Whoever wins Sunday’s Swedish general election will face an extraordinarily difficult fiscal equation, with structurally high defense spending that not only increases demands on the welfare state but also reduces the room to pay for it.
The challenge comes as Russia’s war in Ukraine enters its fifth year and uncertainty over U.S. President Donald Trump’s commitment to European security increases pressure on Ukraine to shoulder more of its own defense burden.
But neither Russia nor Trump attracted much attention during the campaign. Voters are primarily focused on domestic concerns such as health care, schools and household finances, even though economists have warned that the incoming government will have far less room to deliver on its promises.
“As we normally do in election campaigns, there are a lot of campaign promises,” SEB chief economist Jens Magnusson told CNBC. “But I think if these promises match reality after the election, we’re going to see a pretty severe crash.”
Domestic issues dominate the vote, while policy space is limited as the next government inherits fiscal and security commitments.
Sweden’s centre-left opposition party, led by the Social Democratic Party, has held a significant lead in most opinion polls heading into the election. However, the gap has narrowed as the current government led by Ulf Kristersson from the Moderate Party gained support from the Swedish people.
The government is supported by the far-right Sweden Democrats, but the center-left has refused to cooperate, and the formation of a post-election coalition remains up in the air.
“We’re going to have to prioritize defense spending for quite some time,” Magnuson said. “We have to prioritize Ukraine. We can’t continue to cut taxes and increase spending, only to borrow money to cover the difference.”
The changed security environment
Sweden joined NATO in March 2024, abandoning more than two centuries of military non-alignment following Russia’s full-scale invasion of Ukraine.
Last year, NATO members agreed to significantly increase defense spending to 3.5% of GDP by 2035, with a further 1.5% increase in defense and security spending.
According to the Stockholm International Peace Research Institute, Swedish military spending rose sharply from 2022 to 2025 as the country embarked on a major rearmament.
Despite these changes, foreign policy remains largely absent from election debates. Political scientists say this is not because security has become less important, but because there are relatively fewer disagreements among the major political parties over Russia, NATO, or continued support for Ukraine.
“The signal that is being sent by virtually all political parties is that Swedish voters need to get used to defense spending being a much larger part of the budget,” Stockholm University political science professor Jonas Tollberg told CNBC.
“The question is not whether Sweden should invest in defense itself, but how it should invest in defense,” he said.
Therefore, the next administration will be faced with the question of how to ultimately finance ever-increasing defense spending.
“The increased level of defense spending that we see in Sweden and in many other parts of Europe would have to come at some sacrifice, typically aspects related to the welfare state and, by extension, foreign aid,” Tollberg said.
Matthias Persson, chief economist at Swedbank, similarly acknowledged the trade-off between defense and welfare spending, but noted that policymakers see security as a prerequisite for maintaining the welfare state.
“If we don’t have secure borders, we don’t have welfare,” Persson said, adding that ultimately scarce resources must be prioritized.
russia and trump
Although Russia remains the fundamental driver of Sweden’s rearmament, President Trump’s approach to NATO has added another dimension.
As European governments build their capabilities to deter Russia, they are also preparing for the possibility that they will have to shoulder the continent’s security burden themselves.
Tallberg said part of Sweden’s defense investments are aimed at building the capabilities needed to deter a potential Russian invasion. The other is aimed at strengthening the “European pillar of NATO” at a time when European allies are less certain they can count on America’s continued commitment to the alliance.
Magnusson similarly cautioned against attributing Sweden’s defense buildup primarily to Trump. He said Russia’s invasion of Ukraine and Sweden’s subsequent NATO membership would have boosted defense spending anyway, although pressure from the U.S. government spurred the change.
“It’s a pretty troubling situation,” Magnusson said. “I don’t think you can blame everything on Trump, but he’s certainly not helping.”
President Trump’s trade policies are a new source of uncertainty for Sweden’s small, export-dependent economy, but Magnusson and Persson said the impact so far has not been as severe as initially feared.
And Trump himself is unlikely to decide many votes on Sunday.
“Swedes are not going to vote because of the impact that Donald Trump will have on Sweden,” Tallberg said, adding that the two parties “have essentially the same ideas about what Swedish foreign policy should be.”
limited financial space
Sweden goes into the election in a relatively strong fiscal position. Government debt remains low by international standards at 35% in 2025, and is expected to rise to 39% this year, while Swedish households’ disposable income remains steady.
However, both SEB and Swedbank say the next government will have much more room to make reforms without spending money than in recent years.
Mr. Magnusson said the government had spent about 80 billion Swedish krona ($8.3 billion) on unbudgeted reforms this year, as well as an additional 45 billion to 50 billion kronor in defense spending and aid to Ukraine outside the normal fiscal framework.
This approach has allowed Sweden to increase domestic spending and reduce taxes while funding security efforts. But Magnusson said that cannot continue indefinitely.
He said the increase in defense spending is a structural change that he expects to continue for at least the next five to 10 years. Ultimately, he said, that means raising taxes, cutting other spending or taking on more debt.
Swedbank’s Persson also said Sweden can currently afford to maintain its welfare state, increase defense spending and maintain a healthy public finances. But he argued that defense spending needs to be brought back within the country’s regular budget process over the next few years.
This fiscal constraint conflicts with a campaign focused on domestic spending.
Jan Teorer, a political science professor at Stockholm University, said foreign policy had historically played little role in determining Swedish elections. This situation remains, even though NATO membership represents a historic break with the country’s long tradition of military non-alignment.
Rather, “this looks like it could be more of a welfare election than previous elections,” Teorelle told CNBC.
He said immigration and law and order remain important to voters, but welfare issues are becoming more important to voters.
At the same time, both SEB and Swedbank point to strong household finances, creating a new contradiction in an election dominated by promises aimed at easing pressure on voters’ wallets.
“In both Sweden and the United States, households typically believe that inflation is much higher than it actually is,” Persson said.
Teorel pointed to measures introduced by the government to cushion household budgets from the economic impact of the US-Iranian war and the turmoil around the Strait of Hormuz, and suggested that such interventions may have helped push purchasing power further onto the political agenda.
“Maybe it started a snowball and other parties caught up,” Teorel added.
It may be easier to make pledges before an election than to make them happen afterward.
“Whoever is actually making these promises will have to soften them to some extent after the election,” Magnusson said.
