UPDATE 2-Swedish budget sees growth easing, modest stimulus

Published 10/12/2010, 05:47 AM
Updated 10/12/2010, 05:52 AM

* Budget sees good growth, but slackening in 2011

* Jobless rate easing to 8.0 percent next year

* Sees slightly bigger budget gap in 2011; surplus in 2012

* Measures in 2011 worth 13 bln SEK to boost jobs, welfare

* Analysts say stimulus programme on cautious side

(Adds quotes, details)

By Niklas Pollard and Johan Sennero

STOCKHOLM, Oct 12 (Reuters) - Sweden's government, setting what some analysts said was a cautious 2011 draft budget, said on Tuesday it would run a slightly wider than expected fiscal deficit and forecast softer but still healthy economic growth.

The Nordic country has bounced back from its deepest downturn in decades relatively quickly compared with its European neighbours, with public finances in good shape thanks to a recovery in exports and strong domestic demand.

The Swedish crown was little changed against the dollar at 6.7078/99 as the budget proposals were largely in line with promises made ahead of the September 19 election.

But some analysts said that, given the sluggish recovery in the United States and fiscal trouble brewing in other parts of Europe, the government's projections looked too optimistic and the budget gap should have been widened further.

Stimulus measures in the budget -- including 13 billion crowns ($1.94 billion) of spending to support the recovery -- were "unnecessarily cautious", Swedbank said in a note to clients.

"A too optimistic view of the macroeconomic development risks leading to a budget that is too tight next year. Compared with the government, we have a rather more pessimistic forecast," the bank said.

Sweden's National Institute of Economic Research, which supplies economic forecasts to the government, recommended in September that stimulus measures should amount to 25 billion crowns, or about twice what the government has planned.

Mats Dillen, NIER's general director, told news agency TT on Tuesday: "It is not a huge difference, but on the margin it's better to stimulate the economy now rather than later."

The government said it would also look to raise 25 billion crowns per year during the next four-year mandate from sales of the state holdings in some of the country's leading companies, but Finance Minister Anders Borg said there was no pressure to sell and it could wait until market conditions were favourable.

The government came first in last month's election but lost its parliamentary majority after the anti-immigrant Sweden Democrats party won their first seats.

It still expects to pass the 2011 finance bill, however, as the centre-left opposition would have to link up with the Sweden Democrats to agree an alternative package, something which analysts see as highly unlikely.

The government said the economy was expected to grow at a faster-than-expected 4.8 percent clip this year, but forecast a slower 3.7 percent expansion in 2011.

HARSH WINDS

"We have a solidly built house when harsh winds are blowing elsewhere," Finance Minister Borg told a news conference, pointing to public debt woes in Europe and growth issues in the United States.

He added that Sweden was still in a period of low economic activity and high unemployment and that there were still risks that developments would be less favourable than expected.

Roger Josefsson, an analyst at Danske Markets, said weaker prospects for growth in the rest of the world implied that there will be a much greater strain on fiscal balances than believed.

"They have taken into account to at least some degree the dire prospects for the global economy, but maybe not as much as we think they should," he said.

The government said the 13 billion crowns of stimulus would include labour market measures, education and a temporary higher grant to local councils for services such as education, healthcare and social services.

The budget deficit for 2011 would be 1.3 percent of GDP, 0.2 percentage points wider than previous forecasts. It forecast a surplus of 1.0 percent of GDP for 2012.

It said further tax cuts during its four-year mandate depended on the budget surplus target being met.

Its priorities were income tax cuts, halving VAT for restaurant and catering services and to launch compulsory unemployment insurance.

(Editing by John Stonestreet)

(Additional reporting by Mia Shanley and Patrick Lannin)

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