Tax hikes in pipeline

New tax reforms totalling SKr 62 billion are to be expected over the next four years, reveals Dagens Industri (DI), which has taken a closer look at the long-term trend in government’s budget proposals and the expenditure ceiling.

The expenditure ceiling in the government’s autumn budget proposal reflects how many reforms the government wishes to implement and how much taxes need to be raised.

“Which means that taxes need to be raised with a corresponding amount,” says Jesper Hansson, head of forecasts at the National Institute of Economic Research, who points out another way would be to relax deficit targets. The Institute would have liked to have seen greater clarity on this.

When DI confronts Finance Minister Magdalena Andersson over what the rising expenditure ceiling really means, she does not wish to admit to plans to raise taxes, and explains that it is about “creating scope for reform if we get good jobs growth and increased tax revenues.”

At the same time the Finance Ministry is fully occupied hunting for new sources of tax revenue, and the minister talks of a new tax on financial activities, “The finance sector should be able to contribute a bit more.”

Taxes higher than we think

All of 94% of Swedish taxpayers think they pay lower taxes than they actually do, finds a new report “Underestimated taxes” by the Confederation of Swedish Enterprise (Svenskt Näringsliv) and TNS Sifo.

Swedish taxpayers think they pay around 34% of their income in tax revenue, but in fact they pay on average 52%. The misconception is largely due to the many indirect taxes, of which payroll charges constitutes the biggest one, states the report.

Nightmare for Ingves

Risk aversion and waning confidence that the US Federal Reserve will raise interest rates in September caused Monday’s sharp fall in market interest rates and the US dollar to weaken against other currencies, including the Swedish krona.

The fact that the Swedish currency strengthens when there is turbulence on the financial markets is not something that is appreciated by the Riksbank, which is actively seeking to keep the krona weak to boost inflation.

“It’s a nightmare scenario for the Riksbank that the krona may become a safe haven at times like this,” says Claes Måhlén, chief strategist at Handelsbanken.

Traditionally, the Swedish krona has never been a safe haven, but following the financial crisis of 2008 (ed.) Sweden was viewed as being a refuge where assets could be placed in turbulent times.

Riksbank helpless

Sweden’s central bank, the Riksbank, has had to resort to desperate measures in a bid to raise inflation. The benchmark interest rate has been cut to a negative 0.35% and the central bank is to purchase government bonds to a value of 135 billion kronor, which is equivalent to 4% of GDP. Despite this, inflation has not picked up and the time has come to consider other measures, according to Professor Tore Ellingsen of the Stockholm School of Economics.

The Professor, who is the chairman of the committee that awards the Riksbank’s Prize in Economic Sciences in Memory of Alfred Nobel, advocates an increase in government borrowing as a way of pushing up inflation. The idea is that the state borrows money and passes this on to households in the form of tax cuts or transfers.

“With more money, it becomes worth less, which is the same as inflation. The idea is that households become more interested in goods and services than money,” says Professor Ellingsen.

New rules – a year in the making

With household debt levels rising to new highs, the heads of Sweden’s central bank, financial watchdog and debt office called on Monday for tougher mortgage repayment rules to be introduced as soon as possible in order to prevent a potential financial crisis. However, Per Bolund, the minister for financial markets, has said that tougher rules may not come into force before summer 2016. First of all, the government and the opposition must agree to give the Financial Supervisory Authority the legal powers to make new mortgage borrowers pay more than just interest on their loans.

United call for clear amortisation requirement

The rapid rise in household debt is worrying the heads of the Riksbank, the Financial Supervisory Authority, and the National Debt Office (Riksgälden). The three write in Dagens Nyheter (DN) that low housing construction, falling interest rates, and scrapped taxes have driven up home prices and spurred borrowing, and warn that this trend could forebode the coming of a financial crisis. Amortisation requirements should be implemented as soon as possible, conclude the three.

Sweden’s banking system in focus

Thirty years ago Shenzen was a sleepy fishing village just north of Hong Kong, today it is a city of 15 million and home to a number of the biggest companies in the world, including telecoms giant Huawei. However, Shenzen, along with other cities in China, must make the shift to high technology and creative industries, as businesses move abroad in search of cheap labour.

As part of the process, China is sending a delegation to Sweden that will include representatives from the Shenzen Stock Exchange and the China Development Institute. The delegation, which will arrive in Stockholm on Saturday, will meet Nasdaq OMX, Handelsbanken and Sweden-China Trade Council representatives to find out more about Sweden’s financial system.

“Sweden’s banking system is internationally lauded. China is currently trying to reform and internationalise its banking system, and we have much to learn, particularly in risk management and supervision,” Guo Wanda, deputy head of CDI, has said.

Riksbank takes market by surprise

Citing growing economic uncertainty, worries about Greece and the strengthening of the krona, Sweden’s central bank, the Riksbank, has announced a further cut in the benchmark repo rate, down to minus 0.35% from 0.25%. The decision was not unanimous, however, with deputy governor Henry Ohlsson, arguing that rates should have been held and that the extension on the purchases of government bonds would have sufficed.

The central bank’s announcement was unexpected, says Anna Felländer, Swedbank’s chief economist, who is critical of the move. She says it will reinforce the imbalances in the Swedish economy.

Meanwhile, Dagens Industri journalist Henrik Mitelman says it is the inflation target that should be lowered, not the repo rate, and that “crisis interest rates” provide a breeding ground for new bubbles and new crises.

Sweden may have to borrow more

In a new forecast for the Swedish economy, GDP will grow by 2.6% this year, and by 2.7% in 2016. However export-led growth has stagnated and productivity is something of a disappointment. Additionally, tax revenue is less than previously forecast. As a result, the government is revising down its forecast over public savings.

To date Finance Minister Magdalena Andersson has said that the government’s reforms will be financed “krona for krona”. However, uncertainty in the euro area could force Sweden to increase its borrowing. “But we are not there yet, since reactions have been muted despite the Greek drama,” said Andersson on Tuesday

Default would wipe out ECB’s equity

We do not yet know how the Greek drama will end. One possible scenario is that the EU/ECB/IMF troika will extend Greece’s bailout programme at the last moment. Such a move is feasible, since Greece is in quite a strong negotiating position, writes Professor Mats Persson at Stockholm University’s Institute for International Economic Studies.

In a debate piece in Dagens Industri, the professor makes the point that 75% of Greece’s debt is owned by the troika, and thereby indirectly by taxpayers. If the programme is not extended, and Greece goes bankrupt, the troika will be forced to report massive capital losses. The losses would be so great that the ECB’s equity would be wiped out.