Sweden's budget watchdog cuts deficit outlook despite higher defence spend

STOCKHOLM (Reuters) -Sweden's budget watchdog on Tuesday nearly halved its public deficit forecast for 2025, predicting deficits will shrink both this year and next as a recovering economy helps offset higher spending on defence.

The National Financial Management Authority's (ESV) now sees public finances running a deficit of 51 billion crowns ($5 billion) or 0.8% of gross domestic product (GDP) this year, against a November forecast of 94 billion crowns or 1.4% of GDP.

In 2024, the deficit was 94 billion crowns or 1.5% of GDP.

Government expenditure is rising relatively fast in the Nordic country due to large increases in spending on defence and the justice system, but income will rise even faster, buoyed by higher tax revenues, the agency said in a statement.

"The economic recovery will pick up speed this year, and next year GDP will increase at a rapid pace," it said, cautioning that the outlook for the European Union country's economy was uncertain due to a turbulent global situation.

ESV predicted the budget deficit would shrink further in 2026, to 19 billion crowns or 0.3% of GDP.

The agency forecast GDP growth of 2.2% this year and of 2.8% next year, compared with 1.0% in 2024.

In October, the government announced plans to ease tight spending rules - dropping a long-standing budget surplus target to instead aim for a balanced budget - as it looks to boost spending on infrastructure and defence.

Sweden, also NATO's newest member state, is alongside other European countries increasing defence spending in response to Russia's three-year-old full-scale invasion of Ukraine and a deteriorating security outlook in Europe as a whole.

($1 = 10.0673 Swedish crowns)

(Reporting by Anna Ringstrom; editing by Essi Lehto and Mark Heinrich)