The future of Swedish tax cuts

The Swedish government had planed to cut taxes (mainly income taxes) sometime next year, now that looks less certain. With increasingly ruthless austerity measurers in Europe, a slowdown of the American economy and inflation fears in China, demand for Swedish exports is likely to decrease. This has brought down projections for Swedish growth. The Reinfeldt government want to run a small budget surplus, something that might be incompatible with new tax cuts. So which will the government choose, fiscal discipline or tax cuts? Both are likely to appeal to voters in the upcoming election.

Given that Swedish elections in later years have been fought over the issue of high unemployment, I would place my bets on further tax cuts. Giving Swedes a bit more spending money should increase demand in the economy helping to compensate for lost exports. Since the bulk of the tax cuts are likely to be aimed at the income tax, that could also cut unemployment by making work more rewarding. A favorite argument if the Reinfeldt government. But if the economy really is heading for more troubled times the cause of increased unemployment is likely to lie in low demand for workers, and not in the willingness of workers to seek employment. Making it harder to argue that lower income taxes would be especially effective in fighting unemployment. Rather they would simply stimulate aggregate demand leading to increased employment the same as all other tax cuts that leaves tax payers with more money in their wallet.