Learning the lessons from Sweden's budget crisis

In the early 1990s Sweden's long-lived economic recession posed a crisis on three fronts: an exploding budget deficit, high interest rates and record-high levels of unemployment. While other countries may have balked, Sweden implemented the painful foscal measures required - and they paid off.

In a new Breugel essay Jens Henriksson, a senior official in the Swedish Finance Ministry at the time, draws on his experience of one of the most dramatic consolidation episodes of the post-WWII period. In 10 Lessons about Budget Consolidation, Henriksson gives a truly fascinating and informed first-hand account. Here are the first two paragraphs:

In its Economic Outlook of December 1994 the OECD projected that the Swedish public debt would explode. By the year 2000 the public debt was expected to hit a record 128 percent of GDP2. Today we know that the gross debt for 2000 turned out to be less than half that figure at 53 percent. And within a few years the budget deficit, from a high of over 11 percent of GDP, turned into a large surplus.

But getting there was not an easy task. During the consolidation of public finances, I had the opportunity to work in close contact with different ministers of finance in Sweden. This paper relates what this experience taught me about the political economics of budget consolidation.

There are lessons here for all countries facing budget problems - not just those intent on he cutting back the sizxe of the state. As he notes:

It is not a paper about how to get rid of the welfare state. On the contrary, it is about how to strengthen the economic foundations for whatever kind of social model that is preferred. The budget consolidation in Sweden was dramatic but it preserved,preserved, and in many ways modernised and improved, the
welfare system.

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* The joys of fiscal consolidation, 25 May 2007

UPDATE: See also a new Cleveland Fed discussion paper by O. Emre Ergungor, On the Resolution of Financial Crises: The Swedish Experience (PDF)

Sweden was one of the Scandinavian countries experiencing a severe financial crisis In the late 1980s and early 1990s. I review the policy choices and external factors that pushed the country’s financial system over the edge and then examine the steps the government took to make its resolution of the crisis one of the most successful in the past 30 years.

Comments

[Arthur Eckart]

Sweden's economy is roughly the size of the U.S. state of North Carolina's economy. However, what may work in North Carolina may not work for the U.S. Nonetheless, U.S. states can learn from each other. California tends to be anti-business and ignorant about economics, perhaps, because one party has extensive control of government. Consequently, regions, e.g. San Francisco and Los Angeles, are run-down. However, the U.S. state of Colorado tends to be pro-business. Colorado's state, county, and city governments work together with business. Consequently, a lot of improvements are made. In Denver Colorado, there has been extensive economic development, e.g. a new international airport, three new professional sports stadiums (football, baseball, basketball/hockey), a new light rail system, new main library (where a G-8 meeting was held one year), new convention center, renovation of lower downtown, general improvements of city streets, etc. However, in Oakland California, there have been almost no city improvements. Yet, local and state taxes are higher in Oakland than in Denver. Oakland tends to focus on income redistribution and there seems to be extensive corruption (because of one party rule). Living standards for the poor seem much lower in Oakland than in Denver (including higher crime rates, rolling blackouts, garbage strikes, water shortages, etc.). On the state level, California government has little understanding of economics. Exxon wanted to build a huge refinery in California, because of projected future shortages. However, there were so many attacks on Exxon's reputation, lawsuits, and hostility in general by many groups, that Exxon concluded it would have to be out of its mind to build in California, which contributed to the highest gasoline prices in the country. The California Public Utilities Commission, totally controlled by one party, has attacked Wall Street, big business, and other states (which exported energy to California) for making money, and seems to have no understanding of economics. California has many policies that result in higher prices and costs, which lowered living standards. It's important that government and business understand each other's concerns, work together, treat each other equally, and with more trust and respect.