STOCKHOLM: Sweden will cut corporate tax rates sharply next year, its government said, joining the country’s central bank in trying to boost an economy increasingly feeling the effects of the euro zone debt crisis.
Announced ahead of a Sept. 20 budget as data showed unemployment unexpectedly rose last month, the cut will put business taxes in Sweden at 22 percent, slightly below the European Union average.
“This improves the conditions for new jobs and investment in Sweden,” the four-party center-right coalition said in a statement.
Sweden’s export-driven economy expanded robustly in the first half of the year but has since started to succumb to falling demand from the euro zone, prompting the central bank cut interest rates to 1.25 percent from 1.50 percent last week.
Data yesterday confirmed that picture, with unemployment rising in August to 7.2 percent, well above the 6.8 percent forecast.
Separate numbers showing the consumer price index rose 0.1 just percent during the month and 0.7 percent on an annual basis showed that the strong crown was keeping inflationary pressure at bay, adding to chances of another cut in borrowing costs before the end of the year.
.”..(The unemployment and inflation data) increases market speculation that more rate cuts will come,” said Michael Grahn, economist at Danske Markets.
That would put help ease pressure on the crown which, despite dipping over the last month, remains near 12-year highs against the euro.
Economists have long argued that Sweden’s robust public finances give the government room to loosen fiscal policy to counteract the falling demand from Europe, where many countries face years of austerity.
Although the country’s budget watchdog expects deficits this year and next, overall state borrowing is expected to fall to below 30 percent of GDP in the coming years — a stark contrast with much of the rest of Europe where debt levels average closer to 90 percent of output.
Bowing to pressure, the government announced earlier this week it would increase spending on infrastructure and research in order to create jobs and boost growth.
It said the reduction in corporate tax, to 22 percent from 26.3 percent, would cost around 16 billion crowns ($2.43 billion) out of total budget spending and tax measures worth around 23 billion.
The average corporate tax rate is 23.4 percent in the European Union and 25.5 percent in Organization for Economic Co-operation and Development (OECD) states.
Analysts said the effect of the Swedish tax cut would not be felt immediately.
“You could expect that GDP will be a couple or a few tenths of a percentage point higher over the longer term,” said Jesper Hansson, director of forecasting at Sweden’s National Institute of Economic Research (NIER).
Over a two-year horizon, data points to slowing economic output as well as inflation well below the central bank’s target of 2 percent in a couple of years’ time.
Many analysts believe that points to further rate cuts, despite the central bank saying last week it expected base rates to stay at 1.25 percent until the middle of next year before starting to rise.
“We think the Riksbank will cut in December,” said Annika Winsth, Chief Economist at Nordea.
Many economists also expect GDP for the second quarter to be revised lower this week, from initial estimates in July that put growth at a very healthy 1.4 percent quarter-on-quarter and 2.3 percent on the year.
SEB, for instance. believes those numbers will be trimmed to 1.0 percent and 2.0 percent.
That would likely further weaken the crown, which fell to around 8.54 to the euro yesterday from 8.50 before the data.
SEB head of fixed income research Jussi Hiljanen said the market is pricing in a 34 percent chance of a rate cut at the next meeting, and expects a repo rate of 1.0 percent at the end of the year.
The bank publishes its next decision on rates on Oct. 25.