Tighter budgets as economy strengthens
The Swedish economy will grow healthily in the coming years, driven by export growth and higher household consumption. As the economy strengthens, fiscal policy will need to be tightened to bring public finances into balance. This will mean spending cuts and/or tax increases in the coming years, even with a switch to a balanced-budget target. Such are the results of the latest forecast from the National Institute of Economic Research (NIER), published today.
The Swedish economy will continue to recover, with GDP growing by around 3 per cent both this year and next. The biggest contribution to GDP growth will come from exports, which are set to climb at 4-5 per cent in the coming years, buoyed by an investment-led economic recovery in the OECD countries and a weak krona. This outlook is supported by the latest Business Tendency Survey, which shows that sentiment in the manufacturing sector is above the historical average.
Recent years’ fiscal stimuli – primarily tax reductions – have helped prop up resource utilisation. As the economic climate improves, it will be natural for these stimuli to be phased out and for fiscal policy to compensate for the deficits that have arisen. Given the government’s principle of fully funded reforms, public finances will remain in deficit until 2018. Fiscal space will therefore be non-existent, even with a switch to a balanced-budget target for public finances. An unchanged public sector commitment in 2016-2019 will require taxes to be raised by around SEK 100 billion.
After weak employment growth over the summer, the number of vacancies and firms’ recruitment plans suggest that employment will rise more quickly during the rest of the year. While employment is set to grow at a stable rate, the labour force will expand considerably due to high immigration. New immigrants have a weak position in the labour market, however, and are harder to match to vacant jobs. This is among the reasons why unemployment will fall only slowly and will still be around 7 per cent in 2017.
Inflation to rise with support from monetary policy
The krona’s depreciation over the past year is one reason why inflation has bottomed out and is now on the way up. The NIER nevertheless expects inflation to rise more slowly than in the Riksbank’s forecast. The Riksbank is therefore expected to reduce the repo rate further to –0.45 per cent in December in a bid to get inflation and inflation expectations to come up more quickly. The repo rate is then assumed to remain at this level until the end of 2016, when a series of rate increases will commence.
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