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ECONOMY

Swedish National Institute of Economic Research criticizes government budget

Sweden needs a tougher fiscal policy by 2019, The Swedish National Institute of Economic Research (KI) said on Tuesday.

Published: 10 October 2017 16:32 CEST
Swedish National Institute of Economic Research criticizes government budget
The institute's head of forecasting, Ylva Hedén Westerdahl, pictured here in June. Photo: TT

The government's budget is severely under-financed and is not in line with the surplus target, according to the institute's latest forecast.

“If the public welfare commitment is also to be kept at 2018's level, the budget will need to be increased by around 30 billion kronor,” the Institute of Economic Research wrote in its forecast.

Asked if the institute was critical of the under-financing, Urban Hansson Brusewitz, general director of the institute, said: “Yes, it's our assessment that the budget is not in line with either the existing surplus target or the new surplus target. It is measured in terms of structural saving, which depends, among other things, on a non-accelerating inflation rate of unemployment, where we make different judgments compared with the government.”

According to KI, unemployment is expected to fall from 6.6 percent this year to 6.3 percent next year and 6.2 percent in 2019, before increasing slightly after that. At the same time, the report shows that there is currently a large shortage of labour with the skills which are in demand. 

The situation in the labour market is described as “strained” with a significant problem in supply and demand.

“At the moment we have a boom and we say that unemployment won't fall below 6.2 perent. That's quite a high level of unemployment generally, and that shows that there's a problem of supply and demand. There are many people in the workforce for whom it's not easy to find work,” said Ylva Hedén Westerdahl, head of forecasting at KI. 

When it comes to salaries, the increase is more moderate despite the shortage in the work market. 

In general, the growth rate in the Swedish economy is expected to weaken slightly over the next few years. This year, the GDP is expected to grow by 2.8 percent, while next year a growth of 2.7 percent is expected. But the growth rates for 2019 and 2020 are estimated at 1.8 and 1.5 percent respectively.

There are some risks to be highlighted in the forecast. One is the economic-political uncertainty across Europe, as well as the risk of a hard landing (a rapid shift from growth to slow-growth to flat) in China and a fall in asset prices.

Falling house prices in Sweden are another factor which could have a negative effect. The extent to which this would affect the Swedish economy would depend on what triggered any decline. If house buyers start to feel worried about buying a home, the impact on the economy would likely be less than if falling prices were due to a global factor such as a financial crisis. 

In general, the growth rate in the Swedish economy is expected to be slightly depleted in the coming years. This year, GDP is expected to grow by 2.8 percent, while the corresponding figure next year is expected to be 2.7. For 2019 and 2020, the assessment is 1.8 and 1.5 percent respectively.

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ECONOMY

How is Denmark’s economy handling inflation and rate rises?

Denmark's economy is now expected to avoid a recession in the coming years, with fewer people losing their jobs than expected, despite high levels of inflation and rising interest rates, The Danish Economic Council has said in a new report.

Published: 30 May 2023 15:46 CEST
How is Denmark's economy handling inflation and rate rises?

The council, led by four university economics professors commonly referred to as “the wise men” or vismænd in Denmark, gave a much rosier picture of Denmark’s economy in its spring report, published on Tuesday, than it did in its autumn report last year. 

“We, like many others, are surprised by how employment continues to rise despite inflation and higher interest rates,” the chair or ‘chief wise man’,  Carl-Johan Dalgaard, said in a press release.

“A significant drop in energy prices and a very positive development in exports mean that things have gone better than feared, and as it looks now, the slowdown will therefore be more subdued than we estimated in the autumn.”

In the English summary of its report, the council noted that in the autumn, market expectations were that energy prices would remain at a high level, with “a real concern for energy supply shortages in the winter of 2022/23”.

That the slowdown has been more subdued, it continued was largely due to a significant drop in energy prices compared to the levels seen in late summer 2022, and compared to the market expectations for 2023.  

The council now expects Denmark’s GDP growth to slow to 1 percent in 2023 rather than for the economy to shrink by 0.2 percent, as it predicted in the autumn. 

In 2024, it expects the growth rate to remain the same as in 2003, with another year of 1 percent GDP growth. In its autumn report it expected weaker growth of 0.6 percent in 2024.

What is the outlook for employment? 

In the autumn, the expert group estimated that employment in Denmark would decrease by 100,000 people towards the end of the 2023, with employment in 2024  about 1 percent below the estimated structural level. 

Now, instead, it expects employment will fall by just 50,000 people by 2025.

What does the expert group’s outlook mean for interest rates and government spending? 

Denmark’s finance minister Nikolai Wammen came in for some gentle criticism, with the experts judging that “the 2023 Finance Act, which was adopted in May, should have been tighter”.  The current government’s fiscal policy, it concludes “has not contributed to countering domestic inflationary pressures”. 

The experts expect inflation to stay above 2 percent in 2023 and 2024 and not to fall below 2 percent until 2025. 

If the government decides to follow the council’s advice, the budget in 2024 will have to be at least as tight, if not tighter than that of 2023. 

“Fiscal policy in 2024 should not contribute to increasing demand pressure, rather the opposite,” they write. 

The council also questioned the evidence justifying abolishing the Great Prayer Day holiday, which Denmark’s government has claimed will permanently increase the labour supply by 8,500 full time workers. 

“The council assumes that the abolition of Great Prayer Day will have a short-term positive effect on the labour supply, while there is no evidence of a long-term effect.” 

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