Nordic thaw: Shrinking the state in…Sweden?

posted at 12:31 pm on February 1, 2013 by Mary Katharine Ham

It is a rare report on any country that gives me hope any of us can tackle our mounting, disastrous debt problems, so I think I’ll revel in this one, from the unlikeliest of places— Sweden.

Sweden has reduced public spending as a proportion of GDP from 67% in 1993 to 49% today. It could soon have a smaller state than Britain. It has also cut the top marginal tax rate by 27 percentage points since 1983, to 57%, and scrapped a mare’s nest of taxes on property, gifts, wealth and inheritance. This year it is cutting the corporate-tax rate from 26.3% to 22%.

Sweden has also donned the golden straitjacket of fiscal orthodoxy with its pledge to produce a fiscal surplus over the economic cycle. Its public debt fell from 70% of GDP in 1993 to 37% in 2010, and its budget moved from an 11% deficit to a surplus of 0.3% over the same period. This allowed a country with a small, open economy to recover quickly from the financial storm of 2007-08. Sweden has also put its pension system on a sound foundation, replacing a defined-benefit system with a defined-contribution one and making automatic adjustments for longer life expectancy.

The welfare state of the Nordic countries is still certainly generous, but it’s encouraging to see a society so defined by and proud of that lavishness can actually make some pretty fundamental changes. I mean, defined contribution pension plans and huge drops in tax rates and government spending as a percentage of GDP? I would have thought, if it sounds this good to me, it can’t be happening in Sweden, right? Wrong, and then there’s this:

Most daringly, it has introduced a universal system of school vouchers and invited private schools to compete with public ones. Private companies also vie with each other to provide state-funded health services and care for the elderly. Anders Aslund, a Swedish economist who lives in America, hopes that Sweden is pioneering “a new conservative model”; Brian Palmer, an American anthropologist who lives in Sweden, worries that it is turning into “the United States of Swedeamerica”.

So, what has allowed the region to make such shifts? Necessity, says the Economist, in a special report on the region, which is outperforming much of the EU in economic growth and combining that with high marks for citizen well-being. The region “got to the future first,” and had to deal with its fiscal problems:

Why are the Nordic countries doing this? The obvious answer is that they have reached the limits of big government. “The welfare state we have is excellent in most ways,” says Gunnar Viby Mogensen, a Danish historian. “We only have this little problem. We can’t afford it.” The economic storms that shook all the Nordic countries in the early 1990s provided a foretaste of what would happen if they failed to get their affairs in order.

There are two less obvious reasons. The old Nordic model depended on the ability of a cadre of big companies to generate enough money to support the state, but these companies are being slimmed by global competition. The old model also depended on people’s willingness to accept direction from above, but Nordic populations are becoming more demanding.

There are plenty of caveats, and reasons transferring such lessons could be tricky. These countries are small and largely homogenous, and one of the serious problems they face is integrating immigration populations and dealing with growing racial tensions. But it’s interesting and encouraging to see a region so idolized by the Left neuter (if not gore) many of liberalism’s sacred cows when fiscal necessity calls, and without the catastrophic consequences that are always so histrionically predicted at the mere mention of defined contribution or school choice. I’m happy for Sweden and others to maintain many of the generous benefits of which they’re proud as long as they can figure out how to do it without sinking themselves and making the rest of us pay for it.

Breaking on Hot Air