which is already one of Europe’s lowest) by 2020; a target which will be difficult to reach, given the current refugee crisis in Europe. Unemployment decreased somewhat in 2015 and early 2016. However, 2017 and 2018 will prove more challenging as the large numbers of immigrants will register as unemployed in early 2017 after completing Swedish language training programs.

Perhaps even more troubling, there are now signs on both sides of the political aisle that policymakers might relax their commitment to the regulatory framework that has to date shaped public budgets and the economy. The previous non-socialist government downplayed the importance of a surplus goal, a stance which the incoming Social Democratic and Green government after the 2014 election has shared. The argument for doing so is that there are urgent programs that require public funding. In 2016, the Social Democratic and Green government negotiated with opposition parties to introduce a reform of the financial framework. The revised framework retains the surplus goal, but at a lowered 0.33% over a business cycle. More importantly, the revised framework states that public debt is to be brought down incrementally.

Moreover, some sectors of the economy, for example the housing market, suffer from low efficiency and lack of transparency. In addition, tax reforms implemented before the last period under review have further undermined economic equality. Nonetheless, Sweden’s economy and its regulation thereof are generally considered to be efficient and sound. Whether this is a product of policy incentives, or a consequence of being outside the euro zone is a matter debated among economic experts.

Although the institutional and regulatory framework of economic policy remains overall robust and efficient, the governance of that system has proven exceedingly complex since the 2014 general elections. With 49 seats, the Sweden Democrats (SD) party is in a pivotal position between the Social Democratic-Green government (supported by the Left Party) and the non-socialist “Alliance.” None of these parties is willing to negotiate with the SD. In December 2014, an agreement (the “December agreement”) was reached between the two party blocs saying, inter alia, that parties would only be allowed to vote for their own original budget proposal. That arrangement meant that the pivotal power of the SD would erode. The December agreement, however, lasted only some ten months; in October 2015 the “Alliance” parties walked out of the accord and, thus, Sweden is once again in a difficult and unpredictable situation in terms of the government’s capacity to organize parliamentary majorities and to have its budget accepted by parliament.

Citations:
Finanspolitiska Rådet. Swedish Fiscal Policy. Fiscal Policy Council Report 2017 (http://www.finanspolitiskaradet.se/download/18.4c8bf10a160291805212159b/1512728204599/Swedish+Fiscal+Policy+2017.pdf).

IMF Country Report 16/353. Sweden (https://www.imf.org/external/pubs/ft/scr/2016/cr16353.pdf).

Kvist, Jon et al. (eds.) (2012), Changing Inequalities. The Nordic Countries and New Challenges (Bristol: Policy Press).

Regeringen (2016), Överenskommelse om skuldankare, nytt överskottsmål och förstärkt uppföljning (http://www.regeringen.se/4a7bfa/contentassets/24a388a9a9994e67a706e0b91768bdd2/overenskommelse-om-skuldankare-nytt-overskottsmal-och-forstarkt-uppfoljning.pdf)

Mehrtens, Philip (2014), Staatsschulden und Staatstätigkeit. Zur Transformation der politischen Ökonolmie Schwedens (Frankfurt/New York: Campus).

Brenton, S. and J. Pierre, “Budget surplus goal experiments in Australia and Sweden,” New Political Economy 22 (2017):557-72.

Labor Markets

#17

How effectively does labor market policy address unemployment?

10
 9

Successful strategies ensure unemployment is not a serious threat.
 8
 7
 6


Labor market policies have been more or less successful.
 5
 4
 3


Strategies against unemployment have shown little or no significant success.
 2
 1

Labor market policies have been unsuccessful and rather effected a rise in unemployment.
Labor Market Policy
7
The heyday of full employment policies in Sweden is gone, seemingly forever. Current labor market statistics indicate that Sweden today does not differ in any significant way from comparable capitalist economies. If anything, unemployment among youth and immigrants is higher than in other comparable countries. This pattern raises questions about the efficiency of Sweden’s labor market policies and the overall regulatory framework. The former, non-socialist government pursued a policy which incentivized unemployed to look for work by lower unemployment support. The current government (Social Democrats and Greens) is committed to increasing that support. Their policy stance marks a return to more government-sponsored employment as a means of helping the unemployed access the labor market. It is too early to assess whether this new (return to an older) approach to unemployment will be any more successful than that pursued by the previous “Alliance” government. The huge influx of refugees into Sweden in 2014 and 2015 was expected to significantly impact the labor market in 2017, when successful asylum-seekers register as job seeking. So far, however, the strong economy has kept unemployment (primarily among native swedes) at a very low level, thereby moderating the impact of the growing number of jobseekers. The more long-term challenge of integrating refugees into the labor market still looms large.

Ongoing EU integration and the mobility of labor has triggered a new set of issues related to the domestic regulations in the market. Also, there has been extensive debate about introducing an apprentice model to help younger age cohorts to make the transition from education to the labor market. Additionally, Swedish policymakers have been trying to create a short-time work scheme for public employees, as it exists in Germany. These examples may indicate that the old Swedish model of labor market policy is gradually moving toward the German model.

Union strength has declined rapidly in recent years, but union power remains strong by international standards. The strength of unions in part explains the relatively modest reform in labor market rules related to dismissal, minimum wage and apprentice arrangements, which would entail some workers earning a lower salary. But this applies only to insiders on the labor market because employment protection legislation for precarious work is underdeveloped. As in other European countries, Sweden’s labor market is undergoing dualization, albeit at a slower speed than, for example, in Germany.

Whether related to culture or differences in training and work experience, immigrants to Sweden have for a long time experienced severe problems in entering the labor market. Sweden shares this problem with a large number of countries but it has proven to be inept at addressing this aspect of integration. The large number of unemployed immigrants tears at the fabric of integration policies. In 2018, large numbers of immigrants will be actively looking for employment, which will pose a significant challenge to the labor-market system.

Sweden’s Labour Market Agency is criticized by both business organizations and the unemployed for performing poorly in terms of matching the unemployed with vacant jobs. The agency has been subject to a massive internal reorganization process and developed a new model for its internal management, which will take time to establish.

Citations:
OECD (2016), Employment Outlook (Paris: OECD)

OECD (2017), Employment Outlook (Paris: OECD)

Rothstein, Bo (2014), “The End of Swedish Exceptionalism,” Foreign Affairs, September 18.

Taxes

#3

To what extent does taxation policy realize goals of equity, competitiveness and the generation of sufficient public revenues?

10
 9

Taxation policy fully achieves the objectives.
 8
 7
 6


Taxation policy largely achieves the objectives.
 5
 4
 3


Taxation policy partially achieves the objectives.
 2
 1

Taxation policy does not achieve the objectives at all.
Tax Policy
8
In terms of horizontal equity, this aspect of tax policy has improved over the last several years. The tax system has been reformed and simplified with fewer deductible items, which in turn has broadened the overall tax base. Combined with a less progressive tax rate and an overall reduction in taxes, horizontal equity has improved.

Vertical equity has significantly decreased, however. Studies show that differences between different socioeconomic strata has increased over the past decade in most OECD countries, but more rapidly in Sweden. Current tax policy penalizes those who do not work, regardless of the reason for not being part of the workforce. Thus, for instance, retirees have not been able to make deductions that the employed are allowed to make (this arrangement, however, is currently under review). This policy has served to incentivize people who are outside the workforce to seek jobs.

The government managed to balance public budgets quite successfully during the financially turbulent years after 2008. Declining taxes were accompanied with spending cuts and privatization. Hence, the tax revenue has been sufficient so far, with the loss in revenue balanced by spending reductions. More recently budget deficits have increased somewhat, so much so that the surplus goal has not been attained for the last couple of fiscal years.

Tax policy is less of a factor in national competitiveness today than it was 10 to 15 years ago when economists pointed to the high-income tax levels as a major impediment to the competitiveness of Swedish businesses. The first two budgets of the red-green government, however, signal a return – however modest – to a philosophy of higher levels of taxation and public spending, rather than incentives, as the engine of the domestic economy. Swedish tax levels are still largely on par with those of its main competitors – in fact, taxation of business is low from a comparative perspective.

Citations:
Finanspolitiska Rådet. Swedish Fiscal Policy. Fiscal Policy Council Report 2017 (http://www.finanspolitiskaradet.se/download/18.4c8bf10a160291805212159b/1512728 204599/Swedish+Fiscal+Policy+2017.pdf)

Kvist, Jon et al. (eds.) (2012), Changing Inequalities. The Nordic Countries and New Challenges (Bristol: Policy Press)

Mehrtens, Philip (2014), Staatsschulden und Staatstätigkeit. Zur Transformation der politischen Ökonomie Schwedens (Frankfurt/New York: Campus)

OECD (2015), In It Together: Why Less Inequality Benefits All (Paris: OECD)

Budgets

#4

To what extent does budgetary policy realize the goal of fiscal sustainability?

10
 9

Budgetary policy is fiscally sustainable.
 8
 7
 6


Budgetary policy achieves most standards of fiscal sustainability.
 5
 4
 3


Budgetary policy achieves some standards of fiscal sustainability.
 2
 1

Budgetary policy is fiscally unsustainable.
Budgetary Policy
9
Since the mid-1990s, fiscal, and budgetary discipline has been extraordinarily strong in Sweden and its tight budgetary regime has begun to yield benefits. In the wake of a financial crisis in the early 1990s, maintaining sound fiscal policy has been an overarching policy goal for both center-right and Social Democratic governments. Sweden is one of very few countries that targets a budget surplus and neither government nor opposition harbor any plans to abolish it. In 2016, a revised budget surplus goal of 0.33% was negotiated between the two major blocs in parliament. The agreement also includes a commitment to a long-term reduction of public debt. Thus, while the surplus goal is somewhat relaxed, there is now a stronger commitment to addressing public debt. Indeed, the past two budgets have reduced the budget deficit. Overall, these developments indicate a continuing bipartisan commitment to maintaining fiscal and budgetary discipline.

The budget surplus goal issue ultimately relates to the Keynesianism-monetarism controversy. The government wants to use the budget actively to drive the economy while the coalition of non-socialist parties in opposition (Alliance) take a somewhat more monetaristic approach. Either way, the fiscal and budgetary regulatory framework helps sustain a course of strong and sustained economic development. Not even the 2008 global economic crisis nor the euro crisis have profoundly disrupted Sweden’s economic growth.

Since the 2014 elections, the issue in this context has been to what degree the two main contenders for power in Sweden (i.e., the four non-socialist parties that form the Alliance or the Social Democrats with support from the Greens) still unconditionally subscribe to the surplus goal and other aspects of the financial regulatory framework. The period following the election has been very positive in budgetary terms, with strong and sustained growth. Combined with a few moderate tax increases, this situation has enabled the government to reduce national debt, but also to increase public spending. Thus, current government policies signal a return to conventional Social Democratic economic policy, albeit embedded in a firm regulatory framework.

Citations:
Brenton, S. and J. Pierre, “Budget surplus goal experiments in Australia and Sweden,” New Political Economy 22 (2017):557-72.

Finanspolitiska Rådet. Swedish Fiscal Policy. Fiscal Policy Council Report 2016 (http://www.finanspolitiskaradet.se/download/18.3a8070ba157c4f032a872f5b/1476880513278/Swedish+Fiscal+Policy+2016.pdf).

Finanspolitiska Rådet. Swedish Fiscal Policy. Fiscal Policy Council Report 2017 (http://www.finanspolitiskaradet.se/download/18.4c8bf10a160291805212159b/1512728 204599/Swedish+Fiscal+Policy+2017.pdf).

Mehrtens, Philip (2014), Staatsschulden und Staatstätigkeit. Zur Transformation der politischen Ökonolmie Schwedens (Frankfurt/New York: Campus).

Regeringen (2016), Överenskommelse om skuldankare, nytt överskottsmål och förstärkt uppföljning (http://www.regeringen.se/4a7bfa/contentassets/24a388a9a9994e67a706e0b91768bdd2/overenskommelse-om-skuldankare-nytt-overskottsmal-och-forstarkt-uppfoljning.pdf).

Research and Innovation

#1

To what extent does research and innovation policy support technological innovations that foster the creation and introduction of new products?

10
 9

Research and innovation policy effectively supports innovations that foster the creation of new products and enhance productivity.
 8
 7
 6


Research and innovation policy largely supports innovations that foster the creation of new products and enhance productivity.
 5
 4
 3


Research and innovation policy partly supports innovations that foster the creation of new products and enhance productivity.
 2
 1

Research and innovation policy has largely failed to support innovations that foster the creation of new products and enhance productivity.
R&I Policy
10
Sweden ranks among the top five advanced industrialized democracies on all aspects of research and development (R&D): spending (public and private) per capita; number of researchers; number of patent applications and intellectual ownership licenses. This high level of investment in R&D has existed for considerable time. As an economy with high labor costs, Sweden’s competitive edge lies not in large-scale manufacturing but in knowledge-intensive sectors. R&D spending thus directly sustains that competitive edge.

Governments – center-right as well as Social Democratic-Green – rarely miss an opportunity to reinforce the argument that public spending on higher education, research institutions and research and development in general is integral to future prosperity and wealth. There is nothing suggesting that the commitment among all major political players to R&D spending is about to change.

While R&D spending has a long history, converting research and development concepts into valuable products has been far more challenging for Sweden. The “Swedish paradox,” as it is called, is precisely the inability to convert research findings into commercially viable products. However, as recent data show, Sweden now ranks first with regard to patent applications and license fees for intellectual property. This is a valid indicator that R&D is bearing fruit, as securing intellectual ownership of emerging products is a critical stage in the process from the research facility to the market. Public policy has targeted this very issue lately and the data suggest that R&D is now increasingly paying off.

Meanwhile, the new era of digital entrepreneurship has seen Sweden emerge as a global center of digital innovation. This applies to digital communication, computer games and IT-based services. The World Economic Forum, which views Sweden’s tax levels as burdensome, suggests that the social welfare safety net has made Swedes less risk averse than entrepreneurs in many other countries. Overall, it appears that much of this success can be attributed to deregulation and other pro-business reforms that were introduced by the previous, non-socialist government between 2006 and 2014.

Citations:
Digitaliseringskommissionen (2015): Digitalisering, främjande och framtid. En utredning kring behov av digitaliseringsfrämjande insatser (Stockholm) (https://digitaliseringskommissionen.se/wp-content/uploads/2015/02/Digitalisering-fr%C3%A4mjande-och-framtid-Slutlig-februari-2015_korrigerad.pdf).

Edquist, C. and L. Hommen (eds) (2008), Small Country Innovation Systems (Cheltenham: Edward Elgar).

World Economic Forum (12 October 2017), “Why does Sweden produce so many startups?”

Global Financial System

#1

To what extent does the government actively contribute to the effective regulation and supervision of the international financial architecture?

10
 9

The government (pro-)actively promotes the regulation and supervision of financial markets. It demonstrates initiative and responsibility in such endeavors and often acts as an international agenda-setter.
 8
 7
 6


The government contributes to improving the regulation and supervision of financial markets. In some cases, it demonstrates initiative and responsibility in such endeavors.
 5
 4
 3


The government rarely contributes to improving the regulation and supervision of financial markets. It seldom demonstrates initiative or responsibility in such endeavors.
 2
 1

The government does not contribute to improving the regulation and supervision of financial markets.
Stabilizing Global Financial Markets
9
The Swedish government has stood behind essentially all efforts to enforce regulation aiming at preventing criminal financial behavior in international financial management. Sweden also supports and implements rules laid out by the European Union and other international institutions related to international finance. It has rejected proposals, however, to introduce a Tobin-style tax on international financial transactions.

On the domestic scene, some friction between the finance ministry and the big commercial banks has been noticeable over the past couple of years. The discord has related to the banks’ insistence on giving their staff huge bonuses and charging high financial management fees. Another potential source of friction between the finance ministry and the major commercial banks is related to political signals to force lenders to mortgage their loans and not just pay interest. The Ministry, in concert with the National Bank, is concerned about the level of household debt, suggesting that there is a growing bubble in the metropolitan real-estate markets. Reducing debt and/or phasing out the right to deduct interest payments would help reduce the likelihood of such a bubble. Although the banks do not have a commercial interest in debt reduction, they too have recently stated concerns with the high household debt levels.

Taken together, Sweden is a forerunner for the sustainable regulation of international as well as domestic financial markets. This status is a consequence of the financial crisis in Sweden in the early 1990s, which initiated rapid policy learning in all major parties represented in the Swedish parliament.
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