September 16, 2012 4:23 pm

Swedish budget to push for growth stimulus

Sweden will this week unveil a stimulus budget for next year, underlining its status as one of the few European countries able to resist austerity as the storm clouds gather over the Nordic country’s economy.

Thursday’s budget will have a long-term focus with measures on infrastructure, research and education, allowing the government before elections in 2014 to go for more voter-friendly proposals such as income tax cuts.

The centrepiece this week is likely to be a reduction in the corporate tax rate from 26.3 per cent to 22 per cent, which pointedly brings it below the EU average.

But the budget comes as the Swedish economy, which many had touted recently as being close to immune from woes in the eurozone, starts to show some signs of weakness. Swedish second-quarter growth was revised down to 0.7 per cent on Friday from an initial estimate of 1.4 per cent.

Some private-sector economists think there will be little to no growth for the rest of the year, making it perfect timing for a stimulus programme expected to be worth about 0.5 per cent to 1 per cent of gross domestic product.

“We have come to a kind of standstill in the Swedish economy and we don’t expect to see any growth until the turn of the year,” said Robert Bergqvist, chief economist at SEB, the Swedish bank.

But with large parts of the eurozone in the midst of austerity, he added that Sweden – home to many exporters that are heavily dependent on the rest of the EU – was responding to calls for it to do more to boost demand and strengthen the country’s competitiveness.

“We feel the international pressure that we need to spend more money . . . and that we should provide some support or help for the global economy,” Mr Bergqvist said.

The Swedish government, a coalition formed of four centre-right parties, has advertised the budget as focusing on long-term issues to improve the country’s standing.

Fredrik Reinfeldt, prime minister, called the corporate tax “the most harmful tax of all” last week as he unveiled the details of the proposed cut.

“We have been more careful [with public finances] and this has made room for manoeuvre,” Anders Borg, the finance minister, said last month after the summer coalition meeting to decide on the budget’s details. “We want to go on the offensive and put energy into the Swedish economy.”

The stimulus should be worth about SKr23bn (€2.7bn) next year and SKr27bn in 2014, he said, pointing to proposals such as spending more on railways and youth employment.

Business leaders have mostly reacted positively to the leaks from the budget. But some chief executives have called for additional measures.

Stefan Jacoby, the German in charge of Volvo Cars, said the stimulus would be welcome but looked to a labour measure from his homeland as something Stockholm should enact. “What we would need is short-time working,” he told the Financial Times, referring to the system where governments temporarily take over paying workers’ salaries if demand collapses rather than companies simply firing them.

“When you see the recovery of the German economy after the crisis, it went extremely quickly. Why? Because they already had a workforce on board they were able to ramp things up extremely quickly,” he added.

The Swedish economy has also received support from the Riksbank, the central bank, which cut interest rates this month after a summer in which the krona strengthened significantly because of the country’s status as a haven from eurozone problems.

But Mr Bergqvist at SEB said the economy should return to growth in 2013 and 2014 allowing the government to offer households something next year. “This time it is long-term issues; next year we think they will spend more money on income tax cuts for households and also maybe benefits.” 

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