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The Swedish Fiscal Framework – The Most Successful One in the EU?

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Abstract

This paper discusses the history and future of the Swedish fiscal framework. First, we claim that the fiscal framework has contributed to a sharp decline in the debt-to-GDP ratio, from one of the highest to one of the lowest in the European Union. Next, we focus on the future. Despite its success, we argue that the framework is unsustainable. Running large surpluses over the long run is not a steady-state solution. We recommend two changes to the framework. First, that the public pension system is excluded, and second that the Swedish fiscal authorities shift attention from maintaining a budget surplus of 1/3 percent of GDP over the business cycle to sustaining a stable debt-to-GDP ratio of 25 percent of GDP +/- 5 percentage points. A debt anchor at this level will provide sufficient insurance in case of a future major economic crisis judging from recent cross-country evidence. In addition, a debt anchor around 25 percent of GDP would contribute to political stability in time of crises. In a world, where populism and austerity fatigue are rampant, we stress the importance of a fiscal framework allowing successful consumption and tax smoothing in case of major negative shocks to the fiscal space. We conclude with a set of recommendations for the fiscal governance of the EU.

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  • Andersson, Fredrik N. G. & Jonung, Lars, 2019. "The Swedish Fiscal Framework – The Most Successful One in the EU?," Working Papers 2019:6, Lund University, Department of Economics.
    • Handle: RePEc:hhs:lunewp:2019_006
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    References listed on IDEAS

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    1. Olivier Blanchard, 2019. "Public Debt and Low Interest Rates," American Economic Review, American Economic Association, vol. 109(4), pages 1197-1229, April.
    2. Òscar Jordá & Moritz Schularick & Alan M. Taylor, 2016. "Sovereigns Versus Banks: Credit, Crises, and Consequences," Journal of the European Economic Association, European Economic Association, vol. 14(1), pages 45-79.
    3. Felix Roth & Edgar Baake & Lars Jonung & Felicitas Nowak-Lehmann D., 2022. "Revisiting Public Support for the Euro, 1999–2017: Accounting for the Crisis and the Recovery," Contributions to Economics, in: Public Support for the Euro, chapter 0, pages 21-45, Springer.
    4. Carmen M. Reinhart & Kenneth S. Rogoff, 2014. "This Time is Different: A Panoramic View of Eight Centuries of Financial Crises," Annals of Economics and Finance, Society for AEF, vol. 15(2), pages 215-268, November.
    5. Carmen M. Reinhart & Kenneth S. Rogoff, 2009. "Varieties of Crises and Their Dates," Introductory Chapters, in: This Time Is Different: Eight Centuries of Financial Folly, Princeton University Press.
    6. Debrun, Xavier & Jonung, Lars, 2019. "Under threat: Rules-based fiscal policy and how to preserve it," European Journal of Political Economy, Elsevier, vol. 57(C), pages 142-157.
    7. Falilou Fall & Debra Bloch & Jean-Marc Fournier & Peter Hoeller, 2015. "Prudent debt targets and fiscal frameworks," OECD Economic Policy Papers 15, OECD Publishing.
    8. Christina D. Romer & David H. Romer, 2019. "Fiscal Space and the Aftermath of Financial Crises: How It Matters and Why," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 50(1 (Spring), pages 239-331.
    9. Olivier J Blanchard, 2019. "Public Debt: Fiscal and Welfare Costs in a Time of Low Interest Rates," Policy Briefs PB19-2, Peterson Institute for International Economics.
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    Cited by:

    1. Larch, Martin & Busse, Matthias & Jankovics, László, 2021. "Enforcement of fiscal rules: Lessons from the fiscal compact," ZEW Discussion Papers 21-085, ZEW - Leibniz Centre for European Economic Research.
    2. European Fiscal Board (EFB), 2019. "2019 annual report of the European Fiscal Board," Annual reports 2019, European Fiscal Board.
    3. Roel Beetsma, 2022. "The Economics of Fiscal Rules and Debt Sustainability," Intereconomics: Review of European Economic Policy, Springer;ZBW - Leibniz Information Centre for Economics;Centre for European Policy Studies (CEPS), vol. 57(1), pages 11-15, January.
    4. Régis Barnichon & Geert Mesters, 2021. "Fiscal targeting," Economics Working Papers 1793, Department of Economics and Business, Universitat Pompeu Fabra.
    5. Gylfi Zoega, 2021. "Financial Crises and Current Account Surpluses," Atlantic Economic Journal, Springer;International Atlantic Economic Society, vol. 49(2), pages 159-172, June.

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    More about this item

    Keywords

    Fiscal policy; fiscal framework; fiscal policy council; financial crisis; debt crisis; consumption smoothing; Sweden; EU;
    All these keywords.

    JEL classification:

    • E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • E63 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Comparative or Joint Analysis of Fiscal and Monetary Policy; Stabilization; Treasury Policy
    • G02 - Financial Economics - - General - - - Behavioral Finance: Underlying Principles
    • H12 - Public Economics - - Structure and Scope of Government - - - Crisis Management
    • H30 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - General
    • N14 - Economic History - - Macroeconomics and Monetary Economics; Industrial Structure; Growth; Fluctuations - - - Europe: 1913-
    • O52 - Economic Development, Innovation, Technological Change, and Growth - - Economywide Country Studies - - - Europe

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