Sweden has weathered the recent global financial and economic crisis well thanks to strong economic institutions and fundamentals, not least a sound fiscal position. The main challenge going forward is to strengthen institutions and fundamentals even further so as to keep enhancing resilience and sustainable long-term growth.
Maintaining a strong fiscal position. In the face of the crisis, Sweden’s healthy public finances proved a major asset. Sweden is in a better shape than most other OECD countries to face fiscal pressures coming from population ageing. Going forward, maintaining a sound fiscal framework, encouraging greater labour force participation and further increasing the efficiency of public spending would help cope with future negative shocks and various fiscal pressures.
Further improving monetary and financial policy frameworks. Aggressive interest rates cuts, unconventional policy measures and exceptional government support to the financial system all helped contain the depth and length of the recession. As the expansion unfolds, the monetary policy stance needs to continue to tighten and support to the financial system needs to be scaled back. To strengthen the monetary policy framework even further, the central bank could improve communication. Some features of the financial system’s institutional framework need to be reviewed to clarify the allocation of responsibilities and ensure that regulations and toolkits are well designed and assigned.
Limiting long-term unemployment and raising overall hours worked. Past reforms and measures taken during the crisis have limited the fall in employment and exits from the labour market. But, as in the last deep crisis Sweden faced, there is a risk of a permanent increase in unemployment. Reducing the duality of employment protection legislation would foster the inclusion of groups at the margin of the labour market and improving the wage bargaining framework would ease labour market adjustments. The efficiency of active labour market policies could be raised by increasing the use of training, targeting it towards those who need it the most, and improving cooperation between institutions. Further reforms of the social benefit and tax systems are needed to provide the right incentives for increasing hours worked.
Enhancing the cost-effectiveness of climate change policies. Sweden has developed an ambitious policy framework to limit greenhouse gas emissions and has achieved impressive results. Reducing them further could be very expensive, making it important to do so at the lowest possible cost. The carbon price should be made even more central and more uniform across sectors. A larger share of greenhouse gas emission reductions should be achieved in sectors covered by the EU emission trading scheme as well as outside Sweden. The overlaps between targets and policies ought to be limited. Improving the assessment of Sweden’s climate change policies would help in making progress in these directions.