Sweden and the Recession

The Spectator

This article in The Spectator is about Sweden’s Finance Minister Anders Borg who confronted the recession by cutting taxes across all income groups to prevent the wealthy leaving Sweden, refused a big stimulus spend up  and has been working to move Sweden away from a high tax, high regulation system and create smaller government including cutting welfare payments.

His advice, ‘Keep on dealing with the deficit, because deficits destroy everything else.’ Similar to National in New Zealand he was criticized for allowing tax cuts to the wealthy and yet the Financial Times recently declared him the most effective finance minister in Europe.

Interestingly we don’t hear much about Sweden from Labour despite it’s success at dealing with the global recession.

‘Everybody was told “stimulus, stimulus, stimulus”,’ he says — referring to the EU, IMF and the alphabet soup of agencies urging a global, debt-fuelled spending splurge. Borg, an economist, couldn’t work out how this would help. ‘It was surprising that Europe, given what we experienced in the 1970s and 80s with structural unemployment, believed that short-term Keynesianism could solve the problem.’ Non-economists, he says, ‘might have a tendency to fall for those kinds of messages’.

He continued to cut taxes and cut welfare-spending to pay for it; he even cut property taxes for the rich to lure entrepreneurs back to Sweden. The last bit was the most unpopular, but for Borg, economic recovery starts with entrepreneurs. If cutting taxes for the rich encouraged risk-taking, then it had to be done. ‘In most cases, the company would not have been created without the owner,’ he says. ‘There would be no Ikea without [Ingvar] Kamprad. We would not have Tetra-Pak without [Ruben] Rausing. They are probably the foremost entrepreneurs we have had in the last few decades, and both moved out of Sweden.’

But they were not rich, I say, when they were starting out. ‘No, but they were becoming rich. If you have a high wealth tax and an inheritance tax, people emigrate because it becomes too costly to own a company. Ownership is a production factor. Entrepreneurs are a production factor. Yes, these people are rich and you can obviously argue that we want to encourage social cohesion. But it is also problematic if you drive out entrepreneurs from your country, because they are the source of job creation.’

The Conservative took a hit politically for giving tax cuts to the rich, but interstingly the tax cuts across the board had spectacular results:

Tax rates would be cut for workers, and welfare cut to pay for it. High welfare levels, he says, can inflict cruelty in the name of compassion. ‘People emigrate from the labour market. Unemployment traps capture a lot of people in social exclusion.’ Tax cuts are not spoken of as an ideological aim, but as a tool to cut unemployment and advance social justice.

What even Borg 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. Borg had created something that Osborne’s critics say does not exist: a self-financing tax cut. ‘There was some criticism at the time that we were borrowing to finance tax cuts,’ he says. But Sweden could do it, because it was expecting to return to surplus soon; Britain has no such luxury, he says. His main advice to Osborne is: ‘Keep on dealing with the deficit, because deficits destroy everything else.’

National is trying to return to surplus and Labour insists on spending even more. AS Anders Borg says deficits destroy everything else.

  • CJA

    I find this very interesting. It shows what can happen when governments stick to policy and stick to their guns. I also think the Scandanavians have a different take on things in terms of the rest of the world. I think the thing about Finland (off topic I know) is the economy, from my understanding, is essentially dominated by Nokia.

  • a2catlady

    Interesting post – well worth a really hard look. However the advice is basically the same no matter if it is an individual, company or country – DEAL with the debt!!! Shame that your commentators have not picked up on this post but are hard out after your union ones – the same criticism could be leveled at them as the one they level at labour in regards to destructive commentary!!! Come on people open your eyes – here is a constructive post.

    • http://pulse.yahoo.com/_OK7Y7PCSTJ27RCKZ2MGRSAYCTE NEIL

       Some of us have – I can’t bring myself to agree with Cam too many times in one day – we got to have healthy debate…..but there you go I agree – National should have cut taxes – but not done it just for those at the top of the income brackets – then they would have got the balance out with the increase in GST…..doing it the way they did just shut off a sector of spending they always ignore.

      • a2catlady

        LOL Neil as a long time reader I can understand your reluctance to agree with Cam too many times in one day, might be bad for his mental health!!

  • Liberty

    This is what the Libz have been saying for years.
    Cut Taxes and spend less.

  • Davis Gp

    If NZ followed what the Libz have been saying we’d be a prosperous Pacific paradise and a magnet for investment, and greener than green with it.

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