Should we extend the British love affair with all things Scandinavian – from Ikea to its crime series – by modelling our deficit reduction strategy on Sweden’s?

2011 was a difficult year for the economy and the world is braced for more bad news in 2012. However, in the midst of global financial turmoil, Sweden is emerging as a country in control of its finances.

Net debt as a percentage of GDP has fallen to its lowest level; the economy has experienced good growth (5.7 per cent last year), and government net borrowing has returned to surplus. Meanwhile UK net debt rises further, growth is barely visible, and we will not likely see a budget surplus until, at the earliest, the middle of the next parliament.

So how has Sweden achieved this and what lessons could the UK potentially learn?

• First, the government pursued a prudent fiscal programme throughout the ‘good times’ giving it annual surpluses of 103 and 135 billion Swedish Kroner in 2007 and 2008 respectively. This provided additional financial flexibility when the financial crisis hit.
• Second, Sweden capitalised on its robust services and manufacturing sectors. Since its exports troughed in 2009, Sweden saw exports grow 14% in 2010 and expects a smaller but respectable rise of around 7% in 2011.
• Third, they did not announce any grandiose spending plans for fiscal stimulus, nor launch any knee-jerk initiatives. Sweden has continued to follow a pro-market strategy of privatisation and selling off shares and business subsidiaries to strengthen its balance sheet.
• Fourth, its fiscal policy, designed to reduce the cost of the public sector, led to spending falling below 50% of GDP. By reducing interest rates (causing a fall in household mortgage payments), lowering taxes for low and middle income earners and scrapping inheritance and wealth taxes, households have seen a boost in spending power and been encouraged to work (in turn lowering unemployment benefit payments).

Of course there is always a limit in the degree to which different countries can be compared. Yet Sweden makes a good comparison to the UK, not just for public services like schools. The two countries have similar sized financial and services sectors (as a percentage of GDP), both have an independent currency, and both are inside the EU but outside the Eurozone.

Sweden may not be able to maintain this good run of public finances given its close trade and financial links to the Eurozone and the corrosive European debt crisis, but it is clear that their sound fiscal and monetary policy (not to mention a 68 billion Kroner budget surplus) has helped them to outperform the rest of the Eurozone.

As government spending in the UK has now reached levels higher than in Sweden, but with levels of taxation on a par with those in the US, perhaps the time is right to look to our Nordic neighbours for ideas on how to reform our own economy so we might achieve better levels of economic prosperity.

Lauren Thorpe is research and corporate partnership director at the Reform think tank  www.reform.co.uk