A weaker exchange rate than we assume or a stronger increase in consumption could result in higher inflation. The opposite effect could come from, for example, better productivity growth or a different picture of resource utilisation. For the Riksbank it is therefore important continuously to assess new information that may provide guidance about the path of inflation. 3. Two questions The picture of Sweden’s economy I have painted thus far is relatively bright. This is warranted. The economy has gone through a deep recession after the policy realignment in the BIS Review 68/1997  -5-  early 1990s. Difficult adjustments have been made and we are now beginning to see the results. There are many resemblances with Denmark and other countries that have experienced similar processes of adjustment earlier. In every case it has taken time for the situation to become more stable and for households and firms to recover confidence. However, the bright picture must not blind us to the continued presence of serious challenges for economic policy. For one thing there is the importance of securing sound government finance in the long run. For another there is the situation in the labour market. I choose to raise these two questions because what happens with fiscal policy and in the labour market is of great consequence for the Riksbank’s ability to safeguard the value of money. It would therefore be almost a dereliction of duty not to place these matters on the agenda as clearly and distinctly as we are able.
This restricts the future freedom of action in economic policy and means that there is a risk of fiscal policy in practice having a destabilising effect. This is particularly the case in that, with high revenue and spending ratios, the Swedish budget is sensitive to cyclical factors. Seen from this angle the Government’s target of a 2 per cent budget surplus over the economic cycle appears reasonable, though there is no academic foundation for a quantified level of ambition. There may be grounds for strategic tax cuts to improve the long-term growth potential. But in the light of the experience with government finance in recent decades a warning should be issued against tax cuts without parallel cuts in spending. Weak employment The labour market trends in recent years have been bleak. Although annual economic growth since 1993 has averaged 2.7 per cent, employment has not risen. This indicates that a considerable proportion of unemployment is structural in the sense that the level is liable to remain high even if activity continues to improve. The difficulty in generating new jobs is not confined to Sweden; it is a problem we have in common with much of Europe. But there are countries in Europe that have succeeded in turning the employment curve upwards since the mid 1980s. I am thinking in particular of the Netherlands, where employment, after a long period of stagnation, has been increased by 20 to 25 per cent since the mid 1980s.