Reforming Sweden’s Fiscal Policy Framework

Executive Summary

Sweden’s fiscal framework prioritizes low debt over real economic outcomes. Since the 1990s, strict surplus and debt rules have stabilized Sweden’s public finances but at the cost of underinvestment in critical infrastructure and welfare. Arena Idé argues that this orientation is outdated in an era of climate transition, demographic change, and major investment needs. A reformed framework should restore the state’s ability to finance long-term growth-enhancing investments while safeguarding sustainability and transparency.

A structural investment rate would anchor long-term renewal. The proposal introduces a new metric — average investment over a full cycle — targeted at 5% of GDP. This prevents ad hoc austerity from eroding public assets and ensures a steady pace of maintenance and renewal. A dual budget, already practiced by municipalities, would separate operating costs from investments, allowing borrowing to be clearly linked to productive projects rather than current spending.

Fiscal rules must shift from rigid debt anchors to balanced operating budgets. Arena Idé proposes abolishing the 35% debt-to-GDP “debt anchor,” arguing that debt levels should evolve naturally with GDP. Instead, the state would commit to a balanced operating budget, while allowing cyclical deficits in the investment budget to finance infrastructure and modernization. This would align fiscal rules with economic reality and reduce procyclical cutbacks.

Centralizing borrowing and modernizing institutions would improve efficiency. By letting the state borrow on behalf of municipalities, socially critical projects — such as schools, housing, and climate adaptation — could be financed at lower cost and without regional disparities. Excluding the pension system from budget balance targets would prevent short-term fluctuations from distorting fiscal policy. Finally, broadening the Fiscal Policy Council’s mandate to jointly assess fiscal and monetary policy would foster more coherent macroeconomic management.

Policy recommendations

1. Revise fiscal objectives to prioritise employment, production, and adaptability.
2. Introduce a structural investment rate of 5% of GDP over the cycle.
3. Adopt dual budgets separating operating from investment expenditures.
4. Replace the surplus target with a balanced operating budget and cyclical investment borrowing.
5. Abolish the debt anchor to let debt levels evolve with GDP.
6. Centralize state borrowing for municipal investments to lower costs and reduce inequality.
7. Separate pension accounting from budget targets to safeguard welfare financing.
8. Expand the Fiscal Policy Council’s mandate to include fiscal–monetary coordination.