Key findings from the OECD’s Economic Survey of Sweden and Economic Challenges Facing Swedish Economy
Remarks by Angel Gurría, OECD Secretary-General
Stockholm, Sweden, 20 January 2011
Dear Minister Borg,
Ladies and Gentlemen,
It is a great pleasure to be back in Stockholm and to present the OECD’s new Economic Survey of Sweden to such a distinguished audience.
Sweden is recovering quickly and robustly from the crisis. As highlighted in our Survey, this is in large part thanks to the sound macroeconomic and structural policies Sweden has pursued over the past couple of decades. Sweden is an island of prosperity in the middle of very uncertain waters which makes your achievements even more remarkable.
Sweden was hard hit by the crisis, but, in contrast to many other OECD countries, it has rebounded vigorously. The economy is now growing at an annual rate exceeding 5% and we expect it to grow by about 4% in 2011 and 3½ per cent in 2012.
The fiscal position remains strong. The public sector deficit is expected to have been below 3% of GDP in 2010 and to return to a surplus by 2012. Public debt remains relatively low. And contrary to many other countries, you reformed your pension system years ago, so you are not facing huge future liabilities, as a result of the ageing of your population.
The labour market, where the scars of the recession generally take longer to heal, is already recovering. Employment and participation rates remained high throughout the crisis.
Last but not least, Sweden is spearheading efforts to green the economy. Sweden managed to decouple its GHG emissions from growth. It now boasts one of the lowest GHG emissions per capita amongst OECD countries.
This is such a positive picture that you could be excused to rest on your laurels. You shouldn’t. You are never totally free from external shocks. And it is in good times that you should prepare for future storms. This is the time to strengthen fundamentals even further.
Let me go through the main ingredients of Sweden’s success story, as seen from the OECD, and outline our recommendations.
Maintaining a sound fiscal position
Entering the crisis with a strong fiscal position - a general government surplus of 3½% of GDP - proved to be a major asset. It allowed the authorities to let the automatic stabilisers work fully and provided room to inject fiscal stimulus without casting doubts on fiscal credibility.
A strong fiscal framework, with a 1% of GDP surplus target and a well-established expenditure ceiling, has helped bring about these good results. Having an independent Fiscal Council is also a positive feature of the framework – one sorely missing in some other OECD countries.
Further improving monetary and financial policy frameworks
Monetary policy also helped mitigate the downturn, lowering rates when you had to. As economic slack is now shrinking fast, the central bank has started to raise the repo rate. Again, this is appropriate.
Sweden’s monetary policy framework is one of the most transparent worldwide. That said, we welcome the fact that a commission is looking at how asset price and credit developments should influence monetary policy and look forward to its recommendations.
The Swedish financial system has been under stress, but it coped well, partly thanks to government support. Yet, as in many other countries, there are still some gaps in the toolkits needed to supervise and nudge financial institutions. For instance, this is a good time to look at the respective responsibilities of the different authorities and agencies and see if the institutional set up can be improved.
Limiting long-term unemployment and raising participation
The functioning of the labour market is another area of potential improvement. The crisis hit the labour market, but less than feared. Indeed, the Swedish labour market model, where the social partners play an important role, has helped accommodate large macroeconomic shocks while providing security to workers.
Even so, reforms are called for to better help those at the margin.
Minimum wages, set at industry level through collective agreements, are relatively high. They can be a barrier for some workers making it now difficult for them to get jobs. More can be done to ensure that minimum wages are more in line with workers’ productivity.
The efficiency of active labour market policies can also be raised by rebalancing the policy mix from subsidised employment towards training and job search, which help workers find regular jobs. At the same time, the cooperation between job placement services and unemployment insurance agencies could be improved.
All in all, efforts to stimulate job search should continue. We think the government’s proposal to make mandatory the contributions to the unemployment insurance is a good idea. This would reduce the number of unemployed relying on social assistance, many of whom have very little incentive to take a job.
Enhancing the cost-effectiveness of climate change policies
Climate change policies are another area where policies could evolve. Sweden has achieved impressive results in the area of climate change mitigation. GHG emissions have been reduced by more than 10% from 1990 to 2008 and by 17% up to 2009, including the impact of the crisis, according to most recent Swedish data.
How has Sweden managed this feat? By introducing, early on, a credible price for carbon, through the carbon tax. Sweden also has an energy tax, takes part in the EU ETS, and, more generally, is strongly committed to climate change mitigation.
Sweden has very ambitious targets for 2020. But the main challenge is not of achieving these targets. They are achievable with existing policies. The key should be to reach them at the least possible cost by improving what is already a sound policy framework.
For this to happen, carbon prices need to become even more central to shape incentives. It is important that the government continues to remove exemptions to the carbon tax. Other non-price instruments also risk blurring price signals. They should be used only when there is a distinct market failure or for some other clearly defined objectives.
Like many other countries, Sweden has other targets (a renewable target, an energy efficiency target) that interact with the climate target and raise the cost of achieving it. The overlap of targets should be limited and the coherence between them enhanced.
Ladies and Gentlemen,
Sweden’s enviable situation is not a stroke of luck. The very severe crisis Sweden endured in the early 1990s triggered major reforms. Some of them have been painful but they helped put Sweden on a path of sustained and sustainable growth. And they served Sweden well to weather the recent global financial and economic crisis.
Today, the Swedish economy looks as strong as Pippi Longstocking, the famous Swedish fictional character you know so well. It is important to keep up this strength, which stems from the ability to undertake ambitious reforms, even if they are socially or politically costly and if their positive effects are felt mostly in the medium- to long-term.
A founding member of the OECD, Sweden is an example to many other OECD countries. I am proud that the OECD has been a constant and faithful partner to Sweden all those years. And I am happy to see how generous Sweden has been in sharing its policy experiences with other countries at the OECD.
I congratulate you for your achievements and hope Sweden will continue to be a beacon of light as we navigate these turbulent waters of the world economy in the next few years.