Swedish budget sets out tax cuts as defence spending ramped up

FILE PHOTO: A Swedish flag hangs outside a store in the old town of Stockholm

STOCKHOLM (Reuters) -Sweden's government promised 39 billion crowns ($3.5 billion) in tax cuts and more money for welfare, defence and the criminal justice system in its 2024 budget on Wednesday, but said spending had to be limited to help keep a lid on inflation.

Since taking power last year, the right-of-centre coalition has faced multiple challenges at home and abroad.

Soaring inflation and rising interest rates have left many households struggling and put the brakes on the economy, while Russia's invasion of Ukraine has led Sweden to scramble to shore up its defences and join NATO.

"The economic policy is focused on supporting households, supporting welfare, but at the same time making historic investments both in the judicial system and in defence"," Finance Minister Elisabeth Svantesson said.

After years of strong growth and rising wealth, many households now face mortgage payments that are three times higher than they were at the start of 2022. Home prices have tanked and the commercial real estate sector has also been hit.

Investors have taken fright and the Swedish crown has sunk to its weakest level ever against the euro.

To ease the effects of inflation on those hardest hit by rising prices and interest rates, the government plans to hike in-work tax credits and cut fuel duties.

Local authorities will get an additional 16 billion crowns ($1.43 billion) so they can maintain welfare services while pensioners will see slightly lower taxes.

"If the recession deepens, there is strength in the Swedish finances, which gives us room to act if necessary," Svantesson said.

The government also found more money to boost internal and external security.

At home, gang violence has intensified while uncertainty over NATO accession and Muslim anger over Koran burnings in Sweden has led the security service to raise its assessment of the threat against the country to the second-highest stage indicating a "high level" of danger of an attack.

Svantesson said defence spending would rise next year as Sweden moves to meet NATO's target of 2% of GDP. The government has previously said the total increase will be 27 billion Swedish crowns in 2024.

The police and criminal justice system get an additional boost.

($1 = 11.1357 Swedish crowns)

(Reporting by Simon Johnson and Johan Ahlander, Editing by Nick Zieminski, Niklas Pollard and Hugh Lawson)