Sweden and other Nordic countries are increasingly being held up as an example for tax-cutting conservatives to follow. But its relative economic success is due to preserving rather than abandoning a social-democratic growth model
Sweden’s finance minister, Andreas Borg, cuts an impressive figure, and not just because he sports a ponytail and earring. He has steered the Swedish economy through troubled times in Europe, avoiding a double-dip recession while keeping its public finances in rude health.
He’s managed this at the same time as cutting corporation tax and expanding earned income tax credits. Little wonder that he has become the latest poster boy of libertarian conservatives like Fraser Nelson. Follow the Nordic path, they urge the UK chancellor: cut taxes and inject some Thatcherite DNA into the body politic.
Unfortunately, a spicing of herrings in mustard does not warm up a cold dish of Misean, Austrian school economics. Sweden’s recent economic history is a more complicated business than the cut-and-paste tax cut portrait penned by conservative commentators.
The foundations for Sweden’s success were laid in the mid-1990s, when the country was reeling from the catastrophic bursting of a giant asset bubble and the collapse of its banks.
From 1994, the Swedish Social Democrats embarked on an aggressive programme of deficit reduction, raising taxes and cutting spending to bring down a huge annual borrowing requirement of 17 per cent of GDP and return the public finances to a surplus. Remarkably, they achieved this by 1998.
The ratio of tax rises to spending cuts in the consolidation was roughly 50:50, but crucially public services that supported employment and growth were relatively protected. Workers were given extensive skills retraining and Sweden’s schools and world-class universal childcare and early learning were spared the axe.
Structural reforms were also enacted: the government reformed the pensions system to guarantee its long-term sustainability, gave the central bank independence and joined the EU. Bank assets were taken into public ownership to be sold at a profit at a later date.
Household deleveraging was rapid, clearing the path to recovery – in sharp contrast to the UK’s recent experience – and when the consolidation was complete, new fiscal rules were enacted to secure the resilience of the public finances against future shocks.
So far from abandoning the social democratic model, these reforms saved it. They laid the foundations for Sweden’s success in the 21st century and provided the broad framework within which the centre-right Moderate party has governed since 2006.
Universal childcare underpins a high female employment rate, which generates strong tax revenues. Spending on skills and welfare to work is prioritised, to minimise long-term unemployment. Labour and product markets are competitive but nonetheless effectively regulated, rather than deregulated.
In recent years, tax credits have been expanded to boost work incentives, rather than across-the-board tax cuts, but the state still takes 45 per cent of GDP in tax revenues.
Indeed, in addition to cutting corporation tax in last year’s budget, Borg announced big investments in infrastructure (including high-speed rail), innovation, science and R&D, vocational and higher education places for young people, and other welfare and social justice measures. It was a deliberately expansionary budget.
Nonetheless, Sweden still faces tough challenges. Its unemployment rate is relatively high, at over 8 per cent, and youth unemployment is running at 25 per cent. Contraction in the eurozone is shrinking its key export markets, forcing highly competitive Swedish manufacturing companies to lay off workers.
Perhaps most worryingly, Sweden’s households have been loading up mortgage debt to keep up with spiralling house prices: household debt now stands at 173 per cent of disposable income, well above the figure of 135 per cent it reached in the early 1990s.
Loan-to-value ratios have been capped at 85 per cent, but the central bank wants to go further and force homeowners to repay capital, and not just interest, on their mortgages. Sweden’s policymakers are getting nervous about the bursting of another asset bubble.
If we want to learn lessons from Sweden it should be these: protect social investment during fiscal consolidations, and prioritise fiscal policies that support employment and growth, but don’t take your eye off the housing market.
Stable public finances and low inflation don’t guarantee economic stability, as we should know.
Nick Pearce is director of the Institute for Public Policy Research. This post first appeared on his blog
