Swedish Government Plans Narrower 2009 Surplus as Economy Slows

By Johan Carlstrom

Sept. 22 (Bloomberg) -- Sweden's government will say today that the budget surplus is set to narrow next year as it cuts taxes and increases spending to cushion the economic slowdown.

The surplus will shrink to 1.1 percent of gross domestic product and 1.6 percent of GDP in 2010 from an estimated 2.8 percent this year, according to an advance copy of the budget obtained by Bloomberg News. The government will publish it at 10 a.m. today.

``We believe the government will actually post a budget deficit of 1.3 percent in 2010,'' said Robert Bergqvist, Chief Economist at Skandinaviska Enskilda Banken AB. Economic growth will be slower and unemployment higher than the government predicts, he said.

The government will use 32 billion kronor ($4.8 billion), or about 1 percent of GDP, next year to lower income and corporate taxes and boost spending on research, schools, roads and railways. The spending plans will help maintain household spending after economic growth in the second quarter matched the slowest pace in more than 11 years.

Headline inflation, which reached its highest rate in almost 15 years in August, will accelerate to an average 3.8 percent in 2008 from 2.2 percent last year, before slowing to 2.4 percent in 2009 and 1.3 percent in 2010, the government forecast.

Total government debt will fall to 27.5 percent of GDP from 31.1 percent. By the end of 2011 it will have reached 19.2 percent, the government forecast.

The government has posted budget surpluses every month this year after cutting taxes and lowering benefit payouts to boost employment and as it sold stakes in three firms including Vin & Sprit AB, the distiller of Absolut Vodka.

It had prior to today already revealed most of its financial forecasts, including those for economic growth and unemployment. It will officially publish the budget tomorrow at 10 a.m. in Stockholm.

Last Month

The government maintained its forecast from last month that the economy will grow 1.5 percent this year, 1.3 percent in 2009 and 3.1 percent in 2010. Unemployment will rise to 6.4 percent next year and 6.6 percent in 2010 from 6 percent in 2008.

The government will cut income taxes for the third time in as many years, taking total cuts to about 60 billion kronor, or 6.6 percent of labor taxes, since grabbing power in late 2006.

It will also cut the corporate tax to 26.3 percent from 28 percent and lower the general payroll tax by 1 percentage point from 32.4 percent in an attempt to make Sweden more business-friendly.

Lower payroll taxes will be offered employers who hire people under the age of 26. The government has already cut this tax for companies who employ certain immigrants, the disabled and people younger than 25 or older than 65.

``When it comes to the possibility of further reforms in the next few years, it's important to look at risk. The view is now that the negative risks dominate,'' the government said in the budget document.

Came to Power

Prime Minister Fredrik Reinfeldt's coalition government came to power in late 2006 after 12 consecutive years of Social Democratic rule pledging to increase employment by cutting taxes, lower benefits and making it cheaper for companies to hire staff.

It trails the three-party opposition bloc, which includes the Social Democrats, Left party and the Greens, by 8.5 percentage points, according to an opinion poll by Skop published this week. It follows the resignation of three ministers, opposition to the government's lowered sick and unemployment benefits and the proposed expansion of a controversial surveillance law.

To contact the reporter on this story: Johan Carlstrom in Stockholm at jcarlstrom@bloomberg.net