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Sweden adopts austerity plan as nation's boom goes bust

By Juris KazaSpecial to The Christian Science Monitor / May 16, 1985



Stockholm

Swedish consumers discovered this week that, for them, the nation's economic boom has gone bust. The Bank of Sweden and the Social Democratic government of Prime Minister Olof Palme imposed one of the toughest austerity packages in recent memory. It is aimed at drastically reducing private consumption and will be put into effect just four months ahead of a national election.

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The package will boost interest rates to near-record levels on most consumer credit, including home mortgages. It may virtually halt the sale of new cars in Sweden.

Sweden's discount rate was raised to 11.5 percent from 9.5 percent, and the so-called penalty lending rate, for borrowing from the central bank in excess of certain quotas, was increased to 16 percent from 13.5 percent.

Swedish officials said the tough measures were necessary to prevent deterioration of Sweden's balance of payments and to bolster international confidence in the national currency, the krona.

The central bank was especially disturbed by large currency outflows in recent weeks. These had accelerated when a government employees' strike started on May 2, stopping air travel and curtailing import and export shipments.

The average Swede faces overnight increases of some 4 percentage points to 17 or 18 percent on most consumer loans and nonsubsidized mortgages, with credit card interest rates soaring to a record 30 percent.

Buying a new car in Sweden will require a 50 percent down payment, with the rest due in a maximum of 12 monthly installments. Even though many home mortgages are subsidized, the government has doubled the stamp tax charged for registering mortgages and is reducing the amount of subsidized funds available for home loans.

In essence, the rise in the cost of living caused by the austerity measures will consume the tax rebates the Social Democratic government promised during the summer in return for wage restraint by the large blue-collar Swedish Trade Union Confederation.

It also kills hopes for reducing inflation to 3 percent by the end of the year. ``It will be hard to keep it under 7 percent,'' remarked Lars Vinell, chief economist of the Federation of Swedish Industries.

It is not clear how much the ``shock measures,'' as some Swedish newspapers called them, have damaged Mr. Palme's chances for reelection in the fall.

Some commentators say the government, guided by Finance Minister Kjell-Olof Feldt, is confident enough to take tough steps now that it could have put off until after the elections.

But the specter of consumer purchasing power choked off by Europe's highest interest rates may make the Social Democrats' 1985 election slogan ``Sweden on the right path'' ring hollow.

Opposition spokesmen were quick to ridicule the slogan in light of the austerity package, but most conceded that the measures were ``necessary.'' Although opinion polls, taken before the latest economic moves, show a very close race between Sweden's three opposition parties and the Social Democrats, there is no single personality in the non-Socialist bloc who most voters would trust to run a stable coalition.

Torbjorn Falldin, leader of the Center Party and Sweden's prime minister for most of the 1976-1982 non-Socialist interregnum, appears to be on his way out of politics for health reasons.

Ulf Adelsohn, the youthful leader of the conservative Moderate Party, the single largest opposition group, would be most likely to demand the prime minister's office if Palme were voted out, but Mr. Adelsohn is seen as most likely to have disagreements with the other opposition parties.

Moreover, business, generally supportive of conservative parties in many democratic countries, has enjoyed a record earnings boom as a result of the Social Democrats' krona devaluation in 1982 and relatively low rises in labor costs compared to the non-Socialist years.