By Charles Duxbury

STOCKHOLM--Sweden's finance minister Saturday cut the country's economic forecasts, citing the negative effect on exports of slower growth abroad, and said fiscal policy would continue to be used to support the economy both this year and next.

Anders Borg told reporters that public spending cuts and tax increases would ultimately be needed to strengthen state finances but not until the economy resumes strong growth, likely in two to three years' time.

Mr. Borg cut Sweden's gross domestic product growth forecast this year to 1.9% from the 2.5% expected as recently as early July. He said growth next year would be 3% compared with the previously forecast 3.1%.

The state of Sweden's economy is in sharp focus as a general election nears.Swedes go to the polls Sep. 14 and Mr. Borg and the center left Social Democrat shadow finance minister, Magdalena Andersson, are sparring over who can best lead the economy out of its long slowdown.

Sweden's economy returned to growth in the second quarter of this year, boosted by rising household consumption, but the 0.2% upswing was smaller than analysts had expected.

Sweden's economy, like much of Europe, remains in a slow and uneven recovery with domestic consumption just about offsetting muted demand for Swedish goods overseas.

Over the summer the economic outlook across Europe and in the U.S. has become bleaker, the finance minister said.

"These developments affect Swedish exports and willingness to invest," Mr. Borg said.

He said that the leaders of the current center right government, which has led Sweden for eight years, had agreed on a range of potential ways of increasing public revenue that could be used to strengthen state finances later in the next mandate, if it is reelected.

These include a levy on banks and increasing taxes on tobacco and alcohol.

These measures would need to raise about 25 billion kronor ($3.62 billion), or 0.5% of GDP, in 2017 and 2018 to return the budget to surplus.

Mr. Borg also highlighted the added cost of an increasing stream of migrants from war zones such as Syria as a further stress on public finances.

He repeated the government line that Sweden remains willing to take its share of people fleeing conflicts but that it must accept and plan for the financial cost this incurs over the short term.

Write to Charles Duxbury at charles.duxbury@wsj.com

(END) Dow Jones Newswires

August 23, 2014 11:29 ET (15:29 GMT)

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