The corresponding figure for Sweden was a surplus of over 1 per cent; in line with the so-called surplus target.4 The much stronger state of public finances than in many other countries was largely a consequence of the fiscal policy framework that has gradually been developed since the 1990s.5 This put Sweden in a much better initial position in terms of its public finances when the financial crisis began. Fiscal policy contributes to stabilising business cycle fluctuations without any specific decisions being made through the so-called automatic stabilisers; that is through the fact that tax revenues fall and expenditure for various grants and benefits increases automatically when economic activity declines and unemployment increases.6 However, in addition to this, active decisions can also be made that affect revenues and expenditure. Despite the severe downturn in 2008–2009, public net lending in Sweden fell to only –1 per cent of GDP in 2009. This is much less than in the euro area, the United Kingdom and the United States (see Figure 6). Public indebtedness has increased substantially in the United States and in many European countries in recent years, partly as a result of the automatic stabilisers and partly as result of government intervention in the financial sector to deal with systemically-important banks that have experienced problems. In these countries, the scope to influence the economy using fiscal-policy stimulation measures is therefore very limited today.
That is why when the Bank was fundamentally reformed after the crisis, the procedures and structures of the MPC were largely replicated in the Bank’s two new policy committees, the FPC and the PRC. Crucially, all the Bank’s committees have access to the Bank’s information and analysis, all are well-informed about each other’s reaction functions and all can coordinate their policies when appropriate. The Bank’s Committees are independent but not isolated. The second lesson of the past two decades has been the importance of the flexibility in flexible inflation targeting. While the inflation target applies at all times, the remit has always acknowledged that inflation may deviate temporarily from the target on account of shocks. Since 2013, it has explicitly recognised that in exceptional circumstances, bringing inflation back to target too rapidly could cause undesirable volatility in output and employment. In exceptional circumstances like today when the economy is facing profound structural change, the MPC can extend the horizon over which it returns inflation to target from above in order to balance the effects on jobs and activity. After all, even though monetary policy cannot prevent the weaker real income growth likely to accompany the transition to new trading arrangements with the EU, it can influence how this hit to incomes is distributed between job losses and price rises. This brings me to my final point: while carefully circumscribed independence is highly effective in delivering price and financial stability, it cannot deliver lasting prosperity and it cannot solve broader societal challenges.