Tuesday, September 18, 2007

Swedish Economic Growth Reach New Record

Swedish economic growth according to the volume measure rose from 3.0% to 3.5%. It rose somewhat less according to the terms of trade adjusted measure, from 4.1% to 4.4%, but that still means a new high in terms of trade adjusted growth since at least the 1960s.

While there is a strong cyclical element in the current Swedish boom, the reason for this acceleration is the free market reforms implemented by the centre right government elected a year ago. The burden of government spending has continued the decline that we saw during the previous Social Democratic government, while the incentives for work has improved significantly with a combination of lower income taxes and reduced unemployment benefits. The benefits of these supply boosting policies on the labor market is evident in the record high growth in the previous weak spot of the Swedish economy-employment. Employment increased a full 4% with private sector employment increasing 4.9%-the highest private sector employment growth ever recorded in Swedish statistics.

The improvement should continue next year as the government has promised further income tax cuts, while also cutting back on sick leave benefits. Moreover, the housing tax reform should strengthen the cyclical element in the boom.

Problems could however arise later -2009 at earliest, probably 2010 or 2011- as the government makes enlistment into the unemployment benefit system mandatory, something which will reduce incentives for those who have now chosen to opt out of the system (except to the extent they're forced to pay the 70% of the system financed through taxation) both by raising their taxes when they work and by giving them more benefits if they don't work. Then there is of course the question of the inevitable hangover from the housing bubble created by the Riksbank's inflationary policies and by the housing tax reform.


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