Finance Minister Elisabeth Svantesson’s (M) message has been clear. The most important thing the government can do to help hard-pressed households is to fight inflation.
“What I and the government can do is pursue a responsible economic policy that does not drive inflation, that is my input,” she told TT.
At the same time, she emphasizes that the state will not be able to compensate for everything.
The government has introduced electricity subsidies and reduced fuel tax to support households. They have also backed down and do not intend to propose a general pause for the amortization requirement. This as the measure would drive inflation, according to Svantesson.
Reduce incentives
What can the politicians actually do to counter the accelerating inflation? Or is there a risk that the situation will worsen if they do too much?
— Most prices, especially those that are rising now, are set in a market where companies and sellers determine the price, says John Hassler, professor at the Institute for International Economics and adds:
— What works if you want to maintain a market economy is to make it less interesting for companies to raise prices. Make it harder to sell by reducing demand – then the companies will not have as strong an incentive to raise prices.
John Hassler, professor of economics at Stockholm University. Here in connection with the presentation of the Riksbank’s economics award 2022. Stock image.
We have not yet seen the effects of the Riksbank’s interest rate increases. That’s what Anna Seim, docent in economics at Stockholm University and member of the Fiscal Policy Council, thinks.
— The increases have reduced demand, but it will decrease even more. Monetary policy affects inflation and economic activity with a lag.
There are more instruments
Historically, governments have used other instruments, in combination with the interest rate weapon, to curb inflation.
— During the world wars there were regulations. Companies were forced to keep a price and not raise it, says Lars Magnusson, professor of economic history at Uppsala University.
Fighting inflation when it is internationally derived – which in today’s global economy is almost inevitable – involves difficulties, he emphasizes.
Anna Seim is on a similar track:
“Part of the inflation we see now is driven by disturbances in the world economy that we can only wait out,” she says.
Rationing has been another means of fighting inflation during wartime. Lars Magnusson describes the measure as effective but extreme, the consequences of which are difficult to see.
He is supported by John Hassler:
— In a war economy, you can switch to rationing, but that is not a long-term solution.
Targeted interventions
The government always needs to pursue a distribution policy and ensure that the hardest hit get help, emphasizes Hassler.
— It does not reduce inflation, but does not have to have major negative effects by increasing inflation too much, provided that not too large groups receive support.
Supporting the weakest households should be a political priority, according to Anna Seim.
— It is important that fiscal and monetary policy do not counteract each other. Fiscal policy must not become too expansive. One idea is targeted efforts towards those with the least margins, such as an extra job tax credit for low-income earners.
— Demand must not be so strong that it drives up inflation. The price increases are likely driven to a large extent by increased costs at the producer level, not by strong demand from low-income households, she says.