Economists Warn of Permanent Covid Support

There has long been an agreement among Swedish economists that government should exercise prudence in terms of fiscal policy. This agreement may be evaporating.

During the recent pandemic, the Swedish government created a total of 14 programs through which it provided assistance of various kinds to corporations and other businesses. One of the programs allows for the postponement of tax payments beyond their due date, while another temporarily reduces payroll taxes.

Throughout 2020, the Swedish government co-signed loans to businesses hurt by the pandemic which are “otherwise viable.” A separate program provides cash assistance to businesses for 75% of net revenue lost as a result of the pandemic.

Lars Calmfors, professor emeritus of economics at the Institute for International Economic Studies at University of Stockholm, shares Wallström’s worries. There is a tendency in fiscal policy, Calmfors explains, where government support is becoming the norm “even when times are better” as many have gotten used to government handouts.

Laura Hartman, chief economist at Landsorganisationen, the Swedish national trade union federation, concurs, explaining that for every new handout “it becomes more and more difficult to say no to the next group” asking for money.

In a separate comment, Lars Calmfors raises concerns about the consequences of the handouts for long-term fiscal policy. There has long been an agreement among Swedish economists that government should exercise prudence in terms of fiscal policy. This agreement, says Calmfors, is evaporating. On the one hand, he sees benefits in using fiscal measures to support the economy in recessions, but on the other hand he is worried that these measures are becoming permanent. As a result, he explains,

There are reasons to question whether or not the fiscal policy levees in Sweden are breaking down. I believe there is a clear risk for this.

From 2000 to 2019, according to Eurostat, the last year before the pandemic, government spending in Sweden averaged 51% of GDP, compared to 47.8% in the EU as a whole. In 2020, Swedish government spending rose to 52.6% of GDP while the EU average jumped to 53.1%.

Sven R Larson, Ph.D., has worked as a staff economist for think tanks and as an advisor to political campaigns. He is the author of several academic papers and books. His writings concentrate on the welfare state, how it causes economic stagnation, and the reforms needed to reduce the negative impact of big government. On Twitter, he is @S_R_Larson and he writes regularly at Larson’s Political Economy on Substack.