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No event since World War II has become as costly to world governments as this year’s virus crisis. Debts are growing, even in Sweden.
Since last spring, Finance Minister Magdalena Andersson has presented twelve additional budgets with costly crisis measures. The budget deficit both this year and next is expected to be larger than the fiscal policy framework actually allows.
Neither the opposition nor the economic union have protested against him. The options are few. But what will happen after the pandemic is another question, and perhaps more difficult. Does the state have to save and repay crisis loans? Is it enough that future governments return to balance? Or is it not so important?
DN has asked three economists how they see the choice of path once the crisis is over.
Karolina Ekholm is a teacher at Stockholm University, former deputy governor of the Riksbank and was secretary of state in the Ministry of Finance under Finance Minister Magdalena Andersson until 2019.
You are not concerned that deficits will cause serious problems.
– The kind of dynamics that leads to a debt crisis, we don’t have to worry at all. We don’t have to worry about being shut out of financial markets, or costs rising alarmingly, says Karolina Ekholm.
Photo: Juliana Wiklund / Morethanwords
Tore Ellingsen, a professor at the Stockholm School of Economics, also sees no immediate threats.
– The deficits during the crisis have not been a cause for concern. Much of what has been done has been good and successful. What can always worry you is that economic measures become structural measures. That measures that are meant to be short-lived are permanent, says Tore Ellingsen.
Fredrik NG Andersson, associate professor at the Lund University Faculty of Economics, on the other hand, criticizes the size and precision of crisis measures. This applies in particular to the content of the fall budget that the government presented in September, with several major tax cuts, increased unemployment insurance and public investments.
– We have a crisis and then it’s perfectly okay to borrow. Sweden has such a low national debt. But I am concerned that we are borrowing too much and that we are running up a permanent deficit. And are these really stimulating? Rather, it seems that each party has been given between 10 and 20 billion to start, says Fredrik NG Andersson.
Since last year it has Sweden a partially new fiscal policy framework. The surplus target, which previously stipulated that the state would save 1 percent of GDP on average over a business cycle, was lowered to 0.3 percent.
At the same time, something called a debt anchor was introduced. It says the government should target a public debt of around 35 percent of GDP. The National Institute for Economic Research estimates that it will now grow to more than 40 percent of the size of our entire economy.
If you read the two rules literally, the state may need to save after the pandemic.
Tore Ellingsen and Fredrik NG Andersson participated on various sides in the debate on the new budget targets. Tore Ellingsen still thinks they are too strict.
– Personally, I would have preferred not to aim at all to reduce central government debt. I’d rather see them decide on some kind of level, a little higher than today. Maybe 50 or 60 percent. It makes no sense to let debt follow the trend, says Tore Ellingsen.
Photo: Hakan Rojder
The debate among Swedes Economists have taken place in parallel with a global discussion on the vision of fiscal policy and the national debt of countries. Olivier Blanchard, who was the chief economist of the International Monetary Fund from 2008 to 2015, is one of the most high-profile economists to have concluded that the dangers of large public debt have been exaggerated in the past.
Professor Tore Ellingsen thinks so too.
– Historically, it has been extremely cheap to have public debt. For long periods, the interest rate has been lower than growth, and then money is made on debt. When the world looks like this, it’s strange to give up income when there are a lot of good projects to invest in, he says.
Tore Ellingsen also points to the advantages of countries with large central government debts. Especially when world savings are high.
– It’s good if there are more assets that people can save on. So you have to make sure you create forms of savings and government bonds are one of them. Otherwise, the risk is that people save on other things that can be much more risky and can form bubbles. It would be good if countries that can bear a larger national debt could have it.
From the other side This debate points above all to the experience of economic crises throughout history.
Fredrik NG Andersson believes that Sweden should continue to reduce its national debt when the pandemic ends. Preferably even lower than 35 percent of the debt anchor, to obtain margins.
– The research does not provide an exact answer to what is a reasonable central government debt. It depends on what the economy looks like, if the country has its own currency, how big the economy is, and other things. However, from our own history, we can get an idea of what constitutes adequate central government debt. Large crises cause large budget deficits. Then we must be able to borrow. If we have a central government debt between 20 and 30 percent before a crisis, then we have nothing to worry about, says Fredrik NG Andersson.
The research does not provide an exact answer as to what constitutes adequate central government debt.
Karolina Ekholm retires to pinpoint an exact debt level to target.
Instead, what she sees as a risk down the road is that the pandemic crisis pushes politics down an incline.
– It may be difficult to reach the surplus target again. As long as unemployment is high, the government will find it difficult to adjust. Then there is a risk that the surplus target will be missed, he says.
Even if a major cleaning is not required afterwards, it is important to change the policy at the right time.
– Much depends on the power that the Minister of Finance will have in the future. If that person is able to keep government finances under control and not slip out of the box, says Karolina Ekholm.
Fredrik NG Andersson also believes that the crisis budgets that the government has put in place can weaken discipline.
– Will politics have the power to clean up when the crisis ends? Or is it like the 1970s and 1980s that deficits persist even in good times? We have a new generation of politicians who did not participate in the 1990s, says Fredrik NG Andersson.
Tore Ellingsen sees the crisis of the 1990s as history. The risk of Sweden completely losing control of the economy has been lessened with a more orderly budgeting process, a floating currency and an independent Riksbank.
– Now the frame is much more stable. Then you can also afford to run a deficit, he says.
Read more:
Carl Johan von Seth: now begins the final sprint of the government’s crisis policy
Better for Stockholm’s economy, but worrying about the future
