Fiscal consolidation lessons from Sweden

Though I had pointed to the lessons via this excellent paper from Jens Henriksson. But still there is always room for more.

Sweden’s finance minister, Anders Borg gives an insighful speech on lessons from Sweden’s fiscal consolidation program in 1990s.

He says fiscal consolidation matters for four reasons:

The current situation is not sustainable. As outlined above, debts are projected to increase dramatically over the next few years, reaching over 100% in some cases.

Benjamin Franklin once said that the only certainties in life are death and taxes. Well, I’d like to add a third certainty: future economic crises. We know from experience that there is always another downturn around the corner. And we need to be ready for it.

The demographic challenges facing much of the developed world make sustainable public finances a necessity, as has been illustrated by the Commission’s Ageing and Sustainability Reports, published in 2009.

The inability to maintain sustainable public finances would increase the risks of higher equilibrium unemployment and long-term unemployment, with drastic and lasting consequences for economic stability and growth.

I liked the new addition to Benjamin Franklin’s famous quote. Repeat – the only certainties in life are death, taxes and economic crises. How times change. Till 2007 we were all looking at great moderation and how we have advanced in policymaking and crisis are both fewer and smaller in scale.

Lessons from Sweden:

  1. All means must be used
  2. Increase taxes
  3. Lower expenditure
  4. Improve baseline scenario
  5. Do not be disappointing: create a conservative baseline
  6. Frontload the consolidation
  7. Calculate the political cost: public choice
  8. Safeguard labour force participation
  9.  Strengthen fiscal institutions
  10. Maintain social cohesion

Quite similar to Henrisksson’s list except that Borg points to the need to understand political economy as well. The costs of taking on strong interest groups who would defend loudly should be calculated well.

A good speech on fiscal basics.  

Addendum:

Apart from this, Sweden has many other lessons as well

2 Responses to “Fiscal consolidation lessons from Sweden”

  1. Riksbank to examine Sweden housing market « Mostly Economics Says:

    […] useful policy initiative from Sweden which all should look forward to emulate. Sweden has added many feathers in its policy […]

  2. Inflating US debt will not help « Mostly Economics Says:

    […] A country loaded with debt can try to simply tighten its belt, by raising tax revenues and/or slashing spending. (What Sweden did) […]

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