Stability, Cohesion and Growth - PIIE2012/04/23 · •Firm top-down budget process (1994-1996)...

Ministry of Finance Sweden

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


General government gross debt Percent of GDP

Source: IMF Fiscal Monitor Update and the Swedish Ministry of Finance

0

50

100

150

200

250R

ussi

a

Chi

na

Sw

eden

Sou

th A

fric

a

Mex

ico

Bra

zil

Indi

a

Spa

in

Ger

man

y

Uni

ted

Kin

gdom

Can

ada

Fran

ce

Uni

ted

stat

es

Ital

y

Japa

n

2008 2012


Europe today: competetiveness crisis Unit labor cost relative to Germany. Index 1995=100

80

90

100

110

120

130

140

150

160

Portugal

Spain

Italy

Greece

Sweden

United States

Source: OECD


GDP growth Average growth rate 2007-2011. Percent

Employment growth 15-64 yrs. Growth Q3 2006-Q3 2011. Percent

Source: OECD Source: OECD

Unemployment rate 15-74 yrs. Change in percentage points Q3 2006-Q3 2011

Source: OECD and Eurostat

Inflation Average 2007-2011. Percent

Source: OECD

-1

0

1

2S

wed

en

Ital

y

Den

mar

k

Japa

n

UK

Spa

in

Eur

ozon

e

Fran

ce

EU

27

US

A

Finl

and

OE

CD

Net

herl

ands

Can

ada

Ger

man

y

-1

0

1

2

3

4

Sw

eden

Japa

n

Fran

ce

Ger

man

y

Net

herl

ands

Can

ada

Eur

ozon

e

Ital

y

US

A

Finl

and

Den

mar

k

OE

CD

Spa

in

EU UK

-10

-8

-6

-4

-2

0

2

4

6

8

Sw

eden

Spa

in

Japa

n

Den

mar

k

US

A

UK

Ital

y

EU

27

Net

herl

ands

Finl

and

Fran

ce

OE

CD

Can

ada

Ger

man

y

-5

0

5

10

15

Sw

eden

Ger

man

y

Finl

and

Net

herl

ands

Japa

n

Fran

ce

Can

ada

EU

27

Ital

y

EU

17

OE

CD UK

Den

mar

k

US

A

Spa

in


Agenda





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

-2

0

2

4

6

8

10

12

14

19

60

19

63

19

66

19

69

19

72

19

75

19

78

19

81

19

84

19

87

19

90

19

93

19

96

19

99

20

02

20

05

20

08

20

11

Source: Statistics Sweden


Poor real wage growth Real and nominal wage growth. Annual growth rates. Percent

-5

0

5

10

15

-5

0

5

10

15

1960 1970 1980 1990 2000 2010

Nominal wages

Real wages

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

-15

-10

-5

0

5

10

1970 1975 1980 1985 1990 1995 2000



• Broad political support

• Broad consolidation in all areas raised revenues and maintained social cohesion

• Structurally appropriate pro-growth measures where possible

Consolidation in Sweden


Consolidation in all areas Consolidation measures 1991-1998. Percent of GDP

0

2

4

6

8

10

12

14

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

0

4

8

12

16

20

0

4

8

12

16

20

US

Sweden

Source: OECD


Making work pay Average marginal effects 1996-2010. Percent

46 46 46 45

43

41 40 40 40 40

39

36 36

33 33

25

30

35

40

45

50

Source: Statistics Sweden and the Swedish Ministry of Finance


Public finances in order Public revenues and expenditures. Percent of GDP


45

50

55

60

65

70

80 85 90 95 00 05 10

Revenues

Expenditures


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’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

Source: Statistics Sweden. Note: Time series break. 1993–2004: 16–24 years, previous definition. 2005–2011: 15–24 years, international harmonized definition.

0

5

10

15

20

25

30

35

40

Unemployment rate, foreign-born youths Unemployment rate 15–74 years


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

0,00

0,05

0,10

0,15

0,20

0,25

0,30

0,35

0,40

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

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Stability, Cohesion and Growth - PIIE2012/04/23 · •Firm top-down budget process (1994-1996)...

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