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Contents | Executive Summary | How to obtain this publication | Additional information
The following OECD assessment and recommendations summarise Chapter 1 of the Economic survey of Sweden published on 14 February 2007.
Contents
Strong and stable macroeconomic performance
The Swedish economy has recovered strongly in recent years with annual GDP growth expected to exceed 4% in 2006. This recovery has come sooner and been stronger than in most other European countries, illustrating the relative soundness of the Swedish economy. Inflation expectations are well anchored. This successful performance is a result of the way in which Sweden responded to the deep crisis in the early 1990s, when it greatly improved its macro policy framework. With a structural budget surplus of around 2% of GDP, Sweden is preparing itself to meet future demographic challenges much better than most OECD countries. All parts of society benefit from this forward-looking policy framework. For those employed, real wage growth has averaged 3½ per cent since 1998 when a new stability-oriented wage formation framework was introduced, compared to just 2½ per cent during the inflationary 1970s and 1980s.
Regulatory reforms from the 1990s have boosted productivity
Partly owing to the large technology sector, productivity growth is impressive with GDP per hour worked growing 2½ per cent a year for the economy as a whole. Meanwhile, falling prices for a part of manufacturing exports have caused a trend decline in the terms of trade and, taking this into account, aggregate consumption possibilities have grown less fast than GDP volume. Nevertheless, so called command GDP per hour worked, which corrects for the terms-of-trade loss, has sustained a growth rate of close to 2% – well above the average rate it had during the 1980s. Sweden is thereby now reaping the gains from the early steps it took in the 1990s with regulatory reform of publicly funded services, infrastructure, energy and communication sectors as well as deeper international integration following EU membership. Nevertheless, a 22% gap remains vis-à-vis the United States, in terms of GDP per capita, with shortfalls in labour resource utilisation and productivity per hour each accounting for about half of the gap. Progress in regulatory reform should be revived and barriers to higher labour utilisation should be removed.
Productivity growth and the timing of regulatory reform
Whole economy, annual growth rate
Key challenges for Sweden are to combat exclusion in the labour market and deal with distortions in the housing market
While labour-market insiders manage well, groups at the margin like immigrants, youngsters, disabled and sick continue to suffer from exclusion. Strict employment protection and a compressed wage structure with relatively high taxes on earned income for low-income groups make it difficult for people in such groups to find a job. High replacement rates add to unemployment and inactivity traps. The problem is exacerbated by distortions in the housing market which inter alia may reduce labour mobility. The ambitious reform programme put in place by the government is taking large steps to combat exclusion in the labour market by making work pay and strengthening the inroads for outsiders. This Survey devotes its prime attention to this reform agenda and presents options for housing market reform.
The fiscal framework needs tightening
Bringing the public finances from deep deficit in the early 1990s to structural surplus today was a major achievement. It is therefore important that the new government has renewed the commitment for sound macroeconomic framework conditions and will stick to the target for general government net lending of 2% of GDP over the cycle which is necessary to keep public finances on a sustainable path. Underlying this target is the assumption that taxes can be sustained at current levels which could be difficult in the future, not least due to mobile tax bases and international tax competition. In the current juncture, where growth could well continue above trend in 2007-08, positive fiscal surprises should not be allowed to trigger permanent spending increases or under-financed tax cuts. Lowering the expenditure ceilings could help to keep spending on track, while avoiding slippage and absorption of the rather wide margin between budgeted spending and the expenditure ceilings. To create room for more fully-financed tax cuts aimed at making work and entrepreneurship pay, consideration should be given to taking steps towards a uniform value added tax. Finally, while the current rapid reduction in public debt helps to prepare for population ageing, it is also necessary to consider strategies for how to meet the likely future increase in demand for ever-better service standards in the areas where public funding and provision is dominant. In particular, when expanding user choice, it is essential to implement it in ways that can give room for users to contribute financially, for example in higher education, rather than in ways that increase public spending pressures.
Meanwhile house prices and residential investment are booming
With higher house prices, residential investment has grown by double-digit rates since the beginning of 2004, and over half of all construction firms now point to a lack of qualified labour as the main hindrance to expansion. Such pronounced labour shortages have not been seen since the late 1980s. It helps that Sweden has no special restrictions on worker mobility from the new EU member states. Net immigration from Poland, for example, has grown considerably in 2005-06, and this may be part of the reason behind continued wage restraint in construction. Informing workers from abroad, who consider migrating to Sweden, about ongoing qualification needs of the labour market could be considered to guide the skill composition of inflowing workers.
Could it be made less risky and cumbersome to start a firm?
To ensure demand for the increased labour supply as well as to enhance the economy’s capacity for change, it is necessary to look into why business formation occurs less often and firms are less likely to grow than in other countries, for both manufacturing and services. Reviewing bankruptcy laws is particularly important. Making taxation and other rules simpler is also important, and the 2007 Budget takes steps in this direction. As planned, the size and scope of public ownership in business sectors should be reduced and competition among providers of publicly funded services should be enhanced so as to promote innovation and entrepreneurship in new areas. Extensive job security could be another factor behind limited business formation and also make it harder for start-ups to attract experienced employees, as it means that experienced employees lose something when quitting a safe job. Consideration could be given to making the safety net acquired via long job tenure more transferable.
Tax cuts are important for both labour supply and entrepreneurship
Letting people keep a bit more of the value they create is vital to encourage both labour supply and entrepreneurship. The plans to abolish the wealth tax should therefore be endorsed, as it sets in at a rate of 1½ per cent already from wealth slightly above the average price of a metropolitan-area one-family house. Abolition of the wealth tax might lead to repatriation of capital, possibly making more investment capital available for new small firms. Marginal income taxes are also important, though, because high rates kick in already from slightly above average full-time earnings. The combination of social contributions, income and consumption taxes drives the effective marginal tax rate above 70% for over a third of the full-time employed, helping to explain why working hours for those employed are below the OECD average. With recent tax reforms for closely held companies, the net income gain accruing to the entrepreneur in case the start up proves successful is considerably higher, but there is still scope for improvement.
How to obtain this publication
The Policy Brief (pdf format) can be downloaded. It contains the OECD assessment and recommendations but not all of the charts included on the above pages.
The complete edition of the Economic survey of Sweden 2007 is available from:
- SourceOECD for subscribing institutions and many libraries
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OLISnet, under "Publication Locator", for government officials with accounts ( subscribe)
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Additional information
For further information please contact the Sweden Desk at the OECD Economics Department at eco.survey@oecd.org. The OECD Secretariat's report was prepared by Jens Lundsgaard and Felix Huefner under the supervision of Andreas Wörgötter.
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