Skandinaviska Enskilda Banken AB Series C

Sweden's upcoming general election is pushing a new government into an unprecedented fiscal dilemma, as it shoulders a structurally rising long-term defence budget alongside pressure to expand social welfare spending and ease the cost of living, all amid significantly narrowing fiscal space. After Sweden ended its military neutrality to formally join NATO in March 2024, military spending has surged, with NATO members jointly agreeing to raise defence budgets to 3.5 percent of GDP by 2035, alongside related security spending of a further 1.5 percent. Jens Magnusson, chief economist at SEB, said that this year the government has already implemented reform measures with no funding source worth about 80 billion Swedish kronor, or roughly 8.3 billion US dollars, separate from defence spending and off-budget Ukraine aid of another roughly 45 billion to 50 billion kronor. Meanwhile, public debt, which stood at a low 35 percent of GDP in 2025, is expected to rise to 39 percent this year. Mattias Persson, chief economist at Swedbank, and Jonas Tallberg, a professor of political science at Stockholm University, both pointed out that the next government will have to choose between priorities, with higher defence spending potentially coming at the cost of cuts to the state welfare system or international aid. The race between the centre-left opposition alliance led by the Social Democrats and the previous right-wing coalition government of Prime Minister Ulf Kristersson of the Moderate Party is running close, with both sides competing on promises to ease the cost of living, healthcare and education.