Dispute over council’s independence

A dispute has broken out between a number of Sweden’s top economists and the government, which wants MPs from the Committee on Finance to have a say as to who is to be appointed to Sweden’s influential Fiscal Policy Council (Finanspolitiska rådet).

The council, whose remit is to provide an independent evaluation of the government’s fiscal policy, has frequently criticised government policy.

Professor John Hassler warns that there is a clear risk of politicisation and that the council might as well close down.

Finance Minister and IMF

According to Finance Minister Magdalena Andersson, the International Monetary Fund (IMF) shares a view on several issues with the Swedish government, for example concern over the housing market.

She is also grateful for the IMF’s praise for her economic policy. “We are on the same wavelength when it comes to the need for inclusive growth,” she says.

Magdalena Andersson is to attend the IMF’s autumn meeting in Washington and will visit the White House to meet US President Donald Trump’s international advisor.

Five areas for reform

Writing in Dagens Industri (DI) today, the economic spokespersons for the four Alliance parties, state that the economic boom cannot hide the structural problems and imbalances in the Swedish economy. The gaps between those who have work and those who are dependent on benefits are growing.

They consider there to be five areas in which the government is driving Sweden in the wrong direction, including with its fiscal and economic policy, which they write “risks leading to overheating and an unsustainable build-up of debt.”

The alliance’s joint view on economic policy is that it should be more focused and more austere than the government is presenting. “Over the next three years, we therefore want to increase savings and paying off state debt by SEK 10 billion per year, compared to the government.”

Government opens its purse

Finance Minister Magdalena Andersson promised a record election budget when she met journalists yesterday prior to budget negotiations in Harpsund. The investments so far presented for welfare, the police and defence amount to around SEK 10 billion, and she is willing to consider more reforms.

However, the National Institute of Economic Research’s (NIER) Ylva Hedén Westerdahl commented: “We are surprised that the government has so much room for reform. In our forecast, it would mean that they are moving away from the new surplus target.” She points out the government views the underlying potential of the economy more positively.

The Liberals’ economic spokesperson Mats Persson focused on what he sees as a lack of job reforms, which means new arrivals will not get into employment. “It is remarkable that a Social Democrat government is allowing a new underclass to develop,” he says.

Temporary factors help push inflation over 2%

The Consumer Price Index (CPI) rose by 0.5% in July. The 12-month rate was 2.2%. Price increases on package holidays contributed 0.3 percentage point to the change, while increased prices on international flights and electricity contributed 0.2 percentage points each.  The underlying inflation rate (CPIF) rose from 1.9% in June to 2.4% in July, its highest level since December 2010.

The Swedish krona strengthened on the news while the stock market fell. The reaction is justifiable given that the inflation rate is over the 2.0% target set by the Riksbank, which could bring forward plans to raise the benchmark repo rate, argues DI.

But, even if the July data may lift the mood at the central bank, it is too early to celebrate. A number of temporary factors contributed to the increase, as did a new way of measuring inflation and tax hikes on electricity.

Andersson: the economy is strong

Social Democratic Finance Minister Magdalena Andersson’s Friday began well as Statistics Sweden released its national figures for the second quarter. GDP rose by 1.7% on the previous quarter and by 4% compared to Q2 2016.

“The Swedish economy is clearly extremely strong… It stands out clearly if you make international comparisons,” said Magdalena Andersson.

The figures exceeded expectations and Andersson pointed out several contributing factors, including household consumption increasing by 1.1%.

Thriving FinTech industry

Financial technology, or FinTech, has become a thriving industry in recent years with Sweden topping the league for FinTech investments per capita. New payment methods via mobile phones and simpler forms of identification mean that payments can be made from virtually anywhere. But the development of these new services is not without risk and Sweden’s Riksbank warned of growing uncertainty in its latest financial stability report from May. The central bank has warned that deposits could become more volatile, thereby increasing the liquidity risk.

Concerns over tighter monetary policcy

In 2016 Sweden’s national pension funds reported aggregate earnings of SKr 118 billion, corresponding to an average return of 9.7%.

After five years of exceptional growth, which has primarily been fuelled by expansionary monetary policy, there are now indications that monetary policy will tighten.

Kerstin Hessius, the CEO of the Third Swedish pension fund (AP3), has expressed concerns over what will happen when Sweden’s central bank, the Riksbank, starts raising interest rates. She wonders if the adjustment will be dramatic, or orderly, saying that in the worst case scenario it will lead to significant “destruction of capital”.

Not right now

Finance Minister Magdalena Andersson has investigated several paths forward towards lowering interest rate tax deductions, she tells DI.

Experts, including the Riksbank, the Financial Supervisory Authority, the Swedish National Debt Office and the Swedish Fiscal Policy Council have been calling for these deductions as the most effective measure against Swede’s soaring debt.

The Left Party’s economic policy spokesperson Ulla Andersson, says it is time to override the Moderates on this issue, but Magdalena Andersson says that the issue is not current right now and there are other measures to stop debt growing.

Liberal economic policy spokesperson Mats Persson, says, “The Social Democrats and the Moderates are showing a lack of courage. The day that house prices fall then there will be a tough verdict against the political system, which despite warnings, did nothing.”

Interest rate unchanged

The central bank, the Riksbank, is leaving the benchmark interest rate, the repo rate, at a negative 0.5%. The decision was expected.

Riksbank governor, Stefan Ingves, said, “It is important that inflation is more permanently at two per cent and does not just touch on two per cent. For that reason it is pressing and important to continue with an expansive monetary policy for some time longer.”

The first increase in the repo rate is expected in the middle of 2018.