Öberg: Public finances and monetary policy
First Deputy Governor Svante Öberg discussed the importance of public finances for stable economic development in the slightly longer term and the implications they have for monetary policy.
Mr Öberg said that debt crises in several areas in the world around us have illustrated the importance of sustainable public finances. The large deficits in public finances in the wake of the financial crisis tend to lead to higher interest rates and will force fiscal policy to be tightened, which will subdue international growth. He pointed out that this is a factor behind the relatively weak GDP growth in Europe over the coming years that the Riksbank is forecasting in its most recent Monetary Policy Update.
According to Mr Öberg, there is also a risk of a more dramatic development. Greece has recently been the primary object of speculations regarding the sustainability of public finances. But Greece is not alone here. Other countries are also experiencing serious problems. This could in a worst case scenario develop into a debt crisis in several countries, that would also affect the bank system.
Mr Öberg said that in Sweden the surplus target has led to greater confidence and predictability with regard to developments in public finances. The strong public finances have also enabled Sweden to use fiscal policy stimulus measures during the recession without jeopardising the long-term stability in public finances. The Riksbank supports the idea of a surplus target being included in the Budget Act and that the target should be set as a surplus of 1 per cent of GDP over the coming ten years.
In conclusion, Mr Öberg observed that if fiscal policy is predictable and sustainable, then the Riksbank can make better assessments of resource utilisation and inflationary pressures. This makes it easier to conduct a well-balanced monetary policy.
Read the whole speech in the PDF file below.
