The Swedish fiscal policy framework
The fiscal policy framework consists of a number of principles upon which fiscal policy is designed. The framework is a tool to ensure that fiscal policy is transparent and sustainable in the long term. It is a prerequisite for achieving the economic objectives. Certain principles are regulated by law, while others are based on the practice that has gradually developed since the public finance crisis in the 1990s.
The framework covers:
Budgetary policy framework
The budgetary policy framework is a key element of the fiscal policy framework. It is used to create better conditions for achieving the overall objectives of fiscal policy without jeopardising public finances. The framework consists of:
- Surplus target for the entire general government sector Under the Budget Act, the Government must propose a net lending target for the general government sector. The Riksdag has established that the surplus target for net lending is to amount to 1 per cent of GDP on average over a business cycle. The current level will be maintained as long as is necessary to ensure that it develops in a way that is sustainable in the long term.
- Central government expenditure ceiling Under the Budget Act, the Government is obliged to propose a ceiling for central government and old-age pension system expenditures for the next three years. The ceiling is set by the Riksdag. By determining a ceiling, the Government shows the frameworks available for expenditures and tax levies in order to meet the surplus target.
- Local government balanced budget requirements To strengthen the budget process at local level, a balanced budget requirement for the local government sector has been in place since 2000. The requirement means that each municipality and county council must budget for a balanced outcome and good financial management in its activities.
- Strict budget process The surplus target and the expenditure ceiling set the total economic scope in the budget process. The guiding principle is that expenditure increases within an area must be covered by expenditure cuts within the same area. The draft budget must include all revenues and expenditures, as well as other payments that affect the borrowing needs of the central government (the completeness principle). Expenditures are to be reported on the expenditure side of the budget, while revenues are to be reported on the revenue side of the budget.
Principles for stabilisation policy
The most important contribution made by fiscal policy in stabilising the economy is in upholding confidence in the long-term sustainability of the general government finances. When demand in the economy is disrupted the economy will normally be stimulated through monetary policy during an economic downturn and restrained during an upswing. In the event of such disruptions, fiscal policy aids economic stabilisation, mainly through decreased tax revenues and increased expenditures in economic down-swings. Furthermore, unlike monetary policy, fiscal policy plays a role in managing specific problems that can arise in the economy in a downturn. In major disruptions in demand and supply, fiscal policy may be required to provide support for monetary policy.
Principles for central government intervention in financial markets
Effective central government intervention in financial markets requires a clear division of roles between authorities, and clear principles as to what then applies to safeguard public finances.
Principles concerning openness and transparency
Fiscal policy reporting must be clear and transparent. This is to ensure that the framework has a governing role and to facilitate follow up of the policy.
