Theme: Sweden’s election
Tough negotiations to form a government
Sweden is approaching an exciting parliamentary election on September 11. The political situation is new in many ways, public opinion is evenly divided and the outcome is hard to predict. Neither the current majority nor the opposition consists of parties that are fully prepared to join the same government or even cooperate on budgets. Whatever the outcome, the election will thus probably be followed by lengthy negotiations before a new government is in place. New written accords along the lines of the previous January Agreement can be expected. Yet given the stability of Swedish public finances, a political risk premium is unlikely. Neither election promises nor proposals about the fiscal policy framework are expected to have a decisive macroeconomic impact.
Still two political blocks – but they have changed
Sweden still has two main political blocs, but they have changed. Although the leaders of the Social Democrats (S) and the Moderates (M), Magdalena Andersson and Ulf Kristersson respectively, are still the clear prime ministerial candidates for each side, the situation within the blocs is different from before. They include both new parties and new internal contradictions. Forming governments has recently become a lengthy process from a Swedish perspective, and the exercise of power has been complicated by weak parliamentary support.
For example, this has meant that during some periods the government has run Sweden based on opposition budgets, a phenomenon that until a few years ago seemed almost impossible. In just such a budgetary situation, when the Centre Party (C) allowed Magdalena Andersson to become prime minister last autumn but did not support her government's budget, the Green Party (MP) chose to quit the government. Since then, the country has had a single-party Social Democratic government. Recently, C has signalled a further rapprochement to S by saying it is willing to join an S-led government after the elections, albeit with some reservations. The former Alliance (M+KD+L+C) that governed Sweden between 2006 and 2014 is thus definitely a closed chapter.
The Moderate-led opposition has been re-joined by the Liberals (L) and has clearer links with the right-wing populist Sweden Democrats (SD). Sweden’s two blocs thus again enjoy roughly equal popular support, ensuring an exciting election with an uncertain outcome.
Can voter trust, the 4 per cent parliamentary threshold or policy issues decide the election? One advantage for the government is that PM Andersson is the party leader who enjoys by far the highest level of trust among voters. She is the only one who regularly exceeds 50 per cent in such surveys. Second place is a dead heat between Ulf Kristersson (M), Ebba Busch (KD) and Jimmie Åkesson (SD) at around 40 per cent. In a situation where both international and domestic conditions feel uncertain, the issue of voter trust may become important. On the other hand, the party leaders who will have to form the basis for an S-led government (V, MP and C) are at the bottom in voter trust polls.
Still eight parties in Parliament
Still eight parties in Parliament after the election. Over the past two years, MP and L have struggled to stay above the 4 per cent parliamentary threshold in opinion polls, but in recent months both have found themselves on firmer ground. L has been clearly helped by the accession of new party leader Johan Pehrson, and MP has probably benefited from the fact that this summer "Climate & Environment" has become the second most important issue among voters. Since failure to get into parliament could be decisive in the battle to form a government, tactical voting for small parties (a common feature of Swedish politics) cannot be ruled out either. Combined with the historical fact that it is rare for a party to leave Parliament (the last time was in 1994), there are strong indications that all eight parties now represented will remain there after the election.
"Law & Order" is the most important issue for voters. In third place, according to surveys, is "Sweden's Finances". On both issues, the M-led opposition enjoys an advantage, since voters feel these parties have the best policies. But "Law & Order" has been the top issue for years (with the brief exception of "Defence" at the outbreak of the Ukraine war) and the question is whether it can still drive voters from one bloc to the other. As for the second and fourth place issues, "Climate & Environment" and "Health Care", the S-led leftist parties enjoy an advantage, though the differences are smaller than they have been historically.
At present, the voter trust question thus slightly favours the left and the ranking of major issues among voters slightly favours the right, while the battle to overcome the 4 per cent parliamentary threshold is dead even. There are thus strong indications that the final stages of the campaign may be important. Success or failure in media interviews, party leader debates and presentations of proposals and promises could be crucial. The current government may be handicapped by the fact that it has been in office for two terms and that it is famously difficult to be elected for a third term.
Because of intra-bloc contradictions, uncertainty will persist after the election. The days when voters knew on election night what their new government would look like are long past. On the left, C has said it cannot join or even support a government that includes V. On the right, M, KD and especially SD have expressed hesitation about letting L into government. Nor do M, KD or L accept the inclusion of SD. This sets the stage for lengthy negotiations and discussions before a new prime minister can be approved by Parliament.
Despite criticism, new agreement probably needed
Despite criticism, a new agreement will probably be needed. Over the past eight years, Swedish domestic politics has been dominated by written agreements. The December Agreement was signed by the government and three non-socialist parties in 2014 in an attempt to keep SD out of power and allow the larger of the two traditional blocs to govern, despite insufficient parliamentary support. The January Agreement was concluded in 2019 between S, MP, C and L and contained 73 points detailing what policies the government (consisting of S and MP) would implement in exchange for being allowed into power and being supported in budget votes by C and L. Both agreements ended prematurely and were subsequently heavily criticised. Yet this autumn's government negotiations will probably include similar deal-making. On the left, for example, V is unlikely to be invited into government, due to differences of opinion on fundamental issues such as security policy and NATO membership, and because C has flatly refused to support a government that includes it. V will then demand far-reaching commitments from the government that will most likely need to be set down in a written, public agreement. A similar solution may be required for MP and/or C if they are not offered cabinet posts. On the right, the safe government parties are M and KD. However, they have been cool towards L and outright dismissive of SD’s desire to join the government. When the smoke clears and negotiations are over, L will probably be admitted after all, while SD remains outside. SD will then demand an agreement with the government on various commitments in exchange for its support. It is thus hard to see how forming a government – on either side – could take place without some form of new written agreement.
Little risk of a political risk premium
There is thus a significant risk of both a protracted government formation process and a minority government without stable support in Parliament. This raises the question of whether we should be worried about a risk premium (such as a weaker krona, higher interest rates or reduced investments) linked to politics. We believe this risk is limited. One reason is Sweden’s strong public finances, allowing room for manoeuvre. In Sweden, unlike in many other countries, neither weak parliamentary support for the government nor the crises of the past decade have pushed up public debt.
While pandemic fiscal packages increased public debt substantially in many countries, in Sweden the increase was almost marginal and the level is currently below 35 per cent of GDP – which is the “debt anchor” in the fiscal framework. This low debt level makes Sweden less vulnerable and reduces the policy risk premium. Instead, what might hurt Sweden is current global uncertainty – including soaring inflation, rising interest rates, geopolitical unrest and decelerating economic growth. In such a situation, global risk appetite decreases and small countries like Sweden tend to lose their attractiveness. Politically, however, the Swedish tradition of consensus instead seems to be regarded as a strength. It is unlikely that even a lengthy process to form a government will upset this picture.
Balancing act is contributing to restraint
A trickier policy balancing act is contributing to some restraint ahead of the election. Large-scale stimulus packages were common during the pandemic, and economic policy coordination was relatively unproblematic. Both fiscal and monetary policies were expansionary and both sides were keen for the other to do even more. Now inflation has soared and the situation is different. The Riksbank is implementing a front-loaded interest rate hiking cycle, while the economy is slowing. Households and businesses are being squeezed by rising prices and interest rates. The normal reaction of fiscal policymakers is to provide support in a downturn, but their balancing act is now becoming harder, since demand cannot be stimulated so much and so broadly as to fuel inflation. This is one reason for the relative restraint that has characterised election promises so far during the campaign. Many promises focus on tougher criminal penalties, the structure of the health care system, the right of independent schools to make profits and other issues that do not come with a clear fiscal price tag. The biggest exceptions are the parties' proposals for compensation to households and businesses for high electricity prices. To date, S has gone furthest by proposing SEK 60 billion in compensation – to be financed from the increased revenues of Svenska Kraftnät, a state-owned distributor of electricity.
Another restraining factor is that due to the uncertain parliamentary situation, no one knows what can actually be implemented and no one wants to alienate potential future partners. Yet one area that is being handled largely along traditional left-right lines is tax issues. M in particular has promised tax cuts on incomes and fuel, while S has cited the need for tax hikes, especially by launching a "preparedness tax" reminiscent of the recently abolished “defence tax” on higher income earners. Meanwhile S’s would-be partner C has demanded no tax increases by any government that wants its support, making it hard to assess the likelihood of implementation. The tax burden will probably end up slightly higher under an S-led government than an M-led one, but in terms of budget-balancing it is hard to see clear differences in advance. Regardless of which side wins the election, we believe fiscal policy will be expansionary in 2023-2024, but not enough to keep the debt ratio from falling below 30 per cent of GDP.