Finanspolitiska rådet

Finanspolitiska rådet
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Strong finances - But too large safety margins

14 May 2012

Strong public finances
The Swedish economy has thus far fared well with the global crisis. The fiscal policy generally appears to be successful and, on the whole, well balanced considering the shocks that have affected the Swedish economy. In the Council´s opinion, the fiscal policy pursued in 2011 and 2012 has complied with the current fiscal framework. We think that there is little risk of expenditures exceeding the expenditure ceiling in the next few years. We take the view that the fiscal policy is compatible with long-term sustainable public finances.
Lacking a stabilisation policy basis
The Council notes that the tax cuts announced in spring 2011 were not proposed in the 2012 Budget Bill. We think that the position taken by the Government lacked and still lacks a stabilisation policy basis. Rather, the worsened economic situation argued in favour of a more expansive fiscal policy.
Uncertainties regarding safety margins
The Government has referred to the economic crisis and the macroeconomic uncertainty as an argument for larger safety margins in fiscal policy. This argument has caused some confusion about whether the Government thinks that the fiscal framework is adequate. Regular use of safety margins risks creating an undesirable procyclical element in fiscal policy and causing average government net lending to exceed the surplus target.
Uncertainties regarding the public wealth  
The surplus target results in the stabilisation of general government net financial wealth as a percentage of GDP. Net wealth will likely continue to increase from the current level of about 20 per cent of GDP. In the Council´s opinion, the Government should clarify its view of what an appropriate size of government net wealth is. The Council´s view is that a further build-up of net wealth beyond the current level is difficult to justify with the need for safety margins for a future economic downturn.

Overestimated effects of reduced restaurant VAT
The Government´s most costly measure in the 2012 Budget Bill is the reduction of the VAT on restaurant and catering services. It is the Council´s opinion that the estimated effects of the reform on unemployment and employment are exaggerated. We also think that the reduced tax rate is an inefficient way of reducing the administrative costs. The lower VAT on restaurant and catering services is rather more like sectoral support. The Government should instead consider introducing a uniform VAT. This would most likely have large positive economic effects.

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