Fiscal Policy during the 1990’s crisis Government budget

During the 1980’s Sweden was a country with a different economic model than the rest of Europe.  There was large government revue, which resulted in the government having tax revenues amounting up to 60% of GDP[ CITATION Wor12 \l 1033 ]. It gives Swedish government the power to control the most of its country's spending. It includes high unemployment benefits, pensions and health care. Sweden is famous for its democracy and virtually no corruption. It led Swedish people to trust their government and accept paying huge taxes. But the demand for real estate grew larger as the amount of loans given out by banks increased by 31% in the 1988 and continued to rise [ CITATION Per08 \l 1033 ]. Later in that decade, there was a slowdown in the world’s economy, plus the collapse of the real estate bubble led the 90’s crisis. The government faced serious problems with inflation and unemployment, as unemployment skyrocketed from the very start of 1990’s and GDP growth rate became negative. The government went into a huge budget deficit of 12% of GDP in 1993 [ CITATION IMF97 \l 1033 ], mainly because of the unemployment benefits they had to pay out for the huge masses of people who lost their jobs. Change in fiscal policy was needed desperately, to stabilize the financial situation in Sweden. In 1990 Sweden had the largest expenditures on health services.

Country acquired a huge credibility gains from foreign countries, which later in 1997 was accompanied with the depreciation of krona. This led to increase in exports, which helped Sweden to improve its trade balance. They increased it even more by buying goods from countries where it is relatively cheaper to do so.

Swedish model

The way how Sweden got through the crisis of the 90’s with the use of right policies can be described in 7 main operations and conditions, which are: political solidarity, blanket guarantee, immediate responsiveness, Bank Support Authority with open-ended funding, access to information, prevention of moral hazard and different approaches to banks and the right use of macroeconomic policies. All of these fractions can be also called The Swedish model.

Immediate responsiveness

Right at the time when it was conducted that the crisis was in the formation, the competent institutions (government, parliament, Riksbank) started to act to strengthen the faithfulness of depositors and other parties of Swedish financial system. With this kind of strategy Sweden made its recovery from crisis more stable.

Macroeconomics and the end of crisis

One of the main solutions to recover from crisis was the fall of pegged exchange rate of krona, which meant that now it had a floating exchange rate. With a floating exchange rate krona started to devalue rapidly, this increased the exports of Sweden. In the next 16 years from 1992 Sweden’s exports doubled. Thanks to previously accumulated budget surpluses, government could spend sufficiently to maintain the level of GDP even with a high budget deficit around 12% of GDP. Also the decrease in interest rates made it easier for banks to operate which eventually lead to banks to be profitable again [ CITATION Lar091 \l 1033 ].

As the evidence shows, such tools seemed to work, thus government understood and gained some experience how to act during a recession.