Towards a Recipe for effective strategies: How to reconcile budgetary Consolidation and Support for the real Economy The Swedish Experience and Perspective (1990-2012)
Background for Swedish economic crisis in the 1990:s Poor economic and regulatory performance during 1980:s Deregulated credit markets, without reforming tax system that encouraged borrowing Credits boomed, led to credit driven real estate market- which led to bubble on real estate market Unemployment less than 2 percent High demand led to overheated economy High inflation, high relative unit labour cost Bad competitive power High interest rates Overvalued currency
Beginning of 1990:s Prices on real estates fell. 30 percent in Stockholm. Financial institutions show credit losses, credit crunch Banking crisis Private consumption, investment, employment down Unemployment rose fast High interest rates Fixed exchange rate not credible, speculation against the crown, Riksbank let the crown float- depreciated with 20-30 percent Foreign debt from 44 to 58 percent of GDP when crown fell, and worsening Worsening public finances. Negative growth 1991, 1992 and 1993 Low credibility for Swedish economy, high borrowing costs
From middle of 1990:s Consolidation programme for public finances to be implemented 1994-1998. Decision for government debt to come down, but not too fast in order not to kill domestic demand. Priorities for public spending. Pension system reformed to become credible and perseverance When crown fell foreign debt worsened but competitive power was restored. Own currency and export dependent economy gave prerequisite for growth, and not just cut downs and raised taxes To reach credibility for the long term development of public finances goals were put in place for the public financial savings and a ceiling for government spending. Institutional changes aiming at budget discipline Riksbank independent by law, accountable to Riksdag. Target for price stability instead of exchange rate target
Central Bank policy rate (percent)
Unemployment (percent of labour force. ILO) (2012-2017 IMF s prediction) 17.5 Sweden Estonia Germany UK Italy 15.0 12.5 10.0 7.5 5.0 2.5 1990 1995 2000 2005 2010 2015
GDP (year on year growth, percent) (2012-2017 IMF s prediction) 15 Sweden Estonia 10 Germany UK Italy 5 0-5 -10-15 1990 1995 2000 2005 2010 2015
General Government net lending/borrowing (percent of GDP) (2012-2017 IMF s prediction) 7,5 5 Sweden Estonia Germany UK Italy 2,5 0-2,5-5 -7,5-10 -12,5 1990 1995 2000 2005 2010 2015
General government gross debt (percent of GDP) (2012-2017 IMF s prediction) 150 Sweden Estonia Germany UK Italy 125 100 75 50 25 1990 1995 2000 2005 2010 2015
10 year government bonds (percent) (OECD. For Estonia the ECB long term indicator) 15.0 Sweden Estonia Germany UK Italy 12.5 10.0 7.5 5.0 2.5 1990 1995 2000 2005 2010
Economic crisis made new framework for public finances possible Economic crisis during 1990:s hit the whole economy, from the banking sector through the real economy. Growing crisis consciousness finally made economic regulatory reforms politically possible. Government and majority of opposition agreed on: 1. Ceiling for government spending: Riksdag decides on ceiling three years ahead 2. Target for surplus in public savings: one percent surplus during one business cycle. Calculated as a 7 year moving average for actual net lending during last three years, present year and coming three years 3. Balance in budget for municipals
Financial crisis and debt crisis When financial crisis and debt crisis hit Europe, Sweden had a much better economic position than many other European countries Crisis of course hit Sweden as well. Growth plummeted, negative growth 2008 (-0,8) and 2009 (-4,8). But bounced back quickly with 5,8 % in 2010 and 4,0 % in 2011 Due to public finances in order and relatively low government debt, Swedish economy has high credibility which we can see in the cost of borrowing. Among the lowest interest rates in Europe. 1992 government borrowing rate around 11 %. Today 1.32 % Conclusion: Fiscal regulatory framework with ceiling for government spending and surplus target for public financial savings, in combination with low government debt, have served Sweden well. But, no trees grow to heaven, so one can never get laid back and relax. What is a problem today is the historically relatively high unemployment. What could become a problem in the future is the relatively high private and household debt, and maybe the housing prices have increased too much if interest rates start rising. Also, something new always happens. Best to be in good shape when it does, is our lesson from the 1990:s