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Best in class: Public finances in Sweden during the financial crisis

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Author(s): Bergman Michael

Journal: Panoeconomicus
ISSN 1452-595X

Volume: 58;
Issue: 4;
Start page: 431;
Date: 2011;
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Keywords: fiscal policy | debt | sustainability | financial crises | Sweden

ABSTRACT
This paper studies why public finances in Sweden have remained very strong during the current financial crisis. Unlike almost all other European countries, Sweden has had budget surpluses and a government debt ratio around 40 percent of GDP during the recent crisis. We attribute this to two important factors. First, Sweden entered the crisis with strong public finances and second that unemployment did not rise as much as normally during recessions. The Swedish fiscal framework that was introduced after the banking crisis in the early 1990s with expenditure ceilings, a top-down budget process, balanced budget requirement for local governments has played an important role. We show that the behavior of budget deficits has changed significantly recently, from a deficit bias to a surplus bias. Aggregate demand remained strong during the crisis even though exports fell sharply. As unemployment in the manufacturing sector increased, it was to a large extent offset by increased employment in the service sector.
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