The Monetary and Fiscal Policy– An Analysis of the Swedish Economy

Sweden is one of the most stable and developed countries in the European Union. Presently, being the seventh most competitive economy in the world, Sweden’s GDP and per capita income are higher than the EU average. Wealth in Sweden is evenly distributed and fiscal stability is institutionalised. The country has low national debt and efficient monetary, fiscal policies that ensure financial stability. Sweden is known for giving importance to welfare policies which are focused on improving the educational and health services available to its citizens. Sweden, a country once characterised by low growth and high inflation rate, especially during the financial crisis of 1990s, has come back successfully. The Swedish economy has bounced back to a good shape with satisfactory inflationary rates, economic growth, sound banking system, strong fiscal policies and with stable macroeconomic indicators. This stable growth can be attributed to their monetary and fiscal policies.

Monetary policy refers to the policies adopted by Sweden’s central bank to maintain stability in the money market. The Swedish monetary policy aims at maintaining price stability by having a stable and low rate of inflation targeting at around 2% CPIF (Consumer Price Index Fixed). The global crisis of 2008 affected the economy through high housing and mortgage prices, growing maturity and currency mismatch with falling GDP. However, the economy rebounded in the year 2010. The demand for exports and the GDP expanded by 6% in 2010, unemployment rate declined from 9% to 8%, thereby achieving the CPIF target of 2%. Between the years 2010 and 2011, there was a sharp increase in the Riksbank policy rate. The rate has rapidly increased from 0.95 in 2010 to 1.97 in 2011. On the other hand, the Swedish inflation fell rapidly from 2.8% to 2.1%. The real policy rate increased even more causing large real interest rate gap to Euro zone, UK and USA. Even though the Swedish Krona grew dramatically, Swedish unemployment rate stayed high. From the year 2012 onward, the policy rate started declining—1.64 in the first quarter of 2012, 1.22 in the fourth quarter, 0.97 in the year 2013 and 0.0806 in 2014.The year 2015 started witnessing a negative policy rate of -0.25 in the second quarter and -0.35 in the fourth quarter. Presently, the Swedish rate is at a benchmark rate of -0.50 and this can be attributed to the structural reasons. There is no evidence of debt-financed over-consumption and the household saving is at a high rate.

After the crisis in 1990s, the Swedish government adopted the policy of balancing the budget rather than a deficit budget. The government that once resorted to sealing government expenditures has currently a surplus goal, with lowered taxes and increased government expenditure. Currently, changing the strategy from basic development, the government has shifted its focus to areas like healthcare, education and research. The Swedish Fiscal Policy Council was established in the year 2007. The Fiscal Policy Council aims at achieving the goals of growth, employment and long term financial stability. Government spending in Sweden increased to 3, 01,346 SEK million in the second quarter of 2018 from 3, 00,682 SEK million in the first quarter of 2018. Government spending in Sweden averaged 243917.92 SEK million from 1981 until 2018, reaching an all time high of 301346 SEK million in the second quarter of 2018 and a record low of 194201 SEK million in the first quarter of 1981.The personal income tax rate in Sweden stands at 61.85%.

Personal income tax rate in Sweden averaged 56.78 percent from 1995 until 2018, reaching an all time high of 61.85 percent in 2017 and a record low of 51.50 percent in 2000. Swedes’ personal income tax can be as low as 29% of their pay, but most people (anyone earning over £32,000) will pay between 49 and 60 percent through a combination of local government and state income tax. From the year 2010 onward, there is a sharp increase in the tax rates and Sweden is the second country with the highest tax burden. Although taxes make government policies highly unpopular, the case is different in Sweden. The taxation agency experiences great popularity and people are very happy about paying taxes. The reasons for the increased taxes are the high quality public services offered in Sweden.

Although tax rates are high, starting from education to healthcare, the public service quality is good, affordable and contributes well to the definition of a welfare society. Thus, Sweden is a country with well established with carefully framed, stable monetary and fiscal policy. Presently, Sweden is regarded as a model economy. It is one of the most developed and stable economy in the western part and will continue to be the top one.

Picture Credits : dreamstime

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