Election 2006: Centre-Right Opposition Victory Signals Shift in Sweden's Political and Economic Landscape

A Tightly Fought Election Swings in Favour of Centre-Right

Swedes yesterday (17 September) voted in favour of a change in government, resulting in the end of Social Democrat (SAP) left-wing domination in the country. Former SAP leader and Prime Minister Göran Persson admitted defeat after results showed the centre-right Alliance for Sweden bloc taking 48.1% of votes, only marginally ahead of the left bloc with 46.2% of votes, in one of the most closely fought elections in decades. Persson also declared he will be steeping down as leader of the SAP, in the wake of the results. The Alliance for Sweden will have a slim majority in parliament with just 178 seats in the 349-seat parliament, a testament to how close the election was.

Sweden’s new Prime Minister is Fredrik Reinfeldt, leader of the Moderate Party, who is credited with having united the four opposition parties ahead of the elections, and of turning the Alliance for Sweden into a credible alternative for the Scandinavian country which is globally championed for its esteemed welfare model. Beneath the gloss of a well-oiled welfare machine, however, lay the quiet disgruntlement of a public increasingly resentful of the lack of jobs and the dependence on state handouts. The Moderates, styling themselves as the "New Moderates", managed to tap into this discontent and cause a formidable political upset. The young and enigmatic Reinfeldt has stopped short of calling for an overhaul of the welfare state, but has instead focused on small changes to the system which would allow lower state benefits but greater incentives for employment. Furthermore, the alliance has pledged a cut in income tax for low-income households, mooting plans to increase youth employment, as well as a raft of privatisations. One issue intentionally left out of the election campaign was immigration, but with the Scandinavian country facing the same challenges as other European nations over the treatment of migrant workers, refugees and asylum seekers, immigration will definitely be a key priority for the new government.

For the Social Democrats and their left-leaning allies, the defeat should be seen as an opportunity for the bloc. Persson’s ten years as prime minister had begun to weigh heavily on the government; although credited with cementing the country's welfare policy and maintaining enviable economic growth, there is no doubt that a measure of complacency had begun to affect the Social Democrats after nearly 90 years of political domination. Also, recent criticisms levelled at the prime minister personally, as well as the entire government over its handling of the 2004 Tsunami disaster, convinced many of the need for a fresh administration, with new ideas and new faces.

Election Unlikely to Disrupt Buoyant Economic Conditions

With the economy already running at full steam, there is arguably little room for any significant further short-term acceleration in growth. Consumer sentiment already remains very high, following modest tax cuts at the beginning of the year and interest rates that remain very low by recent historical standards. Indeed, if anything, victory for the centre-right is likely to cement expectations further that the Sveriges Riksbank will tighten interest rates at the two remaining meetings of the Executive Board this year.

Current expectations of further rate tightening centre on the continuing oil-driven acceleration of inflation, strong domestic demand and concerns over capacity constraints in industry. It is also being driven by concerns over imbalances in the domestic housing market. However, while the krona has strengthened against both the U.S. dollar and euro, reflecting the financial markets' generally positive assessment of the election result, the centre-right coalition's fiscal plans will become a significant factor in the Riksbank's decision-making process in future months. Specifically, proposals to reduce taxes further on the supply side may well act to loosen current supply constraints both in industry and the labour market, and they will almost certainly bolster already buoyant demand conditions. The centre-right have committed themselves to 37 billion kronor (US$5.098 billion) of tax cuts. This will be compounded by forthcoming wage negotiations that are likely to see employees demand above-inflation wage increases.

Nevertheless, the consensual nature of the Swedish polity means that sustained deterioration of the fiscal surplus remains unlikely. Although there may be short-term mismatches in tax cuts and expenditure reductions, there remains a strong commitment towards sustaining fiscal surpluses into the long-term in order to finance future pension liabilities.

Outlook and Implications

It is not inaccurate to say that a new political and economic era is dawning in Sweden after yesterday’s election. For the next four years at least, the centre-right government will have control over the country's policies after decades of left-wing domination. In the 2002 elections, the Moderates were dismally dismissed by the electorate as a conservative racist party; today the party leader is prime minister. Such a swing testifies to Reinfeldt's efforts in successfully re-styling his party as well as uniting the allies to mount a credible challenge to the established leadership. However, the task of forming a government with the four party leaders now begins, and the first test for the coalition partners will be to overcome any tensions over the allocation of portfolios, which can be expected. Nonetheless, having gained a historic victory, the alliance partners will be keen to remain cooperative at least in the immediate aftermath of their victory.

After having capitalised on voter dissatisfaction with the previous government, combined with an effective electoral campaign and an impressive leader in Reinfeldt, the Alliance for Sweden is riding high on its euphoric victory; whether Reinfeldt can deliver on his promises and adapt the Swedish economic model to cope with today's global challenges remains to be seen. Sweden will operate with a transitional government until a new government is formally approved on 6 October.