Source: EURLEX
Language: en
Format: md

*|*

# 52012SC0328

**COMMISSION STAFF WORKING DOCUMENT Assessment of the 2012 national reform programme and convergence programme for SWEDEN Accompanying the document Recommendation for a COUNCIL RECOMMENDATION on Sweden's 2012 national reform programme and delivering a Council opinion on Sweden's updated convergence programme, 2012-2015 /\* SWD/2012/0328 final \*/**

  

CONTENTS

Executive summary. 3

1........... Introduction. 4

2........... Economic developments and challenges. 5

2.1........ Recent economic developments and outlook. 5

2.2........ Challenges. 6

3........... Assessment of the policy agenda. 9

3.1........ Fiscal policy and taxation. 9

3.2........ Financial sector 12

3.3........ Labour market, education and social
policy. 15

3.4........ Structural measures supporting growth and
competitiveness. 18

3.5........ Modernisation of public administration. 21

4........... Overview table. 23

5........... Annex. 25

              Executive
summary

In 2012, the Swedish economy is expected to slow down as compared to
2011, with a foreseen GDP growth of 0.3 %. After positive labour market
developments in 2011, unemployment is expected to rise slightly to 7.7% in
2012.

The performance of the Swedish economy is overall very good. Since
the mid-1990s, Sweden has followed an ambitious agenda
of fiscal and structural reform. Most recently, the reform efforts have focused
on achieving full employment, ensuring a strong and stable financial sector,
improving the functioning of the housing market, reforming the education
system, promoting innovative and dynamic businesses and tackling the
environmental and climate change issues.

However, several challenges still need to be tackled. Notwithstanding
government measures in the area of the labour market integration of vulnerable
groups, the unemployment rates of these groups remain high. While the housing
market has cooled somewhat since mid-2011, several structural distortions
persist that have contributed to house-price volatility in the past. Certain
aspects of the Swedish tax system could be made more effective, efficient and
growth-enhancing. Moreover, Sweden's competitive position is threatened in the
medium term by falling business investment in R&D and inadequate
commercialisation of innovative output.

1.           Introduction

Procedural aspects

In June 2011, the Commission proposed three
country specific recommendations[1] (CSRs) for economic and
structural reform policies for Sweden. In July 2011 the Council of the European
Union adopted these recommendations which concerned public finances, housing
and the labour market.

In November 2011, the Commission published
its Annual Growth Survey for 2012 (AGS 2012) in which it set out its proposals
for building the necessary common understanding about the priorities for action
at national and EU levels in 2012. It focused on five priorities —
growth-friendly fiscal consolidation, restoring normal lending to the economy,
promoting growth and competitiveness, tackling unemployment and the social
consequences of the crisis, and modernising public administration — and
encouraged Member States to implement them in the 2012 European Semester.

Against this background, Sweden presented its national reform
programme (NRP) and convergence programme (CP) on 20 April 2012. These
programmes give details on progress made since July 2011 and plans going
forward. The two documents outline in an integrated manner the fiscal
consolidation efforts on the one hand and key structural reforms and reforms
underpinning macroeconomic stabilisation on the other. The CP is in conformity
with the Code of Conduct and the NRP follows the guidance provided by the
Commission. Sweden has ensured close coherence between the two programming
documents. Sweden is invited to set in its next NRP a numerical target for
reducing social exclusion to supplement the EU target of reducing the number of
persons at risk of poverty/social exclusion by 20 million.

Before adopting the NRP and the CP, the
Government conducted extensive consultations, particularly at the local and
regional level. Responding to requests from interested civil- society groups,
such organisations were consulted at an early stage of the NRP process. Consultations
also took place in the framework of a special reference group composed of
Government ministries and social partners, including both trade unions and
employers' associations. These efforts have clearly contributed to enhancing
ownership and understanding of the Europe 2020 strategy.

This Staff Working Document assesses the
state of implementation of the 2011 recommendations as well as the AGS 2012 in Sweden, identifies current policy challenges and, on that basis, examines the country’s
latest policy plans.

Overall assessment

Sweden has only partially implemented each of the
Council recommendations. The fiscal policy stance is regarded as prudent, and
is likely to ensure that Sweden fulfils its medium-term objective (MTO) as from
2012. However, this is mainly due to the fact that the government has lowered
the MTO from +1% of GDP to -1% of GDP as of 2012. In 2011, the more ambitious
MTO was not fulfilled. In the area of the housing market and household
indebtedness, the measures taken by the government are relevant, but focus
mainly on strengthening the resilience of the financial sector. So far there
has been less attention paid to measures to foster prudent lending or to diminish
the debt bias in the financing of housing investment. Despite some promising
first steps, the stringent rent regulation and constraints in the housing
supply remain in place. As regards the labour market, the government has taken
a large number of measures aimed at fostering the labour market participation
of young people and other vulnerable groups, but it is still too early to
assess the effectiveness of these measures. Measures to increase flexibility at
the lower end of the wage scale and to ease the difference in employment
protection legislation for temporary and permanent workers are at the stage of
a political debate.

Although Sweden’s economic performance is very good, reflecting its
ambitious fiscal consolidation and structural reform agenda since the
mid-1990s, several challenges still need to be tackled, namely in the labour
market, the housing market and the tax system. Notwithstanding government
measures in the area of the labour market integration of vulnerable groups,
these groups have not fully benefited from the observed cyclical improvement in
the employment situation. While the housing market has cooled somewhat since
mid-2011, several structural distortions persist that have contributed to
house-price volatility in the past. In line with the analysis set out in the
Commission’s AGS 2012, certain aspects of the Swedish tax system could be made
more effective, efficient and growth-enhancing. In particular, the current
design of the taxation of both housing and VAT leaves room for improvement;
improving the former could also help to address the challenges associated with
housing-related indebtedness.

The policy plans submitted by Sweden are relevant and credible, but in some areas lack the ambition to address these
challenges comprehensively. The strategy to contain the risks of high household
debt by strengthening the resilience of the financial sector could be
accompanied by measures to foster prudent lending and flexibility of housing
supply. Policy plans in the field of labour taxation are conditional on the
available fiscal space and overlook the possibility of budget-neutral tax
shifts linked, for example, to reviews of tax benefits for debt accumulation
and the VAT structure. Finally, according to the NRP the Government intends to
continue with active labour market policy measures as the main approach to ensuring
the participation of vulnerable groups in the labour market, whereas a more
determined policy response in other areas, such as employment protection
legislation or wage formation, would also be warranted.

2.           Economic
developments and challenges

2.1.        Recent economic developments
and outlook

Recent economic developments

After growth of 6.1 % in 2010 the Swedish economy continued its
rapid recovery in 2011, reaching annual growth of 3.9 %. Most sectors of
the economy contributed to this performance, with household consumption and
investment particularly strong in the first half of the year and net exports
booming in the third quarter. Positive labour market developments in the wake
of the strong recovery in 2010 continued in 2011, with the seasonally adjusted
unemployment rate falling from 9 % in spring 2010 to 7.3 % in
September 2011. In the second half of 2011, however, the fallout from the
sovereign debt crisis sapped consumer and corporate confidence and the
worsening international economic outlook affected Swedish exports, which
plummeted in the fourth quarter. Households increased their saving rate as they
saw their wealth affected by a fall in stock prices and declining house prices.

For early 2012, various indicators send mixed signals. On the one hand,
both business and consumer confidence have rebounded noticeably in the first
months of the year and household expectations about future house price
developments have also recovered strongly, helped by interest-rate cuts by the
Riksbank.. On the other hand, the latest industrial production data and new
orders have been disappointing, showing a sizeable contraction in February and
March.  The seasonally adjusted unemployment rate increased temporarily around
the turn of the year but dropped again to 7.3 % in March 2012.

Inflation has been low and has declined over the past year with HICP
(harmonised index of consumer prices) inflation averaging at 1.4 %. The
impact of high commodity prices has been mitigated by the lagged effects of
currency appreciation, which continued until spring 2011. At the same time, low
core inflation (HICP excluding energy and unprocessed food) reflected subdued
unit labour costs, stemming from reasonable productivity growth and modest wage
increases.

Public finances are strong, with the general government budget
ending the year with a slight surplus of 0.3 % in 2010 and 2011 and gross
government debt falling to 38 % in 2011. In view of increasing uncertainty
and the intention to achieve fiscal targets with a margin, the government
adopted a rather cautious fiscal approach, abandoning most of its expansionary
plans for the 2012 budget. Against a backdrop of strong fiscal fundamentals,
Swedish government bonds are increasingly being considered as a safe haven
investment, with the effect of strengthening the Swedish krona towards the end
of 2011.

Economic outlook

The Commission’s interim forecast predicts
that growth will remain subdued in early 2012, before gradually picking up. GDP
growth is expected to reach 0.3 % in 2012 and 2.1 % in 2013. In the short
term, the outlook for export growth is rather subdued, as a number of trading
partners are weighed down by the fallout from the sovereign-debt crisis in the
euro area. Private consumption should also grow less briskly, with household
spending expected to be held back by bleaker employment prospects and greater perceived
uncertainty, including with respect to house prices. Some relief is expected
from a more accommodative monetary policy stance and stronger real wage
developments, whereas fiscal policy is not expected to do much to boost demand
in the short term.

Sweden’s convergence
programme contains one main macroeconomic scenario, which is also the main
scenario of the NRP. It foresees that real GDP growth will slow down from 4.1 %
in 2011 to 1.3 % in 2012, before accelerating again to average 3.7 %
annually over the 2013-15 period. The macroeconomic scenario is plausible for
the 2011-12 period, when a broad-based deceleration is expected, whereas it looks
favourable for the later years, when the strong acceleration in growth is based
on households significantly lowering their saving rate. The government
estimates that the major structural reform implemented in 2012 — the reduced
VAT rate for restaurants and catering services — will increase GDP by 0.1 %
and decrease the unemployment rate by 0.1 percentage points.

On 30 May 2012, the Commission adopted the
Convergence Report 2012 assessing whether Member States with a derogation meet
the criteria for adopting the single currency. The report concluded that Sweden does not fulfil the criteria of legal compatibility and exchange-rate stability and
therefore does not qualify for euro adoption.

2.2.        Challenges

Despite generally favourable economic development, Sweden still faces a set of inter-linked policy challenges to sustainable macroeconomic
development. The main policy challenges have remained broadly unchanged since
the 2011 assessment.

Sweden has a rather high level of private debt,
which is accounted for mainly by the non-financial corporations sector (around 155 %
of GDP in 2010), but also the household sector (around 82 % of GDP or 170 %
of disposable income). While the corporate debt burden has decreased
substantially since 2009, accumulation of household debt has continued to increase
even after the 2008-2009 crisis. This has gone hand in hand with strong growth in
house prices. Over the last year, however, the upward trend in house prices has
reversed and household debt has stabilised as a percentage of GDP. Although
these developments make the challenge less urgent, it remains relevant. The
high level of household indebtedness makes households’ net wealth more
vulnerable to asset price fluctuations, changes in interest rates (accentuated
by the widespread use of flexible mortgage rates) and the employment outlook.

There are a number of policies currently in place that may contribute
to the volatility of the Swedish housing market and mortgage debt accumulation.
First, indebtedness of households is encouraged by a debt bias in housing
taxation generated by generous tax deductibility of interest payments and low
property taxes. Second, there has also been a trend towards increasingly longer
amortisation periods, with new mortgage loans typically including no, or very
limited, amortisation. Third, stringent rent regulation pushes households, instead
of waiting for a rental apartment, to buy a house or apartment which will quickly
meet their need for housing services, thus adding to the demand for houses and
tenant-owner’s apartments, which tend to be mortgage-financed. On the supply
side, a local planning monopoly, lengthy zoning processes and rules on
sub-letting of tenant-owner’s apartments, together with insufficient
competition in the sectors supplying input to the construction sector, affect the
flexibility of housing supply, thus contributing to higher house prices.
Addressing all the above issues is necessary to reduce the risk of debt-driven
housing bubbles and to improve the functioning of the housing market.

As regards the labour market, the challenge of low labour market
integration of young people and immigrants is still relevant. The unemployment
rate of young people remains high[2] (22.9 % in 2011),
despite some improvement reflecting a general recovery in the labour market during
2011. The situation of foreign nationals even deteriorated in 2011, with the
unemployment rate of this group increasing by almost 1 percentage point (to 20 %)
between 2010 and 2011. Employment rates for 2010 were 38.5 % for young
people and 47.6% for non-EU nationals. Within the latter group, developments
have been particularly worrying for women. Tackling these adverse developments would
be directly in line with the priorities set out in the Annual Growth Survey
2012 and is essential for achieving the Europe 2020 employment target.

On the supply side, factors behind the relatively high unemployment
rates and low employment rates for young people and immigrants could include
labour taxes and social contributions, which remain comparatively high despite
extensive government reforms since 2005. On the demand side, the full
integration of vulnerable groups in the labour market could be hindered by
relatively high wage levels at the low end of the wage scale.[3]
The differences in employment protection between regular and temporary workers constitute
another possible barrier[4]. As regards immigrants,
there is some evidence that their integration in the labour market is
occasionally hindered by potential employers’ unequal
treatment of foreign-born job applicants. Finally, early
school leaving also plays an important role in the exclusion of young people
and immigrants from the labour market (although drop-out rates are not high in
relation to the EU as a whole.

The AGS 2012 requested an integrated assessment of tax policies. In Sweden, the design and structure
of the tax system could be improved by implementing tax shifts which could make
it more effective, efficient and growth-enhancing. Rather
lenient tax treatment of housing leads to a debt bias, which has contributed towards
the rising stock of mortgage debt and also, potentially, high house prices. A
bias towards debt financing could also be observed in corporate taxation,
contributing to the build-up of corporate debt until 2009. Within consumption
taxation, the efficiency of VAT could be further enhanced by limiting the use
of reduced VAT rates. Reforms in VAT and housing taxation could provide room to
reduce the tax burden on labour, which remains relatively high despite
considerable progress in recent years and may be discouraging domestic economic
activity, employment growth and investment.

Sweden's competitive position is threatened in the
medium term by falling business investment in R&D and little
commercialisation of innovative output. Since 2002 the outflow of R&D
business investments has exceeded the inflow. Consequently, R&D intensity fell
from a peak of 4.13 % in 2001 to 3.42 % in 2010. Sweden’s strong R&D position, as seen in the Innovation Union Scoreboard, is vulnerable
due to its strong dependence on a few large multinational companies which are increasingly
moving towards the global innovation system. Despite being a top performer in
most indicators of R&D performance, Sweden is below EU average as regards
commercialisation of innovative products and services. Also, Sweden is slightly lagging behind in  creation of fast-growing innovative enterprises capable of
ensuring a sustainable and competitive economy for growth and jobs.

Box 1: Summary of the results of the in-depth review under the macroeconomic
imbalances procedure

The
in-depth review on Sweden identified potential imbalances in the areas of the
housing market and private debt.

Although
house prices seem to have developed in line with fundamentals, the Swedish
housing market represents an area
where imbalances may emerge.
Some policies and features, such as supply bottlenecks and rental regulation in
combination with changes to the tax system, may have created an upward bias in
house prices. Some of these policies and institutional features imply distortions or represent
imperfections that carry an economic efficiency cost and could have a
destabilising effect. Their interaction with tax policies and institutional
features in the Swedish mortgage market, such as generous interest deductibility
on mortgages and little amortisation, could also potentially increase the cost
of these.

Despite
some mitigating circumstances, the high level of private-sector debt, in
particular household indebtedness, deserves attention. While corporate debt makes up the largest share of
total private-sector debt, there are specific factors behind it (mainly the
strong role of multi-nationals and of intercompany loans) which makes it less
of a concern. In the case of household debt, however, the high debt level implies
a heightened risk to macroeconomic stability by making households’ balance sheets
more sensitive to negative shocks, such as a fall in house prices, a prolonged
period of low or negative economic growth or a real interest rate shock. In
view of that risk, and the potential role of various policies in stimulating
continued debt build-up, such as generous interest rate deductibility, close
monitoring may be warranted.

The policy response could include measures
to foster prudent lending, reduce the debt-bias in housing taxation, strengthen
mortgage amortisation requirements and promote the use of fixed interest rate
mortgages. Possible measures to improve the flexibility of housing supply
include simplification of the planning and zoning processes, fostering competition
in the construction sector and further easing the regulation of the rental
market.

3.           Assessment of the policy agenda

3.1.        Fiscal policy and taxation

Budgetary developments and debt dynamics

The main goal of the government's budgetary strategy, as expressed
in the 2012 Convergence Programme (henceforth ‛programme’), is to ensure
long-term sustainability by respecting the rules of the Swedish fiscal
framework, including the target of having a surplus in general government net
lending of 1% of GDP over the cycle. The strategy also aims at fulfilling the
requirements of the stability and growth pact, notably respecting the 3%
deficit limit and establishing a medium-term budgetary objective (MTO). Until
2011, the government maintained the MTO at the same level as the surplus
target, i.e. at 1% of GDP. The programme announces that, as from 2012, the MTO
will be a deficit of 1% of GDP. The new MTO adequately reflects the
requirements of the Stability and Growth pact. The reduction is explained by a
wish to ‛distinguish more clearly between the Swedish national framework and
the demands made of Sweden as a member of the EU’ and the lower target should
be seen as a minimum requirement for net lending following from the fact that
Sweden is a member of the EU. The programme states that the guiding principle
for the government's fiscal policy strategy will continue to be the more
demanding 1% surplus-over-the-cycle target.

As in 2010, general government net lending showed a small surplus of
0.3% of GDP in 2011. This compares to an expected surplus of 0.6% of GDP in
last year's programme, with the difference stemming from somewhat slower
revenue growth than expected. Based on a no-policy change assumption, the programme
foresees a small deficit of 0.1% of GDP in 2012, turning into a surplus of 0.5%
of GDP in 2013, as the economy is expected to recover strongly. In the Commission’s
spring forecast, the general government balance is forecast to show a deficit
of 0.3% of GDP in 2012 and a surplus of 0.1% of GDP in 2013, based on a more
muted recovery. Compared with last year's programme, both the 2012 programme
and the Commission’s spring forecast foresees a much lower government balance
in 2012, based primarily on revenues not being as strong as expected, but also
on expenditures being somewhat higher. For 2013, the programme predicts that
household consumption will grow at a much faster pace than foreseen by the
Commission’s spring forecast, based on the assumption that households will
start reducing their saving rate. For 2014 and 2015, surpluses of 1.7% and 3.0%
of GDP are foreseen, respectively, based on a favourable macroeconomic
scenario, with strong employment growth as a result of earlier government
labour-market and tax reforms. Should the effects of these reforms be less than
expected or materialise at a slower pace, there might be slower revenue growth,
which would have a negative impact on the general government balance.
Expenditure restraint is expected to be the main contributor to the improvement
in the fiscal balance over the programme period. Assuming unchanged policies,
the programme forecasts that expenditures will fall by 3.3 % of GDP over the
programme period.

The programme foresees a structural general government balance, as
recalculated by the Commission[5], of 1.0% and 1.6% of GDP in
2012 and 2013, respectively, whereas the Commission’s forecast foresees the
structural balance growing from 0.0% of GDP in 2011 to 0.3% and 0.4% of GDP in 2012
and 2013, respectively. As the MTO has been lowered to -1% of GDP as from 2012,
it means that it is likely to be met over the period covered by the programme,
even taking into account the likelihood of further expansionary discretionary
measures being taken in 2013 or 2014. These could derive from a need to restore
the real value of such expenditure items that are not indexed to inflation or
income growth.

According to the information provided in the programme, in 2012 the growth
rate of government expenditure, net of discretionary revenue measures, will
exceed a rate which is lower than the reference medium-term rate of potential
GDP growth (1.84%) and which ensures an annual structural adjustment towards
the MTO by 0.5% of GDP (0.85%). In 2013 and the later years, by contrast, it
will not exceed the reference medium-term rate of potential GDP growth (1.84%).
Following an overall assessment of the Member State’s budgetary plans, with the
structural balance as a reference, including an analysis of expenditure net of
discretionary revenue measures, the plans have been found to be consistent with
continued fulfilment of the MTO.

|| Box 2: Main budgetary measures ||

|| Revenue || Expenditure ||

|| 2011 ||

|| · Increase in basic income deduction for +65 year-olds (-0.2% of GDP) || ||

|| 2012 ||

|| · Lower VAT rate for restaurant and catering services (-0.2% of GDP) || · Higher spending on infrastructure (+0.1% of GDP) ||

|| Note: The budgetary impact in the table is the impact reported in the programme, i.e. by the national authorities. A positive sign implies that revenue / expenditure increases as a consequence of this measure. The degree of detail reflects the type of information made available in the stability or convergence programme and, where available, of a multiannual budget. ||

The debt ratio has shown a declining trend since the mid-1990s. The
recession of 2008/09 only temporarily interrupted this process and gross debt
stood at 38.4% of GDP in 2011. Over the programme period, the programme
foresees a further decline in the debt ratio to 27.5% of GDP in 2015, with the
main driver being large primary balances, but also a substantial contribution
from real GDP growth. This decline is based on a rather favourable
macroeconomic scenario and includes the effects from some limited further
privatisation receipts. In 2011, Sweden had a positive net financial position
of 18.4% of GDP. Since the debt-to-GDP ratio is below the reference rate, the
debt reduction benchmark is not applicable.

Long-term sustainability

The long-term change in age-related expenditure is above the EU
average. The initial budgetary position offsets the long-term costs. Under a
no-policy change assumption, debt would fall to 23% of GDP by 2020. Full
implementation of the programme plans would reduce debt faster. Ensuring
continued sufficient primary surpluses over the medium-term, as planned in the
programme update, would further improve the sustainability of public finances.

Fiscal framework

The Swedish budgetary framework has been gradually taking shape since
the second half of the 1990s in reaction to the significant worsening of public
finances during the deep recession of the early 1990s. The current fiscal
framework has successfully contributed to putting Swedish public finances on a
much stronger footing at both the central and the local level. It has played a specific
role in preventing strong tax receipts in good times from translating into
pro-cyclical spending increases. This has provided the necessary margin for automatic
stabilisers to play their role in recessions, even making room for
discretionary fiscal stimulus.

The framework is based on three main rules. First, the surplus
target, encompassing the finances of both central and local governments
(counties and municipalities) and the pension system, stipulates that an
overall surplus of 1 % of GDP should be achieved over the business cycle.
The achievement of the target is assessed against seven different indicators.
The multitude of indicators impairs the clarity of the assessment and could lead to an opportunistic interpretation. Second, the three-year nominal expenditure ceiling for central
government (excluding interest expenditure) and the pension system controls
budget overruns and forces government departments to prioritise. Third, the
balanced-budget rule for local governments forbids municipalities and counties
to approve ex-ante deficit budgets and requires them to compensate for any
ex-post deficits within three years. In addition to the budgetary rules, the
Fiscal Policy Council was established in 2007 with the task of providing an independent evaluation of the
government’s fiscal policy and compliance with the fiscal rules.

The fiscal framework has been reinforced in recent years by the
adoption in 2010 of a law making it a legal obligation to define the surplus
target and specify the expenditure ceiling for the coming three years. In an
agreement reached in 2011 among all major political parties in Parliament, the
Fiscal Council received an expanded mandate and some additional resources. This
represents a strengthening of the Council, as previously it had not enjoyed
broad support in Parliament.

Tax system

Sweden is a high-tax country with a tax-to-GDP
ratio of 45.8 % in 2010, well above the EU average. Overall, the tax
policy mix is sound, moving slowly from labour taxation to other sources of
taxation generally regarded as less harmful to growth. Although the share of ‘growth-friendly
taxes’ is substantial, there is scope for further growth-enhancing tax shifts
(from labour to housing taxation) and for important efficiency improvements
(housing, VAT, corporate taxation). Tax administration is among the most
efficient in the EU, with high tax compliance rates and low tax collection
costs.

Taxation of housing in Sweden is characterised by a debt bias,
generated by low recurrent property taxes (reduced significantly in 2008) and
generous tax reliefs for mortgage interest payments. The deduction scheme and
property taxes in their current form are also regressive, as the former
benefits borrowers with high capital and labour income, against which interest
expenses can be deducted and property taxes are kept flat above a certain
threshold. In order to make the tax system more debt-neutral, return on housing
investments could be taxed as other returns (via the imputed rent or higher
property taxes) or the interest tax relief could be reduced or phased out. The timing of these reforms would need to be decided carefully, in
order not to put excessive downward pressure on house prices.

Within corporate taxation, there is a relatively large gap between
the effective marginal tax rate on debt and on equity for new investment,
suggesting a bias towards debt-financing for corporations. Correcting the debt
bias in both housing and corporate taxation is important in view of the high
level of household and corporate debt.

The efficiency of VAT could be further enhanced through a shift
towards a more harmonised VAT structure[6]. The application of reduced
rates complicates the system and distorts the functioning of the market.
Moreover, even if the various reduced rates have been motivated by specific
policy concerns, a reduced VAT rate is normally not the most effective or
efficient policy measure to achieve these aims. This is likely to be also the
case with the reduced VAT rate for restaurant and catering services which was
introduced in January 2012 with a view to boosting youth employment. Experience
from other countries shows that these measures have been criticised as costly,
with a limited impact on employment.[7]

Fiscal space provided by the abovementioned reforms could be used to
reduce labour taxation further, and this could enhance growth. The government
has implemented several reforms in recent years to lower the tax burden on
labour. In particular, the in-work tax credit, introduced in four stages over the
period 2007-2010, reduced the marginal and average tax rates. However, the
marginal tax rates for above-average wage earners and the average tax wedge
remain high. Similarly, the implicit tax rate on labour (39 % in 2010) remains
above the EU average (non-weighted 32.9 %, weighted 36 %), despite a
significant decline over the last decade.

The government is not contemplating any major changes to the tax
system in the near future. A further reduction in labour taxes through a fifth stage
of the in-work tax credit scheme remains one of the reform ambitions, but the
government has announced that there might not be sufficient fiscal space to
implement it before 2014-2015. Given the generally good fiscal position, the
space for a more counter-cyclical impact might deserve more attention. The
government has launched an inquiry to review corporate taxation which will
issue recommendations in 2013.

3.2.        Financial sector

The Swedish financial sector is in relatively good shape. Swedish
banks are well capitalised, with capital ratios already meeting Basel III
requirements[8]. Their exposure to
countries in receipt of EU or IMF financial assistance has declined to a very
low level. Banks’ profitability measured as returns on equity has improved over
the last year, and the share of loans losses has declined (0.04 % of total
lending in mid-2011). From a company perspective, too, access to finance does
not pose a serious challenge in Sweden[9]. However, as discussed in
section 2.2, the Swedish financial sector remains vulnerable to developments in
the housing market due to high household debt. Also, the financial sector
continues to face risks related to its strong international exposure and a
heavy reliance on external short-term funding.

Box 3: The Swedish housing market

From
the second half of the 1990s until the onset of the financial crisis, house
prices in Sweden rose sharply. When the financial crisis hit, house prices
started to fall, though their correction proved fairly muted and since 2009,
house prices resumed their strong up-ward movement reaching a new all-time high
in 2010. During 2011, house prices in Sweden have been rather stable, with some
downward movement accelerating in the fourth quarter of 2011

There
is no straightforward way of assessing whether house prices are now at a level
in line with fundamentals. At least on some metrics, house prices now look
richly valued (e.g. price-to-rent ratio, affordability ratios). The
price-to-disposable-income-per-capita ratio is still some 25% above its
mid-1990s level and close to its recent peaks. However, these valuations are
based on historical average values. Indicators which take into account possible
structural changes as well as econometric estimates suggest that the steady
increase in house prices over the last 15 years may well be justified by
fundamentals, such as strong disposable income growth and low interest rates
coupled with limitations on the supply-side.

There
are reasonable explanations why Swedish house prices have avoided the steep
correction seen in many other countries in recent years. The quick recovery from the 2008/09
recession, which was helped by significant monetary and fiscal stimulus, and a
relatively resilient labour market explains why disposable income has
continued to rise at a respectable pace also in the more recent period. Some
specific tax measures favoring housing (such as significant decrease in
property taxation and deduction schemes for home improvement services) have
also added to demand for owner-occupied housing, as has rental regulation. The
trend decline in mortgage rates, in combination with reduced amortization
requirements, also fuelled demand over the last decade. On the supply side, a
number of factors have contributed to a rather muted supply expansion over the
same period. The effects from the crisis of the early 1990s and the 1991 tax
reform lead to a sharp contraction of the construction sector, which has taken
a long time to recover from. Poor competition and administrative uncertainty in
relation to zoning and issuance of building permits may also have held back
supply by raising costs. Thus, contrary to Spain and Ireland for instance, Sweden did not experience an overexpansion of the construction sector, as increased demand
for housing mainly manifested itself in higher prices and less in increasing
volumes.

Although
house prices seem to have developed in line with fundamentals, the Swedish
housing market represents an
area where an imbalanced development could emerge. Some policies and features, such as supply
bottlenecks and rental regulation in combination with changes to the tax
system, may have created an upward bias in house prices. Some of these policies
and institutional features (a
widespread use of variable-rate mortgages and little amortisation)  imply
distortions or represent imperfections that carry an economic efficiency cost
and could have a destabilising effect. Their interaction with tax policies,
such as generous interest deductibility on mortgages and low property taxes,
could also potentially increase the cost of these.

The challenge of high house prices and household indebtedness were
highlighted in a recommendation given to Sweden in 2011. The government’s
response to the specific risk of house prices has so far been rather limited.
This has to be seen against the background of a housing market situation which has
stabilised since the recommendation was issued. The government has set up an
advisory committee to analyse developments in house prices and household
indebtedness and suggest, by August 2012, possible reforms. While the focus of
this inquiry is relevant, there is no guarantee that it will lead to any actual
measures[10]. In 2011, the government
also marginally eased regulation of the rental market. In its 2012 spring bill,
the government proposes some measures to simplify the sub-letting of apartments
and to stimulate housing construction. Also, it refers to a new act to simplify
the planning and building permits processes. Although certainly welcome, these
measures are not likely to be sufficient to address the issues involved. The
intended lowering of the property fee for rental units and for construction of
new housing, as well as higher tax deductions for revenues of home rentals, are
likely to increase the availability of housing, but a more systematic solution
would have been preferred, based on elimination of tax distortions and rent
regulation. Continuous efforts are needed to achieve a well-functioning rental
market and to tackle the constraints on the housing supply.

In broader terms, the government has been addressing the challenge
of household indebtedness by strengthening the resilience of the financial
sector. A number of measures have been taken in this respect. Above all, the crisis-related more stringent rules for Swedish banks’ capital
adequacy have been extended beyond the end of 2011. In
November 2011, the authorities had already announced higher capital requirements
for four systemically important banks, above the Basel III requirements and
ahead of the Basel III implementation schedule. With a
view to strengthening supervision capacity, the resources of the Swedish
Financial Supervisory Authority have been reinforced. The Financial Crisis
Committee was appointed in 2011 to review the rules for managing a financial
crisis. In order to counter liquidity risks, plans were announced to meet the
short-term liquidity requirement of Basel III ahead of the agreed timetable, with
the euro and the US dollar being treated separately. Moreover, banks should
continue to reduce the differences in maturity between assets and liabilities,
and improve their public liquidity reporting.

The measures taken by the government are relevant, but focus mainly
on strengthening the resilience of the financial sector. In this area, the
efforts to increase capital requirements and advance liquidity requirements for
banks are ambitious compared to other EU Member States. Nevertheless, measures
to foster prudent lending and diminish the debt bias in the financing of
housing investment have so far received less attention, apart from the
introduction in the autumn of 2010 of a cap of 85 % on the loan-to-value
ratio. Furthermore, despite some promising steps, the system of rent regulation
and the major constraints on housing construction remain in place. In this
light, the recommendation on housing and the financial sector is considered to
have been partially implemented.

In line with the Annual Growth Survey objectives, the capital
positions of the systemic banks have been strengthened without restricting
lending to the economy. Credit growth to the private sector has been overall
stable (between 5 and 6 % during 2011), with credit to households slowing
down and credit to non-financial corporations accelerating.

3.3.        Labour market, education and
social policy

The performance of the Swedish labour market is generally very good:
the overall employment rate is very high (78.7 %, 2010); labour
productivity is above the EU average; the wage-setting system is rather
flexible and accommodates cyclical developments well; the dialogue between the social
partners is consensus-oriented and efficient in preventing strikes; the system
of unemployment benefits as well as the sickness and disability benefit schemes
have become more supportive of labour integration and employment; and
substantial progress has been made in reducing labour taxes. Nevertheless, well-targeted
policy action is warranted in several areas, in particular in addressing
persistent and relatively high unemployment rates as well as low employment
rates for young people and non-EU nationals.

The need to tackle the weak labour market participation of young
people and immigrants was identified in a country-specific recommendation for Sweden in the 2011 assessment and was also highlighted as a general priority in the Annual
Growth Strategy 2012. The Swedish Budget Bill for 2012, presented in September
2011, included numerous measures in response to the recommendation. The measures
in favour of youth employment include: lowering the VAT rate for restaurants
and catering services; implementing the apprenticeship programme as a permanent
part of upper secondary school; introducing a reform aimed at increasing the
number of students leaving upper secondary school with passes in all subjects;
and ensuring a better match between upper secondary school and the labour
market. With a view to improving the labour market integration of immigrants,
the measures include: further monitoring of, and improvements to, the reformed
reception system for newly arrived refugees; evaluation of the effectiveness of
Swedish language training for immigrants; launching an inquiry aimed at proposing
by October 2012 measures to speed up integration in the labour market of female
immigrants and immigrants arriving in Sweden on the basis of family
reunification (60 % women), as well as subsidies for employers who hire
unemployed immigrants.

Most of these measures are relevant and can be expected to have a
positive impact. However, since most reforms are not being implemented until 2012,
it is too early to assess whether they have actually had any significant
effects on the target groups. The relevance and effectiveness of the main
measure targeted at youth employment — the VAT reduction for restaurants and
catering services — could be called into question. As experience from other Member
States indicates[11], there is some doubt
concerning the effect which this tax expenditure measure has on job creation
and growth. The Swedish VAT reform will be evaluated by several government
agencies, with final reports to be provided in January 2016. A short-term
evaluation of the price impact will be presented already in July 2012.

In addition to the measures included in the Budget Bill 2012, the
NRP reports on initiatives which aim at improving the functioning of the
Swedish labour market, including in the field of employment protection and wage
formation. The government is considering options to prevent exploitation of fixed-term
employment. In addition, a public inquiry is examining whether employer costs
related to employment termination disputes can be reduced. –Another public
examination has been instructed to investigate and, by 30 November 2012, propose
solutions for a new form of employment with an educational content for young
people – apprentice probation employment. In addition, the government offices
are making preparations for the introduction of a special form of employment
for upper secondary school apprentices. All these
initiatives represent promising steps towards more flexibility at the low end
of the wage scale, benefiting young and low-skilled people, and towards reducing
the employment protection divide between permanent and temporary workers.
However, they are still in an embryonic stage and the result will depend on the
reaction of the social partners.

To summarise, the government strategy to improve labour market
participation of young people and immigrants has so far mainly focused on
active labour market policy measures. Previous measures in this field have not
generated significant and lasting positive effects. It is too early to see the
results of the measures implemented in 2012. In order to handle the challenges
in a more comprehensive way, a more determined effort in areas such as
employment protection and high wages at the lower end of the wage skill might
be required. Initiatives announced in the NRP are promising steps in that
direction, but it is to be seen whether they will translate into palpable
results. In the field of labour taxation, there is a clear risk that none of
the remaining reform ambitions set out in the previous NRP will be implemented
over the programme period, in particular the fifth stage in the in-work tax credit
scheme and a further increase in the threshold for the state income tax,. The
government has indicated that sufficient fiscal space for these reforms might
not be available until 2014-2015. In the light of these observations, the recommendation
on labour market integration is considered to have been partially implemented.

As regards progress towards the Europe 2020 targets, it can be
expected that the apprenticeship programme, the reform of upper secondary
education and the new measures targeting immigrants will be the main measures
which will have a positive impact on the 2020 employment target, as well as the
early school leaving target and the target to reduce the number of people at
risk of poverty. Earlier measures might have contributed already to the
improvement in the employment rate since 2009. However, such a conclusion would
be premature given the difficulty of disentangling the effect of a cyclical
upturn in employment from the effect of the government measures.

The use of the European Social Fund in Sweden support numerous
projects that help fight unemployment and social exclusion, especially for the
most vulnerable groups among young people and immigrants. On a critical view,
it is noted that the Swedish government in its budget for 2012 decreased the
limit for outstanding ESF commitments at the end of the year by 20% compared to
2011, which leads to a less effective use of the ESF for this purpose in the
years 2012-2014. This is in contradiction with one of the objectives set out in
the Annual Growth Survey 2012, mobilising and making better use of the
available EU funds to implement the recommendations on the labour market, and
goes against the spirit of the recent Commission's Youth Opportunities
Initiative.

The Swedish social model is characterised by a well-developed
universal social protection system and an active labour market policy.
Expenditure on social protection as a percentage of GDP has constantly been
among the highest in the EU (in 2009 SE: 32.1 %, EU-27: 29.5 %). The
social protection system has remained solid throughout the economic crisis,
reflecting stable public finances. Sweden has not been forced to introduce any
austerity measures in the social protection system. As a result, the combined
at-risk-of poverty and social exclusion rate has been stable over the last few
years (2007: 14.5 %, 2010: 15 %). Sweden is one of the Member States
with the lowest income inequalities (ranking second in 2010, against the EU
average of 23.3 %)[12].

Despite a slight improvement in the overall at-risk-of-poverty and
social-exclusion indicator in 2010, the situation has not improved for some vulnerable
groups. The negative trends concern the elderly (especially women), in-work
poverty for women, child poverty and the impact of social expenditure in
reducing child poverty (see statistical annexes). The issue looks even more
worrying from a longer-term and EU-wide perspective. While the risk of poverty
and social exclusion decreased in the EU over the period 2007-2010 for people
above 65 by 4.7 pps (by 3.4 pps for women), it increased in Sweden by 5.5 pps (by 8.7 pps for women).

The Swedish government’s overall policy objective is strongly
focused on reducing social exclusion through labour market integration.
Increased labour market inclusion for groups with a weak foothold on the labour
market, such as immigrants and young people, will lead to a significant reduction
in social exclusion for those vulnerable groups. This is also the main purpose
of a key measure taken recently to combat social exclusion — the reform of the
reception system for asylum seekers and their families introduced in December
2010. The reform aims to improve the labour market inclusion of immigrants by
shifting responsibility for activation measures from the municipalities to the
Swedish Public Employment Service. The objective is to harmonise the quality of
introduction measures, strengthen personal incentives for taking up jobs and
provide adequate individualised guidance.

However, there are vulnerable groups, such as elderly women with low
pension earnings and single households with children, for whom labour market
inclusion is not always an effective or realistic method of reducing the risk
of poverty. As a result, the overall policy focus on labour market inclusion as
a way of reducing the risk of poverty should be complemented by other policies
as well.

As regards education, early school leaving fell below the 10 %
target in 2010 and continues to decrease. Sweden has thus already reached the
national target set for 2020. The main measure in the fight against early
school leaving has been the implementation of the upper secondary reform beginning
in the 2011-2012 school year, further differentiating the vocational track and
mainstreaming the apprenticeship system to make upper secondary vocational
training more relevant to labour market needs. As regards tertiary education
attainment, Sweden had already exceeded its 2020 target (40-45 %) in 2010,
with 45.8 % of graduates in the 30-34 age group.

Nevertheless, the declining quality of school education, as
illustrated in international test results (OECD PISA in 2009), and the
continuing lack of attractiveness of the teaching profession remain major
points of concern. The government adopted a range of measures to tackle this: a
new Education Act strengthening rights to learning support; new curricula to
better prepare upper secondary school students for the labour market; a
programme for strengthening education in mathematics, natural sciences and
technology; a reform of initial teacher education under the so-called ‛Boost
for teachers‛' initiative; and additional resources for the continuing
professional development of teachers. The high average age of university
entrants, significant drop-out rates from higher education (46 % in 2008)[13]
and the rather late graduation of university students lead to a relatively belated
entry of graduates into the labour market. This accounts for among the highest
cumulative expenditure per student over the average duration of tertiary
studies. The reforms initiated recently and described in the NRP such as the
quality-based resource allocation starting in 2013 should strengthen the role
of higher education institutions in the knowledge triangle. Overall, Sweden has introduced a large number of relevant and ambitious reforms, particularly in
school education. There is, however, a need for better coordination of these
measures, particularly with regard to early school leaving and to reducing the
incidence of dropping out from tertiary education.

3.4.        Structural measures
supporting growth and competitiveness

Sweden ranks among the most competitive economies in
the world, taking into account factors such as labour productivity, knowledge
and skills levels, infrastructure, eco-efficiency, innovation capacity and the
business environment. Sweden is above the EU average in these areas and did not
receive any country-specific recommendations in the field of structural reforms
in 2011.

Research and innovation

Sweden has the second highest level of R&D
expenditure as a share of GDP and is considered to be an innovation leader
according to the Innovation Union Scoreboard. However, several shortcomings
have been identified that hinder further progress in the area of research and
innovation. First of all, the commercialisation of innovative products is
rather weak with the indicator of ’Sales of new to market and new to firm
innovation’ below the EU average and showing a negative trend.[14]
Also, Sweden appears to be lagging behind in creating fast-growing innovative
enterprises. It creates new firms in innovative sectors, but these firms are
not growing to the same extent as in other European countries. The patenting
activity of young firms in Sweden (less than 5 years) is clearly lower than
that of young firms in the United States or other Nordic countries.[15]

The Swedish innovation environment seems to be loosing the ability
to retain and attract business R&D investments and innovation chains.
Business R&D intensity has declined significantly over the last years[16],
largely reflecting reallocation of business R&D investment by large
companies outside Sweden[17]. As a result, progress
towards the national R&D target of 4 % of GDP has ceased, with R&D
intensity declining from a peak of 4.13 % in 2001 to 3.42 % in 2010.
Within the business sector, R&D investment is very much concentrated in a
few large companies[18], which renders the apparently
favourable position of Sweden vulnerable (also in view of the fact that many
big R&D investors in Sweden are now foreign-owned). At the same time, R&D investments in
Small and Medium-sized Enterprises has fallen almost 30% between 2005 and 2009.

Sweden is a relatively small country in population
terms and the Swedish research and innovation system depends on its being integrated
into the expanding European research and innovation system to access knowledge
in strategic areas for the country and to achieve a critical mass. In this
respect, the public sector could make more progress. Currently, only the most
research-intensive universities in Sweden cooperate extensively with
international partners, which means they miss out on the more intensive
cooperation taking place among top universities in other European countries.

Over the last five years, several initiatives have been launched to
enhance the effectiveness of the Swedish research and innovation system, with a
focus on innovation in SMEs through reinforced cooperation with universities
and better access to seed funding and venture capital. Interesting proposals
have also been made more recently for both demand-side measures (i.e.
introducing a new procurement law, fostering innovation-friendly procurement)
and supply-side measures (in particular to fund testing, demonstration
infrastructure and incubators of new research-based products)[19].
A reform of the early-stage financing system, in order to streamline it and
gain synergy effects, is outlined in the NRP. These initiatives are relevant,
but additional value could be produced if these supply-side and demand-side
measures were linked more closely to each other.

The new Innovation Bill, planned for adoption at the end of 2012,
provides an opportunity to address the weaknesses in the Swedish research and
innovation system in a comprehensive way. An effort is needed to restore the
attractiveness of the business environment for private R&I investments by
introducing schemes to encourage young innovative firms to develop new
technologies and innovative solutions and by developing stronger incentives for
science-industry cooperation targeting in particular large firms established in
Sweden. Through a more strategic use of EU Structural Funds for R&D&I,
it should be possible to further develop smart specialisation and international
linkages as well as strengthen co-ordination between national and regional
initiatives[20]. Key initiatives could
include investments in innovative SMEs along the entire innovation value chain
and the swift commercial exploitation of research and innovation results. The
state could also play a stronger brokerage role, fostering research and innovation
partnerships between the business sector and universities and research
institutions.

Environment, energy and transport

Sweden has developed a good mix of measures to
promote energy efficiency, including fiscal, financial, legislative,
information and voluntary instruments. These measures are supported at various
governance levels (national, regional and local) and tackle all sectors of the
economy. Additional energy-saving potential could be identified by examining the
interaction between the systematic use of combined heat and power on the one
hand and building insulation on the other.

Sweden has committed to reduce its greenhouse gas
emissions by 17% (compared to 2005 and only for emissions not covered by the EU
Emission Trading System) by 2020. According to 2011 projections taking into
account existing measures, Sweden is expected to be very close to reaching its
national target. Nevertheless, given the already low level of emissions,
abatement costs are likely to rise in the future, putting emphasis on the
cost-effectiveness of Sweden’s climate change policies. A number of measures
have been adopted recently to cut emissions from the transport sector (e.g.
hike in fuel taxes, new vehicle tax rules), which together with the agriculture
sector are the main producers of GHG emissions in the country.

As regards renewable energy, Sweden is well on track to reach its
commitments under the Europe 2020 strategy (49 % share of renewable energy
in final energy consumption, 10 % share in the transport sector by 2020). As
Sweden is already advanced in the field of renewables, energy efficiency and
carbon emissions, costs of accommodating even higher standards are likely to
rise in the future. The EU structural funds could increasingly be used to help Sweden achieve its targets in these areas.

Despite the increases in energy and CO2 taxes in 2011,
the taxation system still has the potential to shift towards a greener taxation
scheme. In particular, it would be beneficial to address the large number of
exemptions and differentiated tax rates with a view to increasing the
cost-effectiveness and the overall efficiency of environmental taxation[21].
The intention  to carry out a comprehensive survey on potentially
environmentally harmful subsidies,  announced in the NRP, is welcome and should
be pursued to deliver clear proposals on how these subsidies should be
eliminated.

In the waste sector, Sweden has succeeded in achieving a low
landfill rate (1 %). However, given the high incineration rate (49 %),
there is less focus on prevention and diverting waste from incineration to
recycling. This is the result of a deliberate policy to generate energy/heating
and has led to the establishment of high cost infrastructure, which the
authorities feel a need to use. Shifting the focus from incineration to
recycling would not only significantly reduce direct and indirect GHG
emissions, but would also generate benefits in terms of job creation[22].

Energy infrastructure is well developed, although improving the
connection between surplus generation areas in the north of the country and
deficit consumption areas in the south, as well as cross-border connections,
would be worthwhile with a view to improving the stability of the electricity
supply. Notwithstanding the small size of the gas market, total dependence on a
single interconnection and a heavy reliance on foreign storage facilities
increase Sweden’s vulnerability to distortions in gas supply.

The overall situation of the transport infrastructure network is
quite satisfactory. An increasing share of GDP is being invested in transport
infrastructure. Nevertheless, in addition to bottlenecks in the main cities,
one main area of concern is the low level of investment in the maintenance and
upgrading of the Swedish rail system, which has clearly not kept pace with the
increase in traffic over recent years. Capacity is constrained partly because the
network is mostly single track and carries traffic types with different quality
needs. In 2011 Sweden announced that work on railway operation and maintenance
would be stepped up. These challenges should also be addressed in the upcoming proposal
for infrastructure decisions announced in the Swedish NRP.

Internal market and competition

Sweden is one of the Member States that transposed
the Services Directive within the transposition deadline, involving a
considerable number of amendments to national laws. In particular, Sweden has amended its law on foreign branches and has removed the obstacles created by numerous
formalities and a cross-cutting establishment requirement. The Swedish point of
single contact is well installed, but the clarity of the information could be
improved (such as the search function), and it could be made easier for foreign
users to complete the procedure (including developing ways of accepting
foreign-issued e-identification).

Sweden is also a top performer in implementing the digital agenda. It
ranked first out of 142 countries in the Global Information Technology Report
2012 by the World Economic Forum. E-commerce is widely used both in national
on-line shopping (65.7 % of Sweden's population compared to 40.4 % in
the EU in 2010) and in cross-border on-line shopping (12.7 % compared to
8.8 %). For SMEs, Sweden is the best performer with respect to on-line
purchasing (52.6 % compared to 26.4 %) and scores well above the
average for on-line selling (23.5 % compared to 12.8 %).

In the field
of competition, Sweden is one of the Member States that has made the most
progress over the past decade. Nevertheless, there is still scope for further
improvement in several areas. The wide range of commercial activities run by
municipalities in some sectors can result in unfair competition between publicly
owned companies and private actors, especially in public procurement. Although
the Swedish Competition Authority was given ample powers to act against
commercial activities run by public authorities (municipalities), so far these
powers have not been used. Also, there is a need to reinforce internal scrutiny
and compliance mechanisms as regards state aid.

3.5.        Modernisation of public
administration

Swedish public administration is generally regarded as efficient,
providing comprehensive services of a high quality to both citizens and
enterprises. This strong performance is based on a high degree of openness and
transparency in public administration, strong respect for the rule of law and
consensual decision-making. Sweden consistently ranks among the world’s least
corrupt nations (it ranked 4th in the 2011 corruption index published by Transparency
International). Sweden is also one of the leading countries in e-government:
the provision of services to individuals and businesses has reached 100 %[23]; the take-up of e-government services is also high (90 % for
businesses and 68 % for citizens, which is the second highest in the EU);
and the use of e-procurement is well advanced (56 % of municipalities, 50 %
of county councils and 28 % of state authorities were using e-procurement
at the end of 2010).

At the same time, the Swedish authorities are aware that there is
room for improvement in terms of cost-effectiveness, streamlining and
simplification. Setting up a company is case in point as it remains burdensome,
time-consuming and costly in Sweden. In fact, in terms of the number of days
needed to set up a new company Sweden performs worse than most other member
states.

Sweden is currently developing a new strategy with
a view to stepping up and extending e-government, with targets to be reached by
2015 and a long-term vision for 2020. Moreover, the 2010 Bill on public
administration for democracy, participation and growth proposes comprehensive
use by government agencies of e-procurement by 2013, simplified contacts with public administration and possible outsourcing
of certain public administration support functions in order to improve
efficiency and reduce administrative costs. In the Bill, the government also
proposes scaling back provision by public entities of
goods and services on markets in order to keep market distortions to a minimum
and grant private sector providers a level playing field.

Although the administrative burden is not very high in Sweden
compared to other EU countries[24], the Swedish government
is taking measures to make further reductions in the resources which Swedish
businesses, in particular SMEs, need to allocate in order to comply with the rules
and requirements. In 2006, the government set a target to reduce the
administrative burden for businesses by 25 % by 2010 (subsequently
postponed to 2012). As the reduction achieved so far is just over 7 %, the
Swedish government has stepped up its efforts considerably this year by taking
a large number of measures: a simplification programme for 2011-2014; a newly
created ‘forum for better regulation’ consisting of representatives from the
business community, local authorities, county councils, and government agencies
and bodies; a new training programme for improving interaction between local
authorities and enterprises; and several analyses to support and guide future
policy measures. The mandate of the Swedish Better Regulation Council has been
widened and extended until 2014. Furthermore, the Swedish government has
decided to postpone the annual assessment of administrative costs until 2013 and
in the meantime is looking for alternative, less burdensome ways of measuring
administrative costs. In the area of taxation, several measures have been taken
to simplify tax procedures for businesses and individuals (e.g. taxation of
foreign experts).

The measures to reduce the administrative burden are relevant and in
line with the priorities of the 2012 AGS, although it is less certain whether
they will ensure that the target is achieved in 2012.

4.           Overview table

2011 commitments || Summary assessment

Country-specific recommendations (CSRs)

CSR 1: Keep fiscal policy on a path that ensures that the medium-term objective continues to be met. || Sweden has implemented the recommendation only partially. The stance adopted in the Budget Bill for 2012 is considered balanced, reconciling fiscal prudence with a need to counter the economic slowdown. The medium-term objective  was not achieved in 2011, but is likely to be met in 2012-2013. This is mainly due to the fact that the government has lowered the MTO from +1% of GDP to -1% of GDP as of 2012. The Commission estimates the structural balance to have reached reach 0% of GDP in 2011 and to reach 0.3% and 0.4% of GDP in 2012 and 2013, respectively.

CSR 2: Take preventive action to deal with the macroeconomic risks associated with rising house prices and household indebtedness. A broad set of measures could be considered, such as reviews of the mortgage system, including the capital requirements of banks, rent regulation, property taxation and construction permits || Sweden has implemented the recommendation only partially. Although the stabilisation of the housing and mortgage markets makes the implementation of the recommendation less urgent, it remains valid in the long term. The measures taken by the government are going in the right direction, but focus mainly on strengthening the resilience of the financial sector, where the level of ambition is high. Measures to foster prudent lending and diminish the debt bias in the financing of housing investment,  have so far received less attention. The government has taken some initial steps to ease the rent regulation and is considering measures to tackle the constraints in the housing supply.

CSR 3: Monitor and improve the labour market participation of young people and other vulnerable groups. || Sweden has implemented the recommendation only partially. The government has adopted a large number of measures which can be expected to have a positive impact. However, since most of the reforms are not being implemented until 2012, it is too early to assess whether they have actually had any significant effects on the target groups. A political debate has been launched on ways to increase the flexibility at the lower end of the wage scale and to ease the difference in employment protection legislation for temporary and permanent workers. Nevertheless, a more determined effort in these areas  would be warranted to address the challenge. .

Europe 2020 (national targets and progress)

Employment rate target set in the 2011 NRP: Well over 80 % || Employment rate (%) 2010: 78.7 %, 2011: 80% The EU-wide target has been met. Achievement of the more ambitious national target, already attained in 2007-2008, has been hindered by a significant increase in unemployment following the 2008-2009 crisis. Since then, significant progress has been made towards the achievement of the target.

R&D target set in the 2011 NRP: Approximately 4 % GDP || Gross domestic expenditure on R&D (in % of GDP) 2009: 3.61 %, 2010: 3.42 % No progress has been made towards the achievement of the target. The increase in public R&D expenditure as a share of GDP was outweighed by a decrease in business R&D expenditure.

Greenhouse gas emission target set in the 2011 NRP: a) -17 % compared with the 2005 level or b) -40 % compared with the 1990 level || Greenhouse gas emissions: a) base year 2005: 2010: -10.2 % b) base year 1990: 2009: -17 % Progress has been made towards achievement of the target. Sweden is on track to meet the target by 2020.

Renewable energy target set in the 2011 NRP: 49 % || Share of renewable energy in gross final energy consumption: 2009: 47.3 % (Eurostat), 2010: 47.8 % (national RES report) Progress has been made towards achievement of the target. Sweden is on track to meet the target by 2020. The interim target for 2011/2012 was achieved already in 2009.

Energy efficiency — reduction in primary energy consumption by 2020 (in Mtoe): 12.8 Mtoe || n.a. The method for assessing national progress in energy efficiency is currently being discussed by the institutions in the context of the proposed Energy Efficiency Directive. Alternative indicators (e.g. energy intensity) suggest that progress has been made towards achieving the target.

Early school leaving target (in %): 10 % || Early leavers from education and training (percentage of the population aged 18-24 with at most lower secondary education and not in further education or training): 2009: 10.7 %, 2010: 9.7 % The target has been achieved.

Tertiary education target (in %): 40-45 % || Tertiary educational attainment 2009: 43.9 %, 2010: 45.8 % The target has been achieved. It was even exceeded in 2010.

Target on the reduction of population at risk of poverty or social exclusion in number of persons: Reducing the number of people aged 20-64 who are not in the labour force (except full-time students), the long-term unemployed or those on long-term sick leave to well under 14 %. || According to the NRP, the share of the population defined in the target is estimated to be about 13 % of the age group in 2011 which is a reduction by one percentage point compared with 2010. Progress was made towards meeting the target between 2010 and 2011, according to preliminary figures.

5.           Annex

Table I.
Macroeconomic indicators

Table II. Comparison of macroeconomic developments and forecasts

Table III. Composition of the budgetary adjustment

Table IV. Debt dynamics

Table V. Long-term sustainability indicators

Figure I. Medium-term debt projections

Table VI. Taxation indicators

Table VII. Financial market indicators

Table VIII.   Labour market and social indicators

Table IX. Product market performance and policy indicators

Table X.
Indicators on green growth

[1]               SEC(2011)
806 final of 7 June 2011

[2]               The low employment rate for young people could be due
to the fact that a large proportion of them are involved in tertiary education.
At the same time, according to Eurostat, students (who are mostly looking for
employment alongside their studies) represent about half of unemployed youth
(the share is one third for full-time students according to Swedish national
statistics). This pattern seems to be just as significant for the Netherlands, Finland and Denmark. In Sweden, however, the level of youth unemployment is much higher
than in those countries and education appears to absorb young people who would
otherwise be unemployed.

[3]               The employment rate for persons with an upper
secondary or post-secondary education is much higher than for those with an
education below the upper secondary level, whereas the average pay for these
groups is very close. As suggested in the 2010 Wage Formation Report by the
National Institute of Economic Research, high minimum wages may tend to curtail
employment for groups with limited education or low productivity for other
reasons.

[4]               See the OECD Economic Survey for Sweden, 2011.

[5]               Cyclically adjusted balance net of one-off and
temporary measures, recalculated by the Commission services on the basis of the
information provided in the programme, using the commonly agreed methodology

[6]              The standard rate of 25 %
is high, but reduced rates are applied e.g. to food, restaurant and catering
services (12 %), a range of cultural goods and public transport (both 6 %),
and some items are fully exempt.

[7]               See footnote 12.

[8]               Moreover, no Swedish institution was below the
required 5 % core Tier 1 capital following the July 2011 EBA stress test
nor required to comply with the higher minimum core Tier 1 capital ratio of 9 %
of risk-weighted assets following the temporary recapitalisation plan adopted by
the European Council in October 2011.

[9]               The 2011 survey on SME access
to finance shows that only 8 % of companies in Sweden report access to
finance as being the most pressing problem (EU average: 15 %).

[10]             The previous inquiry, which delivered its results in
October 2010, focused on various aspects including housing supply, rent
regulation and mobility in the housing market, but its conclusions were only
very tentative and did not provide concrete recommendations for policy action
in this field.

[11]             For Finland, see Iida Häkkinen
Skans and Tuomas Kosonen, Sänkt moms på frisörverksamhet
och restauranger i Finland: Blev det verkligen lägre priser och högre
sysselsättning?, Ekonomisk Debatt nr 5 2011; Konjunkturinstitutet,
Yttrande på promemorian ‘Sänkt restaurang- och cateringmoms’ (dnr Fi2011/1404).
For France, see e.g. the report from the "Conseil
des Prélèvements Obligatoires", http://www.ccomptes.fr/fr/CPO/documents/divers/Rapport\_de\_synthese\_Entreprises\_et\_niches\_fiscales\_et\_sociales\_071010.pdf
, page 200 and following. Estimates of the effects of a VAT reduction for
restaurants in  Belgium suggest a similar conclusion.

[12]             The risk of poverty is considerably higher for those born
outside the EU (32.4 % in 2010), non-EU citizens (51.3 % in 2010),
the unemployed (48.9 % in 2010), elderly women (21.6 % in 2010) and
single people with dependent children (37.5 %, 2010).

[13]             OECD, Education at a Glance 2010. This includes
students entering single courses who may never have intended to study all the courses
required for a degree, an estimated 40 % in Sweden.

[14]             Innovation Union Scoreboard 2011.

[15]             Innovation Union Competitiveness report 2011.

[16]             R&D financed by business enterprises as a % of GDP
fell from 2.96% in 2001 to 2.12% in 2009, the largest decrease among all EU
Member States. In fact, most world competitors to Sweden increased their
business R&D investment intensity over the same period.

[17]             Inward business R&D expenditure to Sweden decreased by 11% between 2003 and 2007, while outward R&D investment from Sweden increased by 49% over that period. Declining overall business R&D expenditure
between 2007 and 2010 suggest that this trend continued  in the subsequent
period.

[18]             When foreign affiliates in Sweden are also taken into
account, around 65-70 % of private R&D is performed by large companies
while 98 % of all Swedish companies are SMEs. In recent years, employment
growth has no longer been based in multinational firms in Sweden but in small and medium-sized enterprises.

[19]             Vinnova policy VP 2011:04; Vinnova Information VI
2011:09; Erawatch country report 2010.

[20]             EU structural funds can play an important role here as
they provide 40-50 % of public regional support for research and
innovation with a particular focus on SMEs. Large regional disparities in
R&D expenditure should also be taken into account (R&D expenditure at NUTS
2 level ranging from 0.9 % of GDP to 4.7 % of GDP in
2009, thus revealing large variations in proximity to the national
R&D target).

[21]             The impact of the carbon tax on GHG emissions from the
industrial sector has been lowered by exemptions for petroleum, mineral
products and metal industries.

[22]             Limiting energy recovery to
non-recyclable waste could create more than 2.000 jobs and increase the annual
turnover of the waste sector by over EUR 240 million in Sweden. European Commission, Implementing
EU waste legislation for green growth, 2012.

[23] Based on a basket of eight basic services for enterprises and
twelve basic services for citizens.

[24] European Commission, Member States Competitiveness Performance and
Policies 2011.

[Top](#document1)