Carl Johan von Seth: So you borrow SEK 300 billion

Swedish defense policy has begun a time travel. It goes against the days of the Cold War and Tage Erlander. Not since the 1960s has defense appropriations as high as the latest target levels: 3.5 percent of GDP.

This is the figure that the government and other assessors expect to be NATO’s new expenditure requirements. Formal decision is expected later this year.

Those ambitions now draw about Swedish fiscal policy. The renovation will overshadow all other politics during the rest of the 2020s.

The National Institute of Economic Research estimates that the increase in ambition by rage overpower what remains of the decade’s reform space, ie the margin that arises from the fact that the state’s revenue usually grows faster than expenses.

Therefore, the current government (or next) cannot be paid by the increased defense appropriations in small, unnoticed chews. The military cost mountain requires a strategy. Either increased taxes, lower expenses, loans – or a combination of the three.

The block -crossing direction Now points to loans as the main lifeline.

The Social Democrats have proposed a special defense fund with SEK 250 billion at the checkout. The government parties, in turn, have agreed on a model which means that the state borrows 300 billion extra.

It’s not small potatoes. The National Debt Office’s latest figures show that Swedish government debt is currently just under SEK 1,200 billion. To add 300 billion on top of it is noticeable.

But even a fully credit -funded renovation still seems to be undramatic for Swedish state finances. Borrowing would be significantly more sensible than, for example, the deficits the state made the years after the euro crisis in 2011 (see graphic).

According to the National Institute of Economic Research’s calculations Should the public debt, where, for example, the municipalities’ loans also count, rise to 40 percent of Sweden’s GDP in just under ten years. But it is not enough to disrupt Sweden’s position as one of the EU’s least indebted countries.

The National Institute of Economic Research’s calculation also leans somewhat to the pessimistic direction. Swedbank’s macroeconomer counts more optimistic, with greater stimulus effects of a large loan -financed renovation.

Building new regiments, hiring soldiers and buying ammunition provides a temporary push to the Swedish economy. This means that the investments to a certain, uncertain proportion pay themselves.

Interest rates then, they can be affected? At least in theory, a rising government debt risks pushing up the state’s loan rates. Which in turn usually raises loan costs for companies and households.

Over the past month, we have had two interesting events and a non-event in the interest rate market that may say something about that.

Swedish interest rates increased clearly in connection with Germany launching a large loan package in early March. However, absolutely nothing happened when the Swedish government followed shortly afterwards with its 300 billion model.

But since Donald Trump’s big toll chaos began, the Swedish interest rate has collapsed.

Conclusions of it should be drawn gently. But the pattern indicates that no lender in the financial markets is currently particularly concerned about Sweden’s plans. What Germany does is strangely more important.

And perhaps European indebtedness can be facilitated by the world’s appetite to finance the US’s large deficit is now decreasing rapidly. International investors are looking for new, safe places to pour money in.

The trend speaks for Swedish government bonds.

The big question marks that Rather, it remains political.

Very recently, the parties agreed on a balance target for public finances. They have thus banned themselves from borrowing to permanent reforms, as extensive upgrading is.

How is it connected? Hardly at all.

From a financial obstacle, there are no acute obstacles to a temporary defense loan. The fiscal double morality is a bigger problem.

Read more:

Kristersson: 300 billion extra to the defense

S about the defense initiative: « The long -term funding is crucial »