A predictable monetary policy, focused on a clearly defined inflation target, provides good guidance for wage negotiations. One of the main reasons why wage formation did not function satisfactorily during most of the 1980s was probably that stabilisation policy did not work. Inflation exceeded the official target on several occasions in that period and the labour market organisations had difficulty in discerning the rules of the game. One example of this is the government ambition of bringing inflation down in the mid-1980s: a crisis package was presented in 1983, aimed at inflation rates of 4% in 1994 and 3% in 1995; when inflation exceeded these targets, the employee organisations considered that a 5% ceiling on wage increases was no longer acceptable. Today’s confidence in the Riksbank’s current inflation target facilitates wage negotiations. The 1997 wage round, for instance, took the 2% inflation target as a starting point. The development of wages is always a central factor in inflation assessments, but the difficulties involved in forecasting wages are considerable. The indicators used by the Riksbank include data on wages and unit labour costs, shortage figures (bottlenecks) at industry level, wage drift and unemployment relative to unfilled job vacancies. Another factor of importance for monetary policy is the equilibrium level of unemployment, that is, the level of unemployment that is compatible with stable inflation. Attempts to push unemployment down below the equilibrium level with the aid of monetary stimuli are liable to just boost inflation. Maintaining an expansionary monetary stance cannot therefore generate permanently higher employment.
This calls for an adjustment of demand to the economy’s productive capacity. It is important that structural measures which primarily improve the workings of the economy are implemented in good time. The good consumption trend can then be met by rising output and high growth can be maintained without this necessarily leading to unduly high inflation. As I have already made clear on several occasions, I consider that tax cuts, in tune with the established guidelines for budget policy, are motivated. The tax-to-GDP ratio has risen in recent years as a consequence of the growth of private consumption and rising wage bills; today the ratio is above 50%. The Swedish economy would probably function better with lower taxes. The reforms that are needed in the tax system – as well as those I consider should occur in the labour market – can be arranged, however, in such a way that they promote the aims of stabilisation policy. Tax cuts in Sweden are probably needed that confer long-term benefits on both the supply and the demand side of the economy; a long-term tax reform with those ambitions would be desirable. In the present situation, however, with growth seemingly reaching around 3.5% this year and 3% in 2000, tax cuts and labour market reforms that primarily favour the supply side would increase the opportunities for good growth without contributing to increased inflationary pressure. That would lessen the risk of overheating and facilitate the interaction of fiscal and monetary policies.