Stability, Cohesion and Growth April 23, 2012 Swedish Minister for Finance Anders Borg
Agenda Sweden has weathered the current crisis relatively well Lessons from the crisis in the early 1990s Further reforms still necessary
Russia China Sweden South Africa Mexico Brazil India Spain Germany United Kingdom Canada France United states Italy Japan General government gross debt Percent of GDP 250 200 150 2008 2012 100 50 0 Source: IMF Fiscal Monitor Update and the Swedish Ministry of Finance
Europe today: competetiveness crisis Unit labor cost relative to Germany. Index 1995=100 160 150 140 130 120 110 100 90 Portugal Spain Italy Greece Sweden United States 80 Source: OECD
Sweden Japan France Germany Netherlands Canada Eurozone Italy USA Finland Denmark OECD Spain Sweden EU UK Spain Japan Denmark USA UK Italy EU27 Netherlands Finland France OECD Canada Germany Sweden Italy Denmark Japan UK Spain Eurozone France EU27 USA Finland OECD Netherlands Canada Germany Sweden Germany Finland Netherlands Japan France Canada EU27 Italy EU17 OECD UK Denmark USA Spain 2 GDP growth Average growth rate 2007-2011. Percent Unemployment rate 15-74 yrs. Change in percentage points Q3 2006-Q3 2011 15 1 10 5 0 0-5 -1 8 6 4 2 0-2 -4-6 -8-10 Source: OECD Employment growth 15-64 yrs. Growth Q3 2006-Q3 2011. Percent Source: OECD Inflation Average 2007-2011. Percent 4 3 2 1 0 Source: OECD -1 Source: OECD and Eurostat
Agenda Sweden has weathered the current crisis relatively well Lessons from the crisis in the early 1990s Further reforms still necessary
Sweden in 1980s: a slow train wreck Heavily regulated markets High taxes and high threshold effects Poor business climate Dysfuntional wage setting Unsustainable fiscal policy
Severe macroeconomic imbalances High inflation Poor real wage growth Repeated devaluations Rising public debt levels Persistent current account deficit
High inflation Annual percentage change in CPI 14 12 10 8 6 4 2 0-2 2011 2008 2005 2002 1999 1996 1993 1990 1987 1984 1981 1978 1975 1972 1969 1966 1963 1960 Source: Statistics Sweden
Poor real wage growth Real and nominal wage growth. Annual growth rates. Percent 15 10 Nominal wages 15 10 5 5 0 1960 1970 1980 1990 2000 2010 0-5 Real wages -5 Sources: Medlingsinstitutet and the Swedish Ministry of Finance. 2011-2015 are forecast values
Public finances under severe stress Government net lending 1970-2000. Percent of GDP 10 5 0-5 -10-15 1970 1975 1980 1985 1990 1995 2000 Source: Statistics Sweden
Consolidation in Sweden Broad political support Broad consolidation in all areas raised revenues and maintained social cohesion Structurally appropriate pro-growth measures where possible
Consolidation in all areas Consolidation measures 1991-1998. Percent of GDP 14 12 10 8 6 4 2 0 Expenditure cuts Revenue increases Total Source: Swedish Ministry of Finance
Major expenditure cuts Pensions (reduced indexation) Early retirement pension Government transfers to local authorities Unemployment insurance Health insurance Child allowance Family support Parenting insurance Child maintenance allowance Real public consumption held constant absent discretionary changes Public administration costs subject to annual productivity growth adjustment Reduced subsidies for pharmaceuticals Interest rate subsidies and other housing subsidies Housing benefits Old age housing benefits
Major revenue increases Uniform capital income taxation Indexation of environmental and excise duties Increased payroll tax High tax on petrol Income tax increase for high income earners Increased tax on tobacco Social security contributions for self-employed Amended rules for income tax deductibility of expenses
Lessons from succesful consolidations Expenditure cuts preferable to tax hikes Broaden tax bases rather than raising tax rates Consolidation measures must have acceptable effects on distribution of income Prioritize pro-growth consolidation measures
The Swedish fiscal policy framework Firm top-down budget process (1994-1996) Initial decision on binding expenditure restrictions (frameworks) for expenditure areas Proposed appropriations balanced by reducing other appropriations in the same expenditure area Three budgetary targets Central government expenditure ceiling (1996) Surplus target for general government (2000) Balanced budget requirement on local govts (2000) Fiscal Policy Council (2007)
Improved budget process Bottom-up budget processes are problematic Driven by demand, not by economic growth High expectations for new spending reforms Ministry of Finance involved at a late stage in the process A strict top-down process resolves much of these problems Entire draft budget governed by expenditure ceiling, surplus target and available room for reforms Medium-term context separates budget s total size from issues of needs and desirable expenditures Minority governments can avoid cost-push negotiations with opposition parties
Rules are important but will only work if backed by political commitment Broad support in the Swedish parliament on the importance of the fiscal framework No major deviations from fiscal framework Has created a positive path dependence where deviations from the framework are politically costly External evaluation from fiscal council and others to increase cost of deviating from framework National ownership over the construction of fiscal framework is a pre-condition for success
Structural reforms Major tax reform, lower marginal tax rates on labour Stricter regulation of competition and public procurement Extensive deregulation of important markets banking and finance, air travel, taxi, buses, rail freight, power production and distribution, telecom, postal services, retail including food retail Increased private production of welfare services, e.g. school vouchers
Structural reforms (continued) Pension reform European Union membership Inflation targeting Central bank independence Reformed wage setting process Increased labor market flexibility
Reforming health care Balanced budget requirement Modernised budget system: diagnosis related payments Co-payments Reformed prescription drug subsidies and use of generic drugs Competition between providers inside and outside public sector
Health care costs Total health care expenditure. percent of GDP 20 20 16 12 US 16 12 8 4 Sweden 8 4 0 0 Source: OECD
Making work pay Average marginal effects 1996-2010. Percent 50 45 46 46 46 45 43 40 41 40 40 40 40 39 35 36 36 33 33 30 25 Source: Statistics Sweden and the Swedish Ministry of Finance
Public finances in order Public revenues and expenditures. Percent of GDP 70 65 60 Revenues Expenditures 55 50 45 80 85 90 95 00 05 10 Source: Statistics Sweden
Lessons from the recent crisis No stability without financial stability Higher capital requirements on banks Stronger rules for sufficient liquidity ratios Better financial supervision Improved stress tests International cooperation is crucial
Agenda Sweden has weathered the current crisis relatively well Lessons from the crisis in the early 1990s Further reforms still necessary
Sweden s Achilles heel Tax wedges and compressed wage distribution destroy jobs High barriers when entering labor market Youth and immigrants bear a large share of the burden
Difficulties entering the labour market Unemployment rate among foreign-born youth. Percent of labour force 40 35 30 25 20 15 10 5 0 Unemployment rate, foreign-born youths Unemployment rate 15 74 years Source: Statistics Sweden. Note: Time series break. 1993 2004: 16 24 years, previous definition. 2005 2011: 15 24 years, international harmonized definition.
The road ahead Lower barriers and make work pay Increase labor demand for weaker groups Consider subsidies to some employment forms Education: Raise quality and job market relevance Expand vocational training and on-the-job learning Increase flexiblity while safeguarding security
Prosperity and equality Inequality in income distribution including public services. Gini coefficient 0,40 0,35 0,30 0,25 0,20 0,15 0,10 0,05 0,00 Source: OECD (2011), Divided We Stand
Summary: sustainable fiscal strategy Consolidation requires credibility Strong fiscal framework boosts credibility Structural reforms necessary for long-term growth and competitiveness Stabilility, cohesion and growth