Economic surveys and country surveillance

Economic Survey of Sweden 2008: Key challenges for the Swedish economy

 

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 3rd December 2008.

 

Contents                                                                                                                             

With an active, forward-looking approach to economic reform, Sweden has enjoyed considerable international attention in recent years. Around 1970, Swedish GDP per capita was less than 10% below that of the United States, but following the deep crisis in the early 1990s the gap had widened to nearly 25%. Sweden has since started to catch up as market-oriented reforms boosted productivity growth and, most recently, reforms to promote the attractiveness of work have reduced the share of adults living on income benefits. This Survey focuses on how Sweden can continue to catch up via better policies to promote economic growth. Pursuing a growth-oriented reform agenda can help with social cohesion: a growing tax base would ease pressures on public finances and measures in education and labour markets could promote more equal employment outcomes and equality of opportunity.


Specifically, the following key challenges are reviewed in this Survey:

  • Long-term fiscal sustainability and a growth-oriented tax system. A sound fiscal position has been achieved through consistent consolidation efforts since the crisis of the early 1990s. Now it must be sustained: the fiscal framework should be strengthened with targets more clearly derived from long-term considerations. Building on the recent tax cuts, further reforms could boost growth. In this process, exemptions serving special interests must be avoided.
  • Education policies and employment outcomes for youth. Despite a high overall employment-to-population ratio, youth continue to face problems on the Swedish labour market. Both the education system and labour market institutions need attention.
  • Privatisation and competition. Reducing the scope of public ownership, which currently reaches into a wide range of business sectors, will benefit the Swedish economy. Going forward, it will be important to combine privatisation with reforms to ensure effective competition which should enhance welfare.


GDP growth will be weak in the near term…

The key near-term economic challenge will be to cope with the fall-out from the financial crisis. Growth has stalled since the start of 2008 due to weak consumption and exports, with consumers facing higher interest rates and food and energy prices, slowing house prices and a weakening labour market. Export growth is likely to remain subdued, given the slowdown in key trading partners. Businesses are likely to cut back investment. As a result of weaker demand, considerable margins of slack are set to emerge. Ultimately, the slowdown could be even stronger if large write-downs of Swedish banks’ Baltic assets were to undermine balance sheets, restricting credit in Sweden.


OECD Economic Outlook, no. 84, indicates weak growth for Sweden

 


 … and macro economic policy has started to ease

On the fiscal side, strong automatic stabilisers will provide a substantial cyclical cushion. In addition, the Government has announced a number of measures to be included in the 2009 Budget, implying a reduction of the cyclically-adjusted surplus by almost 1% of GDP next year. This has to be seen in the context of the large surpluses recorded in recent years, with government net lending reaching 3½ per cent of GDP in 2007 – far above the targeted 1%. The cyclically-adjusted budget balance is set to remain above 1% of GDP in 2009, even after the planned loosening. Accordingly, the longer-term soundness of public finances would not be undermined. However, suggestions for further discretionary measures should be weighed against the fact that fiscal balances often worsen more during downturns than anticipated using standard cyclical-adjustment techniques.


Over the summer, inflation reached levels last seen in the early 1990s, at over 4%, driven by high fuel and energy prices. In addition, mortgage interest costs for owner-occupied dwellings increased rapidly since mid-2006, directly pushing up CPI inflation. At the same time, inflation expectations rose, including at longer horizons, leading the Riksbank to hike the repo rate to 4¾ per cent by September. With the intensification of the financial crisis, the outlook for growth has weakened and inflation risks have diminished, leading a number of OECD central banks, including the Riksbank, to cut interest rates in early October. The repo rate was cut again to 3¾ per cent in late October, but even further easing may be warranted in the coming quarters.


Some liberalisation of rental housing is under way

Given the absence of market-determined rents, rental housing is allocated through queuing, extensive search processes and, in some instances, black market trading. As a consequence, some households may have to wait up to ten years for their preferred accommodation or have to buy property when they would prefer to rent. It is therefore welcome that recent reform proposals go in the direction recommended in the previous OECD Survey. Letting rents rise where there are queues addresses the most important problem of Swedish rent regulation, namely that rents are not allowed to adjust in response to supply and demand. Yet, the system remains administratively complex. The gradual approach of capping rent increases to 5% annually probably helps broaden support for the reform, even though more rapid adjustment would be desirable to bring efficiency gains forward. Measures to spur competition in the construction sector and ease land planning processes are also required.


Clear progress has been made on long-standing problems with labour market exclusion and benefit dependency

The share of working-age adults living from income benefits has fallen considerably in recent years. After hovering around 20-21% in 1997-2005, it fell to 18% in 2007. This is partly thanks to cyclical buoyancy. But, as analysed in the previous Survey, recent benefit reforms and other measures addressing labour-market exclusion should have lasting positive effects in the form of higher participation and lower structural unemployment. Much of the improvement reflects falling sickness absence. For a number of years, sickness absence was by far the highest among OECD countries, with 25 working days lost per full-time equivalent employee in 2004. Since then, administration has been tightened and both sickness absence rates and the inflow into disability benefits have fallen by about a third. Even so, sickness absence and the stock of disability benefit recipients remain among the highest internationally. Further reforms, beyond the July 2008 requirements to be ready to change job-function and ultimately workplace, might therefore be needed.

 

How to obtain this publication                                                                                   

The Policy Brief (pdf format) can be downloaded in English. It contains the OECD assessment and recommendations. A Summary in Swedish (pdf format) is also available.

The complete edition of the Economic survey of Sweden 2008 is available from:

 

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 Lunsgaard and David Turvey under the supervision of Vincent Koen. Research assistance was provided by Roselyne Jamin.

 

 

 

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