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Borrow often, pay infrequently. If the finance ministers of the world have a secret motto, I think it says something like this.
In Sweden’s past, there are a couple of exceptions to that rule. Once, during the war against the Danes in the late 17th century, the state borrowed and, in fact, paid the entire sum.
But since then, the story is mostly a series of new debts that surprisingly rarely have been really paid off. This also applies to the last decades.
For a long time it was just war which caused the state to go into debt. The Great Nordic War and the adventures of Charles XII remain one of the most extreme episodes. The King’s Finance Minister, Georg Heinrich von Görtz, had to conjure on his knees and resorted to a trick called emergency coins. As a thank you for his faithful service, he was hanged in the winter of 1719 on Skanstull’s gallows hill.
Sweden has suspended its payments several times. Once, after the wars against Russia, Charles XIV Johan himself contributed to the reorganization of public finances. He paid a third of Sweden’s foreign loans out of his own pocket.
But especially in the last 150 years, the Swedish central government debt is a story that revolves around economic growth, inflation and rising tax revenues. It is fortunate circumstances that have allowed the state to borrow more. Which in turn has allowed the state to build important infrastructure and support the economy during crises, world wars, and economic depression. Quotas have rarely been a big problem.
Finance Minister Magdalena Andersson for several years he has said that Sweden has “the lowest central government debt since 1977.”
It’s a bit run down. In crowns and ören, the central government debt is in fact ten times greater than in 1977. The sum was the same in 1995 as in 2015. On the other hand, the share of debt in the Swedish economy, that is, GDP , has been significantly reduced.
The crisis of the 1990s was one of the occasions when Sweden’s finances were put into action. Göran Persson testified about the humiliation when he was forced to take a “begging trip” to Wall Street. It was not the first. Finance Minister von Görtz appealed to the Amsterdam bankers.
Such events strongly influence the view of central government debt. Fiscal crises can take many different forms. They are degrading to the leaders of a country, but not least they can be painful to ordinary people. Responsible fiscal policy, as we see it today, is to prevent these types of accidents.
But the point of order is also that debt can sometimes increase without our having to worry. It is also one of the reasons why so few oppose the deployment of a billion dollars during the virus crisis.
How much can one been on loan? It is impossible to go around an exact boundary. The EU has a rule that says a maximum of 60 percent of GDP. But not even Germany follows. Japan’s debt corresponds to about 230 percent of GDP.
The Swedish crisis of the 1990s is an example of the economic conditions that make a difference. For various reasons, Sweden experienced a crisis in the banking system, a recession, a currency crisis, a budget crisis and, not least, an interest rate crisis at the same time. But the debt level was not very high at first. The fixed exchange rate was one of the big differences compared to today.
Throughout history, Sweden has borrowed in various ways. The state has applied for loans in riksdaler and dollars. She has borrowed from the church and foreign bankers. The state has borrowed in the short and long term. Sometimes it is forgotten, but those things play an important role.
The ability to close holes in the budget has also varied greatly. Charles XII tried to pay his deficits with a tax on wigs. Magdalena Andersson has more options.
Today, the Swedish economy is in a rather unique situation. Almost all central government debt is borrowed in Swedish currency. A large part of the loans is owned by the Riksbank, that is, by the State itself. The interest rates are very low. There are other reasons why so few are now concerned about deficits. But it is not the same as saying that we will never again have problems with public finances.
Central government finances are not comparable to the economy of a home. A household cannot borrow money, spend it, and thereby turn around the national economy, which is the very basis of the state’s own income. But the state can and needs to do it sometimes.
Another difference is that the state economy is practically connected in a rather strange way.
That is the subject of the next part of this series.
