stability, cohesion and growth - piie2012/04/23 · •firm top-down budget process (1994-1996)...
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Ministry of Finance Sweden
Stability, Cohesion and Growth
April 23, 2012
Swedish Minister for Finance Anders Borg
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Ministry of Finance Sweden
Agenda
• Sweden has weathered the current crisis relatively well
• Lessons from the crisis in the early 1990s
• Further reforms still necessary
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Ministry of Finance Sweden
General government gross debt Percent of GDP
Source: IMF Fiscal Monitor Update and the Swedish Ministry of Finance
0
50
100
150
200
250R
ussi
a
Chi
na
Sw
eden
Sou
th A
fric
a
Mex
ico
Bra
zil
Indi
a
Spa
in
Ger
man
y
Uni
ted
Kin
gdom
Can
ada
Fran
ce
Uni
ted
stat
es
Ital
y
Japa
n
2008 2012
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Ministry of Finance Sweden
Europe today: competetiveness crisis Unit labor cost relative to Germany. Index 1995=100
80
90
100
110
120
130
140
150
160
Portugal
Spain
Italy
Greece
Sweden
United States
Source: OECD
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Ministry of Finance Sweden
GDP growth Average growth rate 2007-2011. Percent
Employment growth 15-64 yrs. Growth Q3 2006-Q3 2011. Percent
Source: OECD Source: OECD
Unemployment rate 15-74 yrs. Change in percentage points Q3 2006-Q3 2011
Source: OECD and Eurostat
Inflation Average 2007-2011. Percent
Source: OECD
-1
0
1
2S
wed
en
Ital
y
Den
mar
k
Japa
n
UK
Spa
in
Eur
ozon
e
Fran
ce
EU
27
US
A
Finl
and
OE
CD
Net
herl
ands
Can
ada
Ger
man
y
-1
0
1
2
3
4
Sw
eden
Japa
n
Fran
ce
Ger
man
y
Net
herl
ands
Can
ada
Eur
ozon
e
Ital
y
US
A
Finl
and
Den
mar
k
OE
CD
Spa
in
EU UK
-10
-8
-6
-4
-2
0
2
4
6
8
Sw
eden
Spa
in
Japa
n
Den
mar
k
US
A
UK
Ital
y
EU
27
Net
herl
ands
Finl
and
Fran
ce
OE
CD
Can
ada
Ger
man
y
-5
0
5
10
15
Sw
eden
Ger
man
y
Finl
and
Net
herl
ands
Japa
n
Fran
ce
Can
ada
EU
27
Ital
y
EU
17
OE
CD UK
Den
mar
k
US
A
Spa
in
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Ministry of Finance Sweden
Agenda
• Sweden has weathered the current crisis relatively well
• Lessons from the crisis in the early 1990s
• Further reforms still necessary
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Ministry of Finance Sweden
Sweden in 1980s: a slow train wreck
• Heavily regulated markets
• High taxes and high threshold effects
• Poor business climate
• Dysfuntional wage setting
• Unsustainable fiscal policy
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Ministry of Finance Sweden
Severe macroeconomic imbalances
• High inflation
• Poor real wage growth
• Repeated devaluations
• Rising public debt levels
• Persistent current account deficit
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Ministry of Finance Sweden
High inflation Annual percentage change in CPI
-2
0
2
4
6
8
10
12
14
19
60
19
63
19
66
19
69
19
72
19
75
19
78
19
81
19
84
19
87
19
90
19
93
19
96
19
99
20
02
20
05
20
08
20
11
Source: Statistics Sweden
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Ministry of Finance Sweden
Poor real wage growth Real and nominal wage growth. Annual growth rates. Percent
-5
0
5
10
15
-5
0
5
10
15
1960 1970 1980 1990 2000 2010
Nominal wages
Real wages
Sources: Medlingsinstitutet and the Swedish Ministry of Finance. 2011-2015 are forecast values
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Ministry of Finance Sweden
Public finances under severe stress Government net lending 1970-2000. Percent of GDP
-15
-10
-5
0
5
10
1970 1975 1980 1985 1990 1995 2000
Source: Statistics Sweden
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Ministry of Finance Sweden
• Broad political support
• Broad consolidation in all areas raised revenues and maintained social cohesion
• Structurally appropriate pro-growth measures where possible
Consolidation in Sweden
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Ministry of Finance Sweden
Consolidation in all areas Consolidation measures 1991-1998. Percent of GDP
0
2
4
6
8
10
12
14
Expenditure cuts Revenue increases Total
Source: Swedish Ministry of Finance
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Ministry of Finance Sweden
Major expenditure cuts
Pensions (reduced indexation)
Early retirement pension
Government transfers to local authorities
Unemployment insurance
Health insurance
Child allowance
Family support
Parenting insurance
Child maintenance allowance
Real public consumption held constant absent discretionary changes
Public administration costs subject to annual productivity growth adjustment
Reduced subsidies for pharmaceuticals
Interest rate subsidies and other housing subsidies
Housing benefits
Old age housing benefits
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Ministry of Finance Sweden
Major revenue increases • Uniform capital income taxation
• Indexation of environmental and excise duties
• Increased payroll tax
• High tax on petrol
• Income tax increase for high income earners
• Increased tax on tobacco
• Social security contributions for self-employed
• Amended rules for income tax deductibility of expenses
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Ministry of Finance Sweden
Lessons from succesful consolidations
• Expenditure cuts preferable to tax hikes
• Broaden tax bases rather than raising tax rates
• Consolidation measures must have acceptable effects on distribution of income
• Prioritize pro-growth consolidation measures
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Ministry of Finance Sweden
The Swedish fiscal policy framework • Firm top-down budget process (1994-1996)
‐ Initial decision on binding expenditure restrictions (frameworks) for expenditure areas
‐ Proposed appropriations balanced by reducing other appropriations in the same expenditure area
• Three budgetary targets – Central government expenditure ceiling (1996) – Surplus target for general government (2000) – Balanced budget requirement on local govts (2000)
• Fiscal Policy Council (2007)
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Ministry of Finance Sweden
Improved budget process • Bottom-up budget processes are problematic
‐ Driven by demand, not by economic growth ‐ High expectations for new spending reforms ‐ Ministry of Finance involved at a late stage in the process
• A strict top-down process resolves much of these problems – Entire draft budget governed by expenditure ceiling,
surplus target and available room for reforms – Medium-term context separates budget’s total size from
issues of needs and desirable expenditures – Minority governments can avoid cost-push negotiations with
opposition parties
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Ministry of Finance Sweden
Rules are important but will only work if backed by political commitment
• Broad support in the Swedish parliament on the importance of the fiscal framework
• No major deviations from fiscal framework – Has created a positive path dependence where
deviations from the framework are politically costly – External evaluation from fiscal council and others to
increase cost of deviating from framework
• National ownership over the construction of fiscal framework is a pre-condition for success
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Ministry of Finance Sweden
Structural reforms • Major tax reform, lower marginal tax rates on labour
• Stricter regulation of competition and public procurement
• Extensive deregulation of important markets – banking and finance, air travel, taxi, buses, rail
freight, power production and distribution, telecom, postal services, retail including food retail
• Increased private production of welfare services, e.g. school vouchers
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Ministry of Finance Sweden
Structural reforms (continued)
• Pension reform
• European Union membership
• Inflation targeting
• Central bank independence
• Reformed wage setting process
• Increased labor market flexibility
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Ministry of Finance Sweden
Reforming health care • Balanced budget requirement
• Modernised budget system: diagnosis related payments
• Co-payments
• Reformed prescription drug subsidies and use of generic drugs
• Competition between providers inside and outside public sector
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Ministry of Finance Sweden
Health care costs Total health care expenditure. percent of GDP
0
4
8
12
16
20
0
4
8
12
16
20
US
Sweden
Source: OECD
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Ministry of Finance Sweden
Making work pay Average marginal effects 1996-2010. Percent
46 46 46 45
43
41 40 40 40 40
39
36 36
33 33
25
30
35
40
45
50
Source: Statistics Sweden and the Swedish Ministry of Finance
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Ministry of Finance Sweden
Public finances in order Public revenues and expenditures. Percent of GDP
Source: Statistics Sweden
45
50
55
60
65
70
80 85 90 95 00 05 10
Revenues
Expenditures
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Ministry of Finance Sweden
Lessons from the recent crisis
• No stability without financial stability – Higher capital requirements on banks – Stronger rules for sufficient liquidity ratios – Better financial supervision – Improved stress tests
• International cooperation is crucial
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Ministry of Finance Sweden
Agenda
• Sweden has weathered the current crisis relatively well
• Lessons from the crisis in the early 1990s
• Further reforms still necessary
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Ministry of Finance Sweden
Sweden’s Achilles heel
• Tax wedges and compressed wage distribution destroy jobs
• High barriers when entering labor market
• Youth and immigrants bear a large share of the burden
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Ministry of Finance Sweden
Difficulties entering the labour market Unemployment rate among foreign-born youth. Percent of labour force
Source: Statistics Sweden. Note: Time series break. 1993–2004: 16–24 years, previous definition. 2005–2011: 15–24 years, international harmonized definition.
0
5
10
15
20
25
30
35
40
Unemployment rate, foreign-born youths Unemployment rate 15–74 years
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Ministry of Finance Sweden
The road ahead
• Lower barriers and make work pay
• Increase labor demand for weaker groups
• Consider subsidies to some employment forms
• Education: Raise quality and job market relevance
• Expand vocational training and on-the-job learning
• Increase flexiblity while safeguarding security
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Ministry of Finance Sweden
Prosperity and equality Inequality in income distribution including public services. Gini coefficient
0,00
0,05
0,10
0,15
0,20
0,25
0,30
0,35
0,40
Source: OECD (2011), Divided We Stand
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Ministry of Finance Sweden
Summary: sustainable fiscal strategy
• Consolidation requires credibility
• Strong fiscal framework boosts credibility
• Structural reforms necessary for long-term growth and competitiveness
• Stabilility, cohesion and growth