On Saturday night there will be a final live television debate between Prime Minister Fredrik Reinfeldt who leads the Moderate Party and Social Democrat leader Stefan Löfven. The Alliance has governed for the past four years – since 2010 (they have been in a minority).
Sweden’s forecast economic growth of 1.9 percent this year masks underlying weaknesses. Unemployment has remained stuck around 8 percent, and much higher among the young. The central bank made a surprise cut to interest rates last month in response to signs of deflation.
Besides the fact that between 2006-2014 340 000 jobs were created, the recent slowdown in the growth rate of labor supply observed is a source of concern. “The current slow-down, because of the continued subdued state of the global economy, is likely to be cyclical rather than a sign of a fundamental weakening of the Swedish economy”. This is the picture presented by Anders Borg, the Ministry of Finance´s new economic forecast.
Possibly we are moving into a period of slower productivity growth, but I for one continue to be amazed at the potential for improving the quality of the lives of most people in the world and competitiveness that the IT explosion has already revealed .
It is often forgotten how Sweden was affected by the crisis two decades ago, and how well Sweden went throughout the worst economic crisis. Following its own financial crisis in the early 1990 and eru crisis 2008, subsequent Swedish governments have made policy choices that reversed the country´s previous economic decline. At a time of record public debt-to-GDP among advanced economies during the crisis Sweden is noteworthy for its strong public finances.
The first selective experience is the Structural policies that the Swedish Government has pursued since 2006 that rest on several cornerstones. Having overhauled economic institutions after a devastating crisis in the early 1990s, Sweden rebounded more rapidly from the 2008-10 crisis than other OECD economies. As part of the structural reforms Sweden´s labor market underwent a major transformation. The main objective was to increase labor market participation by shifting the policy focus from passive to active labor markets activities to find the right mix of policies to protect the unemployed while at the same time creating incentives for them to search for a job and helping them find a placement. At the onset of the crisis virtually all OECD economies increased the flexibility of their labor markets to varying degrees to curtail high unemployment and recover output losses. In addition, Sweden saw a smaller decline in employment growth during the crisis than many other OECD countries and among the largest recoveries.
The challenge for today´s economies, particularly for small open economies like Sweden, is therefore to find the right balance. The Swedish experience shows that prudent reforms can foster growth while maintaining social cohesion and an extensive welfare state. With Anders Borg, the centre-right finance minister since 2006,GDP growth of 12.6%, a rise in gross disposable incomes of almost 20%, a budget moving into surplus and a public debt barely above 40% of GDP. Although the tax burden remains high by international standards, top rates have been cut, as have corporate taxes. Taxes on gifts, inheritance, wealth and most property have been scrapped. Few Swedes need now to flee into tax exile. These figures not only outshine Britain and the euro zone; they also eclipse America.
What marks Anders Borg out is how he responded to the financial crash. While most countries in Europe borrowed massively, Borg did not. Since becoming Sweden’s finance minister, his mission has been to pare back government.
His ‘stimulus’ was a permanent tax cut. To critics, this was fiscal lunacy — the so-called ‘punk tax cutting’ agenda. Borg, on the other hand, thought lunacy meant repeating the economics of the 1970s and expecting a different result. Three years on 2011, it was pretty clear who was right.
What even Borg, the successful tax-cutting – finance minister, did not expect was that his tax cut for the low-paid would increase economic growth so much that it has almost entirely paid for itself. The recovery started just in time for the 2010 Swedish election, in which the Conservatives were re-elected for the first time in history. In power, the current government has lowered taxes more than any other country in the Organization for Economic Cooperation and Development. But the total tax take is still high, around 44 percent of economic output. Tax cuts have increased the average Swede’s annual disposable income by almost a month’s wages since 2006.
Tax cuts are not spoken of as an ideological aim, but as a tool to cut unemployment and advance social justice, he says. There was some criticism at the time when borrowing to finance tax cuts. But Sweden could do it, because it was expecting to return to surplus soon. The second advantage of those experience is the solid microeconomic conditions, including a high openness to FDI, and a base of highly competitive multinational firms that positioned Sweden as one of the key beneficiaries of globalization. Free trade has hence long been prioritized by politicians. One could say that Sweden got a head start on globalization.
Part of the center-right’s success has been its acceptance of Sweden’s model for the welfare state. The economy definition of competitiveness focus on understanding the broad range of drivers of prosperity, amenable to policy actions, including both the productivity of the economic system to mobilize the available workforce and the productivity of individual employees in their jobs. Including global economic activity that give a sense of how underlying competitiveness translates into outcomes in the global marketplace, given the ultimately the source of prosperity and the quality of a country as a place to do business or running a company.
Sweden´s continued reforms combined with its high levels of human capital and innovation capacity and its stable macroeconomic conditions place the country among the most innovation-driven economies of the world. Sweden ranks 10th among 144 economies in the World Economic Forum´s 2014 Global Competitiveness Report. It placed 14the among 189 economies in the World Bank Group´s 2013 Ease of Doing Business ranking, suggesting that its business environment is among the most conducive to private business activity. And its productivity level in manufacturing is among the highest, strengthening its global competitiveness (OECD, 2012). There has been some growth in the importance of countries like China, but USA, Germany and Norway remain by far more important. Most exporters are large companies, much in line with other countries, but smaller companies have seen their role in trade increase. The country invests heavily in research, encourages critical thinking from an early age and is open to international influences. This is, for example, the case for patenting intensity, R&D spending relative to GDP, the number of researchers in the labor force, the quality of scientific publications, and the income from licenses and patents.
Sweden has also long tradition of of creative and tenacious scientists, business leaders and entrepreneours, such as Alfred Nobel, and powerful international companies who are keen to change the world have been crucial both to Sweden´s economic development and the Swedes´ self-belief. The country´s strong roots in engineering and industrial technology, combined with a broad environmental awareness among the general public, are no doubt part of the explanation.
Meanwhile, small businesses are constantly emerging, often in clusters around the country´s many universities, bringing new ideas and the Swedish Government is investing extra resources. Creating conditions that enable new businesses domestic or international to develop and grow is an important part of this strategy, linking together research, innovation and commercialization is another. It is also about simplifying rules and policy in order to build effective partnerships at all levels. The level and the profile of these, including entrepreneurship, provide valuable insights for identifying areas of Sweden´s competitiveness profile that are higher prosperity.
Swedish leaders are playing prominent roles in global diplomacy. Sweden’s banks are strong. Real estate is booming. Consumers around the world hang their H&M clothes in Ikea cabinets, download pop music from Spotify, read Swedish thrillers and watch Swedish television dramas. Yet for all that, the center-right government of Prime Minister Fredrik Reinfeldt, 49, is in serious political trouble. And he centre-right government’s achievements go deeper still and there is an even more fundamental points that should be appreciated.
Returning to the economy reforms, the Swedish government has aggressively introduced private market forces into healthcare to improve access, quality, and choices. Although once entirely public, over a quarter of Swedish primary care clinics are now run by the private sector. Sweden’s municipality governments have increased spending on private care contracts by 50% in the past decade.
It is also fact that an average Swedish family already pays nearly $20,000 annually in taxes toward healthcare according to Swedish economist Per Bylund, about 12% of working adults bought private insurance in 2013, a number that has increased by 67% over the last five years. Half a million Swedes now use private insurance, up from 100,000 a decade ago, even though they are already “guaranteed” public healthcare.
Thirty years ago Margaret Thatcher turned Britain into the world’s leading centre of “thinking the unthinkable”. Today that distinction has passed to Sweden. Anders Borg wants in the coming years to regulate private providers more. But, Borg warns loudly against tax rises by the centre-left and some Swedish businessmen are warning about the dangers from the Social Democrats. A bigger risk is that a Social Democrat-led government may stop or reverse public-sector reform.
Given Sweden’s sunny prosperity, one cloud is the weakness of the euro zone, by far Sweden’s biggest market. And Sweden could also lose its reputation in free-market circles in Britain and America for innovative public-sector reform. “Business has much to fear from a red-green administration,” said Anna Kinberg Batra, parliamentary leader of Mr. Reinfeldt’s party, the Moderates, in arguing that a left-leaning coalition could unravel the country’s economic progress.
Jacob Wallenberg, scion of the family whose foundations own huge stakes in Swedish industry — close to 40 percent of the total value of the Swedish stock exchange — has warned that a “massive shift to the left” could prompt entrepreneurs to flee the country. And there is the shadow cast by a belligerent Russia. The centre-right wants to push up defence spending, which many Social Democrats dislike. Within Europe Swedish foreign minister Mr Bildt has been a one-man diplomatic force against Russian aggression.
Thanks to its centre-right government, Sweden has played a bigger part in Europe and on the world stage than its 10m-odd population would seem to justify. Its withdrawal to the wings would be regretted far beyond Stockholm. The four alliance parties have a joint manifesto; the Social Democrats merely say they want to team up with the Greens, but that is unlikely to yield a majority.
The greatest danger lies in Mr Lofven’s ability to form a coalition. The Social Democrats’ voting share is in secular decline, from 45% or so two decades ago to barely 30% now. Their chances of luring any of the alliance parties are small, and they do not want to join the ex-communist left. Nobody will work with the far-right anti-immigrant Sweden Democrats, who may take 10% of the vote, so any coalition is likely once again to be a minority government. Carl Bildt, who was prime minister in 1991-94, suggests that a Social Democrat-led coalition will be fragile and may well not last a full four-year term.
The Alliance government would remain focused on boosting jobs (of 350,000 more private-sector 2014-2020) and new business (Sverigebygget reforms) in Sweden and allowing private companies to play a role in schools and hospitals. Fredrik Reinfeldt might make a fresh start by reshuffling his cabinet or creating new government departments.
Sweden has eight main political parties, so it is very rare for one party to win an election and form a majority government. Fredrik Reinfeldt could stay Prime Minister if the Alliance got enough votes to remain the largest political bloc. Majority building is the whole point of Swedish politics. ‘A Harmonious Democracy’: this term was used by Herbert Tingsten in 1966 to describe Sweden’s ability to resolve conflict and maintain a high standard of living.