On 2 February 2021 the IMF issued a report following discussions with Sweden in relation to article IV of the IMF’s articles of agreement.

Sweden has been hit hard by the pandemic but has introduced effective support measures for individuals and businesses. The economy can adapt to the restrictions because it has a high proportion of employments that can be performed remotely, with a large export sector but only a small hospitality sector. There is still scope for further support from the government if the economic recovery is not strong enough, so the design of support measures could be adapted to support structural reforms.

In the medium term a return to economic growth can be encouraged by bringing forward structural reforms and increasing government spending to enhance economic growth and promote green industry while dealing with health challenges.

The fall in economic output in 2020 is estimated to be around 3%, lower than the EU average. The pandemic has however increased previously existing inequities in the labour market, and the increase in unemployment was larger than in countries that suffered a deeper recession.

The large government support package for 2020 was equal to around 12% of GDP. The package included additional resources for healthcare, a short-term work scheme, grants to companies, tax cuts, tax deferrals and loan guarantees. Not all the intended recipients took up the support offered by the government.

The economic recovery is expected to begin in 2021 although downside risks are increasing. The risks include a new wave of the pandemic, mutations of the virus, a slower rollout of vaccinations, and a possible need for further tightening of containment and lockdown measures. If the downside risks materialise there is still sufficient fiscal space to provide more support.

In the medium term, government spending could be increased to achieve green goals and inclusive policies. The design of support measures could be reviewed to allow structural changes, for example by making the short-term work scheme more flexible with increased support for temporary workers, incentives for hiring new workers and encouragement of retraining. As the economic recovery begins the support measures should be gradually withdrawn.

Sweden must address the long-term structural challenges and market distortions, including demographic changes. The 2021 Budget Bill increased spending on training and education and reduced the social security contributions for the youth. A further reduction of the tax wedge for taxation of labour would also be helpful. Property taxes could be gradually increased from their current low level and other reforms could be introduced to assist the mobility of labour.