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The following OECD assessment and recommendations summarise Chapter 2 of the Economic Survey of Sweden 2005 published on 9 June 2005.
The bolts on the fiscal framework should be tightened
By international and historical standards, the fiscal framework is working relatively well. Fiscal policy is constrained by a top down budget process, multi year expenditure ceilings and a medium term target for the general government surplus. Combined with the political will to make them work, they have delivered an average budget surplus of 1.6% of GDP in recent years (so long as the exceptional year 2000 is included), despite several years of economic weakness. However, there are signs that the framework is starting to fray around the edges. While the ceilings have helped rein in expenditure, the government has avoided breaching them in the past few years only because some spending has been channelled through tax expenditures instead. Moreover, the 2005 budget was strongly expansionary and inconsistent with the surplus target. Unless some of this is clawed back, the structural surplus is likely to remain well below the government’s 2% surplus target.
The fiscal surplus needs to rise
General government net lending, per cent of GDP
Source: Ministry of Finance; OECD calculations.
Although the framework is still functioning adequately, the commitment to sound public finances needs to be re invigorated. More emphasis will need to be given to the surplus target as a guide for policy. An important reform would be to ensure that the level of the expenditure ceilings is consistent with the surplus target. The framework could also be augmented with a medium term debt target to reduce the chances of slippage from year to year. The expenditure ceilings should also be made more binding. The main problem is a tendency to spend up to the limit even in good years. Much of this additional spending ends up as transfers to local government, which means that central government is often adding to the pro cyclical swings in county and municipal budgets that are caused by the balanced-budget rules. To avoid this, it would help to make sure there is an adequate margin for business cycle fluctuations. In addition, tax expenditures should not be used to get around the ceilings.
Raising income taxes might be counter productive
Raising taxes may look like an easy way to strengthen the fiscal situation but it is likely to be costly and perhaps even counter productive. In the short term, it would reduce the pressure to reprioritise spending or to find productivity improvements instead. Further out, it would reduce labour supply. High tax wedges have a negative impact on hours of work; raising them further is likely to worsen the situation, in which case it may not generate much in the way of receipts anyway. But there is scope to collect revenue in less costly ways. Making the VAT uniform again and continuing the shift towards green taxes would raise revenue that could then be used to reduce labour income taxes, thereby improving work incentives.
High taxes reduce hours of work
1. Marginal income tax rate plus employee contributions and indirect taxes, single person with no children earning the average wage.
Source: OECD, Taxing Wages 2003/2004; Estimates based on European Labour Force Survey. See OECD Employment Outlook (2004) for further details.
There is scope to do more with less in the public sector
Another way to strengthen public finances is to raise the efficiency of the public sector. Opening up to competition can be a powerful way of achieving this. Ultimately, all levels of government should think about whether the public sector needs to provide certain services at all. There is still a tendency in Sweden to think that, if the government has to step in, it must also produce the services itself. Public policy objectives can often be achieved through regulation and outsourcing instead. Although exposure to competition and the regulatory background have got better over the years, there is room for further reform. First, the market activities of municipalities and other public institutions should be subject to normal competition legislation, and the competition authorities should have the power to impose sanctions on local governments. Second, the public procurement process needs to be improved so that there is a level playing field between internal and external suppliers. Third, more use of benchmarking could help uncover best practice and show up the poorer performing local governments. Finally, there is considerable scope for selling state assets, especially in competitive parts of the business sector.
Return to the OECD Economic Survey Sweden 2005 homepage
Go to Chapter 3
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A printer-friendly Policy Brief (pdf format) can also be downloaded. It contains the OECD assessment and recommendations, but not all of the charts included on the above pages.
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For further information please contact the Sweden Desk of the OECD Economics Department at webmaster@oecd.org. The OECD Secretariat's report was prepared by David Rae and Martin Jørgensen under the supervision of Peter Jarrett.
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