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Sweden Politics January 2019

Sweden: New government finally formed; expansionary 2019 budget approved

On 18 January, Stefan Löfven, leader of the Social Democrats, was voted back in as prime minister, ending over four months of parliamentary impasse. He will head a minority government in coalition with the Green Party and the collaboration of the Centre and Liberal parties. Economic policy is consequently set to become more liberal, although the new administration could be politically unstable. In December, parliament approved the 2019 budget proposed by the opposition Moderate and Christian Democrats, which should boost growth this year through greater fiscal stimulus.

The new government is pledging significant tax cuts on labor and business in the 2020 budget, to be offset by higher environmental taxes. Moreover, the Spring 2019 budget—to be presented in April—will contain notable new tax and spending initiatives which should support the economy, and the government aims to introduce measures to make the labor market more flexible.

Commenting on the formation of the new government, Oscar Andersson, an economist at Swedbank, noted:

“The new policy will clearly be more right-wing (liberal) oriented. […]. The aims are to increase productivity and potential growth in the long term.”

However, given the parliamentary arithmetic, the smooth passage of legislation is by no means guaranteed. Combined, the Social Democrats, Greens, Centre and Liberal parties still hold less than half the total seats in the Riksdag, meaning the government will be reliant on outside support, which may not always be forthcoming. For instance, the Left Party—which abstained during the vote on Löfven’s nomination as PM—would likely be resistant to loosening labor market rules and lowering taxes. Opposition posed by the Sweden Democrats is also likely to be robust.

The expansionary 2019 budget approved in December includes a substantial boost to government spending on the police and defense, and hefty income tax cuts worth around SEK 20 billion which came into force on 1 January. This should boost domestic demand and GDP growth this year, providing support to an economy whose underlying momentum has waned in recent quarters. However, the fiscal stance remains prudent, with a surplus of SEK 61 billion forecast for 2019.

According to Olle Holmgren, Chief Strategist Sweden at SEB: “The right-wing budget that was accepted by parliament in December is estimated to include fiscal stimulus totaling 0.6-0.7% of GDP. The new government’s supplementary bill will add another tenth or more according to our expectations.”

On the monetary policy front, the more expansionary fiscal stance could make the Riksbank slightly more inclined to raise rates. Nevertheless, future monetary tightening will still likely be gradual and mild, particularly given the prospect of a rate hike by the ECB is now shrouded in doubt in light of recent weak economic activity in the Eurozone.

Regarding the implications for monetary policy and FX, Mr Andersson added:

“We think the new government and the January agreement is positive for the Riksbank. Structural reforms, slightly expansionary and green taxes that might help to push up CPI by 0.1-0.2 p.p. The fact that Sweden finally has a Government and the contents of the January agreement are krona positive factors. We think the krona will strengthen gradually going forward.”

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