Sweden Maintains Surplus, Cuts Taxes

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The Swedish ETF (NYSEARCA:EWD) has been acting better and should get a boost from another tax cut by the center-right ruling coalition.

The center-right coalition inherited a strong economy and solid public finances in 2006 from the Social Democrats, who had ruled for 12 years. The election was won on a platform to increase employment and the government has used cuts in taxes and benefits to increase work incentives. It also initiated a privatization program in invigorate the economy and raise capital.

Robert Anderson of the FT noted that this is the third budget in a row the government will cut tax rates in a country that is one of the most highly taxed in the world. At the same time it will increase public spending to bolster its credentials as a defender of the welfare state – a key concern for many Swedes.

Anders Borg, the finance minister, insisted on Monday that the budget would remain in surplus. The budget surplus is forecast to fall from 2.8% this year to 1.1% in 2009 and 1.6% in 2010. Employment has jumped under the new administration, but paradoxically, the unemployment rate has edged up adding to the electorate's unease about the economy.

“We should be able to manage to post a budget surplus even if we have to revise down growth considerably,” he told journalists after presenting the budget to parliament.

The government expects the economy to grow 1.5% this year, 1.3% in 2009 and 3.1% in 2010, though analysts are more pessimistic. Sweden has maintained good growth but its export-oriented economy is becoming more affected by the global slowdown. About 70% of Sweden's exports are to Europe.

Corporate taxes will be cut by nearly Skr16bn by reducing the rate from 28% to 26% and by lowering employers’ social security contributions by one percentage point.

The benefit cuts, though minimal, have hurt the government’s support, giving the Social Democrats an almost 20-point margin over the Moderates, the main party in the four-party coalition.

Party leaders hope that the new tax cuts will help close that gap by the general election in autumn 2010 but weakening economic growth and rising unemployment give them a huge mountain to climb.

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