Swedish reforms have been many, systematic, and comprehensive

A Swedish Lesson 

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 re-elected 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.