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The following OECD assessment and recommendations summarise Chapter 1 of the Economic Survey of Sweden 2005 published on 9 June 2005. This chapter discusses the key challenges facing the Swedish economy. It reviews recent economic performance and discusses the areas that need to be improved in order to maintain the welfare state.
Sweden has been one of the OECD’s better-performing economies
Sweden’s economic performance over the past decade or so has been impressive in many respects. The business sector has shown its resilience by brushing off some fairly large shocks, including a global slowdown and the bursting of the telecoms bubble. The current account has swung from a deficit to a large and growing surplus. The fiscal accounts have also moved into surplus, and the government has moved into a net asset position. Inflation has been maintained at a low level. And one of the more encouraging signs for the country’s medium-term outlook is the remarkable surge in productivity. This productivity pick up appears to be sustainable and can in part be attributed to the various structural and macroeconomic policy reforms put in place since the economic crisis of the early 1990s. The labour market performance has been less exemplary, however, even though it is better than in many other European economies. While labour force participation and employment rates are high, especially among women and the elderly, the overall employment rate has not yet recovered to its pre-crisis level and hours of work are low by OECD standards.
Maintaining the welfare system under the pressures of ageing and globalisation will require further reforms
Since the underlying economy is sound, the key challenge for Sweden is for the long term: to maintain the core of its welfare system in the face of a variety of internal and external pressures. Public finances are already feeling the effects of several forces, and others are in the pipeline. On the expenditure side, the greying of the population will lift demand for public services such as healthcare and elderly care. As well as these purely demographic spending pressures, there will no doubt be demands to raise public service standards over time, especially in healthcare, both because people will be getting wealthier and because new technologies will expand the range of services that can be offered. On the revenue side, tighter integration within the EU and globalisation more broadly are making it harder to maintain the high tax rates on mobile bases that are needed to finance the country’s ambitious public expenditure programmes. The tax base is also coming under pressure from within as high tax wedges are putting downward pressure on labour supply and encouraging people to operate in the “informal economy” instead.
Policy reforms will be needed to keep public finances under control
in the long term
Primary balance and net debt of the general government, per cent of GDP
1. The primary balance is the general government balance excluding net interest payments.
Source: Ministry of Finance; OECD calculations.
Boosting labour supply is the best option
Maintaining the welfare system – and the egalitarian Swedish model more broadly – is certainly possible, but it will require further policy reforms. Although the fiscal situation is much better than in most OECD countries, it is a little shy of the level needed to ensure that the welfare system will be financially sustainable in the long term. The most immediate priority is therefore to comply with the government’s surplus target of 2% of GDP. Public finances need to be strengthened by at least one percentage point of GDP. Maintaining the surplus at the target level for 15 years or so afterwards would allow net assets to be accumulated that can later be drawn down to finance the age-related spending pressures. Spending cuts and tax increases are both difficult, so the most attractive option for achieving the surplus target is to increase labour supply. Key areas are reducing sickness and disability absences and raising participation by youths, the elderly and immigrants. In the absence of progress in these areas, the government would need to be more ambitious still in its savings plans or be forced to cut back on the welfare state in the future. Achieving the 2% surplus target would go a long way towards what is needed to safeguard current service levels. However, it would leave no room for anything extra. For the reasons discussed below, tax financing alone will probably not be able to cover this extra demand. This suggests that some further adjustment of the Swedish model may be necessary over time. First, Swedes will need to decide what are the core parts of the system that should still be provided free of charge to everyone. Second, other financing sources may have to be used to a certain extent for some of the lower-priority services. Finally, the tradeoff between public spending now and in the future needs to be recognised. There is an understandable demand for generous parental, study and sabbatical leave, for instance, but the less that people work today, the fewer public services the country will be able to afford in the future.
The tradeoff between equality and efficiency needs to be carefully balanced
Equality remains a high priority in Swedish policymaking and among the general public. There is little, if any, acceptance of policies that would permanently widen the income distribution. This is a legitimate social choice. Of course, the best option is to look for reforms that would be good for growth and that would leave the long-run income distribution intact, and then try to find compensation mechanisms to offset any short-run impacts on dispersion. But where that is not possible, such strong distributional concerns can be costly. There is sometimes a tradeoff between equity and efficiency which needs to be recognised. Sweden may be foregoing growth-enhancing reforms which, if implemented, might make it significantly easier to achieve other social objectives.
Return to the OECD Economic Survey Sweden 2005 homepage
Go to Chapter 2
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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.
To access the full version of the OECD Economic Survey of Sweden:
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Non-subscribers can purchase the PDF e-book and/or printed book at our Online Bookshop.
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Government officials can go to OLISnet's Publication Locator ( subscribe).
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Accredited journalists can go to their password-protected website.
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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