Sweden’s lessons in dealing with financial crisis

Sweden’s lessons in dealing with financial crisis

STOCKHOLM, May 11 (SCBR) – Sweden’s experiences in the 1990s can be a good lesson for many countries which are experiencing crisis now, said Anders Borg, Swedish Minister for Finance at the recent international conference on Consolidation of Fiscal policy in Stockholm.
STOCKHOLM, May 11 (SCBR) – Sweden’s experiences in the 1990s can be a good lesson for many countries which are experiencing crisis now, said Anders Borg, Swedish Minister for Finance at the recent international conference on Consolidation of Fiscal policy in Stockholm.

The conference was co-hosted by Ministry of Finance and International Monetory Fund.
”Swedish economy in the 1980s was heavily regulated with rigid domestic market, ” said Borg.

There was high tax and high threshold with a disfunctional wage setting. The labor wages enjoyed double digit increase which caused inflation and the real wages were not increasing that much. The currency has repeated devaluation over the 20 years.
The public debt level was very high.

Borg said the problem was not a shock, it was an accumulated problem over the previous 20 years because the productivity was low. The crisis broke out in 1991 and 1992.

Because the productivity was low, the real wage increase was just 0.3 percent.
A Japanese journalist used to say that she remembered in 1980, suddenly they had a lot of money in Sweden.

But after 1992, the market credibility was severely undermined. In order to rescue the credibility, Sweden carried out painful but sustained reforms. That was not done within one year, but many years.

They consolidate the fiscal policy and used 12 percent of GDP for restructuring.
”Broad consolidation in all areas raised revenues and maintained social cohesion,” Borg said.

The major expenditure cuts covered unemployment insurance, work injury insurance, sickness benefits, pensions, reduced indexation and comprehensive reform and early retirement pension.

Child allowance, family support and parenting insurance were the measures to win back credibility. Borg said economists would not suggest these measures, but these were taken under the condition that there were no other choice. Otherwise the credibility would be lost.

Swedish Central Bank governor Stefan Ingves said Sweden was determined to win back credibility, that was why a lot of debt were exempted at that time.

The cuts also extended to interest rate subsidies and other housing subsidies, housing benefits including old age housing benefit.

Central government transfers to local authorities, real public consumption held constant absent discretionary changes.

Public administration expenditure subject to annual productivity growth adjustment. Reduced subsidies for pharmaceuticals.

The major revenues came from indexation of environmental and excise duties, increased tax on petrol and increased tax on tobacco. These are the measures Borg would suggest countries under crisis to take.

The increased payroll tax, social security contributions for self-employed, income tax increase for high income earners, amended rules for income tax deductibility of expenses and uniform capital income taxation also contributed to the revenue increase.

Borg said the lessons from Swedish consolidation are to consolidate in all areas, necessary benefits cut , to safeguard core public services.

”Consolidation is painful, but it works,” said Borg.

Tough measures are inevitable once the market confidence is lost, Borg said firmly.

Lessons from successful consolidations are that consolidation must mitigate structural problems, expenditure cuts are preferable to tax hikes which means it is better that the government tightens a bit than to increase tax for the people.

”Consolidation measures must have acceptable effects on distribution of income and one must prioritize pro-growth consolidation measures,” Borg stressed.

What fiscal measures Sweden had taken during those years?
Sweden has changed the bottom-up budget policy to top-down budget policy.
There are three budgetary targets: one is the central government expenditure ceiling, surplus target for general government and balanced budget requirement on local governments.

Organizational adjustment was to set up a fiscal policy council.

Structural reforms were carried out in inflation targeting of 2 percent and central bank independence. The central bank increased the interest rate a lot in the early 1990s.

Reformed wage setting process and increased labor market flexibility. Major tax reform, lower marginal tax rates on labour, and stricter regulation of competition. Extensive deregulation of key markets, banking and finance, air travel, taxi, buses, rail freight, power production, telecom, postal services, retail including food retail.

Increased private production of welfare services.

Reforms were carried out in health care sector with balanced budget requirement, modernized budget system: diagnosis related payments, co-payments, reformed prescription drug subsidies and use of generic drugs, competition is created between providers inside and outside public sector. ”Before that health care benefit was done according to the days you stayed in hospital, later it is done according to diagnosis, this way, the health care expenditure substantially reduced.” Borg said.

As a result the health care cost in 1990 in Sweden was the same as in the USA. But by 2008, the US health care cost doubled while that in Sweden didn’t increase much. But the health care quality is quite similar.

Prosperity has been achieved through equality. Equality was not sacrificed to achieve prosperity, Borg said. He also mentioned that these measures were carried out with all the different parties.

Borg concluded that consolidation requires credibility and strong fiscal framework boosts credibility, structural reforms necessary for long-term growth and competitiveness. Stability is the precondition for growth and cohension is conducive to growth.

Comment: Many people said market economy is about confidence and credibility. So it is obvious that if one spends two dollars while he only earns one dollar, it won’t work. The same with the country. When the political leaders didn’t understand what is really the cost and how much they really earn, then there will be problems. In the end, Chinese thinking of long term and be prepared for the worst is a better way. Of course one needs to improve people’s living standards, but crisis often comes when people are too happy.

Obviously the situation in 2008 was just a bit crazy because so many people suddenly earn so much money and buy too much. But then when the major players are too happy, it is the majority who will suffer, then the market lost credibility.

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