I have also had reason to go over how fiscal policy has been managed, since leaving the Ministry of Finance in 1997 to become head of the National Institute of Economic Research and later General Director of Statistics Sweden in 1999. In June 1999, Finance Minister Bo Ringholm appointed me to assess the reformed budget process. The budget process had been reformed in stages since the end of the 1980s. Following the assessment and with broad political agreement, a Budget Act came into force on 1 January 1997. It contained regulations on, for instance, an expenditure ceiling and guidelines for public expenditure. The main conclusion of the assessment was that the new budget process had functioned well. It had contributed to public expenditure as a percentage of GDP being reduced significantly and to public sector financial saving being turned around from a large deficit to a surplus. Of course, there had been some creative accounting to bring public expenditure under the ceiling, but this was on a relatively small scale. The changeover in exchange rate and monetary policy In 1992, when the fixed exchange rate for the krona could no longer be defended, and we changed over to a floating exchange rate, Sweden found itself in a situation where it had not been since the 1930s. The krona was floating and the fixed exchange rate could no longer function as a nominal anchor for monetary policy.
I have since had reason to go through what happened when confidence was restored in the Swedish economy and economic policy. Despite the decision on budget consolidation essentially being taken by the Government and Parliament in autumn 1994, it took some time before various figures believed it would succeed. The first international recognition of our policy came from the European Commission in spring 1995. I accompanied Göran Persson to Brussels and gave an account of Sweden’s convergence programme to Giovanni Ravasio, who was one of the leading economists at the Commission. Each member state of the EU was to draw up a convergence programme that would show what policy they intended to conduct to achieve stable public finances, low inflation and low interest rates. The Swedish convergence programme was aimed at achieving balance in public finances in 1998, and had the broad support of all of the parties in Parliament with the exception of the Left Party. Ravasio was convinced that the programme was sustainable. 4  BIS Review 21/2006  It was possible to see in the financial markets that the interest rate differential between Swedish and German long-term bonds began to decline in spring 1995 when the Swedish convergence programme had been decided and even more so in autumn 1995, when it had been approved by the EU’s finance ministers. For the Riksbank it took until the beginning of 1996 before short-term interest rates began to be cut. The krona was still weak during 1995 and inflation was close to 3 per cent.