Overreliance in Automatic Stabilizers? - Sweden’s Fiscal Policy during the Financial Crisis

Abstract: What was the outcome of Sweden’s fiscal policy between 2009 and 2012 and why was it different from forecasts? Research by the OECD during the financial crisis, used by the Swedish Government to illustrate their fiscal policy, suggested that Sweden would have the biggest stimulus of all OECD countries. However, Sweden’s fiscal policy ended up rather modest. By examining the forecasted fiscal policy with the outcome I find that the Government systematically underestimated its income. By using a simple regression I find correlation between the forecast errors in GDP growth and forecast error in budget balance. Also, by looking at specific budget post I show that a big part of the miscalculations comes from overestimating the overall cost of the automatic stabilizers. The research shows that relying on automatic stabilizers as the biggest part of a country’s fiscal policy is problematic as it is dependent on forecasts.