This consists of three parts: an expenditure ceiling entailing that the Riksbank annually sets up an upper limit for nominal government expenditure for the next three years, a surplus target requiring public finances to have a surplus of one per cent of GDP over an economic cycle1 and a stipulation that municipal and county council budgets may not have deficits. This framework has worked well. Unlike many other countries, Sweden was able to enter the most recent financial crisis with a large public finance surplus. Secondly, the monetary policy regime has been changed. Instead of a fixed exchange rate, we now have a floating exchange rate and an inflation target. After the fixed exchange rate was abandoned in November 1992, the Riksbank decided in January 1993 on a new “nominal anchor” in the form of an inflation target of 2 per cent, to apply from 1995. The new monetary policy regime has worked significantly better than the old one with the fixed exchange rate. Inflation has decreased considerably since the 1970s and 1980s (see Figure 3). In addition, this has not been at the cost of lower average GDP growth than previously. On the contrary, since the mid-1990s, GDP growth has been higher than it was in the 1970s and 1980s. Thirdly, and perhaps not as widely-known, wage formation has improved since the mid1990s. The changes had already started by the early 1990s.
Our assessment was that there is a need to continue to raise the repo rate in order to stabilise inflation at a level close to the inflation target of 2 per cent and to avoid too high a level of resource utilisation in the future (see Figure 11). However, as usual, we would like to add that uncertainty concerning the future is great and the interest rate path we have calculated is a forecast, not a promise. Wage formation will probably continue to work well in the years ahead The conditions are good for wage formation to continue to work well in the years ahead, just as it has since the mid-1990s. This is also the assumption made in the Riksbank’s forecasts from April. The rapid improvement of the labour market means that the central agreements concluded in the autumn and next year are expected to reach higher levels than the agreements concluded last year. Wage increases over and above the central agreements (“wage drift”) are also expected to contribute towards slightly faster wage increases. The Riksbank’s assessment is that overall hourly wages will increase by about 3.5 per cent per year in 2012–2013, which is compatible with a CPIF inflation rate (inflation excluding interest rate changes) of close to 2 per cent at the end of the forecast period.3 But all forecasts are uncertain. This also applies to wage forecasts. It is normally easier to make good forecasts for the development of wages than it is for inflation.