Tuesday, October 17, 2006

About Swedish Government Budget

Yesterday the new Swedish finance minister Anders Borg presented his first government budget. I had some trouble getting to the relevant information. Press releases are as usual just filled with high-sounding empty phrases and the selected parts which they think will maximize public sympathy. The pdf-file with the full budget is written in a way which is anything but easy to read and pedagogic. Instead of first summarizing the relevant parts (i.e. economic forecasts, total income and spending with specification in general factors and a summary of all of the changes they propose) they mix them with detailed specifications of various posts. But after some trouble I did finally manage to find what I was looking for.

The good news is that Swedish government spending is projected to continue to fall, from 52.8% in 2006 to 51.3% in 2007 and then to 49.8% in 2009. Other good news include a SEK 40 billion income tax cuts, a cancellation of a planned airline tax planned by the former government and spending cuts in a few areas most notably unemployment insurance. The combination of the reduction in unemployment insurance benefits and lower income taxes will increase incentives for work and therefore increase the structural growth rate of the Swedish economy.

The bad news is that the reduction in government spending to GDP is only to a small extent expected to come through active net spending cuts by the new government. For 2007, projected total spending will only be SEK 7 billion lower (or 0.23% of GDP) than what the previous government had proposed. Also contributing to this will be spending restraint in municipalities increasingly controlled, particularly in the Stockholm area, by the centre-right parties (and particularly in Stockholm, the local Moderates are more radical than the national party dares to be) . But the biggest factor will be a projected continued cyclical upswing, as Sweden's government budget are extremely cyclical in its nature. Even if this comes true, which it indeed might until 2009 considering the cyclical effects of the gradual reformation of the property tax, it is dangerous to rely on it permanently, considering the fact that this means that government spending could then rise rapidly relative to GDP in the event of a cyclical downturn. So there should clearly be far bigger cuts than just 7 billion.

The reason why the net cuts are so small is that most of the savings from the cuts in unemployment- and sick leave payments will go to increasing government consumption and other areas where the centre-right parties propose higher spending than the Social Democrats.

And so since the net spending cut is a mere 7 billion, this means that most of the 40 billion income tax cut will be payed for by raising other taxes as well as reducing the budget surplus. The centre-right government for example proposes to raise the tax on snus and they also propose doing away with a number of tax deductions, do away with a rebate in payroll taxes for small businesses and raise the "fee" for traffic insurance, which since it is mandatory is a tax. Moreover, they propose to raise the "fee" for unemployment insurance. While it is currently correct to call it a fee, it will soon become a tax since the centre-right government plan to make unemployment insurance mandatory.

One curious fact is that they for next year only propose to cut the wealth tax in half, rather than abolish it completely. Given how they themselves argue that it is so harmful that doing away with it would probably be self-financing given how the boost to the economy would increase revenues from other taxes, it is puzzling that they do not propose a complete abolition.

One saddening fact is that I turned out to be right when I predicted that the Moderates would cave in and let the Liberal Party, the Centre Party and the Christian Democrats have their way with regards to foreign aid which will be raised to 1% of GNP, which is the arbitrary target that all parties except the Moderates for some reason have decided should be wasted on foreign aid.

In short, the budget is slightly better than what it would have been had the Social Democrats stayed in power, but only slightly .


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