Incentives, Indebtedness, and Labor Market Outcomes in the Swedish Debt System

jan. 20, 2026

Rising household debt and financial vulnerability have become increasingly pressing issues in Sweden and across advanced economies. In a recent interview on Ekonomibyrån (The Economy Desk) on SVT (Swedish Television), Paula Roth, researcher at the Swedish House of Finance (SHoF), discusses how current credit markets and debt enforcement systems shape household behavior, financial distress, and long-term economic outcomes.

Drawing on her research, Roth explains why Sweden stands out in its approach to household debt, how generous tax incentives and the normalization of credit-based consumption have contributed to rising indebtedness, and why the design of the debt relief system plays a crucial role for both individuals and society. She also outlines concrete reforms that could strengthen work incentives, improve rehabilitation after financial distress, and reduce the social costs associated with over-indebtedness.

The interview highlights how policy choices around credit, enforcement, and debt relief affect not only household finances, but also labor market participation, mental health, and long-term economic stability.

 

Why Has Credit-Based Consumption Become the Norm?

Roth argues that it is not only the Swedish system that encourages indebtedness, but that this is characteristic of Western societies more broadly, where borrowing for housing and consumption has become the norm. At the same time, she points out that Sweden stands out in several respects. One is that the country has had an unusually generous mortgage interest deduction compared to other countries, where such subsidies have gradually been phased out. Another is the emergence of new actors that have contributed to normalizing credit-based consumption.

 

Does Debt Relief Undermine Work Incentives?

Roth also makes it clear that Sweden’s debt relief system needs reform. She describes how the current system requires over-indebted individuals to live at a subsistence level for five years, with far-reaching consequences.

“It affects the indebted very negatively. Many people leave the labor market entirely during this period and then never come back,” she says.

She highlights the need to shorten the repayment period to three years, in line with Sweden’s Nordic neighbors, to strengthen work incentives. Another key reform concerns how repayment amounts are determined. Today, individuals in debt relief are allowed to keep a fixed amount each month, while any additional income goes directly toward debt repayment. According to Paula, this makes work pointless for many:

“There is basically no incentive to take a job during this period.”

She also points to the unique role of the Swedish Enforcement Authority (Kronofogden). Unlike in many other countries, where debt collection takes place through the courts, a government agency in Sweden manages the entire process. While this makes the system efficient, it also creates distortions.

“It means that some lenders can, in practice, make a living from collecting debts through Kronofogden at a very low cost,” she says.

Roth does see some reasons for optimism going forward, particularly when it comes to consumer credit. She notes that the interest rate cap has been lowered and that supervision of lenders is being strengthened, which may reduce the most problematic forms of lending:

“The most irresponsible lenders may disappear or at least become less common, so there is reason for hope.”