Automatic fiscal stabilizers in Sweden 1998–2019

We use data from Sweden, a welfare state that has undertaken sizeable reforms to strengthen work incentives, to shed more light on the trade-off between policies to make work pay and the size of automatic (fiscal) stabilizers.

By Johan Almenberg and Markus Sigonius

We use data from Sweden, a welfare state that has undertaken sizeable reforms to strengthen work incentives, to shed more light on the trade-off between policies to make work pay and the size of automatic (fiscal) stabilizers. A drawback of policies to make work pay is that tax cuts and benefit reductions can increase the volatility of households’ disposable income and hence increase macroeconomic fluctuations. We estimate the size of Sweden’s automatic stabilizers over the period 1998-2019 using standard methods. We find that the implementation of policies to make work pay have not impaired automatic stabilizers, due to the design of these reforms. The size of the automatic stabilizers decreased somewhat but mainly in the first half of the sample. Our baseline estimate of the size of the automatic stabilizers in Sweden is about 0.5 over the entire period. Roughly speaking this means that a 1 percentage point increase in the GDP gap automatically leads to a 0.5 percentage point increase in the fiscal balance as a share of GDP. We construct 68 percent confidence intervals based on the uncertainty stemming from the underlying regressions and the bound for the interval is +/-0.05 around the point estimate We conduct several robustness tests. The overall conclusion from these tests is that our baseline estimate is reasonably robust. Widening the definition of automatic stabilizers to include discretionary expenditures for active labour market programs, a so called semi-automatic fiscal stabilizer, has only a modest effect. Data suggest that a large share of the long run variation in such expenditures is not explained by variations in unemployment or in the number of persons enrolled in active labour market programs, casting some doubt on the extent to which they may be considered semi-automatic.