By Anders Åslund
To
Brits, Sweden with its tightly regulated social welfare state is often a byword
for socialism. But in the last two decades the country has been transformed.
today it offers a flexible and dynamic European model with ever falling public
expenditure, lower taxes, economic growth and budget surpluses.
After
many years of absence from the Swedish debate, I attended a conference on the
Swedish economy in the southern city of Malmö in May, organized by Swedbank.
The 180 speakers represented the full range of Swedish views, which have moved
amazingly far to the free-market right, not least social democrats and trade
union leaders. Key values are competition, openness and efficiency, while
social and environmental values remain. The idea is not to abolish social
welfare but to make it more efficient through competition among private
providers. A new consensus has emerged on having a social welfare society
rather than a social welfare state.
The
changes have been dramatic. While Sweden’s public expenditure has fallen by
one-fifth of gross domestic product since 1993, between 2000 and 2009 Britain’s
public expenditure skyrocketed by 15 per cent. This has brought Swedish and
British public spending to a similar level, but Sweden’s is still steadily
falling. Swedish taxes have been cut and her markets have opened up. The Social
Democratic Party was in power from 1932 until 1976, and again from 1994 until
2006, but Sweden was actually quite a liberal market economy until 1968. After
a century of superior growth, its GDP per capita was the third highest in the
world.
But
in 1968 left-wing madness took over. Our economic success had been too great,
making the government take high economic growth as a given, and the left-wing
wind that blew through the world in the late 1960s was particularly strong in
Sweden. But the decisive reason was the election of the extreme socialist Olof
Palme as prime minister in 1969. He dominated Swedish politics until he was
murdered on the street in Stockholm in 1986. His murder remains unsolved, but
it became a turning point for Swedish politics.
Palme ruled with great force. From 1970 until 1989, he raised taxes,
including wealth tax, to more than 100 per cent of income for the wealthy,
while social security exploded. Palme undermined the rule of law through
retroactive legislation and arbitrary state intervention. A major scheme for gradual
nationalisation of Swedish corporations through a punitive tax on their
profits, using the money to buy their shares, was adopted.
Arguably, Sweden is the only old nation that has never gone through a revolution, and the people stayed obedient and peaceful in the face of this onslaught. Private initiative was the victim. Since everybody was paid full wages when taking sick leave, Swedes recorded more sick days than any other nation. The truly wealthy emigrated en masse whereas others worked less. Two decades of low growth ensued, and by 1990 GDP per capita had fallen to 18th in the world. Swedes started feeling poor during their holidays abroad. As elsewhere, Keynesian policies failed, and the country entered a cycle of rising inflation, devaluation and unemployment. In 1990, crisis hit. The country suffered a severe real-estate and bank crash that reduced GDP by 6 per cent in 1991-93. Prime real estate prices collapsed by 50 per cent in 1990. In 1992, like Britain, Sweden was forced into an uncontrolled devaluation of its currency. Unemployment surged and so did public expenditure that peaked at 71 per cent of GDP in 1993, when the budget deficit reached 11 per cent of GDP.
Finally,
in September 1991, the social democrats lost an election and a real non-socialist
government under Carl Bildt came into office from 1991 to 1994. Although it was
a four-party minority government, it took many radical decisions and broke the
trend. It turned the country around. Sweden had been influenced by the free
market ideology of Ronald Reagan and Margaret Thatcher in the 1980s. In
particular Timbro, a free-market think tank financed by the Swedish Employers’
Confederation (SAF), caused a huge shift in political thinking. Right-wing
social democrats, who controlled the public finances, systematically
deregulated all the most complicated financial markets that left-wingers did
not understand.
Swedish
reforms have been many, systematic, and comprehensive. The immediate concern
was the budget deficit. In the 1990s, Sweden’s budget deficit was 13 per cent
of GDP, with public expenditure cuts of 8 per cent of GDP and tax hikes of 5
per cent of GDP. Sweden’s public debt was gradually reduced from 73 per cent of
GDP in 1996 to 38 per cent of GDP in 2011. The government trimmed all kinds of
social security payments to reasonable levels. Sickness leave has fallen by
half since employees are no longer paid from the first day or in full. Today,
Sweden has regular budget surpluses, although tax revenues have been reduced by
9 per cent of GDP from 1994 until 2011. Sweden’s main scourge was tax. In 1990,
the social democratic government actually cut sky-high marginal income tax from
90 per cent to 50 per cent. The current government has decreased taxes every
year and abolished the wealth tax. Inheritance tax and gift tax are also gone.
A corporate profit tax of 26 per cent may seem reasonable, but tax competition
is fierce in this part of Europe, as most East European countries have slashed
corporate taxes to 15-19 per cent. Business wants to reduce the corporate
profit tax to 20 per cent.
One
of the greatest reliefs is the simplification of tax administration. Since the
tax reforms of 1990 abolished almost all deductions, while cutting rates, tax
declarations have become extremely simple. Ninety per cent of taxpayers simply
confirm with a phone message that the declaration automatically prepared by the
tax authorities for them is correct. Pensions have been subject to a major
reform, giving everybody a pension in accordance with their contributions plus
a minimum pension for all. As a consequence, the Swedish pension system is
actuarially correct without any pay-as-you-go system or implicit pension debt.
It is also transparent so that all can see how large a retirement capital they
have saved, and to a considerable extent they can choose when and how to invest
it and access it.
The
Swedish school system, Palme’s original bailiwick, was badly ravaged by
left-wing reforms of the 1960s and 1970s. Today, all pupils are entitled to
school vouchers of equal value for each child of a certain age. Their parents
can allocate this school voucher to any school the child is qualified to enter.
As a result, while in the 1970s Sweden had only four private schools, one-fifth
of Swedish secondary schools are now private, some for profit, others
cooperatives or non-profit foundations. Yet, in international school
comparisons, Sweden lags behind Finland that never carried out any foolish
left-wing reforms.
In
1995, Sweden joined the European Union in order to safeguard the rule of law.
In the bad old days, the Social Democratic Party regularly appointed its
partisan top civil servants as supreme court judges. Being within the
jurisdiction of the European Court of Justice, means that the prospects of
winning against the Swedish government have improved greatly. After the
devaluation of 1992, Sweden adopted a floating exchange rate and inflation
targeting. The Riksbank used to be little more than a subdepartment of the
ministry of finance, but now it is independent. Today Sweden has persistently
one of the lowest inflation rates in Europe. In 2003, a referendum dismissed
euro adoption.
One
of the first decisions of the Bildt government was to abolish the wage-earners’
funds (sharing company profits with employees) and stop all nationalisation. By
and large, Sweden has followed Margaret Thatcher’s policy of privatisation,
privatising piecemeal when market conditions are conducive.
A
tedious but important task is deregulation. Swedish governments have quietly
deregulated one market after another, contributing to greater economic
dynamism. The annual centralised wage
bargaining between the Trade Union Confederation (LO) and SAF was the pride of
the old Swedish model. But in the 1970s it led to inflation and strikes, and
today this system is long gone. Wage bargaining is still collective, but it is
becoming increasingly decentralised. Wage inflation is no longer a concern and
strikes are extremely rare. The employers have won, but real wages are rising
with productivity. As everywhere, trade unions are losing members, money, and
power. The Trade Union Confederation has adjusted, its chair declaring
recently: ‘We want flexibility on the labour market.’
As
the Thatcher revolution exemplified, real ideological victory is when your
opponents steal your clothes. In 1994, the social democrats under Göran Persson
returned to power and stayed until 2006. Although they complained about all the
cuts the non-socialist government had undertaken and carried out few reforms,
they did not revoke the reforms but completed fiscal tightening. It was
actually Persson who abolished the inheritance and gift taxes.
In 2006, four non-socialist parties formed a coalition government with Fredrik Reinfeldt as prime minister. Finance Minister Anders Borg, with his trademark pony-tail and earring, has led further reforms. After having taken Sweden successfully through the global financial crisis, this government was Reelected in 2010, and the Financial Times named Borg Europe’s best finance minister last year.
Keynesianism
remains disliked in Sweden. Before the global financial crisis Sweden had a
budget surplus on average of 2.5 per cent of GDP in the years 2004 7. After a
minimal budget deficit in 2009, it has once again a budget surplus. Sweden
remains, like Germany and Finland, highly dependent on exports, and its GDP
fell by 5 per cent in 2009, but it rebounded by 6 per cent in 2010 and 4 per
cent in 2011, and the current account surplus is substantial. Sweden’s credit
default swaps are lower than Germany’s. The only concerns are the euro crisis
depressing demand, and unemployment, which hovers around 7.5 per cent.
Swedes
shake their heads when they see the economic policy in euro crisis countries.
They take their cue from their own crisis in the early 1990s and call for far
more expenditure cuts and structural reforms. Finance Minister Borg argues
against more expansionary policy in Sweden in case the euro crisis should lead
to a real meltdown. The right-wing drift of the much reduced Social Democratic
Party continues, making it reminiscent of New Labour. Its brand-new leader,
Stefan Löfven, came to prominence during the global financial crisis, when he
and the metalworkers’ union agreed to major wage cuts to safeguard their real
incomes in the long run. The social democrats have not only joined the free
market consensus, but seem to attack the current government from the right,
demanding a better business environment. Gone are demands for the restoration
of social benefits.
Opinion polls have rewarded the social democrats for their
right turn with sharply improved ratings. The left-wing intellectuals are also
gone. The old socialist think tanks have closed down. The Centre for Labour
Market Studies was a state institution, and the non-socialist government closed
it, since it did not generate research but left-wing propaganda. The Trade
Union Organisation had a sophisticated research institute, which it eliminated
for not being sufficiently political. The trade union economists, who dominated
the Swedish economic debate in the 1970s and 1980s, have been replaced by bank
economists. The free-market right has won the debate and maintains substantial
think tanks in Stockholm. Their main problem is a lack of resistance.
Sweden
is not alone. Developments are similar in the other Scandinavian countries, the
Baltic countries, and Poland. The Swedish about turn is the most dramatic.
While its direction is clear, much remains to be done. The Baltic states look
very attractive with public expenditures around 35 per cent of GDP and low,
flat income taxes. They are a source of inspiration for their Scandinavian
neighbours. In the last two years, five incumbent EU governments have been
re-elected, namely centre-right governments in Sweden, Finland, Estonia, Latvia
and Poland, showing that the new North European conservatism enjoys popular
support.
'Welfare' Sweden's Free-Market Turnaround
Not so long ago, Sweden could claim world leadership in unmitigated Keynesian economics, with a 90 percent marginal tax rate and a welfare state second to none.
Now Swedes look at the conflict between the U.S. and German examples over whether more spending or more austerity is the key to financial salvation, and for them the choice is easy: Germany was right. Northern Europe harbors no sympathy for the spendthrifts of Southern Europe.
Americans still think of Sweden as a tightly regulated social-welfare state, but in the last two decades the country has been reformed. Public spending has fallen by no less than one-fifth of gross domestic product, taxes have dropped and markets have opened up.
The situation is similar in the other Scandinavian countries, the Baltic nations and Poland. But no turnabout has been as dramatic as Sweden’s.
From 1970 until 1989, taxes rose exorbitantly, killing private initiative, while entitlements became excessive. Laws were often altered and became unpredictable. As a consequence, Sweden endured two decades of low growth. In 1991-93, the country suffered a severe crash in real estate and banking that reduced GDP by 6 percent. Public spending had surged to 71.7 percent of GDP in 1993, and the budget deficit reached 11 percent of GDP.
Turning Point
The combination of the crisis and the non-socialist government under Carl Bildt from 1991 to 1994 broke the trend and turned the country around. In 1994, the Social Democrats returned to power and stayed until 2006. Instead of revoking the changes, they completed the fiscal tightening. In 2006, a non-socialist government returned, and Finance Minister Anders Borg, with his trademark ponytail and earring, has led further reforms. Sweden successfully weathered the global financial crisis that started in 2008, and the Financial Times named Borg Europe’s best finance minister last year.
Before 2009, Sweden had a budget surplus, and it has one again. For the past two years, economic growth has been 4 percent on average, and the current-account surplus was 6.7 percent in 2011. The only concerns are the depressed demand for exports caused by the current euro crisis and an unemployment rate that is about 7.5 percent.
Sweden’s traditional scourge is taxes, which used to be the highest in the world. The current government has cut them every year and abolished wealth taxes. Inheritance and gift taxes are also gone. Until 1990, the maximum marginal income tax rate was 90 percent. Today, it is 56.5 percent. That is still one of the world’s highest, after Belgium’s 59.4 and there is strong public support for a cut to 50 percent.
The 26 percent tax on corporate profits may seem reasonable from an American perspective, but Swedish business leaders want to reduce it to 20 percent. Tax competition is fierce in some parts of Europe. Most East European countries, for example, have slashed corporate taxes to 15-19 percent.
In the bad old days, the annual centralized-wage bargaining between the Trade Union Confederation and the Swedish Employers’ Confederation was a prized custom. But in the 1970s, this system led to both inflation and strikes. Today, it is long gone. Wage bargaining is still collective, but it is decentralized. Wage inflation is no longer a concern and strikes are extremely rare. The employers have won, but real wages are rising with productivity, so the workers are benefiting, as well. As everywhere, trade unions are losing members, money and power.
The combination of the crisis and the non-socialist government under Carl Bildt from 1991 to 1994 broke the trend and turned the country around. In 1994, the Social Democrats returned to power and stayed until 2006. Instead of revoking the changes, they completed the fiscal tightening. In 2006, a non-socialist government returned, and Finance Minister Anders Borg, with his trademark ponytail and earring, has led further reforms. Sweden successfully weathered the global financial crisis that started in 2008, and the Financial Times named Borg Europe’s best finance minister last year.
Before 2009, Sweden had a budget surplus, and it has one again. For the past two years, economic growth has been 4 percent on average, and the current-account surplus was 6.7 percent in 2011. The only concerns are the depressed demand for exports caused by the current euro crisis and an unemployment rate that is about 7.5 percent.
Sweden’s traditional scourge is taxes, which used to be the highest in the world. The current government has cut them every year and abolished wealth taxes. Inheritance and gift taxes are also gone. Until 1990, the maximum marginal income tax rate was 90 percent. Today, it is 56.5 percent. That is still one of the world’s highest, after Belgium’s 59.4 and there is strong public support for a cut to 50 percent.
The 26 percent tax on corporate profits may seem reasonable from an American perspective, but Swedish business leaders want to reduce it to 20 percent. Tax competition is fierce in some parts of Europe. Most East European countries, for example, have slashed corporate taxes to 15-19 percent.
In the bad old days, the annual centralized-wage bargaining between the Trade Union Confederation and the Swedish Employers’ Confederation was a prized custom. But in the 1970s, this system led to both inflation and strikes. Today, it is long gone. Wage bargaining is still collective, but it is decentralized. Wage inflation is no longer a concern and strikes are extremely rare. The employers have won, but real wages are rising with productivity, so the workers are benefiting, as well. As everywhere, trade unions are losing members, money and power.
Debt Averse
Sweden has belonged to the European Union since 1995, but it isn’t a member of the euro area, and the exchange rate of its krona floats freely. Finance Minister Borg argues against a more expansionary policy in Sweden in case Europe faces a real meltdown. After the Keynesian financial and monetary stimulus in the 1970s and ’80s, which led to inflation, repeated devaluations and low growth, Swedes believe in fiscal discipline. They are scared of huge national debt and budget deficits -- especially at the levels they are in the U.S.
Where are the left-wing intellectuals to challenge this new order? They have disappeared. The old socialist research organizations have closed down. The Center for Labor Market Studies was a state institution that generated propaganda, not research, and the government closed it. The Trade Union Confederation had a sophisticated research institute, which it eliminated for not being sufficiently political.
The union economists, who dominated Swedish economic debate in the 1970s and ’80s, have been replaced by bank economists. The free-market right has influential research centers in Stockholm.
After many years of absence from the debate, I attended a conference on the Swedish economy in the southern city of Malmo last month. Swedbank, a large bank, was the organizer, and the 180 speakers represented the full range of Swedish views. I was amazed to hear how far the consensus had moved to the free-market right, even among Social Democrats and trade-union leaders. The values are competition, openness and efficiency, while social and environmental values remain -- a social-welfare society without the social-welfare state. The idea is to make it more efficient through competition among private providers.
The name of the conference said it all: “Growth Days.” Wanja Lundby-Wedin, the president of the Trade Union Confederation, declared without hesitation: “We want flexibility in the labor market.” She complained that the media no longer pay attention to the labor market. The reason is that it functions so well.
During the global financial crisis, the metalworkers’ union quietly agreed to major wage cuts to safeguard their real incomes in the long run. The leader of that union, Stefan Lofven, has just been elected chairman of the Social Democratic Workers’ Party.
Sweden has belonged to the European Union since 1995, but it isn’t a member of the euro area, and the exchange rate of its krona floats freely. Finance Minister Borg argues against a more expansionary policy in Sweden in case Europe faces a real meltdown. After the Keynesian financial and monetary stimulus in the 1970s and ’80s, which led to inflation, repeated devaluations and low growth, Swedes believe in fiscal discipline. They are scared of huge national debt and budget deficits -- especially at the levels they are in the U.S.
Where are the left-wing intellectuals to challenge this new order? They have disappeared. The old socialist research organizations have closed down. The Center for Labor Market Studies was a state institution that generated propaganda, not research, and the government closed it. The Trade Union Confederation had a sophisticated research institute, which it eliminated for not being sufficiently political.
The union economists, who dominated Swedish economic debate in the 1970s and ’80s, have been replaced by bank economists. The free-market right has influential research centers in Stockholm.
After many years of absence from the debate, I attended a conference on the Swedish economy in the southern city of Malmo last month. Swedbank, a large bank, was the organizer, and the 180 speakers represented the full range of Swedish views. I was amazed to hear how far the consensus had moved to the free-market right, even among Social Democrats and trade-union leaders. The values are competition, openness and efficiency, while social and environmental values remain -- a social-welfare society without the social-welfare state. The idea is to make it more efficient through competition among private providers.
The name of the conference said it all: “Growth Days.” Wanja Lundby-Wedin, the president of the Trade Union Confederation, declared without hesitation: “We want flexibility in the labor market.” She complained that the media no longer pay attention to the labor market. The reason is that it functions so well.
During the global financial crisis, the metalworkers’ union quietly agreed to major wage cuts to safeguard their real incomes in the long run. The leader of that union, Stefan Lofven, has just been elected chairman of the Social Democratic Workers’ Party.
Moving Right
The Social Democrats haven’t only joined the free-market consensus, but seem to attack the current government from the right, pushing for a better business environment. Gone are demands for the restoration of social benefits. Opinion polls have rewarded the Social Democrats for their right turn with sharply improved ratings.
Sweden is still offering good social welfare, but more efficiently and sensibly and increasingly through the private sector. This model of falling taxes and public spending is rapidly proliferating from the north of Europe toward the south, and the northern Europeans have little tolerance for the statist conservatism and fiscal negligence of Southern Europe. Nor do the Swedes understand the fiscal irresponsibility of the U.S., while they still admire American research and innovation.
Anders Åslund is an Oxford University-trained, Swedish economist with a particular specialty in economic transition from centrally-planned to market economies. Åslund served as an economic adviser to the governments of Kyrgyzstan, Russia, and Ukraine and from 2003 was director of the Russian and Eurasian Program at the Carnegie Endowment for International Peace. Åslund was an advocate of and advisor in the controversial "shock therapy" measures that were applied to the Russian economy following the end of communism. Åslund has been a senior fellow at the Washington-based Peterson Institute since 2006. He is also the co-chair of the Kyiv School of Economics Board of Trustees.
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