Long abstract

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Sweden is now profiting from the macroeconomic and structural reforms undertaken in the wake of the severe recession of the early 1990s. Output has been growing at around 4 per cent per year, while inflation has been lower than in almost all other OECD countries. With healthy external and fiscal balances, the main risk to the immediate outlook is inflation drifting upwards and some overheating, since the economy is still growing faster than can be sustained in the medium term. The fiscal stimulus provided once again in this year's budget is, therefore, unhelpful, and higher interest rates are appropriate to start to relieve the pressure. Public spending strains likely in 2002 merit immediate attention, while the expenditure ceilings need more effective safety margins. At the same time, the momentum for further structural reform has weakened, even though current buoyant activity would make it easier for the economy to adjust. But the reform agenda remains unfinished, and emphasis should be placed on improving the incentives to work, save and invest in order to boost the supply of labour and capital. Competition remains weak in a number of product markets, thereby inhibiting the efficient allocation of resources across the economy as a whole. Environmental issues present a number of challenges, and although in some areas Sweden has led the way in the use of economic instruments, in others more rigorous analysis of the net social costs and benefits of alternative policies should be undertaken. Altogether, Sweden is well placed to maintain admirable economic outcomes and to achieve an even higher standard of living as long as it continues pursuing sound macroeconomic policies and satisfactorily addresses its remaining structural weaknesses.