In Sweden, Fiscal Health Spurs Spending Debate
EU election results in Sweden may complicate the government’s fiscal debate
As many European countries face difficult choices about cutting budgets to reduce soaring debt, Swedish politicians are debating whether to use strong public finances to prop up its weakened economy.
Sweden has a debt-to-GDP ratio of just 30%, far below the European Union (EU) average of 90%, allowing the Nordic country to alleviate some of its domestic economic problems and invest in its future.
Prime Minister Ulf Kristersson, the leader of the Moderate Party, recently highlighted Sweden's fiscal health and growth plans. "Investing in Swedish competitiveness, investing in Sweden's future is the next step in economic policy," he said at a press conference on June 5.
Sweden’s inflation, which had peaked at over 10%, has subsided and is now nearing the Riksbank central bank’s target of 2%, providing the government with more leeway for expansive fiscal measures. Nordea’s chief analyst Torbjörns Isaksson doesn’t rule out an early interest rate cut, expecting more than two cuts in 2024, currently signaled by the Riksbank.
Fiscal prudence in times of uncertainty has undercut Swedish economic growth. The country has experienced four consecutive quarters of declining GDP. Although the country has managed to slow inflation (2.4% in April), the economic contraction has taken its toll.
Following a domestic financial crisis in the early 1990s, Sweden implemented fiscal consolidation measures, including spending reductions and tax increases. While initially challenging, these measures established a robust financial foundation that allowed Sweden to navigate the Great Recession of 2008 with relative stability.
The EU parliamentary election results in Sweden may further complicate the government’s debate about how best to leverage this strength for the nation's long-term benefit.
The Swedish Greens, who support increased government spending on climate change targets, unexpectedly came out ahead, with 13.6% of the vote, of the Sweden Democrats (13.4%). narrowly avoided being thrown out of the European Parliament during the elections from June 6-9, according to provisional results published by the Swedish government.
Deputy Prime Minister Ebba Busch has proposed maintaining deficit spending of around 0.5% until debt reaches about 45% of GDP, boosting the budget by SEK 50 billion (€4.37 billion) annually. Finance Minister Elisabeth Svantesson expressed caution against long-term deficits.
Svantesson, a member of the pro-business Moderate Party, has argued that income tax cuts and benefit reforms are better strategies for boosting tax revenues through long-term growth. "Some are saying that we should have a deficit long into the future. That would just leave our debts to the next generation," she warned.
Social Democrat Fredrik Lundh Sammeli, a left-leaning opposition member of parliament, has advocated for greater investments in a "green" industrial revolution in northern Sweden. This region holds immense potential for renewable energy production but has lacked the government spending to develop a clean energy infrastructure.
"If we don't do it now, we won't just miss out on being at the cutting edge of green industrial development," Sammeli, an opposition Social Democrat member of parliament, said. "It will be a threat to ... Sweden as an industrial nation."
Lars Jonung, a professor emeritus at Lund University, said on Radio Sweden that deficit spending is ”historically ignorant” and the wrong direction to move from today’s surplus target to a deficit target. He argued that the fiscal policy framework has worked well in the past twenty years, and Sweden has increased its public investments more than any other EU country.
Boosting GDP
The government has set aside about SEK 200 billion (€17.4 billion) for new investments in the renewable industry sector in the north. These investments, as estimated by McKinsey Co., could boost current GDP by 2-3%.
A notable project in the Northern green initiative is the SEK 52 billion (€4.54 billion) steel company SSAB’s (STO: SSAB-A) fossil-free steel plant in Luleå, which is expected to reduce Sweden’s total CO2 emissions by 7%. The steel manufacturer trades at a favorable P/E ratio of 4.9x, boasting a healthy balance sheet with plenty of cash and little debt while paying a notable 8.5% dividend. Finnish state investment firm Solidium is the largest shareholder with a stake of 6.48%.
A recent commission examining long-term public finances recommended targeting a budget deficit of 0.5% for the next 20 years. This approach would free up an additional SEK 50 billion (€4.37 billion) annually for investment. This strategy would allow Sweden to bolster infrastructure, energy systems, and research, driving future growth and productivity.
Defense Spending
However, Sweden’s financial strategy must also account for increased military spending. As a new North Atlantic Treaty Organization (NATO) member, Sweden is committed to raising its defense spending from 1.54% of GDP to approximately 2.6% by 2030 as it meets the NATO target of at least 2%.
Even before joining NATO, Sweden has supported Ukraine's defense, contributing SEK 43.5 billion (€ 3.83 billion) to the cause.
The latest, 16th and largest military package will include an Advanced Medium Range Air-to-Air Missile (RB 99-AMRAAM), Airborne Surveillance and Control aircraft (ASC 890), artillery ammunition and PBV 302 armored vehicles. SEK 13.3 billion (€ 1.17 billion) package is part of the upcoming additional amending budget.
Undercutting Growth
To support the healthcare, justice, and employment system, the government introduced a spending package totaling SEK 17.3 billion (€1.51 billion). This package includes a SEK 6 billion (€524 million) addition to local governments responsible for healthcare and increased defense and infrastructure spending.
"The good news that inflation is slowing allows us to shift toward a more normalized fiscal policy," Svantesson noted in a press release in April. "We will provide support to the areas most in need and where the consequences of inflation have been the greatest."
The GDP contraction has had a significant negative impact on Sweden's economy, with corporate defaults extending the streak of annual increases to 21 months in April. The largest increase in defaults was recorded among hotels and restaurants, followed by consultancy firms and companies in the construction industry, which are grappling with a troubled real estate sector.
“While there are positive signs, with slowing inflation and the possibility of future rate cuts, it will take time before that has a noticeable effect on companies’ financials,” Creditsafe Sweden CEO Henrik Jacobsson said for Bloomberg.