Economic Survey - Sweden 2002
Sweden's economic performance has remained robust despite the slowdown last year and its prospects are bright. Macroeconomic policies may need to adjust as the economy picks up, while structural reforms are needed to assure better medium-term growth prospects. However, the momentum of structural reform has slackened and further progress is needed across a wide range of policy areas to maintain growth in living standards and to meet the costs of a generous social welfare system and coming demographic challenges. In particular, there are various aspects of the labour market where problems need to be addressed. In the short term, the tight labour market and inflation persistently above the Riksbank's target will require further monetary tightening. To achieve an appropriate level of aggregate demand, fiscal stimulus should be avoided next year and planned income tax cuts should be offset by other measures. Central government expenditures need to be scaled back to provide credible margins within the ceilings. The framework for budgeting could be made more robust and expenditure priorities made more explicit, with the benefits systematically compared with the alternative of reducing taxes. Rigorous evaluation of performance in each area of public service would also help to promote efficiency and identify low-return programmes. More effort could be devoted to reducing unhelpful disincentives to work, most notably in the sickness and disability schemes and in the high marginal effective tax rates on labour. Room could be created to reduce income taxes further by raising the effective VAT rate and increasing real estate taxes. Liberalising the housing sector so that a better balance between supply and demand can be achieved would also be beneficial. Overall, the economy is performing well, but the medium-term outlook would be enhanced markedly by taking further structural measures.
Long abstract
