Sweden enjoys boom, critics warn of long-term challenges

Surging growth, falling debt and money left over for investment in welfare, jobs and security mean Sweden is enjoying an economic boom that few European countries can match.

Swedes are in sombre mood after the deadly attack on Stockholm earlier this month, but the centre-left coalition outlined rosy budget forecasts on Tuesday that will make the country the envy of most of its European neighbours. 

The government upped its growth forecast for the next two years and pointed to an increasing surplus in public finances. Debt levels are set to fall to the lowest level since the 1970s despite increased spending on welfare, jobs and security.

"The strength of the economy and public finances mean that we are in a completely new situation," Finance Minister Magdalena Andersson told a news conference.

"We can invest in the future at the same time as we build up buffers against the day when things are worse."

Few European countries boast such strength, although some economists warn soaring household debt and the challenge of integrating large numbers of immigrants could trip up Sweden's economy.

Debt levels in the eurozone are around 90 per cent of GDP on average compared with 40 percent and falling for Sweden. The government is even mulling a sovereign wealth fund should debt fall below 30 per cent of GDP.

A 62 billion Swedish crown ($6.9 billion) shortfall in public finances in 2014 has been reversed, with the surplus on track to reach 110 billion in three years' time.

Challenges

Unemployment is set to fall to its lowest level since 2008 and more Swedes will be employed than at any time in the last quarter century by 2020, according to the centre-left coalition.

The economy will expand 2.6 per cent this year after 3.3 per cent in 2016. Only Ireland did better among large and medium sized European economies last year.

At the same time, inflation is, if anything, too low and not projected to stabilise around the central bank's 2 per cent target until late 2018.

Partly, the government has been lucky since taking power in 2014. Sweden's banks rode out the financial crisis of 2008-2009 without major mishap and most importantly, no state bail-out.

Ailing banks in countries like Italy, for example, still need to be dealt with.

Unemployment spiked, but not to the levels seen across the rest of Europe thanks to flexible policies by unions and employers, and a generous welfare system supported many of those made redundant. That meant there was no house-price crash.

Income tax cuts by the former government, the centre-right Alliance, also cushioned the impact of the crisis. Since taking over in 2014, the Social Democrats and Greens have prioritised prudence, keeping a lid on spending.

Ultra-low rates have driven borrowing and consumption and helped keep Swedish exports cheap.

But the Goldilocks scenario of boom without bust may be short-lived. Inflation is subdued, but house prices and household debt levels have surged, creating fears of a bubble.

Sweden will also struggle to integrate the record numbers of asylum seekers of the last few years without major structural reforms to the labour and housing markets while taxes and red-tape crimp small companies.

"When you have such good public finances and such a strong economy in general, it is somewhat remarkable that we have not been able to make structural reforms to deal with the challenges that everyone agrees exist," said Anna Breman, chief economist at Swedbank.

The government said in the spring budget it would boost spending by 3.1 billion crowns ($344.52 million) with 700 million going to the police in the wake of the deadly truck attack in Stockholm.

More money will also go to the military, schools and healthcare, the government budget bill showed.

For 2018, the coalition has outlined tax hikes for sectors such as airlines and small businesses, plans that the main centre-right opposition has said it aims to block.

That risks throwing Sweden in to political chaos and strengthening the hand of the anti-immigration Sweden Democrats at a time when the country is still trying to deal with the fall-out from the Stockholm attack.

Source: Timesofoman