Long-Term Developments of Swedish Public Finances – Can 'Straight Jackets' Reverse the Trends?

Bank of Italy Fiscal Sustainability Conference, p. 629, 2000

24 Pages Posted: 17 Jul 2012

See all articles by Yngve Lindh

Yngve Lindh

Ministry of Finance

Henry Ohlsson

Uppsala University - Department of Economics

Date Written: July 16, 2012

Abstract

Swedish public finances have shown considerable cycles, in response to economic activity, during the last decades. The budget cycles have been asymmetric in the sense that surpluses during expansions have been smaller than deficits during recessions. This has lead to a trend increase in public debt. The crisis for Swedish public finances in the beginning of the 1990s is solved in the short run. It is less clear that the long run trend has changed. The convergence criteria of the EMU and the “peer pressure” within the union are restrictions on public debt and budget balance. The medium run target of a general government net lending of 2% of GDP is a response to this. Our first main conclusion is that in the short run this is not ambitious enough while it is too ambitious in the long run — the trend will be too much reversed in the long run. A “top-down” budget process and expenditure ceilings are intended to help in reaching the target. Our second main conclusion is that, while measures like these may be effective in reducing expenditure in the short run when they are introduced, the long run efficiency is less clear. In the long run there will have to exist strong political commitment to the necessity of fiscal discipline. “Straight jackets” cannot work alone and especially not in the opposite direction of the intentions of the political decision makers.

Keywords: fiscal policy, convergence criteria, budget targets, optimal public debt management

JEL Classification: E6, H6

Suggested Citation

Lindh, Yngve and Ohlsson, Henry, Long-Term Developments of Swedish Public Finances – Can 'Straight Jackets' Reverse the Trends? (July 16, 2012). Bank of Italy Fiscal Sustainability Conference, p. 629, 2000, Available at SSRN: https://ssrn.com/abstract=2109488

Yngve Lindh (Contact Author)

Ministry of Finance ( email )

Drottninggatan, 21
Stockholm, SE-103 33
Sweden

Henry Ohlsson

Uppsala University - Department of Economics ( email )

Box 513
Uppsala, SE-75120
Sweden
+46 18 471 51 04 (Phone)

HOME PAGE: http://www.uueconomics.se/henryo/

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