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Home Opinion Sweden’s fight for survival

Sweden’s fight for survival

Katrine Kielos - 10 January 2012

Budget consolidation became a critical ideological victory for Swedish social democracy in the aftermath of the 1990s financial crisis

The authors of the pamphlet “In the black Labour” argue that the Labour party needs to put fiscal sustainability at the core of the party’s agenda to secure social justice. The Swedish social democrats did just that in the 1990s and managed to win three elections. In politics respect is a hard currency to earn.

When the Swedish financial crisis peaked in the autumn of 1992, with repo rates at 500%, experts and politicians abroad announced the death of “The Swedish model”. Sweden had the largest deficit of any OECD country and in 1994 there were rumours that the International Monetary Fund would come in and take over. For the social democrats who came back to power in 1994, the budget consolidation they took on became a fight for the survival of the Swedish welfare state. Restoring the health of public finances was the prerequisite for preserving the social model they believed in.

After four years, the government managed to get public finances in surplus and in the decade that followed Sweden had a higher average growth rate than both the EU average and the OECD average.

Economically, the situation the UK faces today is different. Budget consolidation in a small open economy at a time when the rest of Europe is doing fine is one thing. Budget consolidation in a large economy next to a continent full of centre-right governments who all embrace austerity whether they need it or not is something very different.

Additionally, when you're a small country with a tax burden of over 50%, like Sweden, you get the benefit of the doubt from the financial markets. As the consolidation gained results, Sweden was rewarded with lower interest rates. The fiscal contraction was balanced by a monetary stimulus. Today things are different. Politically, however, there are lessons Labour in the UK and other social democratic parties could take from the Swedish experience.

Restoring the health of public finances is the prerequisite for preserving the public sector in the long term

If a conservative government cannot keep public finances in order it will be taken as proof of their incompetence. If a centre-left government cannot keep public finances in order it will be taken as proof that the whole idea of a generous welfare state is unsustainable.

That is why centre-left governments need to take fiscal stability so seriously. Sound public finances are not only the basis for a well-functioning economy, with low inflation and high increases in real wages. What is at stake is the perception of what is possible.

In the end it's about national freedom and faith in democracy

A country with deficit and debt problems is constantly monitored by the financial markets. The former Swedish prime minister Göran Persson always tells the story of how he, as finance minister, had to travel to London, New York and Frankfurt to meet with “young sneering boys in expensive suits”. When these people from the financial industry questioned the size of Swedish unemployment benefits he could not tell them it was none of their business – because it was. A country that each and every day has to borrow money, either to service the debt or to finance the deficit, is in the hands of its creditors.

This means that power shifts from the open chambers of the people’s representatives to the closed rooms of the financial markets. If nothing is done, citizens will sooner or later lose respect for the political system.

Be open about the fact that it will hurt

The social democrats won the 1994 election promising deeper cuts and sharper tax increases than any other party. The centre-left can do this because, unlike the right, they can’t be accused of wanting to decrease the size of the welfare state for ideological reasons. Reminding the public again and again that the measures will hurt was also key to staying in control of the process when the cuts became real for ordinary people.

Everyone should share the burdens

Public support for tough policies quickly deteriorates if they are not perceived as fair. Expenditure cuts must be balanced with tax increases for the better off.  

Sweden unfortunately had to cut pensions, sick-leave compensation and unemployment benefits significantly. It hurt people who already had small margins, only had a small net effect on the budget and reduced domestic demand. It was, however, necessary to regain confidence among investors. Only when the social democrats did something they absolutely did not want to do did the markets believe that they were serious about slashing the deficit.

Use the law of small numbers

During the Swedish consolidation a flat 11% was taken from all government expenditures with only a few exceptions. The ministry of finance and the prime minister's office should cut just as much as everyone else. By presenting the measures together, it became clear to all interest groups that they were not the only ones being asked to make sacrifices and that it was not personal.

Try to spare education

The argument during the Swedish consolidation was that it was better to cut down on benefits than to cut down on schools. You can live with having less money for a couple of years – it's much harder to compensate a child for poor education.

Invest in people

In 1997 the government introduced the largest adult education programme ever. People with basic schooling got the chance to complete a secondary education that would qualify them for university. An employed worker got the equivalent of the unemployment benefit if he or she entered the programme and if the employer agreed to replace him or her with an unemployed person. The employer’s cost was unchanged, and the state’s cost was limited to the education. More than 10% of the workforce seized the opportunity. The policy eased the pain of unemployment and increased competitiveness by lifting the average competence level of the workforce.

Introduce strategic policies directed at future growth

In order to introduce information technology to broad layers of the population, the government introduced a scheme that allowed people to obtain a home computer through a very favourable leasing agreement with their employers. Computer penetration soon outpaced every other country in the world and it's no coincidence that Sweden went on to produce companies such as Spotify and Skype.

Undertake the necessary structural reforms

Sweden reformed its pension system from an unsustainable pay-as-you-go system to a partially funded one with defined contributions. The social democrats brought the country into the EU and a new budget process was created. A system of nominal expenditure ceilings and a goal of public finances in surplus was introduced, plus the central bank gained independence.

There were naturally things that, in retrospect, could have been done differently. But the Swedish social democrats showed the world not just that the Swedish model wasn't dead, but that it was the model itself that was the base for Swedish competitiveness. The budget consolidation hence became an important ideological victory for social democracy.

If centre-left parties were able to do something similar today, the world on the other side of the crisis would truly be a better place.

Katrine Kielos is lead-writer for Aftonbladet, Sweden and Scandanavia's largest daily newspaper

This article forms part of a series of international responses to Policy Network's discussion paper In the black Labour: Why fiscal conservatism and social justice go hand-in-hand

This is a contribution to Policy Network's work on Globalisation and Governance.

Tags: Katrine Kielos , In the black Labour , Sweden , OECD , IMF , fiscal responsibility

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