HOW I SOLVED SWEDEN’S FINANCE PROBLEMS

In 1994 Sweden was mired in a deep economic crisis. Unemployment was high. The state debt was at 80 percent of the gross domestic product. Today the country is in a sound condition. The prime Minister explains his concept.

By Goran Persson

[This article published in: DIE ZEIT 33/2005 is translated from the German on the World Wide Web,  http://zeus.zeit.de/text/2005/33/Schweden. Goran Persson was the Swedish minister of finance until 1996 and Prime Minister since 1996.]


When the social democratic government began its work in 1994, Sweden was mired in a serious economic crisis. Never before in the modern history of the country were so many people unemployed. The deficit of public finances amounted to 13 percent. State debts had doubled within a few years to over 80 percent of the gross domestic product. The West lost confidence in the Swedish economy, which was reflected in extremely high interest rates. The new government had to radically restore trust in the Swedish economy.

Before the 1994 election, the social democrats did not hide the fact that unpopular measures were necessary to master the crisis. The fact is we won the election with the promise of extensive tax increases and gigantic austerity measures – knowing that our lofty welfare ambitions could only be realized with healthy state finances.

Our program included an increase of the income tax and contributions for health- and pension funds. We lowered the payment levels for children’s allowances and parents’ benefits. Prerequisites for claims to housing assistance were tightened as well as regulations for housing grants for pensioners. Pensions and development funds do not rise parallel to inflation any more. In addition, we raised the capital tax. In times of economic decline, the principle of solidarian justice must be in force. Everyone should contribute according to one’s possibilities. Promises of enormously higher taxes did not frighten voters. The deep crisis of the country is a partial explanation for their acceptance.

According to several studies in Sweden, there is a great understanding about the connection between taxes and a well-functioning welfare system. The readiness to pay taxes is comparatively high because people know that the funds benefit the common sector: the education system, nursing and care of the aged, services open to everyone. Of course, taxes also arouse displeasure and the – occasionally justified – criticism that the public sector does not work satisfactorily. People recognize that a social welfare model cannot exist without high taxes.

Swedish conservatives seem to have accepted this after years of missionizing for drastic tax cuts. Following a series of election defeats, they realized they could not take on another election this way. Now they have skillfully adjusted their message and played down their desire for tax cuts.

The welfare model enjoys great legitimacy in Sweden today. This model is based on high public spending and includes a strong redistribution between different groups with the goal of creating security for everyone, not only for a few. The argument is often heard that globalization requires lower taxes and a restriction of social spending. This is ideology. An ambitious welfare policy is very compatible with free trade and openness. High taxes levied in the scope of a rational tax system not saddling production with excessive burdens do not stand in the way of an essential growth.

In the past ten years, Sweden has posted a growth of nearly three percent. In 2005 the growth will be twice as high as the average in the Euro-zone. Sweden has low interests. Its very low inflation strengthens real wages and purchasing power. Moreover the income differences in Sweden have now diminished for the third year in a row. Sweden has fewer unemployed and more employed than the countries of the Euro-zone although unemployment and underemployment present great problems for the future. Sweden has strong public finances today.

Sometimes I compare the Swedish model with a bumblebee. With its heavy body and delicate wings, it actually should not be able to fly – and yet it does. We have high taxes, a large public sector and a strong union movement. Nevertheless, Sweden soars to new heights. This is also true for the other Nordic states. We have high tax burdens and a comprehensive welfare policy along with healthy growth and high competitiveness.

The degree of redistribution in a society is mainly determined by the political conditions and traditions, not by globalization. In addition, many social services – like education, nursing and care of the aged and the environment – create favorable production conditions. In such a society, people face changes openly.

With the laborious reorganization process in the 1990s, we saved the Swedish welfare model and created the basis for strong economic development. One of the great challenges will now be financing the welfare model in a time of aging populations. We share the demographic questions with many governments in Europe. When young Europeans are asked how many children they would like, the answer on the average is 2.4. However they actually only have 1.2 children. In other words, every second planned child in Europe is not born. In Sweden, we have noted a change in the trend for two years. More couples are venturing a life with children again thanks to o0ur well-developed childcare and generous parental insurance systems.

I believe in our welfare model. This model survived the crisis of the nineties and will help us master the demographic challenges.