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Sustainability of Swedish Fiscal Policy: Navigating Demographics and Economic Challenges

Explore the sustainability of Swedish fiscal policy amidst demographic shifts like lower fertility, rising longevity, and immigration. Evaluate the government's responses and implications on taxes, debt, and expenditure management. Delve into the interconnected objectives of fiscal sustainability through an analysis of principles. Consider trade-offs, intergenerational equity, efficiency, and precautionary savings for the future economy.

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Sustainability of Swedish Fiscal Policy: Navigating Demographics and Economic Challenges

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  1. The sustainability of Swedish fiscal policy Thomas Eisensee Senior Economist

  2. The ageing of the population • Demographics: • Lower fertility (TFR 1.85) • Rising longevity (Women 82.5→86.5, Men 78.3 → 83.3) • Immigration (12% foreign born) • Fundamental problem • Fewer workers • More retirees • Implies higher expenditure and lower tax revenue (even at constant taxes)

  3. Is Swedish Fiscal Policy sustainable? • The Government provides two answers: • Given taxes and expenditures Central Government gross debt does not increase beyond its present level • The present discounted value of Central Government primary surpluses equals the current level of outstanding debt.

  4. Evaluating Fiscal Policy • Sustainability is the ultimate objective • The Expenditure ceiling and the Surplus target are intermediary objectives • An analysis of principle is required: how are the intermediary objectives linked to the ultimate objective? • Some considerations • Several paths for debt are sustainable • Intergenerational equity • Efficiency (tax-smoothing) • There are trade-offs • Future generations are better off • Precautionary savings to meet unexpected shocks to the economy

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