By Per Gunnar Berglund

Keynes's words – "Look after Employment, and the Budget will look after itself" – seem to have been reversed in the mind of the Swedish Prime Minister, Göran Persson – "Look after the Budget, and Employment will look after itself". The practical consequences of this Perssonian wisdom is shown, abundantly and daily, by the unemployment statistics. The endeavour to pursue a fiscal policy according to Persson's home-made lines has already ruined hundreds of thousands of Swedes, and more are likely to join in the coming.

The whole of the grandiose project to consolidate the budget is built on a huge misunderstanding, namely the notion that politicians, by raising and lowering taxes and expenditures, determine the size of the budget deficit. In fact, they don't. It is true that public expenditure is subject, in all essentials, to the direct control by Government, by Parliament and by local councils. But public revenue is not. The politicians can control the percentage share of the nation's incomes, the GDP, which is levied in taxes and fees. This percentage share is usually called the revenue ratio (or, somewhat loosely, the "tax ratio" or "tax pressure").

A balanced budget means that public revenue = public expenditure. If such a balance prevails, the revenue ratio must, by pure logic, be equal to the expenditure ratio, i.e. the public expenditure expressed as a percentage of the GDP. Then it is also true, provided that the budget is balanced, that


–––––––––––– = GDP

Revenue ratio

If both the numerator and the denominator of this quotient are subject to political control, it follows that the GDP must also be controllable – provided that the budget can be balanced at all times. The trouble is that it cannot. But a well-designed monetary policy can ensure that the budget always approaches, or converges (as the usage goes in these EU days) towards balance. This means that the right-hand side of the equation may be regarded as a point of convergence, a target towards which the actual GDP-level moves like a homing missile, ruddered by monetary policy.

A well-designed monetary policy will efficiently steer the economy right at the target, while the kind of monetary policy we experienced during 1992–5 had the economy looping around the target before finally converging. Under all circumstances, the Budget will consolidate itself, provided the monetary policy is run rightly.

According to the government's Plan of Finances, the revenue ratio will be at 59.4 percent in the year 2000, which is a drastic reduction from the 66.0 percent ratio of 1996. Public expenditure, in constant prices, are going down from 1,107 billion kronor in 1996 to 1,067 billion kronor in the year 2000. By entering these numbers into the formula, we obtain


––––– = 1,796 billion kronor,


which should be compared to the 1996 GDP of 1,678 billion kronor, an increase of 7.0 percent, barely amounting to 1.8 percent per annum.

Now, the government counts on the missile to over-shoot the target, i.e. that the GDP will go higher than this computed target point, by means of the monetary policy being so expansionary that the budget will show a surplus of 28 billion kronor, corresponding to 1.5 percent of the government's GDP hopes or 1,843 billion kronor for the year 2000. This might possibly succeed, but even if it does, the growth will still only be at an annual 2.5 percent during 1996–2000, which is too little to increase the number of jobs at all.

In order to seriously start dealing with the employment problem, the GDP growth rate ought to be pushed up to a yearly 6 percent, implying a GDP target of approx. 2,119 billion kronor in the year 2000. Provided that the government has made up its mind to stubbornly hold the tax pressure on the grotesquely high level of today, expenditure should be increased by some 151 billion kronor to 1,258 billion kronor during that period, instead of being decreased by 40 billion kronor as intended. If we, on the other hand, would content ourselves with maintaining the expenditure level of today, the revenue ratio should be lowered to 52.2 percent in the year 2000. By using a pocket calculator, You, my dearest reader, may compute some in-between, or more extreme scenarios.

However, one thing is for sure: if the government implements the fiscal policy planned in the Spring Proposition, we will not have moved significantly in the full-employment direction when reaching the year 2000. The unemployed and the destitute should not make themselves any illusions: by the policy of Persson still more years of living from hand to mouth are to be expected.


Footnote: The model used is based on the very innovative approach taken by Cambridge (UK) economists Wynne Godley and Francis Cripps in their book Macroeconomics (1983). All GDP and public expenditure figures are stated in 1996 prices.