Recommendation for a COUNCIL RECOMMENDATION on the 2016 national reform programme of Sweden and delivering a Council opinion on the 2016 convergence programme of Sweden
Date: 2016-05-18
Institutions: European Commission, Secretariat-General
Subjects: Sweden, budget deficit, debt, economic convergence, gross domestic product, household, indebtedness, mortgage, price increase

EN 

   EN 

   EUROPEAN COMMISSION  Brussels, 18.5.2016  COM(2016) 347 final   Recommendation for a COUNCIL RECOMMENDATION on the 2016 national reform programme of Sweden  and delivering a Council opinion on the 2016 convergence programme of Sweden  
 
 
Recommendation for a 

COUNCIL RECOMMENDATION 

on the 2016 national reform programme of Sweden 

and delivering a Council opinion on the 2016 convergence programme of Sweden 

THE COUNCIL OF THE EUROPEAN UNION, 

Having  regard  to  the  Treaty  on  the  Functioning  of  the  European  Union,  and  in  particular 
Articles 121(2) and 148(4) thereof, 

Having regard to Council Regulation (EC) No 1466/97 of 7 July 1997 on the strengthening of 
the  surveillance  of  budgetary  positions  and  the  surveillance  and  coordination  of  economic 
policies1, and in particular Article 9(2) thereof, 

Having  regard  to  Regulation  (EU)  No  1176/2011  of  the  European  Parliament  and  of  the 
Council  of  16  November  2011  on  the  prevention  and  correction  of  macroeconomic 
imbalances2, and in particular Article 6(1) thereof, 
Having regard to the recommendation of the European Commission3, 
Having regard to the resolutions of the European Parliament4, 

Having regard to the conclusions of the European Council, 

Having regard to the opinion of the Employment Committee, 

Having regard to the opinion of the Economic and Financial Committee, 

Having regard to the opinion of the Social Protection Committee, 

Having regard to the opinion of the Economic Policy Committee, 

Whereas: 

(1) 

(2) 

1 
2 
3 
4 

On  26  November  2015,  the  Commission  adopted  the  Annual  Growth  Survey, 
marking  the  start  of  the  2016  European  Semester  of  economic  policy  coordination. 
The priorities of the Annual Growth Survey were endorsed by the European Council 
on  17-18  March  2016.  On  26  November  2015,  on  the  basis  of  Regulation  (EU) 
No 1176/2011,  the  Commission  adopted  the  Alert  Mechanism  Report,  in  which  it 
identified Sweden as one of the Member States for which an in-depth review would 
be carried out.  
The 2016 country report for Sweden5 was published on 26 February 2016. It assessed 
Sweden’s  progress  in  addressing  the  country-specific  recommendation  adopted  by 

OJ L 209, 2.8.1997, p. 1. 
OJ L 306, 23.11.2011, p. 25. 
COM(2016) 347 final. 
P8_TA(2016)0058, P8_TA(2016)0059, and P8_TA(2016)0060. 

EN 

2 

   EN 

 
 
 
 
                                                 
the Council on 14 July 2015 and Sweden's progress towards its national Europe 2020 
targets. It also included the in-depth review under Article 5 of Regulation (EU) No 
1176/2011. On 8 March 2016, the Commission presented  the results of the in-depth 
review.6 The Commission’s analysis leads it to conclude that Sweden is experiencing 
macroeconomic  imbalances.  In  particular,  high  and  increasing  household  debt 
associated with high and growing house prices in a context of positive credit flows 
pose  risks  of  disorderly  correction  with  implications  for  the  real  economy  and  the 
banking  sector.  Policy  measures  have  been  taken  in  the  macroprudential  domain, 
which may however remain insufficient. Policy gaps remain in the area of housing-
related  taxation,  the  amortisation  of  mortgages,  the  functioning  of  housing  supply 
and the rental market. 

On  28  April  2016,  Sweden  submitted  its  2016  national  reform  programme  and  its 
2016  convergence  programme.  To  take  account  of  their  interlinkages,  the  two 
programmes have been assessed at the same time. 

recommendations  have  been  addressed 

Relevant  country-specific 
the 
programming  of  the  European  Structural  and  Investment  Funds  for  the  2014-2020 
period.  As  foreseen  in  Article  23  of  Regulation  (EU)  No  1303/2013,  where  it  is 
necessary  to  support  the  implementation  of  relevant  Council  recommendations,  the 
Commission may request a Member State to review and propose amendments to its 
Partnership  Agreement  and  relevant  programmes.  The  Commission  has  provided 
further  details  on  how  it  would  make  use  of  this  provision  in  guidelines  on  the 
application  of  the  measures  linking  effectiveness  of  the  European  Structural  and 
Investment Funds to sound economic governance.7 

in 

Sweden  is  currently  in  the  preventive  arm  of  the  Stability  and  Growth  Pact.  In  its 
2016  convergence  programme,  the government  plans  to  achieve  a  headline  balance 
of -0.4% of GDP and to continue to meet the medium-term budgetary objective — a 
structural deficit of 1 % of GDP — throughout the programme period. According to 
the convergence programme, the government debt-to-GDP ratio is expected to fall to 
42.5%  in  2016  and  to  continue  declining  to  39.1%  in  2019.  The  macroeconomic 
scenario  underpinning  these  budgetary  projections  is  plausible  until  2016  and 
cautious  thereafter.  Based  on  the  Commission  2016  spring  forecast,  the  structural 
balance is  forecast  to  be  at  -0.5  %  in  2016  and  -0.9  %  of  GDP  in  2017,  above  the 
medium-term  budgetary  objective.  Possible  future  deviations  would  be  assessed 
against  the  requirement  to  maintain  the  structural  balance  at  the  medium-term 
budgetary  objective.  Based  on  its  assessment  of  the  convergence  programme  and 
taking  into  account  the  Commission  2016  spring  forecast,  the  Council  is  of  the 
opinion that Sweden is expected to comply with the provisions of the Stability and 
Growth Pact.   

Household debt is at a very high level in Sweden and has been growing at one of the 
fastest  rates  in  the  EU  over  the  past  decade.  Household  debt  to  annual  disposable 
income was 175% in 2015 according to Riksbank (Sweden's central bank) estimates, 
and in relation to GDP it was 87%. Sweden has one of the highest tax incentives for 
home  ownership  in  the EU  due  to  relatively  low  property taxes  and  high  mortgage 
interest deductibility. The high level of household indebtedness constitutes a risk for 

(3) 

(4) 

(5) 

(6) 

5 
6 
7 

SWD(2016) 95 final. 
COM(2016) 95 final. 
COM(2014) 494 final. 

EN 

3 

   EN 

 
                                                                                                                                                         
(7) 

(8) 

(9) 

macroeconomic  stability.  The  government  has  taken  some  steps  to  stem  household 
indebtedness,  including  legislation  aimed  at  imposing  mandatory  amortisation 
requirements  on  new  mortgage  loans,  which  the  parliament  adopted  on  23  March 
2016. Adoption of this key measure was significantly delayed due to questions being 
raised  about  the  macroprudential  authority's  legal  mandate  to  introduce  this 
requirement.  There  is  a  risk  that  further  measures  that  may  be  needed  to  address 
Sweden's  rising  imbalances  may  be  similarly  delayed  unless  the  legal  framework 
concerning the macroprudential authority's remit is revised. Finally, the government 
has  taken  no  action  to  adjust  fiscal  incentives  by,  for  instance,  reducing  the  tax 
deductibility of mortgage interest or revising property taxation. 

The Swedish housing market remains a potential source of instability. House prices 
have risen almost constantly over the last 20 years, in particular in the metropolitan 
areas  of  Stockholm  and  Göteborg.  House  prices  keep  growing,  not  only  caused  by 
strong  fundamentals,  such  as  disposable  income  growth,  but  also  due  to  structural 
inefficiencies in the housing market. Housing supply is hampered by ineffective use 
of the existing housing stock, a high degree of rent control, weak competition in the 
construction sector, insufficient availablity of land for new construction and lengthy 
and  complex  planning  procedures.  The  existing  design  of  the  transaction  tax  on 
capital gains  from real estate sales limits the potential  for more efficient use  of the 
existing  housing  stock.  Structural  inefficiencies  result  in  insufficient  investment  in 
housing and widespread housing shortage, and contribute to the persistent increase in 
house  prices.  Lack  of  available  and  affordable  housing  also  limits  labour  market 
mobility and is a constraint for the effective integration of migrants into the labour 
market.  The  government  has  taken  some  measures,  including  increasing  public 
funding  for  investments  in  the  housing  sector  and  simplifying  some  planning 
procedures. In December 2015, an inquiry into competition in the construction sector 
came up with a series of possible measures,  such as enhancing transparency in the 
field  of  public  housing  contracts.  However,  the  government  made  no  progress  in 
reforming the rent-setting system. 

Despite relatively good investment performance, Sweden faces challenges that may 
have  a  negative  impact  on  the  long-term  competitiveness  of  the  country.  In 
particular, structural inefficiencies in the housing market hamper investment in this 
area. Investment in infrastructure to improve connectivity within and between urban 
areas is insufficient in view of the constraints caused by the housing shortage.  

Sweden experienced the sharpest decline in the educational performance of 15-year-
olds  of  any  OECD  country  over  the  past  decade  in  the  PISA  survey,  and  is  now 
performing  below  both  the  EU  and  OECD  averages.  Deteriorating  outcomes  of 
school  education  risk  putting  pressure  on  Sweden's  competitiveness  and  innovation 
capacity in the  long run. An important performance gap between students with and 
without  a  migrant  background  adds  to  the  education  challenge.  This  gap  deserves 
particular attention in light of the large number of newly arrived young migrants to 
be integrated into the education system. Unclear school funding mechanisms paired 
with unsystematic monitoring of the use of funding at different levels of the school 
system  hinder  the  efficient  use  of  resources.  The  government  has  made  additional 
funding  available  to  improve  school  outcomes  and  equity,  and  it  is  taking  steps  to 
integrate the newly arrived migrants in education.  

(10) 

The high influx of refugees experienced in the past year has a number of social and 
economic consequences for Sweden. While in the short run, the inflow of refugees is 
set to increase public expenditure and to create additional domestic demand, thereby 

EN 

4 

   EN 

 
raising  GDP,  the  medium-term  effect  on  employment  and  growth  hinges  on 
refugees’ successful labour  market and social integration, including  via educational 
support. This issue is high on the political agenda both at the EU and Member State 
level  and  will  be  monitored  and  analysed  closely,  including  in  the  2017  country 
report. 

In  the  context  of  the  European  Semester,  the  Commission  has  carried  out  a 
comprehensive  analysis  of  Sweden’s  economic  policy  and  published  it  in  the  2016 
country  report.  It  has  also  assessed  the  convergence  programme  and  the  national 
reform  programme  and  the  follow-up  given  to  the  recommendations  addressed  to 
Sweden  in  previous  years.  It  has  taken  into  account  not  only  their  relevance  for 
sustainable  fiscal  and  socioeconomic  policy  in  Sweden  but  also  their  compliance 
with EU rules and guidance, given the need to strengthen the EU's overall economic 
governance  by  providing  EU-level  input  into  future  national  decisions.  The 
recommendations  under  the  European  Semester  are  reflected  in  recommendation  1 
below. 

In  the  light  of  this  assessment,  the  Council  has  examined  the  convergence 
programme,  and  is  of  the  opinion8  that  Sweden  is  expected  to  comply  with  the 
Stability and Growth Pact. 

In  the  light  of  the  Commission’s  in-depth  review  and  this  assessment,  the  Council 
has  examined  the  national  reform  programme  and  the  convergence  programme.  Its 
recommendations under Article 6 of Regulation (EU) No 1176/2011 are reflected in 
recommendation 1 below.  

(11) 

(12) 

(13) 

HEREBY RECOMMENDS that Sweden take action in 2016 and 2017 to: 

1. 

Address  the  rise  in  household  debt  by  adjusting  fiscal  incentives,  in  particular  by 
gradually  limiting  the  tax  deductibility  of  mortgage  interest  payments  or  by 
increasing  recurrent  property  taxes.  Ensure  that  the  macro-prudential  authority  has 
the legal mandate to implement measures to safeguard financial stability in a timely 
manner.  Foster  investment  in  housing  and  improve  the  efficiency  of  the  housing 
market,  including  by  introducing  more  flexibility  in  setting  rental  prices  and  by 
revising the design of the capital gains tax to facilitate more housing transactions.         

Done at Brussels, 

For the Council 
The President 

8 

Under Article 9(2) of Council Regulation (EC) No 1466/97. 

EN 

5 

   EN