definition of general government net lending was changed in the national accounts. during the ten - year period prior to the most recent crisis, the surplus averaged 1. 4 per cent of gdp and it was possible to reduce the gross public debt by almost half in this period. the framework for fiscal policy also includes another essential part, the expenditure ceiling that prescribes an upper limit in swedish kronor for general government expenditure over the coming three years. this has been a decisive factor in contributing to the fall in public expenditure as a percentage of gdp from 56 per cent in 1998 to 50 per cent in 2007. it is important to continue using a surplus target for public finances over the next ten years. there are two main reasons for this. firstly, it will strengthen sweden ’ s ability to manage crises and recessions. if there is a public - finance surplus when a crisis begins, there is little risk that the deficit will exceed the 3 per cent of gdp limit of the growth and stability pact when the crisis is most severe. secondly, averaging a surplus over an economic cycle means that the indebtedness and interest expenditure of the public sector will decrease over time. in a review of the lessons that can be learned from this crisis, olivier blanchard, chief economist at the imf, points to the value of “ fiscal space " in the form of strong public finances in the initial position and mentions that fiscal policy rules may be helpful in this respect. 4 the surplus target is thus a valuable component of the swedish fiscal policy framework. it anchors expectations regarding public finances in such a way that those who are interested in investing in swedish government securities can be relatively certain about how public sector finances will develop in the longer term. it reduces uncertainty regarding the preconditions for saving and investment. the more established the surplus target is perceived to be, the higher will be the credibility of swedish fiscal policy and the lower will be the future interest rates on sweden ’ s central government debt. there is a clear parallel here with the riksbank ’ s inflation target. 5 the more certain households and companies are that inflation will be close to the inflation target, the less time and energy they will need to devote to adapting their savings, investments and wages to inflation, and the fairer price setting in the economy will be. from the riksbank ’ s perspective, it is also clear that monetary policy will be more efficient the more predictable developments in public finances are, and the greater the confidence in the sustainability of

today. at that time, our public finances deteriorated from a surplus of 3 per cent of gdp in 1990 to a deficit of 11 per cent of gdp in 1993. ( slide : general government net lending in sweden ). this put us in a situation with a gross public debt of 84 per cent of gdp, a central government debt of 76 per cent of gdp and interest expenditure amounting to over 6 per cent of gdp in 1996. ( slide : sweden ’ s central government debt and gross public debt ). like the countries in the euro area whose public finances are in a poor state today, sweden had also experienced problems with the development of costs. however, unlike these countries, it was possible for us to limit the loss of competitiveness by means of a depreciation of the currency, just as in the united kingdom today. we also had a long - established pattern of substantial surpluses in public finances in normal times, which probably increased the credibility of our consolidation measures and thus limited our costs for financing the central government debt. at the beginning of the current downturn we had a surplus in public finances of around 4 per cent of gdp in 2007 and it looks as though we will have a deficit of approximately 1 – 2 per cent of gdp in 2010. this is a weakening of the budget balance of the same magnitude as that expected for the euro area, and unlike most other eu countries, it appears that sweden will be able to stay above the stability and growth pact ’ s deficit limit of 3 per cent of gdp. the comparison with the euro area and the united kingdom is striking. ( slide : general government net lending in sweden, the euro area and the united kingdom ). the strong public finances to start with have helped sweden to pursue an expansionary fiscal policy during the crisis without putting the long - term sustainability of public finances at risk, and to keep interest rates down at german levels. ( slide : government bond rates of different countries ). important to have a surplus over the economic cycle one of the reasons why public finances in sweden are so strong is that after the crisis of the 1990s the government and parliament formulated a surplus target for the public sector. public finances were to show a surplus of 2 per cent of gdp over an economic cycle. this was in line with the growth and stability pact in the eu, which among other things meant that public finances should be in balance in the medium term, or show a surplus. this target was changed to 1 per cent of gdp when the