Sweden

   

Economic Policies

#1
Key Findings
Showing exceptional results in a number of areas, Sweden shares the SGI 2020’s top position (rank 1) with respect to economic policies. Its score on this measure has improved by 0.3 points relative to 2014.

The country has been on a positive, stable economic-development track for years. Growth has been consistently robust at above 2%. The trade-dependent economy is highly competitive, with the institutional and regulatory framework providing basic stability and predictability. However, inflation rates remain below targets, and household debt is a mounting concern.

The unemployment rate has fallen to about 6%. While large numbers of migrants were continuing to look for employment, the country has been successful in integrating a significant share of refugees into the labor market. However, the unemployment rate among migrants remained more than twice as high as among native Swedes.

Tax levels are comparable with those of the country’s main economic competitors, with corporate taxes low from an international perspective. The economic boom of the last several years has led to a number of years of budgetary surplus. Government debt levels are quite low. The country invests strongly in R&D, and is emerging as a global center of digital innovation.

Economy

#1

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
9
Over the past several years, the Swedish economy has been exceptionally strong. Growth in terms of GDP in 2017 and 2018 was 2.3%. For 2019, GDP growth is expected to be somewhat weaker, mainly due to the impending international recession. In 2020 and 2021, the GDP growth rate is expected to be approximately 1.5%. As a highly trade-dependent economy, Sweden’s economic development is sensitive to fluctuations in international markets.

Notwithstanding, most long-term economic indicators on Sweden assuage concern; particularly 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. However, there are some challenges. The National Bank of Sweden, fearing deflationist tendencies in the economy, lowered its “steering interest rate” to an unprecedented 0% in late October 2014, then to -0.35% in September 2015. By November 2016, the interest rate had fallen to -0.5%, which is also the interest rate level in October 2019. In addition, the inflation rate remains below the National Bank of Sweden’s target.

Another concern is household debt, which remains high. There are also growing fears (e.g., mentioned in an IMF report) of an emerging bubble in the real-estate market. In an attempt to cool the market, the government introduced mandatory mortgage repayment rules and there is 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 areas in the longer term. Nonetheless, 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, 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 labor-market dynamics. The red-green government committed itself in 2014 to halving the country’s unemployment rate (which, at the time, was one of Europe’s lowest) by 2020, a target which will be difficult to reach. Unemployment gradually decreased since 2015. In 2018, unemployment fell to approximately 6%. In other European countries, the decline of open unemployment is stronger.

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 center-right government (2006 – 2014) 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 area 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 2018 general elections. With 62 seats, the Sweden Democrats (SD) party holds a pivotal position between the Social Democratic-Green-Left bloc and the center-right “Alliance.” In January 2019, the Social Democratic-Green government negotiated a 73-item agreement (“the January Accord”) with the Center Party and the Liberals in order secure parliamentary passage for major government bills. The agreement indicates a shift toward neoliberal economic policy, including an overhaul of the tax system and re-evaluation of public services across a large number of policy areas.

Citations:
Finanspolitiska rådet (2019), Finanspolitiska rådets rapport 2019.
http://www.finanspolitiskaradet.se/download/18.3503cfdc16c417dd2ae56a76/1567153042967/Swedish%20Fiscal%20Policy%202019.pdf

Agreement between the Social Democrats, the Greens, the Center Party and the Liberals in January 2019. https://www.socialdemokraterna.se/globalassets/aktuellt/utkast-till-sakpolitisk-overenskommelse.pdf

Regeringen (2016), Överenskommelse om skuldankare, nytt överskottsmål och förstärkt uppföljning (https://www.regeringen.se/49f5b0/globalassets/regeringen/dokument/finansdepartem entet/pdf/2016/utredningars-prm/overenskommelse-om-skuldankare-nytt-overskottsma l-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

#21

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 (with an unemployment rate of 7.1% in August 2019) 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 huge influx of asylum-seekers into Sweden in 2015 and 2016 has put a pressure on the labor market. Unemployment among immigrants in August 2018 was more than twice as high (15.4%) as among native Swedes. In 2017 and 2018, the strong economy kept unemployment (primarily among native Swedes) at a very low level, thereby moderating the impact of the growing number of job seekers. With a recession expected to hit Sweden in 2020 and 2021, we should expect unemployment to increase further.

One of the key problems is matching the recently arrived refugees to the often knowledge-intensive jobs that are available in the job market. Also, language skills remain a significant barrier for the recently arrived job seekers. There is also a more general problem associated with matching. The Public Employment Service (Arbetsförmedlingen) has for some time now been criticized for underperforming in this respect. The agency has also undergone a massive internal reorganization process and developed a new model for its internal management, which will take time to implement. In the midst of this process, a key part of the January Accord – a 2019 agreement between the government, the Center Party and the Liberals – involves relaxing regulation on private business to boost the efficiency of matching job seekers and available jobs. The initial reform of the Public Employment Service was effectively dismantled with the 2019 budget, which significantly reduced the agency’s resources in lieu of a reform opening up the task of matching unemployed with available jobs to private businesses.

While language skills and professional skills remain major problems in matching job seekers with job vacancies, more and more asylum-seekers do successfully enter the labor market. Overall, employment has increased significantly since 2014 and reached an all-time high in 2018. In 2019, a large number of immigrants are actively looking for employment, posing a challenge to the labor market system in terms of matching job seekers with available jobs. The proportion of adults not in education, employment or training (NEET) in Sweden is about the OECD average. This indicates that, despite high open unemployment, the Swedish labor market is successfully integrating a large share of people into the labor market.

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.

Thus, whether related to culture or differences in training and work experience, immigrants to Sweden continue to have severe problems entering the labor market. Sweden shares this problem with many countries but has proven to be particularly inept at addressing this aspect of integration. The large number of unemployed immigrants tears at the fabric of integration policies.

Citations:
OECD (2019), Youth not in Employment, Education or Training (NEET) (Paris: OECD).

OECD (2019), Employment Outlook (Paris: OECD)

OECD (2018), Interim Economic Outlook (Paris: OECD).

OECD (2018), Education at a Glance (Paris: OECD).

SCB (2018), Employment increased mainly among foreign born persons in 2017 (https://www.scb.se/en/finding-statistics/statistics-by-subject-area/labour-market/labour-force-surveys/labour-force-surveys-lfs/pong/statistical-news/labour-force-surveys-lfs-annual-averages-2017/).

Taxes

#4

How effective is a country’s tax policy in realizing goals of revenue generation, equity, growth promotion and ecological sustainability?

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. A broad tax reform is envisaged for the next few years.

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 so 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.

Taxes are obviously central to budget balance or surplus. The economic boom of the past few years have helped the government balance the budget and reduce the national debt. In 2017, the budget surplus was some SEK 61 billion, roughly equal to €10 billion. During 2018 and 2019, the government has made strong progress in reducing the national debt, which is now quite low.

Taxes are also increasingly used to promote sustainability. This includes taxing energy consumption and CO2 emissions. Exemptions are given to high energy-consuming industries in order to safeguard their international competitiveness.

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 (2019), Finanspolitiska rådets rapport 2019. http://www.finanspolitiskaradet.se/download/18.3503cfdc16c417dd2ae56a76/1 567153042967/Swedish%20Fiscal%20Policy%202019.pdf

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

#5

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 three budgets have generated surpluses. Overall, these developments indicate a continuing broad 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 center-right 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.

After the 2018 election, the coalition government between the Social Democrats and the Green Party continued, although with the additional parliamentary support of the Liberals and the Center Party. In return for their support, the Liberals and Center Party presented an extensive list of demands to the government. Even so, however, the 2019 budget proposal submitted to parliament in late 2019 shows a surplus of SEK 130 billion (€12 billion).

There are only two clouds on this otherwise bright sky. One is the level of private lending, which the National Bank of Sweden and other financial observers find alarming given that interest rates may rise over the next few years. The other source of concern is the low rate of inflation, despite very low general interest rates.

Citations:
The Swedish Government (2019), The budget in numbers. https://www.regeringen.se/sveriges-regering/finansdepartementet/statens-budget/statens-budget-i-siffror/

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

Finanspolitiska rådet (2019), Finanspolitiska rådets rapport 2019.
http://www.finanspolitiskaradet.se/download/18.3503cfdc16c417dd2ae56a76/1 567153042967/Swedish%20Fiscal%20Policy%202019.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 https://www.regeringen.se/49f5b0/globalassets/regeringen/dokument/finansdepartementet/pdf/2016/utredningars-prm/overenskommelse-om-skuldankare-nytt-overskottsmal-och-forstarkt-uppfoljning.pdf

Research, Innovation and Infrastructure

#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 was for a long time far more challenging for Sweden. The “Swedish paradox,” as it is called, was 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 issue lately, for instance, by simplifying the regulatory framework for private businesses, 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 introduced by the 2006 to 2014 center-right government.

Citations:
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

#2

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 System
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 Ministry of Finance and large commercial banks has been noticeable over the past couple of years. This discord has related to the banks’ high profit levels and their insistence on giving their staff huge bonuses while charging high financial management fees. The government announced in August 2019 that it intends to levy a special tax on the commercial banks of SEK 5 billion per annum, starting in 2022. The government argues that this tax will help fund an increase in defense spending.

Another potential source of friction between the finance ministry and major commercial banks relates to political signals, and subsequent reforms, to force lenders to mortgage their loans rather than 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 per se, they have also recently expressed concerns regarding 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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