Per Jansson: Is it time for a more active fiscal policy?

How should roles be allocated between monetary policy and fiscal policy in terms of creating the most favourable macroeconomic development possible in Sweden? This question was discussed by Deputy Governor Per Jansson, speaking today at the Riksbank. For quite a long time, the view has been that monetary policy should be the most active party, in order to keep both inflation low and stable and the economy in balance. But could it perhaps be time for fiscal policy to start to play a larger role?

Date: 08/12/2021 08:00

Speaker: Deputy Governor Per Jansson

Monetary policy and fiscal policy are dependent on each other

“Keeping public finances in good order” has often been equated with “making sure that debt does not increase”. When government debt shrinks, it is always perceived as something positive and not as something that creates room for a more expansionary fiscal policy.

In addition, the macroeconomic environment has changed quite a lot in recent decades. The most important change is that the global real equilibrium interest rate has fallen and today is historically low. As a result, many central banks’ policy rates are now at or near their lower bound.

“Monetary policy and fiscal policy are probably more dependent on each other than we usually think, and this dependence has also become even clearer today,” said Mr Jansson.

With a more active fiscal policy, it would be easier to keep inflation at a level that allows monetary policy to counteract economic downturns and high unemployment in the future as well.

Good opportunity to make important public investments

However, there are also reasons other than the development of inflation that suggest that fiscal policy may have to play a more active role in the future.

“If public investments, which, sooner or later, may still need to be made, can be financed at a historically low cost, this would seem like a good opportunity to implement them. And, as we know, the needs in this area are great”, Mr Jansson said.

Sweden has good prerequisites

The prerequisites for allowing fiscal policy to play a more active role differ from country to country. But they are particularly good in Sweden’s case, not least because the public debt is low from an international perspective.

“One idea could be that fiscal policy-makers would announce that they will keep the policy expansionary for a certain period of time according to a predetermined path or until a specific target is achieved. The Swedish Fiscal Policy Council could then be given the task of evaluating policy and its effects during that time," said Mr Jansson.

“It is true that much additional work is required before these thoughts and ideas can be put into practice. Nevertheless, no problem can be solved by turning a blind eye to it instead of dealing with it. This process will be easier if we can have a free and open discussion with the overall goal of making the Swedish economy work as well as possible,” said Mr Jansson in conclusion.

Updated 08/12/2021