That is hardly the case today, as the Trade Union Confederation, for example, has acknowledged. Their wage negotiations in 1997 started, in fact, from the 2 per cent inflation target. In the assessment of future inflationary pressure, monetary policy in turn must take the labour market situation into account. Wages are of major economic importance: in that the wage bill accounts for almost 70 per cent of value added, the development of wages has a large impact on costs and thus on price formation. Moreover, wage settlements are liable to influence inflation expectations. Wage tendencies are therefore one of the principal variables in any assessment of inflation. However, the difficulties in forecasting wage trends are considerable. The Riksbank does, of course, follow data on wages and unit labour costs; other important indicators include labour shortages in particular industries, wage drift, registered and total unemployment in relation to job vacancies. A central concept in this context is equilibrium unemployment, often referred to by the English acronym NAIRU—the level of unemployment that can be combined with stable inflation. Attempts to push unemployment down below the NAIRU with monetary stimuli are liable to have the sole effect  BIS Review 77/1999  4  of boosting inflation. In other words, the NAIRU is not responsive to an expansionary stabilisation policy. It depends instead on the workings of the labour market, together with demographic changes and technology. Thus, lastingly higher employment cannot be generated by continuously implementing an expansionary monetary policy.
Some comments are therefore called for. One comment concerns the formulation of the budget target. A medium-term average implies that in good years the surplus should be above 2 per cent and by most standards the coming years must be regarded as good. While the economy does admittedly still appear to have some unutilised resources, they will gradually be utilised. Maintaining a surplus above 2 per cent when activity is high means that a smaller surplus can be tolerated when activity is lower. In this way, room is created for the budget to act as an automatic stabiliser. If, instead, the surplus is held mechanically at exactly 2 per cent from year to year, fiscal policy will tend to accentuate cyclical fluctuations and exert a destabilising effect. Another comment concerns the demand effects of an easier fiscal stance in the present situation. The tax changes being discussed seem largely to be unfinanced income tax reductions for low and medium income groups. Judging from what has been indicated to date, a corresponding adjustment of public spending is not envisaged. In that case, the tax cuts would enlarge household income and raise the level of economic activity via increased consumption. That could result in increased inflationary pressure that monetary policy might need to counter. That said, I want to underscore that tax cuts may well be motivated. There are many indications that the Swedish economy would work better if taxes were lower.