Posted by Bill Dorotinsky
In the early 1990's, Sweden faced serious budget and economic woes, with deficits reaching 10 percent of GDP in 1993. After a substantial retrenchment program, Sweden had balanced its budget within about four years. A recent article (2009 Number 3), entitled "," by Alastair Levy and Nick Lovegrove interviews Sweden's former prime minister (and former finance minister) Göran Persson about the lessons from the retrenchment exercise. As countries look ahead towards fiscal retrenchment, the lessons from Sweden come at an opportune time.
Key messages from Mr. Persson include:
• "The electorate must understand that drastic measures are required"
• "a mandate from the voters" is required to succeed
• "You have to make it absolutely clear that you are putting your office at stake"
• "Be in the driver's seat"
• "the consolidation program must be designed so that burdens are shared fairly."
• "..the consolidation program has to be .. a comprehensive package...an ad hoc hodgepodge of measures will only have limited chance of success."
• "It has to be a front-loaded program." (Immediate measures to get early results, rather than delaying the fiscal pain.)
• "Transparency...never play down the effects the effects... remind the public again and again." "..be completely honest with the financial markets..clarify assumptions and calculations. Don't use bookkeeping tricks...always go for conservative estimates."
• A leader has two years until the electorate's patience runs out (Sweden has a parliamentary system)
• "Restoring the health of ...public finances was the prerequisite for preserving the Swedish public sector in the long term.."
• "One third of our program consisted of tax increases, and two-thirds of spending cuts ...in operational budgets...and...legislated levels of welfare transfers."
• "High interest rates made it necessary to regain the confidence of investors all over the world whose perception was that Sweden's generous welfare model was to blame for the crisis...it wasn't until we cut unemployment benefits and got into open conflict with the trade unions that market interest rates started coming down."
• Use the opportunity to improve long-term performance of the public sector.
Mr. Persson describes a four-prong strategy for the consolidation:
1. Cuts in government consumption
2. Liberalization of regulated sectors (telecommunications, mail, railways, infrastructure industries) to improve productivity, service quality, choice, including allowing private and private providers to compete for tax-financed services in health, education, elder and child care.
3. Expand IT to more of the population
4. Upgrade labor force skills by giving people with basic schooling the chance to complete secondary school and qualify for higher education
In terms of government expenditure reductions, Sweden introduced three year expenditure ceilings for each ministry, capping spending. A novelty was allowing ministries to shift spending across the three years as long as they met their final target. Another novelty, after the major spending cuts were complete, was to set an annual productivity target based on private sector levels, reflected in annually tighter budgets.
A few other interesting tidbits:
• Given the acute crisis, no special implementation machinery was set up to monitor progress. In retrospect, he might set up a special unit to do so, and share good practices.
• Efficiency targets encouraged better service delivery and cross-agency collaboration
• The cabinet worked as a team to solve the crisis. Team solidarity and loyalty were key to success.
• Ministries were responsible for their bottom-line, and the finance minister and prime minister did not second-guess them. Ownership of the problem remained with line ministries. Occasional meetings with line ministers may have been needed to help them move forward.
PFM Blog comments
The interview is an interesting vignette on fiscal retrenchment. Many of the lessons ring true from my own experience in the U.S. Office of Management and Budget during the 1980’s and 1990’s. Budgeting is as much art as ‘science.’
We try various analytic techniques in budgeting, from cost-benefit analysis to zero-based budgeting, and these do add value. But, allocating resources to complex systems such as government also has an art to it. For example, using ‘efficiency’ dividends to keep annual pressure on line ministries to economize. Similar pressure can be introduced with simply providing annual budgets that supply less than full inflation costs, or that ‘straight-line’ a budget from the prior year. These can be useful. The nature of bureaucracies is to maintain the status quo and grow (advance their mission). Incentives for economy and efficiency often take second place to delivering on mission objectives.
I recall one case where an agency complained about having its budget straight-lined. As an example, they noted that they could not longer send headquarters-based staff traveling across the country to train field staff. Instead, they prepared videos and other new media for training. Asked if training was less effective, they replied it wasn’t, and was even more effective as it was available on demand, as needed. To me, this was an example of a positive efficiency gain, not a sign of budget hardships endangering mission objectives. The pressure to find alternative, more efficient means of delivering services would not have come without some continual, gentle pressure to reduce costs.
A key challenge is to find the right mix of cuts and revenue increases, and to identify the right programs to eliminate. It is relatively easy to cut spending across the board, or focus on narrow issues such as travel expenses, printing, etc. More important is to identify those programs which, through regulation or subsidies, lock economic resources into less productive uses. Agricultural import protections or subsidies, for example, that raise the domestic price of sugar, and keep human and capital resources tied in sugar production, could be eliminated. This would not only save public funds immediately, but also free the resources for more productive or profitable uses in other sectors. Fiscal retrenchment needs to do more than cut spending, but also create dynamics in the economy that will increase productivity over time. The Swedish example is close to this ideal, though the spending cuts seemed more across the board, there were selected new programs for education of the workforce, which also took some portion of the labor force out of unemployment, and paved the way for more productive work in future.
Budget offices around the world should be busily analyzing spending and regulations, identifying options for making the most of the coming retrenchment exercises.
