By Johan Carlstrom and Niklas Magnusson
Sept. 21 (Bloomberg) -- Sweden’s government unveiled a budget for election year that forecast a narrower deficit than it predicted previously as higher spending and lower taxes help generate economic growth.
The deficit of the Nordic region’s largest economy will widen to 3.4 percent of gross domestic product in 2010 from 2.2 percent this year, Swedish Finance Minister Anders Borg said in Stockholm yesterday. The deficit will shrink to 2.1 percent in 2011 and 1.1 percent in 2012, Borg said.
Prime Minister Fredrik Reinfeldt’s government will cut taxes and raise spending on schools, hospitals and measures to support the unemployed before the elections next September. A package of new and previously announced stimulus measures will contribute 1.7 percentage points to economic growth next year, the budget forecasts, after Sweden’s worst economic decline in at least 15 years in the first half of 2009.
“We’re surprised by the positive development of government finances,” said Robert Bergqvist, chief economist at SEB AB in Stockholm. “The stimulus measures that we will now get and stable government finances mean that the economic outlook for Sweden looks pretty good.”
Sweden has suffered a deeper economic decline than neighbors Norway and Denmark after a slump in global trade undermined demand for its exports, which make up about half of national output.
Better Than Expected
“The public finances have developed somewhat better than forecast in the 2009 economic spring budget both because of higher income and lower expenses,” Borg said. “Expectations of stronger export orders, a more positive purchase managers index, further improvements on the financial markets” and a global upturn “may make the recovery faster than expected.”
The government last month forecast the deficit would amount to 2.4 percent of GDP this year and 3.7 percent in 2010.
Borg yesterday reiterated forecasts from last month that the economy will return to growth of 0.6 percent in 2010 and 3.1 percent in 2011 after shrinking 5.2 percent this year.
Prices will rise 0.4 percent in 2010 after falling 0.4 percent this year and unemployment will peak at 11.6 percent in 2011 from 8.8 percent this year. Total government income next year will be 723 billion kronor ($105 billion), according to the budget.
The government had already announced plans to cut income taxes for a fourth time since it came to power in 2006. Yesterday, it announced higher spending on new stimulus measures of 32 billion kronor next year and 24 billion kronor for 2011.
Election Year
“It’s definitely an election year budget,” said Stefan Hoernell, senior economist at Svenska Handelsbanken AB.
The government trails the three-party opposition bloc of Social Democrats, the Left Party and the Greens by 3.4 percentage points, according to an opinion poll by Sifo Research International published last week.
The Social Democrats want to raise income taxes and re- introduce the country’s wealth tax in a different shape to create more jobs and invest in hospitals and schools.
“We say no to borrowing money to fund tax cuts,” said the party’s economic spokesman, Thomas Oestros, after the budget was presented. “It’s a very ineffective way to increase employment.”
The “most serious risk” to the economic forecasts and budget stems from the Baltic countries of Estonia, Latvia and Lithuania, where Sweden’s Swedbank AB and SEB AB are the biggest lenders, Borg said. A deepening of the crisis in the Baltics will “affect the entire Nordic region,” he said.
Estonia, Latvia and Lithuania, the European Union’s fastest-growing economies from 2004 through 2006, have since toppled into the bloc’s deepest recessions. Property-investment and spending booms, financed mainly by bank lending, turned to bust as inflation soared, cheap credit evaporated and demand for exports ebbed.
To contact the reporters on this story: Johan Carlstrom in Stockholm at jcarlstrom@bloomberg.netNiklas Magnusson at nmagnusson1@bloomberg.net
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