Fiscal Rules and the Scope for Stabilisation Policy – The Case of Sweden

Abstract

Yngve Lindh and Gösta Ljungman focus on the scope for stabilisation policies in the context of the strict Swedish fiscal framework, characterized by three mutually supportive elements: a surplus target for general government, a multi annual nominal expenditure ceiling for the central government and a balanced budget requirement for local governments. The surplus target is set as an average over the business cycle, allowing for countercyclical fiscal policy through both automatic stabilizers and discretionary measures, albeit with the constraint that expansionary policies should be offset during a later phase of the same cycle. The authors propose to use an average of net lending based on both past- and forward looking data to assess whether the annual target is in line with the surplus target for the cycle. In order to absorb any unexpected increase in expenditure, the government has to set the relevant figures at a level lower than the ceiling. Nevertheless, the margin thus created to mitigate temporary increases could actually be used to expand expenditure permanently. So the authors suggest setting expenditure at a level close to the ceiling. Accordingly, the government has to plan expenditure cuts for future years to make sure that uncertainty can be managed within the ceiling.