## Sweden -- 2001 IMF Article IV Consultation -- Concluding Statement

_IMF News, June 20, 2001_

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## Bibliographic details
- Published: June 20, 2001

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### Recent economic performance (2000)
- Strong growth in 2000, driven by a boom in the high technology sector, reduced unemployment sharply and moved the economy closer to productive potential.
- Inflation remained below the Riksbank's target.
- Competitive position of the economy remained robust.
- Fiscal surplus exceeded the authorities' announced aim and public debt continued to decline.
- Policy achievements credited to deft macroeconomic management and reforms of the last decade.

### Near-term outlook and risks
- Global slowdown (United States, Europe, Asia) expected to weigh on Sweden; high-technology sector amplifies adverse impact.
- Recent indicators point to a sharper slowdown in activity than expected a few months earlier.
- Unexpected surge in underlying and headline inflation in April and May and a prolonged fall in the krona raise medium-term inflation risks.
- Outlook for remainder of 2001: slower growth than earlier envisaged; subdued growth into early 2002 possible due to weaker external demand and household attempts to rebuild savings.
- A projected rebound in global growth and high domestic resource use could lead to return to potential output thereafter, with recovery expected at least by the latter half of 2002.

### Inflation, exchange rate, and monetary policy
- Low inflation and interest rates through early 2001 owed to the Riksbank's consistent monetary framework and non-monetary factors (deregulation, ICT-driven productivity gains).
- Policy interest rate broadly steady since early 2000; Sweden enjoyed one of the lowest rates among advanced economies.
- Recent months: sharp spurt in headline inflation mixed with rising indicators of underlying inflation (even excluding import prices).
- Persistent krona weakness undermines assumption of gradually strengthening krona in the Riksbank's May Inflation Report.
- Moderate three-year wage agreements provide some anchor for inflation expectations, but prolonged krona weakness increases probability of adverse inflation effects.
- Balance of inflation risks has shifted to the upside since the May Inflation Report.
- Authorities undertook signaling interventions to nudge market sentiment; monetary policy should remain focused on keeping medium-term inflation within its tolerance band.
- If necessary, the Riksbank should follow through with interest rate increases to preserve credibility.

### Financial system stability
- Most indicators suggest limited systemic risks; strong banking sector position should allow coping with a more marked downturn than expected.
- Recent financial consolidation and risk of further share price declines warrant expanded supervision and continued vigilance.

### Fiscal policy stance and recommendations
- Fiscal policy anchored by medium-term fiscal rules: target general government surplus of 2 percent of GDP over the cycle and ceilings on nominal central government spending for the subsequent three years.
- Expenditure ceilings tight because:
  - Room for discretionary increases largely used by measures announced in 2001-02.
  - Recent unanticipated rise in inflation reduces real value of nominal ceilings.
- Essential to adhere scrupulously to announced expenditure ceilings; may require offsetting mandatory inflation-induced spending increases with discretionary cuts elsewhere.
- Full amount of prospective overperformance relative to the structural surplus target should be used for tax cuts.
  - Estimated structural surpluses over 2002-2004 imply room for tax cuts of at least 2 percent of GDP.
  - Two remaining income tax cuts in 2002 and 2003 to offset earlier increase in employees' social security contributions would use about 1¼ percentage points of GDP.
  - Remaining room of three-quarters of a percent should be used in the 2002 budget to reduce the most distortionary taxes as part of a medium-term program.
- Implied policy mix: tighter monetary stance if required, and a moderate fiscal expansion to help strengthen the krona and counter any unexpected slowdown.

### Structural reform agenda: taxation and spending
- Need to lift potential growth above recent range of 2-2½ percent through renewed structural reforms.
- Reinforce efficiency of tax-benefit system while preserving social objectives.
- Priority tax reforms:
  - Reduce high marginal effective tax rates on labor caused by taxation of earnings and withdrawal of benefits, especially at both ends of the income scale.
  - Unify the two central income tax rates at a level below the current lower rate to improve incentives and reduce transformation of labor into capital income under the dual income tax regime.
  - Reform wealth tax: remove exemptions favoring the wealthiest and raise threshold to exclude moderate housing wealth.
- On spending:
  - Reassess rapid increase in sickness benefit payments during the upswing, including design and allocation of financing between employer and state.
- Medium-term fiscal measures should aim at balanced reduction in taxation and public spending, targeted for maximum efficiency and growth while respecting distributional concerns.

### Labor market, employment, and local government roles
- Labor market improvements: marked rises in employment and participation rates since recession trough; active labor market programs better adapted; tightened duration rules for unemployment benefits.
- Three-year wage agreement encouraging and consistent with inflation objective; risk that moderation could be undermined by excessive wage drift—vigilance required.
- Further labor market improvements through:
  - Easing employment protection regulations.
  - Enhancing regional mobility by easing rent-control distortions in the housing market.
  - Continuing reduced wage compression.
- Local governments:
  - Balanced budget rule effective last year is important.
  - Risk that central government spending pressures could be deflected to local level.
  - Fiscal equalization system impairs incentives for local authorities to expand tax bases or moderate tax rate increases and will need reassessment.

### Deregulation, privatization, and long-term challenges
- Authorities should continue deregulation to enhance competition and long-run efficiency and growth.
- Sectors with high gains from deregulation or elimination of monopolies: rental housing, construction, pharmaceuticals, retail trade, and transportation.
- Privatization of public enterprises operating in competitive markets is desirable.
- Long-run demographic pressures:
  - Reformed pension system includes safeguards for solvency.
  - Full response to demographic transition requires measures beyond pensions, such as raising the effective retirement age.
- The crisis of the early 1990s showed need for modification of some Swedish model features; strengthened macro framework and reforms place economy on stronger footing, but broadening and deepening reform agenda is necessary for continued success in a globalizing world.

*International Monetary Fund—Sweden--2001 Article IV Consultation Concluding Statement (June 20, 2001).*

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## References

- [Sweden and the IMF](http://www.imf.org/external/country/SWE/index.htm)
- [Mission Concluding Statements](https://www.imf.org/en/news/searchnews)
- [PRESS CENTER](http://presscenter.imf.org/)
- [Article IV](https://www.imf.org/external/pubs/ft/aa/aa04.htm)
- [2005](https://www.imf.org/cgi-shl/create_x.pl?ms+2005=)
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