Reforming the Fiscal Framework. The Case of Sweden 1973-2013

This paper explores the evolution of Swedish fiscal policy from one extreme approach to another one in less than four decades. After the demise of the Bretton Woodssystem in the early 1970s, Swedish fiscal policy was based on a Keynesian approach with the goal to stabilize the business cycle and maintain full employment using a large set of instruments in a discretionary manner. In the wake of the deep financial crisis in the early 1990s, this policy paradigm was eventually replaced by a rule-bound scheme. A fiscal framework was set-up as an instrument to rein in public finances. The present goal of fiscal policy is to maintain sustainable public finances while avoiding discretionary measures.

The fundamental changes in the past 40 years in the fiscal policy regime – the goals, the instruments and the institutional framework for fiscal policy-making – is studied as the outcome of a learning process where the economic crises hitting the Swedish economy forced
policy-makers and economists to rethink and redesign the use of fiscal policy. The process of policy learning is a continuous one. New changes in the fiscal regime will follow in the future.

By now, Swedish public finances are among the strongest in Europe. Sweden may serve as a model as it has carried out a successful fiscal consolidation since the mid-1990s while simultaneously developing a comprehensive fiscal framework and displaying an impressive macroeconomic record. A set of policy lessons are distilled.