2010

Speech International Press Centre, Stockholm 08 September 2010 Anders Borg, Minister for Finance The Election and the State of the Economy

Minister for Finance Anders Borg met foreign press representatives for a briefing on the Swedish economy. Download Presentation slides (pdf 128 kB)

Speech London School of Economics 14 January 2010 Anders Borg, Minister for Finance Getting fiscal consolidation right: lessons from Sweden

Introduction It is a pleasure to be here at the London School of Economics this evening, to speak at one of the world's most prestigious and respected academic institutions. The title of this evening's lecture is "Getting fiscal consolidation right: lessons from Sweden." My intention is to contribute to the discussion concerning the fiscal consolidation facing the UK and many other OECD countries, by sharing some lessons from the Swedish experience of dealing successfully with fiscal deficits and mounting debt in the 1990s. I will also highlight some cornerstones that are fundamental in our current economic policy and that have helped us through the financial crisis without ruining public finances. Key elements here include our policies for safeguarding labour force participation, our reforms of benefits systems, and our tax reforms. These reforms have been crucial in dealing with the underlying structural problems in the Swedish economy, which the consolidation of the 1990s did not address. Most importantly, they have allowed us to pursue an expansionary fiscal policy, manage the economic crisis, and maintain order and stability in the economy, all while avoiding large deficits. Sweden was hit by a deep recession in 1990-93, as GDP fell three years in a row, employment declined by 11 percent and unemployment quadrupled to 8 percent. Public finances suffered greatly, with deficits at around 10 percent for several years, and the debt growing from around 45 percent to nearly 80 percent of GDP. Today public finances are again under threat, but this time in many different countries, as a result of the worst economic crisis since the 1930s. One year ago we stood on the brink of catastrophe. The collapse of Lehman Brothers sent shockwaves through the financial system. Credit markets and interbank lending dried up, world trade plummeted, and we feared the onset of another Depression, with years of negative growth and a possible implosion of the financial system. In this context, it was necessary and justified to pursue heavily expansionary fiscal policies throughout the world - and it will be necessary to continue doing so throughout 2010. While a depression has been avoided, we are still going through some tough times. EU GDP has fallen by five percent in the past year. Unemployment across Europe has increased by over five million, and a further three million risk losing their jobs over the this year. As we look back now, in January 2010, we can say with confidence that the worst is behind us. The policies adopted by EU Member States jointly and individually to prop up the financial system and their economies worked. These massive stimulus programmes were necessary in the context of the crisis. But they have left us with a major challenge. The Challenge The economic crisis and unprecedented fiscal measures, taken to support the financial sector and limit demand shortfalls, have significantly weakened the state of public finances across the world. The EU's average budget deficit is set to more than double to about 7 percent of GDP this year. Twenty EU member states are expected to breach the 3 percent of GDP deficit threshold of the Stability and Growth Pact. Outside Europe, other leading economies, like the US, Japan, and India, will all be running fiscal deficits over 10 percent in 2009. In terms of increased indebtedness, the debt-to-GDP ratio in the EU will jump to nearly 80 percent of GDP in 2010, up from 60 percent in 2008. On the basis of unchanged policies, debt ratios would increase to around 120 percent in 2020, and in some countries even up to 200 percent. The Euro area's debt ratio will reach nearly 90% in 2011. Advanced economies' public sector gross debt is forecast to increase from an average of 78 percent of GDP in 2007 to 118 percent in 2014. The UK's fiscal situation, with a large deficit, a major increase in the debt, and a low sustainability level, is among the most problematic in Europe. The deficit is widening rapidly and is expected to reach around 14 percent of GDP in 2010 according to OECD projections. The gross government debt-to-GDP ratio is on course to reach around 90% by 2010, according to the OECD. In the EU Commission's Sustainability Report, UK public debt is forecast to increase to 160 percent by 2020 and 270 percent by 2030, assuming that no policy changes are adopted. The size of the UK deficit and debt implies that it will soon be necessary to embark on one of the largest fiscal consolidations in peacetime. Why fiscal sustainability matters There are many good reasons why strong public finances matter and why countries struggling with growing deficits and debt levels need to embark on a process of fiscal consolidation: 1. The current situation is not sustainable. As outlined above, debts are projected to increase dramatically over the next few years, reaching over 100% in some cases. As debt accumulates, risk premiums on government bonds will rise, and countries will have to spend ever-larger amounts servicing debt repayments, thus crowding out welfare services and growth-generating investments. This is not a very attractive future. In some countries, there is a considerable risk of deficits and debts spiraling out of control, with disastrous consequences for the entire economy. 2. Benjamin Franklin once said that the only certainties in life are death and taxes. Well, I'd like to add a third certainty: future economic crises. We know from experience that there is always another downturn around the corner. And we need to be ready for it. This means strengthening our public finances soon and returning to a fiscal position where we will be able to act to stabilize the economy in the next downturn. Experience shows that a process of rising debt ratios is difficult to reverse. Even a decade after the start of a crisis, most governments ran public debt-to-GDP ratios above pre-crisis levels, according to a recent Commission report. Avoiding a situation where countries enter the next economic downturn with unsustainable public debt positions must therefore be a priority. Such a downturn may well materialise before output gaps have been closed completely, with strong demands for both automatic stabilisers to work, as well as discretionary fiscal policy. If we are not in position, by then, to pursue a sufficiently expansionary fiscal policy, citizens will suffer immensely and government will lose its credibility as a guarantor of the welfare state and societal security. 3. The demographic challenges facing much of the developed world make sustainable public finances a necessity, as has been illustrated by the Commission's Ageing and Sustainability Reports, published in 2009. Europe's population is living increasingly longer and healthier lives, a great achievement that we should be proud of. However, ageing populations also pose major economic, budgetary and social challenges. Low birth rates, rising life expectancy and a continuing inflow of migrants can be expected to result in an almost unchanged, but much older, total EU population by 2060, meaning that the EU would move from having four working-age people (aged 15-64) for every person aged over 65 to a ratio of only two to one. Fewer economically active people will, all else equal, lead to lower economic growth and smaller tax revenues, while more retired people increases the costs of age-related transfers and services. Based on current policies, age-related public expenditure in the EU is projected to rise on average by 4.3 percentage points of GDP by 2060. The UK will also struggle with the consequences of an ageing society. According to the EU Commission, age-related spending in the UK is projected to increase by nearly 5 percent of GDP by 2060. This will put severe pressure on the public purse. The United States, too, faces similar challenges. A December 2009 report by the Congressional Budget Office projects that spending on Medicaid and Medicare will double to 10 percent of GDP in the next 25 years, largely driven by an ageing population. 4. The inability to maintain sustainable public finances would increase the risks of higher equilibrium unemployment and long-term unemployment, with drastic and lasting consequences for economic stability and growth. As the long-term unemployed grow discouraged, they tend to drop out of the labour force and become economically inactive. This puts increased pressure on social welfare systems and thus public finances. Moreover, it is very difficult to bring these people back into the labour force and employment. They risk being permanently excluded from working life, with serious implications for their own well-being. The lessons from Sweden 1. All means must be used Given the magnitude of the fiscal problems in many of the OECD countries, the fiscal consolidation must be substantial, in some cases up to about 3% percent of GDP per year. For this kind of consolidation to be credible, the government must use all means available, which implies increasing taxes and reducing spending. Only focusing on expenditure cuts would excessively harm socio-economically disadvantaged groups, who rely extensively on the social programmes that would inevitably suffer. This is neither politically desirable nor politically acceptable. Only relying on tax hikes would massively distort incentives to work. Moreover, empirical evidence shows that fiscal consolidation based solely on higher taxes is not as effective and does not create as lasting effects as a balanced consolidation, with sizeable expenditure reductions. The key is hence to find an appropriate balance between tax and expenditure adjustments. In order to achieve its programme of fiscal consolidation in the mid-1990s, the Swedish government chose to rely heavily on both tax increases and expenditure cuts, although spending cuts accounted for a slightly larger proportion of savings (53 percent of total savings versus 47 percent from higher taxes). 2. Taxes Any government undertaking a comprehensive fiscal consolidation must almost certainly consider increasing taxes, including broad-based taxes, such as consumption taxes. In conducting a tax reform, economic theory holds that one should seek to minimize the general harm to the economy of higher taxes, by focusing on increasing taxes on those items with negative external effects, such as carbon dioxide, alcohol, and tobacco, and minimizing the burden that falls on income and capital, as such taxes tend to be most harmful to growth. The OECD has investigated the issue of how to design a tax system promoting economic growth and their study confirms the above principles and the results of the earlier literature on taxes and growth. The main finding is that recurring taxes on immobile property, and to a lesser degree, consumption taxes, appear to have the least impact on growth, while corporate taxes, followed by income taxes, are found to be the most harmful. However, practical tax reform also requires a balance between the aims of efficiency, equity, simplicity and revenue raising. And one must also consider whether a tax is legitimate or not. In the latter respect, the property tax faces special problems. And ultimately, every country, given its own context and history, must chart its own tax course. Swedish taxes were increased substantially in the mid-1990s. A large portion of these tax hikes were aimed at income and capital. While this was necessary for the consolidation at the time - both to balance the budget and create legitimacy for the programme - it was unfortunate from an structural efficiency point of view. 3. Expenditure Clearly, any fiscal consolidation programme will always have to rely on substantial spending cuts in order to reach the desired target. However, in analyzing which public programmes and items should be reduced, there are several principles that should be kept in mind. First, spending that enhances growth and employment prospects, such as education and training, should, as far as possible, be preserved. Second, spending decisions should boost incentives to work and join the labour force, since minimizing the number of economically inactive people is key. This means that social welfare programmes and pension systems should be designed to encourage people to work more, start working at an earlier age, retire later, and stay in the work force. Poverty traps, which arise when effective marginal tax rates of moving from unemployment to employment are too high, must be avoided. Third, there must be effective rules and regulations governing welfare programmes, with appropriate controls, so that money truly reaches those who need them. Fourth, savings must be structurally sound, forward-looking, and not target key public investments, such as road or railway maintenance, or other vital infrastructure projects. Research and development spending is another area of productive public investment that should not be cut. Such savings are stop-gap measures that will need to be reversed soon, to maintain a functioning infrastructure. One-off measures that do not contribute to a lasting consolidation should be avoided. The expenditure cuts made in Sweden in the 1990s focused largely on government transfers, such as pensions, early retirement benefits, housing subsidies, as well as social and unemployment insurance. Cutting back on such programmes is always difficult, but compared to saving on the core functions of the welfare state - hospitals and schools - this is the lesser of two evils. And in a period of fiscal retrenchment, political leadership means making tough decisions, which are unpopular but necessary. 4. Improve the baseline scenario In implementing a fiscal consolidation, it is important to ensure that major expenditure programmes are not indexed to inflation, as this kind of indexing automatically erodes much of the intended savings. This happened in Sweden in the early 1990s, when we tried to implement various savings. Today central government grants to local government and several allowances such as child allowance and student grants are fixed in nominal terms in Sweden. These are items that are politically quite important. Since the appropriations are nominal, the cost of these grants gradually decreases if no decisions are taken in this regard. Hence the baseline is constantly improving, unless a discretionary decision is taken to increase spending on these areas. Another important feature of the Swedish fiscal policy framework is that the price and wage indexing of appropriations to central government agencies - that is, the upward adjustment of costs for items such as wages - is adjusted for productivity every year. The adjustment thus includes a deduction equalling the average productivity growth of white-collar workers in the service sector during the last ten years. For the 2010 fiscal year, the productivity deduction was 1,5 percentage points. This means that an agency often receives funding increases below inflation - a decreasing level of real funding - which in turn helps limit expenditure increases and creates incentives for government agencies to constantly innovate and raise efficiency. 5. Do not be disappointing: create a conservative baseline Credibility is central to any successful consolidation process. The government in general and the Minister of Finance in particular must establish credibility with markets, investors, analysts, and the public. The country must be seen as trustworthy, as committed to its promises. Such credibility is worth a lot: a non-credible fiscal policy will lead to higher interest rates, increased costs of borrowing, speculation, and, ultimately, default on loans. Credibility is a function of many factors. It depends on transparency and honesty: being up-front about one's goals, the time required to reach them, and key calculations. It depends on delivering realistic and accurate, but not overly optimistic, forecasts, so that external observers are not disappointed by the results. It depends on exceeding, or at least living up to expectations, and never underperforming. Conservative assumptions regarding key macro-economic data are of the essence. Ultimately, credibility is about building a reputation of competence and consistent performance, which creates trust among markets that you will deliver. This, in turn, will lower interest rates and borrowing costs. In creating a conservative baseline, one should have a readiness to deal with unexpected events, which may threaten the underlying baseline. This means having additional savings proposals in one's back pocket, which can be used if a target is likely to be missed. Upon embarking on its consolidation programme, the Swedish government spent considerable time and effort on achieving credibility with financial markets. When the OECD and European Commission have evaluated Swedish fiscal policy, forecasts have found to be accurate, up front and with a built-in conservative bias. Most importantly, during the consolidation, forecasts were consistently met and even at times exceeded, thus building confidence among investors. 6. Front load the consolidation It makes sense, both politically, economically, and psychologically, to begin and to do as much of the consolidation as soon as possible after having received a political mandate to do so. There is then a window of opportunity to act, as the public has, hopefully, voted for such a policy and - at the very least - understands the need to shore up public finances. The longer one waits with the heavy lifting, the more difficult it becomes. From a political point of view, starting earlier also increases the prospects of being able to show results before the next election. Moreover, as alluded to above, acting now creates political (and economic) room for manoeuvre at a later stage, such as a future crisis, when deficit spending will be needed again. From an economic perspective, front-loading reduces the future borrowing costs. It also signals the intention of the government to act - to do something about the situation - which will boost credibility. As the saying goes, "Actions speak louder than words." The Swedish government certainly front-loaded its savings in dealing with the crisis of the early 1990s. Key decisions were taken already in 1992 and 1993, including the de-linking of certain benefits to inflation and the introduction of productivity adjustments to price and wage indexing. Indeed, about half of all savings were decided on by 1994. The result was that the deficit, which in 1994 had been over ten per cent, had been reduced to 2 per cent by 1997. 7. Calculate the political cost: public choice One should be aware of the interest groups defending various policy areas and the political costs associated with taking on these special interests. It may not make sense to push through large savings on a small, well-organised group, which will protest loudly and at length. Rather, one needs to dare to take on large groups, where cuts will yield large savings. However, sometimes one must pursue more symbolic savings, which are not worth a lot of money, but send a strong message about the government's will. One such area is the remuneration of politicians or leading civil servants. For example, restructuring the benefits and compensation of Members of Parliament or Ministers reinforces the gravity of the situation. 8. Safeguard labour force participation The long term sustainability of public finances rests ultimately on safeguarding labour force participation, especially in a welfare state, with high tax levels. A higher labour force participation leads to more hours worked in the economy and lower unemployment, which in turn generates higher tax revenues and puts less pressure on social welfare programmes. Maximising labour force participation is particularly important in a context of an ageing society. As the population grows older and incomes rise, the demand for welfare services will increase. In the UK, as in most developed countries, the number of people aged 65 or over will increase rapidly in the next 30 years, while the increase in the group aged 20-64 is expected to be more modest. According to the EU Commission, age-related spending in the UK is projected to increase by nearly 5 percent of GDP by 2060, which is close to the EU average. In pursuing fiscal consolidation, a government must pay attention to how its tax and spending reforms affect labour force participation. More concretely, this translates into a number of Do's and Do-not's in terms of policy formulation. First, the government should evaluate its benefit system, and examine how this can be reformed to make it more worthwhile to work. This means considering the size and/or duration of unemployment benefits, social security payments, and other benefits that may serve as disincentives to seeking employment. Second, the government should also ensure that there is an adequate cost control and oversight mechanism concerning the benefits systems, so that welfare payments are truly going to those who need them the most. A key aspect involves people not being forced out of the labour force into a welfare programme, such as early retirement, if they do indeed still have the ability to work. Finally, active labour market policies play a key role in safeguarding labour force participation. They helped dampen the effects of the economic crisis in the early 1990s and they are indeed highly relevant today as well. What should be avoided in a consolidation? Well, any and all spending that contributes to maintaining labour force participation, such as subsidized child care, education, and active labour market policies, should be shielded from cuts. In some cases, it may even be justified to increase investments on such items, to maintain labour force participation rates. In particular, spending that strengthens female work force participation should be preserved. Actions that intensify poverty traps, such as the introduction of means-testing, must also be resisted. The current Swedish government has promoted labour force participation by pursuing a number of reforms to make work pay. Perhaps most importantly, we have significantly reduced marginal tax rates for low and middle-income earners through the introduction of a earned income tax credit (EITC). This is a crucial structural reform in helping people move out of the poverty trap. In fact, low and middle-income earners have received two thirds of total tax cuts, thus markedly reducing their total tax burden. We have also restructured the functioning of the benefits system, to further incentivize people to shift from unemployment, early retirement, and other welfare programmes into employment. In addition to making it more profitable to employ people who have long been excluded from the labour market, we have strengthened measures to support the unemployed in their job search. Furthermore, the Swedish Public Employment Service, responsible for helping people currently out of work find new jobs, has been improved. These reforms have helped Sweden weather the current economic crisis. First, unemployment has increased less during the crisis than we expected. Compared to the most pessimistic earlier forecast the current prognosis is that unemployment will be significantly lower during 2010-2012 and have been revised downwards between 0.7 to 1.6 percentage points per year. More stable financial markets in combination with extensive fiscal and monetary stimuli have raised demand, which in turn have made the effects on the labour market less severe. Second, and related to the first point, the costs associated with unemployment will also be less than expected. The labour market related expenses is now projected to be 7 per cent lower for 2011 than projected last spring. If one does not take into account recent reforms in the budget bill for 2010 the labour market related expenses would be even lower, around 13 percent. Third, the costs for early retirement and sick leave have fallen dramatically in the last few years. In fact, in 2006 to 2011, the accumulated cost savings are in the order of about 70 billion Swedish kronor (almost 6 billion pounds sterling). Fourth, according to the latest forecast, hours worked in the Swedish economy - the most important tax base - will develop substantially better than projected earlier. Previously we saw a decrease in hours worked by 3 percent between 2009 and 2012. Now we believe that hours worked will marginally increase during the same period, leading to higher tax revenues. Fifth, unlike many other countries, Sweden will not have to engage in a painful fiscal consolidation, owing to our robust public finances. The 2010 average fiscal balance in the OECD is -8 per cent of GDP. Sweden is among the countries with the smallest deficits, having a fiscal balance at -3 per cent of GDP. Sweden also has among the most sustainable public finances in the EU according to the European Commission's Sustainability report 2009. So, the economic crisis that has devastated many of the world's leading economies has not hit Sweden as hard as we had feared. This may be a sign of the effectiveness of the current government's reforms. 9. Strengthen fiscal institutions There is widespread agreement that fiscal policy frameworks matter. A wide range of empirical studies show that countries with stronger fiscal institutions, including centralized policy-making, fiscal rules concerning deficits and multi-annual expenditure ceilings, and transparent procedures, achieve better fiscal outcomes, in terms of lower deficit and debt. This is why many countries have reformed their fiscal institutions during the last couple of decades, and why the EU has made stronger fiscal policy frameworks a key part of the Göteborg principles for comprehensive fiscal exit strategies, agreed at the informal ECOFIN Council meeting in October 2009, during the Swedish Presidency. Sweden reformed its fiscal framework in the mid-1990s, since the previous system was among the worst in Europe, as had been illustrated by poor outcomes in public finance terms. We now have a robust system with a surplus target of 1 percent over the economic cycle, a multi-annual expenditure ceiling, a centralized top-down budgetary process, in which the Ministry of Finance has a strong co-ordinating role, and a statutory balanced budget requirement for local governments. There is also a fiscal policy council that independently evaluates the government's fiscal policy, including its long-term sustainability, the surplus requirement, and the multi-annual expenditure ceilings. Since the introduction of stronger, more effective rules, public finances have improved substantially in Sweden. Deficits have been replaced by surpluses and the public debt as a percent of GDP has fallen steadily from its peak in the mid 1990s to under 40 per cent by 2007. This also means that Sweden today has room to manoeuvre in taking measures to combat the financial crisis. Fiscal frameworks vary across the OECD, in terms of centralization of budgetary power, the existence of formalized expenditure ceilings and/or surplus targets, and various other rules. Given the relatively poor fiscal performance of various countries with weaker budgetary institutions, it would seem justified that they introduce stronger fiscal rules and processes, along the lines recommended by the OECD. While the OECD acknowledges that fiscal institutions need to be adapted to the country-specific context, it also emphasizes that certain features are necessary for the rules to be effective, including the "need to combine transparency with sufficient flexibility to face cyclical (and other) shocks, a wide coverage across various budget items and effective enforcement mechanisms." It is also important that there is clarity regarding the timing of an economic cycle, and that changing assessments of the cycle's start date do not prevent the functioning of the fiscal rules. In the case of the UK, the OECD has suggested amending its fiscal rules so that they are forward looking, ensure medium-term spending discipline and account more explicitly for off balance sheet public liabilities. Also, income tax thresholds and national insurance thresholds should be linked to wage, rather than price inflation so that fiscal drag is handled more transparently. Ultimately, a country's fiscal institutions are best assessed according to that country's fiscal outcomes, ie the evolution of debts and deficits. Given the relatively poor fiscal performance of the UK and many other states, it seems clear that a comprehensive reform of budgetary rules and procedures is in order. 10. Maintain social cohesion A fiscal consolidation process must not come at the expense of social cohesion. It should not harm the poorest members of society, but rather the burden must be shared by all, in an equitable fashion, with the richer taking on a larger burden, in proportion to their greater wealth. This is crucial in ensuring that a consolidation has sufficient legitimacy in a society. Social justice requires us all to do our part because we are all in this together. More robust fiscal institutions, as described above, should also contribute to social cohesion, by protecting the poorest, who suffer when weak public finances necessitate fiscal consolidation. In the case of Sweden's consolidation, the two richest deciles accounted for 43 percent of the savings, whereas the other deciles each contributed about five to ten percent (with the poorest deciles accounting for the least). Conclusion The value of sound public finances cannot be underestimated. Weak public finances are a major source of instability, as the market and the public question the direction and credibility of government fiscal policy. The costs of this uncertainty are manifested in terms of a risk of higher interest rates, increased inflation, and the strong likelihood of forced fiscal consolidation, through higher taxes and reduced spending. Such a consolidation process is painful, particularly for the poorest members of society, whose welfare programmes are disproportionately cut. The value of stable, robust public finances is then that it reinforces the credibility of government policy, thus allowing fiscal stimulus programmes to have effect, as individuals don't need to hold back consumption, for fear of future tax increases. In conclusion, it is clear that a number of OECD states, including the UK, face a challenging situation, in terms of public finances. A fiscal consolidation will be necessary to deal with the high deficit and growing debt levels. However, Sweden and other OECD countries have been in similar positions yet have successfully restored robust public finances. The key lessons from Sweden's fiscal restructuring of the early 1990s include the need to use both tax increases and expenditure cuts; the importance of raising the right taxes and cutting the right expenditures; the significance of realistic yet ambitious forecasts; and the necessity of front loading consolidation. Calculating the political costs of various reforms, creating robust fiscal policy frameworks, and maintaining social cohesion are other key elements of a successful consolidation. The current Swedish government's structural reforms, including tax and spending changes, welfare reforms, and measures to safeguard labour force participation, have further strengthened the Swedish economy and public finances, dealing with structural problems that remained unresolved from the 1990s. These reforms have played a key role in helping Sweden's public finances survive this downturn relatively unscathed. I am confident that the UK, with strong political leadership and appropriate policy decisions, will address its fiscal challenge and bring public finances back to a sustainable path. 2009

Speech Federal Ministry of Finance, Berlin 27 March 2009 Anders Borg, Minister for Finance What needs to be done to make public finances in the EU more sustainable in the long term?

Introduction The financial crisis is affecting growth and employment all over the world. The forecasts for economic growth Download in the near future are dismal. To combat the negative growth, many countries, not least in the EU, are What needs to be done to implementing extensive stimulus programmes to mitigate this negative trend. make public finances in The dramatic slowdown in the world economy, along with the requisite stimulus packages, will have a major the EU more sustainable in the long term? (pdf 146 impact on public finances. Most countries will experience a steep decline in their public finances. Many will kB) have a growing budget deficit and thus a rising public debt ratio. Presentation slides (pdf In such a situation, it is essential to safeguard the long-term sustainability of public finances. One important 250 kB) instrument - and here I speak from my own experience in Sweden - is good fiscal rules that are observed even when they are under pressure. This applies to both the common rules we have in the EU and existing national rules. In Sweden, we have had very good experience with fiscal rules. These rules provide a good basis for the effort to safeguard long-termism. In my remarks I will first look at the challenges we now face and then review the design of the Swedish rules and our experience with them. Lastly I will try my hand at some reflections on Germany. However, let me stress here that my expertise is in Swedish fiscal policy and Swedish fiscal rules. My comments on the EU and on Germany in particular should thus be seen as an outsider's reflections rather than well-developed advice.

Click on the pdf file to the right to read the whole speech 2008

Speech The Economist's Business Roundtable with the Government of Sweden Stockholm, March 5, 2008 05 March 2008 Anders Borg, Minister for Finance Re-establishing the Swedish Model Speech by Anders Borg, Minister of Finance, at The Economist's Business Roundtable with the Government of Sweden

Thank you for your invitation and the opportunity to present my view of the Swedish economy and discuss the Government's economic policy. The Swedish economy has grown vigorously in the last decade, both from a historical perspective and in comparison with other countries. Sweden has gradually climbed from fourteenth Download place 1997 to ninth place 2007 in OECD measurements of GDP adjusted for purchasing power parities (New Re-establishing the ranking based on revised figures). Even though estimates of this type should be taken with a grain of salt and Swedish model, the changes that have occurred in recent years should be interpreted with great care, the trend is gratifying. presentation by Minister of Finance Anders Borg In my speech I will describe the reform process that the Swedish economy has undergone in the past few (pdf 257 kB) decades. The growth and stability oriented economy we have today in many respects resembles the economy we knew in the 1950s and 1960s when the Swedish model was created. The development during the years in which this model gradually took shape stand in stark contrast to the problematic years of the 1970s and 1980s. Today Sweden's economy has a strong foundation with stable, low inflation, sound public finances, a well- educated labour force and good productivity growth, viewed over time. The confidence that has been established means that periods of economic uncertainty today have less impact on Sweden, with its small, open economy. The Swedish krona no longer takes a roller coaster ride when international financial markets are troubled. The confidence built up during several years is something we must always nurture. The work that we in the Alliance Government have taken upon us is to reinvent the Swedish model. Our principle objectives are to restore full employment in Sweden, re-establish salient parts of the economy and overcome the exclusion and mass unemployment that sprang up over a number of years. By improving the incentives for getting a job, making it easier and less costly to hire new employees and creating better conditions for starting and running a business, we are reinventing the Swedish model. Sweden will be a country with full employment, good conditions for growth and a well developed social welfare system. We know that full employment is by far the best antidote to the growing rifts and inequalities in society. Only by being employed will people have the resources to set their own course and shape their own lives as they themselves see fit. By attracting more people into the labour force, we are establishing a stable basis for our social security systems and a strong position for taking on the challenges that lie ahead. This work will take time and require important reforms. In a relatively short time, we have made a number of improvements to get more people working. We are gradually beginning to see results. It is particularly gratifying to see that more and more people who previously were the most detached from the labour market are finding jobs. Now we in the Alliance Government would like to press forward with measures to improve social welfare and the conditions for growth. Our discussion focuses mainly on quality in pre-school, taxes, climate policy and infrastructure, which is so important for growth. We will further suggest reforms to strengthen the Swedish position as a knowledge based economy.

The rise of the Swedish model Let me begin by going back a few decades. In the 1950s and 1960s Sweden experienced years of rapidly growing prosperity. Between 1950 and 1973 the annual increase in GDP came to 3.7 per cent, which was more than 1 percentage point higher than it had been from 1918 to 1950, when it was 2.74 per cent a year (In comparison, growth in Sweden, 4.65 per cent a year, in the two decades following the Second World War was actually almost 1 per cent lower than the average for countries in Western Europe). Varying between 1.5 and 2.0 per cent, unemployment was lower than the European average and much lower than the U.S. average. The strong and stable growth experienced by the Swedish economy in the 1950s and 1960s gave Sweden the fourth highest per capita GDP adjusted for purchasing power parities in the early 1970s. The Swedish model was during these years not based on any miraculous solution but on a number of fundamental economic principles that are still valid today: - Flexibility and mutual understanding. A labour market and labour market legislation that are characterised by understanding between the social partners and ensure that there is a reasonable balance between employees' legitimate demands for job security and employers' need to be able to adjust the labour force and the organisation of production in response to changes in competitive conditions. - The work-first principle applies to all the social insurance systems. The social insurance systems are to be designed so that there are clear incentives to work at the same time that they provide security in the event of change. - Publicly financed welfare systems accessible to all and ensure a high level of labour force participation and high productivity growth. - Low and stable prices. The international exchange rate cooperation decided at Bretton Woods, which lasted until the early 1970s, had a stabilising influence. - Sound public finances. Public finances during those years were stable. However, a gradual expansion of public transfer systems made the budget increasingly sensitive to swings in the business cycle. - A business sector that is open to international competition and in which interventions in the free price mechanism are few. Historically, these components of the model was the foundation on which our broad economic development was constructed. A model based on work-first principle, supported by a focus on knowledge and education are vital for a sustainable society with equal opportunities to all. Likewise, in my view, problems of low growth and increasing macroeconomic imbalances in the 1970s and 1980s, like the employment problems that manifested themselves in the wake of the crisis in the early 1990s, were in large measure the result of abandoning fundamental principles in the Swedish model. The economic policy in the 1970s in particular created institutions and structures that, owing to their rigidity, were incapable of dealing with either new economic realities, such as a growing international economic integration, or with the negative effects on the economy in general that were a consequence of neglecting the need for flexibility, dynamism and economic incentives.

Developments in the 1970s and 1980s: Why did the model stop working? What then were the factors that made the Swedish model stop working? The international recession that followed in the wake of the two oil crises in the 1970s naturally had a negative impact on Sweden. But these shocks also affected other industrialised countries and it is difficult to assert that Sweden would be so sensitive to the international business cycle that this could explain why Sweden fell from fourth place in the OECD's ranking of countries by per capita GDP around 1970 to ninth place in 1990 and fourteenth place in 1997 (New ranking based on revised figures). Instead I would argue that the explanation can be found in the economic policy conducted during the 1970s and 1980s. Five factors are generally emphasised as being particularly significant: - Budget deficits and high inflation undermined macroeconomic stability. - Tax and benefit systems weakened the work-first principle. - A weak competition policy and ignorance of entrepreneurship and the capacity for renewal in the business sector. - An uncertain investment climate in the wake of macroeconomic imbalances. - A fragmented political system together with a weak institutional environment made a long-term economic policy more difficult. These problems had to be addressed if Sweden were to turn the tide. Let me also say that the compressed wage structure that existed as early as the 1950s and 1960s, together with rising employer's social security contributions and consumption taxes in the 1970s, created tax wedges and pushed up the cost of employing people with low productivity in particular, people who most often had difficulty getting a foothold in the labour market. To simplify a little, the Swedish model with strong trade unions and a compressed wage structure was not compatible with the high tax wedges that arose in the 1970s.

The economic crisis in the 1990s forced reforms In the late 1980s the negative effects of the policy became clear. High inflation and low productivity growth created a situation which weakened many households' purchasing power and weakened the competiveness of Swedish companies. All of this leading to persistent economic efficiency losses. The credit market had been deregulated in the mid-1980s, followed by the abolition of the foreign exchange restriction. Several attempts were made to halt the inflationary spiral and some years later work began to reform the Swedish tax system, which many critics from both the left and the right of the political spectrum condemned as "perverse". In addition a Productivity Delegation was appointed in 1991 to develop proposals for improving Swedish productivity. Productivity growth in Sweden had lagged behind since 1970. The rate of increase fell from about 6 per cent a year in the 1960s to about 2 per cent a year in the second half of the 1970s and in the 1980s. The decline can be attributed in part to the economic policy, which proved not to be sustainable in the long term. Instead it caused inflation. Frequent devaluations to manage these problems resulted in little pressure for structural change in Swedish industry. In addition sharp tax increases weakened the incentives for investment and for individuals to get an education. On top of all this, the oil price shocks caused a worldwide fall in GDP and investment. In the early 1990s, Sweden and a number of other European countries experienced a severe economic shock that, together with the unsolved structural problems, both put an end to full employment and led to a sharp downward turn in public finances. Between 1990 and 1993 open unemployment increased from 1.6 per cent to 8.2 per cent of the labour force. The employment rate among the working age population (aged 16-64) shrank from 83.1 to 72.6 per cent in the same period. The public finances weakened in an equally dramatic manner. Public sector net lending changed from a surplus of 3 per cent of GDP in 1990 to a deficit of 11 per cent in 1993. The economic crisis strengthened what many analysts and decision makers had become aware of in the latter part of the 1980s, namely that the serious situation in which the Swedish economy found itself was not temporary in nature, but required a fundamental reorientation of economic policy. The embryo of an economic and political reform programme that had its beginning in the 1980s was strengthened and several reforms were introduced in the early 1990s. The reforms included both structural policy and the framework for stabilisation policy. In addition wage formation was gradually changed, a crucial step in creating stability in the economy.

Structural reforms in the 1990s The structural reforms implemented in the 1990s aimed at increasing efficiency through more competition and better incentives to work. While economic policy, particularly in the 1970s, had been aimed at selective industrial policies and attempts to bridge recessions with various forms of support for investment and stockbuilding, the policy was instead aimed increasingly at the factors of production by putting the emphasis on promoting education and stimulating capital formation. Thus better conditions were created for companies to compete internationally. A major tax reform carried out in 1991 included reduced marginal taxes, simplified regulations and a broader tax base. The corporate tax was gradually reduced to 28 per cent. In a reorientation of housing policy, interest rate subsidies were reduced and the aim of housing policy over time has shifted from support for production to financial support for consumers. The main feature of the policy was that both producers and consumers had to shoulder a greater share of both the capital and production costs. In 1993 a stricter competition law was introduced and several product and service markets, such as transport, telecommunications and electricity, were deregulated during the 1990s. Sweden was given full access to the internal market in 1994 under the Agreement on the European Economic Area and a year later became a member of the EU. In the 1990s labour legislation was also amended to meet the demands for greater flexibility. One of the changes, agreed fixed-term employment, has made it easier to hire on a temporary basis. A broad policy agreement was reached on a new pension system with a closer link between contributions and future benefits. The pension system was introduced in 1994 and applies in its entirety to those born in 1958 and after. Macroeconomic stability with functioning framework for fiscal and monetary policy The crisis of the early 1990s also helped increase understanding of deficiencies in economic policy and its framework. A consensus developed on the need to improve the regulatory framework and review the goals of economic policy. The result was a number of reforms aimed at greater stability and increased predictability. Under the reforms, both monetary and fiscal policy were given clear goals as well as the conditions for achieving them. Since 1999, price stability has been well anchored in legislation and the Swedish central bank, the Riksbank, has been given greater independence in maintaining the target for low and stable inflation of about 2 per cent. After the crisis in the early 1990s, the public finances were consolidated. In total, measures consolidating the budget came to 7.5 per cent of GDP, according to IMF estimates (Bennett, A. et al, (1995), "Challenges to the Swedish Welfare State", IMF Occasional Papers, No. 130). The then Social Democratic government completed the consolidation of the public finances. (A savings programme totalling SEK 118 billion was presented in 1995. The next year it was expanded to include budget reinforcements totalling SEK 126 billion up to and including 1998. Expenditure reductions accounted for SEK 66 billion. This savings programme was ambitious in an international perspective. Henriksson, J. 2007, Ten Lessons About Budget Consolidation. Bruegel förlag. Jens Henriksson, the previous state secretary, in this publication emphasises the guiding principles that steered the government of the time in its work consolidating the public finances.)

The total consolidation programme came to about 15 per cent of GDP and stabilised the unsustainable debt situation and enabled public finances to begin showing a surplus again. The credibility of the consolidation programme was strengthened by the reform of the budget process. Sweden went from having one of the weakest budget processes to having one of the strongest. Sound public finances is today firmly entrenched in policy. The target of a surplus in general government net lending of 1 per cent of GDP in average over a business cycle also has the aim of lowering the debt ratio. This is warranted by the expected burden that an ageing population will impose on the public finances. Sweden, as an EU member, has agreed to follow the terms of the Growth and Stability Pact on central government net lending and indebtedness, an undertaking that also strengthens fiscal policy credibility. The policy of maintaining budgetary surpluses is supported by three-year central government nominal expenditure ceilings and a new statutory requirement for municipalities and county councils to balance their budgets was introduced in 2000.

Employment remained a problem The Swedish economy was in most respects in better shape at the end of the 1990s than it was at the beginning. The public finances had been consolidated, the inflation had been shifted down to more sustainable levels and the conditions for production were more favourable. While Sweden has succeeded in rectifying a number of important problems, the labour market problem remained unsolved. The labour market was characterized by weak development in private employment and growing exclusion, with an increasing number of people on sickness absence or in early retirement. The percentage of the population with sickness or activity compensation (disability retired) has risen continuously from just over 3 per cent in the early 1970s to over 8 per cent in 2006. Open unemployment has increased from about 2 per cent of the labour force in the 1980s (up to about 1990) to over 5 per cent in 2006. In the early 1970s there were about a half million people who were dependent on various benefit systems, in the 1980s there were about one million and in the 2000s they exceeded one million. The reason for the weak growth in the labour market is that policy in past decades has created serious structural problems. As a result, the labour market has functioned poorer and the equilibrium rate of unemployment has increased. Too high taxes, too generous benefit systems, ineffective labour market policies and too high employers' social security contributions have tended to make labour supply and demand too low. They also cause matching in the labour market to function poorly. The incentives to work or to move from part-time to full-time work were much too weak and it was too expensive to hire. In addition the business climate was much too poor. Few people have been prepared to start a business and get it to grow rapidly. Being an entrepreneur simply has not been sufficiently attractive. Employment problems have been particularly evident in certain groups - young people, older people, women and people with a foreign background. This has contributed to increased income disparities and it has become more difficult for people to exercise control over their own life. The Alliance Government's foremost goal is to overcome this exclusion that has been allowed to grow for thirty years and get more people working.

The challenges ahead Overcoming exclusion and getting more people working means that we as a nation are able to make the most of the potential that exists within our national borders. Sweden's economy faces a number of important challenges in the long term. I have in mind the ageing population, globalisation and increasing competition, but the environmental challenges, not least climate change, are also global and affect living conditions everywhere. As the population ages and incomes rise, the demand for welfare services will increase. The number of people aged 65 or over will increase rapidly in the next 30 years at the same time that the increase in the group aged 20-64 is expected to be more modest. To meet the growing demand for welfare services, the surplus target for general government net lending must be maintained as long as it is needed to ensure sustainable public finances. In addition, steps must be taken to improve the efficiency of the public sector. In order to get more resources for welfare services, it is crucial to increase the number of hours worked in the private sector. Globalisation puts the Swedish economy's adaptability and flexibility to the test. Employees who lose their job today cannot in the same way as earlier be sure to find a new in the same occupation or sector. Thus there is a risk that an individual's knowledge and experience will now decline in value more rapidly than before (Ljungqvist, L. & Sargent, T. J., (2006), "How Swedish unemployment became more like Europe's". Paper presented at SNS/NBER Conference, "Reforming the Welfare State", 9-10 September in Stockholm). The ability to adapt easily is necessary in a globalised economy. It requires not only lifelong learning but also social security systems designed so that the incentives for re-entering the labour market are strong. Only then is it possible to reduce the risk of individuals becoming trapped in permanent exclusion with few possibilities of affecting their income development. The reforms we implement now to reduce emissions over the next two or three decades will largely decide the long-term global temperature increase and thus the expected impact. I believe that a good basis for meeting these challenges is an economy of full employment in which all who want to work are able to do so.

A policy for full employment The Alliance Government went to the electorate in September 2006 with a clear strategy tackling Sweden's major remaining structural problems - the weak growth in employment and the high level of exclusion - and at the same time, safeguard and develop the many successful reforms implemented by both the non-socialist and the Social Democratic governments in the 1990s. Before I go into these proposals, I want to mention a few principles that formed the basis for this policy: - Sound public finances are the basis for a successful reform policy: Sound public finances and stable prices form the corner-stones for a successful reform policy to achieve good long-term growth and employment. Sound public finances and a surplus in general government net lending are also necessary in order to achieve stable public finances in the long term as the population ages. - Safeguarding the Swedish model in the labour market: In the Swedish model, conditions in the labour market are primarily regulated in agreements between the social partners. It is important that the social partners are engaged in - and shoulder their share of the responsibility for - the development of modern and well- functioning labour legislation. The Swedish labour market model has delivered stability, predictability and industrial peace and it should therefore be kept. - Welfare systems must be jointly financed and distributed according to need: A central feature of the Swedish model is that health care and social services are jointly financed and distributed according to need. Maintaining this principle is essential. In order to be able to maintain the Swedish welfare model in the future, it is important to undertake reforms that increase the labour supply and employment and take measures to increase efficiency in the production of publicly financed services. Our jointly financed welfare must at the same time be open to new ideas. Strong new incentives can contribute to the provision of welfare that is better at meeting the individual needs of patients and care recipients. Reforms aimed at increasing diversity and competition among different actors in health care and social services increase the freedom of choice, but they also contribute to more employment in these sectors.

A broad reform programme The Government's policy for sustainable higher employment and a reduction in exclusion takes a broad approach and has a long-term orientation. The different parts of the economy are interconnected and reforms in one area have a greater impact if reforms are implemented in other areas at the same time. A broad programme is also expected to have a greater impact on employment when its various measures complement and reinforce each other. Measures that increase the demand for labour but not the supply tend to lead to rising labour costs and thus limit the impact on employment. Measures to increase the labour supply in the absence of proposals making it easier to leave unemployment run the risk of having a delayed impact and negative distribution policy effects. Instead the aim is to carry out measures to increase the labour supply and at the same time, create the conditions for business to increase its demand for labour. The reform strategy for increased employment and less exclusion has three elements: 1.More incentives to work 2.Simpler and less costly to hire 3.Easier and more attractive to start and run a business Most of the measures in these areas are of a general nature. For some particularly vulnerable groups in the labour market, especially young people and people born outside Sweden, general measures are not sufficient. Therefore reforms targeted at improving the possibilities for these groups to enter the labour market are also being undertaken. -More incentives to work- Swedish and international experience shows that a policy that makes it more worthwhile to work plays a decisive role in increasing employment and reducing unemployment. The design of the tax system and the design of unemployment and sickness insurance are of major importance in an individual's incentives to move from exclusion to work or from part-time to full-time jobs. The threshold effect in the labour market - for having a job or not - is critically important for the labour supply and for a reduction in exclusion. If we lower taxes for those earning the most at the margin, there is a relatively small impact on the employment. It may be wise to do so for other reasons, for example, for improving the premium on education, but it has relatively little impact on employment. If we lower taxes on the lowest incomes, it will become more worthwhile to shift from not working to working. In that case there will be a substantial impact on exclusion, as shown by the experiences of other countries that have introduced a similar deduction. By changes to the income tax, the financial returns on working may increase, which will encourage an increase in the labour supply. The Government has introduced an in-work tax credit of about SEK 50 billion. The aim is to strengthen the incentives to work, particularly for low- and middle-income earners, and to create better conditions for those outside the labour market. But by lowering marginal taxes, it will also help increase the labour supply from broad groups of those who already have a job. Unemployment insurance is meant to be an adjustment insurance. Generous insurance for a short or normal period of unemployment can oil the wheels of the labour market, promoting increased mobility by giving more people the courage to then try out new jobs. If the period of compensation drags out, a high replacement rate can, however, reduce people's chances of finding a new job. Unemployment insurance must be designed so that work should always pay better than unemployment insurance and so that bottlenecks in the labour market are eliminated. The aim of sickness insurance is to provide security to those who suffer illness. Sickness insurance should not drive people far from the labour market and create situations in which there is exclusion with weak economic growth. Instead sickness insurance should provide security in the labour market for people who fall ill and for that reason are unable to work. The Government has proposed a number of measures to provide more ways to return from sickness absence to work and workmates. The link to the labour market while on sick leave has been strengthened and the risk of long-term absence has been reduced. Improving the conditions for returning to work has been important in light of the steady increase in sick leave and early retirement during the past thirty years.

More worthwhile and easier to hire... We want to increase employers' interest in employing people whose ability to work employers may feel is uncertain. We are improving the opportunities for hiring such people and making it easier for them to enter the labour market by providing financial support to reduce the obstacles that this uncertainty may present. A structure of labour costs in which the labour costs of people with low qualifications and low productivity are comparatively high will mean that their risk of unemployment is higher. It also means that people with relatively low qualifications or people who have lost some of their skills owing to a lengthy exclusion will have difficulty finding a job. In addition rigid job protection provisions put those outside the labour market at a disadvantage and favour those with a strong position in the labour market. Job protection thus has a redistributive effect on unemployment and hence contributes to a lingering high level of exclusion. However, there is not any clear-cut proof that job protection legislation would have any observable impact on the average level of unemployment. We have introduced what we call new start jobs, which mean that people who have been unemployed, in early retirement, on sickness absence or dependent on social assistance for at least one year, contributing to increased uncertainty about their qualifications, will be able to have the employer's social security contribution waived for a period equivalent to the time that they have been away from the labour market. We have lowered employers' social security contributions for young people and older workers. We have made it easier for asylum seekers to enter the labour market quickly via step-in jobs. We have lowered the tax on the purchase of household-related services. It has also become easier to hire people for up to twenty-four months and the option of seasonal employment has been re-introduced. These measures will pave the way for those who have been hidden and forgotten in big systems. Now we are giving these people a chance.

&and better matching in the labour market Measures for facilitating and improving matching in the labour market, that is, the process whereby jobseekers and businesses wanting to take on employees are put in contact with each other, can contribute to lower unemployment and higher employment. These matching measures include strengthening the incentives to look for and find work, for example, by adjusting taxes and the benefit levels in unemployment insurance. Another important factor in boosting the labour supply and improving matching in the labour market is how the requirement for the unemployed actively to look for work is followed up and what sanctions are available if this requirement is not met. Here employment offices play an important role. It is important that the application of sanctions be explicit. At the same time, it must be possible to apply sanctions without making too large an intervention in the individual's benefits. Labour market policy can and must serve to oil the wheels of the labour market. It must help enable people to move as speedily as possible from one job to another or from unemployment to a position in the regular labour market. In such a way, labour market policy can contribute to better matching. Efficient employment offices, which provide contacts with employers and actively coach the jobseekers, increase the possibilities for the unemployed to find jobs. Likewise labour market training that is adapted to the employers' needs can contribute to better matching. Labour market policy resources must have a clear focus on matching jobseekers with vacancies, increased competition in the employment service and improved control and more consistent application of unemployment insurance rules. The Government's reform strategy to streamline labour market policy includes emphasising job search activities, giving priority to support for hiring over labour market training and focusing measures on those most excluded from the labour market. A Job and Development Guarantee is replacing the Activity Guarantee Programme, which had obvious deficiencies in both quality and effectiveness. We want to get those participating in the Job and Development Guarantee into the labour market with individually designed measures such as job searching activities with coaching, clearer routes into the labour market with job training, work placement, employment opportunities and skills enhancement. The number of labour market policy programmes has been reduced, making it possible to focus more on quality.

More worthwhile and easier to start and run a business The way to full employment and rising prosperity is through a dynamic business sector in which entrepreneurs and business leaders want and dare to take new ventures. The conditions for entrepreneurship are good in Sweden in many respects. Swedes are well educated and they have been quick in adopting new technology. The business sector is innovative with extensive research and development and a good financial capacity. In recent years, Sweden has risen steadily in international rankings of competitiveness and business climate. Even though conditions are good in many respects, there is a need for further improvements in the business climate, not least for smaller companies. It is also important to make continuous improvements in the overall business climate so as to maintain the strong position of Swedish business in an increasingly integrated world economy. The entrepreneur is the most important instrument of economic renewal and therefore measures creating favourable conditions for entrepreneurship are key in a successful economic policy and a country's adaptability. A number of factors perceived as obstacles to entrepreneurship in Sweden have been found repeatedly by several business climate surveys conducted in recent years. Among these obstacles are the access to risk capital for small and new enterprises, high taxes and social contributions, labour market laws, the regulatory burden on enterprise, distortion of competition in markets in which the public sector is active, bankruptcy laws and difficulties finding workers with the right skills. Private ownership and private capital are essential for entrepreneurship. Research shows that having private capital affects the probability that an individual will become an entrepreneur and expand his or her business activities. Venture capital companies have an important role to play in the successful commercialisation of a new product. However, in the very earliest stage, the informal risk capital markets in the form of one's own private capital and business angels may be at least as important as formal markets. The riskier the activity, the more important it is to have one's own capital. Investing one's own capital in the activity also indicates to creditors that the investment has a high expected return. The previous government abolished inheritance and gift taxes. To further stimulate private capital formation and thus more entrepreneurship and higher growth, the Government has abolished the wealth tax and changed the 3:12 rules on the taxation of close companies. Together these measures mean a substantial cut in private equity taxation. In addition to these reforms, a number of measures have been introduced to make it more worthwhile and easier to start and run enterprises: Employer co-financing of sickness benefit costs on and after the fifteenth day of absence has been abolished, the VAT accounting period has been changed, the regulatory burden will be reduced by 25 per cent, there will be more competition in the production of welfare services, and bankruptcy and insolvency legislation is under review.

What effects are the reforms having? The reforms being carried out by the Alliance Government aim at a durable increase in employment by getting the Swedish economy to function better. The reforms are expected to have considerable impact in the next couple of years and take full effect in about five to ten years. So far, we can establish, that exclusion measured as full-year equivalents fell by about 130 000 people in 2007, according to the Ministry of Finance's preliminary results, the largest decrease measured since the time series began in 1970. The number of people in all the groups for which there are estimates of exclusion fell - people on sickness absence, the unemployed, the early retired or those receiving social assistance. Such a drop has never happened before. Economic developments certainly are an important factor, but we can also see that our policy is gradually yielding results. The progress made, particularly among groups that have had difficulty getting a foothold in the labour market, is clear: more are getting jobs and more are leaving exclusion. Approximately 40,000 young and a good 35,000 foreign born were employed during 2007. The growth in hours worked were, both in absolute and relative terms, greater among women than among men. Looking at the cumulative effects over a longer period, we at the Ministry of Finance estimate that the policy will lead to an increase of over 140,000 (3.3 per cent) in the number of people employed and open unemployment will fall by 1.0 percentage points in the long term. The number of hours worked in the economy is expected to increase 4.1 per cent I want to point out that economic policy can affect growth and employment through other channels than those described here. The Government has introduced and is planning to introduce measures in a number of areas that may have an impact on growth and employment. Education policy and investments in infrastructure may contribute to stronger growth ahead. Also changes in the supply of risk capital and the abolition of the wealth tax can contribute to stronger economic growth. The effects of such measures are not included in the assessments, as they lie far ahead and/or are less well documented in economic research.

External forecasters' assessments A number of external assessments of the Government's package of labour market reforms have been made. However, comparing them is difficult. In most cases not all parts of the Government's policy have been taken into consideration in these assessments, which accordingly should be viewed as partial analyses of the effects of a limited number of reform measures. It is therefore not surprising that the Government's own estimate of the cumulative effects of the reforms on employment and GDP is higher than other estimates. The National Institute of Economic Research: The National Institute for Economic Research estimates that the measures proposed by the Government in the 2007 Budget Bill and other proposals presented in autumn 2006 will contribute to increasing the potential labour force by 1.3 per cent in the long term. According to the Institute's estimate, the reforms will reduce the equilibrium rate of unemployment by 0.2 percentage points. This means that potential employment will increase by 1.5 per cent in the long term. (The National Institute of Economic Research, (2007), The Swedish Economy - March 2007, The National Institute of Economic Research, Stockholm. The National Institute of Economic Research, 2008, The Swedish Economy - January 2008, The National Institute of Economic Research, Stockholm. The National Institute for Economic Research has also estimated the effects on employment of the proposals the Government presented in the 2008 Budget Bill. It estimates that the strengthened job tax deduction introduced in 2008 will increase the total number of hours worked in the economy by 0.3 per cent in the long term. The impact of other reforms is so difficult to estimate that they have not been quantified. However, the National Institute for Economic Research thinks that the six measures for which estimates have been provided will probably have little impact on the number of hours worked. If a large number of municipalities introduce the municipal child-raising allowance, the cumulative effect of the reforms for which there are estimates could be some decrease in the number of hours worked. EEAG Report on the European Economy 2007 The EEAG has estimated that the reform proposals presented in the 2007 Budget Bill will reduce open unemployment by about 0.5 percentage points. Regular employment is expected to increase by between 1.5 and 2 percentage points in the long term. (European Economic Advisory Group, 2007, ibid.) The IMF Sweden Report The IMF has welcomed the Government's reform package. The Government's reforms will contribute to strengthening the increase in employment during the current economic upswing. Total unemployment, including people in labour market programmes, is expected to fall. The IMF endorsed the reform package's focus on changes in the tax and social insurance systems and noted that the measures in these areas will contribute to higher employment. The Government's reforms will mitigate the negative impact that the compressed wage structure has on low-skilled people's possibilities of getting jobs, even though the size of the effects is uncertain. (IMF, 2007, Sweden, Article IV Consultation - Staff Report.) OECD The OECD in its Economic Outlook for December 2007 wrote that the reforms carried out by the Government and the additional measures announced in the 2008 Budget Bill will have a considerable impact on employment in the long term. The OECD also thinks that the effects on the labour supply may possibly even occur in the short term. This could make the labour market work better and make a more rapid expansion of production possible. The EU Commission Every year the EU Commission conducts an evaluation of Member States' policy within the framework of the Lisbon Strategy. According to the Commission, Sweden has made good progress from 2005 to 2007 in addressing the challenges involved in increasing the labour supply. The latest reforms have focused on increasing the incentive to work, labour market policy and the education system. The Commission also thinks that Sweden has made good progress in the areas that the 2006 Spring European Council identified as priorities, namely, knowledge and innovation; enhancing business potential; employability; and energy/climate change. As a result of these favourable opinions, the Commission for the second year in a row has chosen not to give Sweden, unlike the majority of other Member States, any specific formal recommendations. SNS The SNS Economic Policy Group estimates in its latest report that the reforms implemented by the Government will increase the number of hours worked in the long term by 1.8 per cent. It finds that the reforms have the greatest impact on the lowest income group, whose number of hours worked would increase by 16.2 per cent. The main reason for the sharp increase is the considerable number of people in this group who, owing to the reforms, will move from not working to a job. The estimate for the group with the highest incomes is that the reforms will instead reduce the labour supply by 0.2 per cent. This is due to the fact that for individuals with high incomes, the job tax reduction only has an income effect and thus they can afford to work fewer hours. The report also discusses how the reforms affect various income groups. The job tax deduction has a marked impact on low- and middle-income earners. According to the report, low-income earners' increase in income (8.6 per cent) will be double that of high-income earners (4.2 per cent). The job tax deduction also has marked income distribution effects between women and men and may help smooth the differences between men and women's working hours and incomes. The explanation for this is that more women than men are expected to elect to work more and thus increase their income more. ( Lundgren, S., Behrenz, L., Edquist, H. & Flood, L. 2008; Vägar till full sysselsättning, SNS Economic Policy Group, SNS Economic Policy Report 2008. SNS förlag, Stockholm.)

Concluding remarks In 2006 the Alliance for Sweden went to the voters with an ambitious reform programme to increase employment and reduce exclusion. The reform programme is based on preserving and building on the strengths of the Swedish model in all essentials. Our reforms will provide more jobs, higher employment and lower unemployment. Less unemployment and less exclusion are of major importance to smooth income differences and thereby achieve income distribution policy goals. In addition to the income distribution effects, increased employment will lead to increased welfare and to greater means with which to finance important welfare services in the long term. The latter is of considerable importance since access to welfare services of good quality is a way of smoothing consumption between individuals and helping those who, for various reasons, end up outside the labour market or who have low incomes. The Government's employment policy is ultimately based on the understanding that the opportunity to work has a value in a broader sense. By offering more people the opportunity to move from exclusion to employment, there will also be more people who can provide a livelihood for themselves and their families. Having a job affects one's sense of well-being. In the workplace, one is part of a larger social community and is capable of achievement, development and a sense of participation. Without a job, the risk of financial, social and health problems increases. For the individual and for welfare in general, the value of work is fundamental. A policy for increased employment and less exclusion is thus a moral imperative and not just a financial necessity. 2007

Speech World Bank annual meeting, Washington 22 October 2007 Anders Borg, Minister for Finance Speech held by Finance Minister Anders Borg at the World Bank annual meeting

Mr. Chairman, Ladies and Gentlemen, I am honored to address the 2007 Annual Meeting on behalf of the five Nordic countries. Let me first of all welcome the new World Bank President Mr. Zoellick. The Governors of the Nordic countries strongly believe that the World Bank plays a crucial role in the fight against poverty and in the achievement of the Millennium Development Goals. The time has come to agree on a common vision globally, and then implement it, locally. We strongly support the vision for an inclusive and sustainable globalization that has been brought forward by Mr. Zoellick, and we look forward to actively participate in further discussing and refining it. Today, I will focus on:

1 global economic development 2 the needs of Africa, especially Sub-Saharan Africa, and 3 addressing challenges of climate change.

I will also stress the need for 4 women's economic empowerment for growth and development, and 5 effective use of available resources.

1 Global economic development We have a global responsibility for the world economy and its resilience to shocks. Recently we have seen some turbulence on financial markets. To ensure sustained economic growth we must strengthen the functioning of financial markets and continue to strive for macroeconomic stability. In such favorable economic environment, it is the responsibility of the developed countries to seize this opportunity and decrease budget deficits. Likewise, structural reforms should be carried out and economies should be further opened up to trade. The developing countries must, on their side, show commitment and ownership to carry out essential reforms, such as promoting a sound business environment and private sector-led development. One pre-condition is to have an institutional and legal framework in place and firmly work against corruption. The recent large debt reductions for many poor countries have been important to facilitate growth and development. Now it is vital to avoid the accumulation of new unsustainable debts. Developed and developing countries share the responsibility to take wise borrowing and lending decisions.

2 The needs of Africa Sub-Saharan Africa is experiencing promising economic progress. It is important to build on this momentum and the Nordic countries are committed to strengthening our focus on the challenges facing this region. We therefore welcome the Bank's increased attention and involvement in this region. To ensure sustained progress, a number of institutional features are of utmost importance. Respect for human rights, democracy, rule of law and well functioning economic markets are important as such, but also significant for economic development. Further, reforms must be socially acceptable and inclusive. We should listen to the voices of the poor. Although the prime responsibility for social and economic development, including good governance and sound economic policies lies with the countries themselves, development assistance makes an important contribution to further progress in Sub-Saharan Africa. The Nordic countries have long been committed to the agreed UN ODA (Official Development Assistance) target of 0.7% of Gross National Income. We urge all donors, including non-OECD DAC donors, to deliver on their ODA commitments as well as to fully finance the Multilateral Debt Relief Initiative (MDRI) and the Heavily Indebted Poor Countries initiative (HIPC). The ongoing replenishment of IDA (International Development Association) will be one evident occasion for all donors to deliver on their commitments.

3 Addressing challenges of climate change Climate change is a challenge to the world as a whole. However, the poorest countries are the most vulnerable to the effects of climate change. Therefore, we have to address this challenge forcefully and through well coordinated international efforts. We believe that the Bank has an important role to play in mitigating the negative effects of climate change and in promoting a reorientation towards clean energy. The Bank is also a key player in helping developing countries adapt to climate change. The Bank's work with the Global Environment Facility (GEF), as well as the initiative to establish the Carbon and Deforestation Funds, are good examples of successful work in this area. We support activities to develop and launch additional mechanisms for long term carbon trading and investment. We encourage constructive action in reaching agreement on a post-Kyoto Protocol climate treaty. We will work hard for a new treaty to be adopted at the international climate conference in Denmark in 2009. Sweden has recently launched an International Commission on Climate Change and Development. The main task of the Commission will be to explore and promote effective ways to integrate risk reduction and adaptation to climate change into development and poverty reduction plans in developing countries. And to ensure that future investments in Official Development Assistance take full account of climate stresses and increased disaster risks. I hope that the work of the Commission can contribute to a successful outcome of the international climate negotiations in 2009.

4 Women's economic empowerment for growth and sustainable development I am a firm believer that equal rights and opportunities between individuals - women as well as men, girls as well as boys - are essential for sustainable development. Gender equality is necessary to ensure individual freedom and give people equal access to resources and opportunities to shape their own lives. Promoting gender equality contributes not only to women's and their households' own economic security, but also to national development, to broad-based growth and stability. Promoting gender quality is therefore essential for sustainable poverty reduction and the achievement of the Millennium Developments Goals. The implementation of the World Bank's Gender Action Plan is a welcome and important step in the right direction. I would also like to express our appreciation for the focus on gender issues in this year's Doing Business Report.

5 Effective use of available resources We must all work to ensure that development assistance is spent effectively and to achieve clear and measurable results at country level. What really matters is the real impact for the poor of our joint efforts. The Nordic countries commend the World Bank for being at the forefront in terms of focus on results. Aid effectiveness and management for results at the country level is crucial. Of special importance is country ownership and the alignment of donors to the partner countries' Poverty Reduction Strategies. The road map for this work is provided in the Paris Declaration on Aid Effectiveness. The World Bank must show leadership in the implementation of these commitments. We support all measures to increase transparency, promote democratic governance and fight corruption. We welcome the World Bank's implementation plan for the Governance and Anticorruption Strategy and will work constructively with the Bank to maintain the momentum in this important task. At the global level, the Bank should continue its advocacy role and active involvement in international effort to strengthen good governance.

In Conclusion In light of the global challenges that we are facing, not least the pressing issue of climate change, the need for international cooperation clearly remains of utmost importance. The ultimate goal being that of promoting equitable and sustainable global development and growth that is inclusive and to the benefit of all. Thank you!

Speech The Stockholm Region European Committee and Sörmland Regional Council, Hedenlunda Slott, Sörmland 08 June 2007 Anders Borg, Minister for Finance More People into Work, Todays Challenges for European Economies

In conjunction with the General Assembly of the Lisbon Regions Network held in Sweden, the Stockholm Region European Committee and Sörmland Regional Council arranged a conference on the topic "From Reaction to Action - managing regional challenges today and tomorrow". Minister for Finance Anders Borg Download took part and spoke about the importance of getting more people into the European labour market in order to Hedenlunda Slott 8 June manage the challenges of the future. 2007 (pdf 127 kB)