The New Government’s Economic Policy

1. The New Government’s Economic Policy Per Jansson

2. Plan of talk • Some personal data • A few facts about the Government Offices, the Ministry of Finance, and economic policy in general • Facts about the Swedish economy • The new economic policy • Undertaken and planned policy measures • Expected effects (forecasts from Budget Bill and evaluation done by Lars Calmfors)

3. Personal data • PhD 1994; Associate Professor 2000 (Uppsala University) • Mainly: general macro (empirical) and monetary policy • 10 yrs at the Riksbank, 2 yrs at the NIER • Also: FIEF, the Economic Council of Sweden, SJ

4. The Government Offices The Government Ministry of Industry, Employ-ment and Communications Ministry of Agriculture, Food and Fisheries Office for Administrative Affairs Ministry of Sustainable Development Ministry for Foreign Affairs Ministry of Education Research and Culture Prime Minister’s Office Ministry of Health and Social Affairs Ministry of Defence Ministry of Finance Ministry of Justice

5. The Ministry of Finance average age is about 40 470 plus employees 95% are non-political staff 50 per cent are women 25% have administrative responsibilities 65% have executive responsibilities most common occupations: economists, lawyers and social scientists 10% have managerial responsibilities

6. MinisterMats Odell Minister for Finance Anders Borg PoliticalAdvisers Press Press Chief Political Adviser Political Advisers Legal Secretariat State SecretaryHans Lindblad State SecretaryIngemar Hansson State Secretary State Secretary Per Jansson InformationDepartment BudgetDepartment International Department Tax and Customs IA KLA Economic Affairs FinancialMarkets PublicAdministration Departement forCoordination and Support 7 Divisions 3 Divisions 3 Divisions 4 Divisions 3 Divisions 5 Divisions 5 Divisions

7. State Secretary for economic policy responsible for… • Departments: International Department, Economics Affairs, Division for Structural Policies at Budget Department • In addition: issues related to statistics and government real estates • Government agencies: NIER, Statistics Sweden, the Economic Council of Sweden, the Swedish National Financial Management Authority (ESV), the National Property Board (SFV), the National Fortification Administration

8. Conducting economic policy means… …undertaking measures to influence the national economy. Divided into: - stabilisation policy - distribution policy - structural policy The Ministry of Finance • monitors and analyses the Swedish economy • makes short and long-term forecasts • conducts studies at household and individual level • takes part in international economic work

9. The goals of economic policy… … are set by the Government and the Riksdag, and can broadly be summarised as follows: fair distribution a stable economy high growth stable prices sound public finances full employment

10. Economic policy is implemented through the budget process Government submits Spring Budget Bill including proposals for expenditure ceilings to the Riksdag Government commences preparatory budget work Riksdag approves the budget January • February • March • April • May • June • July • August • September • October • November • December The Riksdag approves expenditure ceilings and preliminary frames for the expenditure areas Government submits the Budget Bill to the Riksdag Government agencies supply background budget data

11. The Swedish economy: since the mid 1990s good macro performance in many respects • Growth higher than previously and higher than in many other countries • Inflation low and stable • Public finances with surplus • Reasonable real and nominal wage increases

12. GDP level and growth rate

13. CPI inflation

14. Public savings (percent of GDP) Note: The dashed line is the forecast in the Budget Bill for 2007.

15. Nominal and real wage growth

16. But there are also problems… • Weak labour market development with high absence • Equilibrium (un)employment too low (high) • It does not pay enough to work • Business climate for in particular small companies not as good as it should be • Too few want to employ and run a business • Demographic challenges ahead

17. GDP growth and unemployment

18. The Swedish population by labour force status, 2005

19. Individuals supported by social transfersThousands of full-time equivalents

20. The difference between going to work and being sick-listed is too small

21. Few new companies established

22. Swedish population growth up to 2050 (change compared to 2006)

23. Dependency ratios

24. Population growth in the age 20-64 years (change compared to 2006)

25. The labour market at different points in time 1990 1993 2005 Unemployment 1,5 8,3 5,4 Labor force participation 84,5 77,7 78,0 Employment 83,3 71,2 73,8 Benefit recipients 15,7 22,2 20,4

26. Possible sources of unemployment persistence Decreasing search activity Calls for: measures that increase search activity and decrease locking-in effects Generous benefits Calls for: measures that make it worthwhile to work The compressed wage structure Calls for: measures that increase the availability of low-skilled jobs at an agreeable wage Stigmatization Calls for: measures that decrease the cost associated with employing jobseekers who have been out of work for a long time Employment protection legislation

27. What is needed? A combination of measures that affect simultaneously: The matching process Labour supply Labour demand

28. Autumn Budget Bill 2007 affectsMatching through: Changes in the institutional set-up of labour market policies Individual action plans and coaching Changes in unemployment benefits Lower volumes of labour market programmes

29. Autumn Budget Bill 2007 affectsLabour supply through: Earned income tax credit that increase after-tax revenue Changes in unemployment benefits Changes in sick-leave benefits Lower volumes of labour market programmes

30. P AS AD Y

31. Autumn Budget Bill 2007 affectsLabour demand through: “New start jobs” targeted at benefit recipients, refuges, and older people Decreased employers’ contributions for youth & older Increased possibilities to time-limited hires and also: Tax reductions on household-related services (in 2007) Tax reductions in various service sectors (in 2008)

32. P AS AD Y

33. P AS AD Y

34. The Swedish labour market according to the Budget Bill

35. Effects on income distribution (2007, percentage change)

36. Effect on income distribution: Gini coefficient

37. Calculation of effects by Lars Calmfors • Approach: use estimates (elasticities) of previous empirical studies (several) to quantify the long-run effects of the different policy measures • Studies considered: • Bassanini & Duval (2006, OECD WP 486) • Forslund, Gottfries & Westermark (2006, CESifo WP 1649) • Forslund & Kolm (2000, IFAU WP 7) • Nickell (2003, CESifo DICE Report 2)

38. Bassanini & Duval (2006): lower unemployment benefits and tax wedge

39. Forslund et al (2006): lower net replacement rate and reduction of ALMPs

40. Forslund & Kolm (2000) and Nickell (2003) • FK about 1 percentage point larger unemployment effect • Nickell: Change in U = -0.42 – 1.24 x (net no. of ”employment-friendly” reforms) R2 = 0.51, N = 20 => for Sweden this gives 3 x 1.24 = 3.7 percentage points lower unemployment