In a stunning
setback, Sweden's Social Democrats were ousted from power in
Sunday's election after receiving their lowest share of the vote
since 1914. This result is somewhat surprising since Sweden, at
least by European standards, is experiencing decent economic growth
and modest levels of unemployment.
examination, however, reveals that the famous "Swedish Model" does
not work very well. This system, which combines high taxes and a
large government sector with laissez-faire policies in other
areas, is supposed to generate strong growth while also providing
protection against the vicissitudes of a market-based economy.
This system may
work better than the "Continental Model" of across-the-board big
government, which has caused stagnation in places like France and
Germany, but it is not a recipe for economic prosperity. In 1970,
Sweden was the world's third-richest nation, but it has fallen in
the rankings as the welfare state has expanded.
Indeed, Swedes now have less per capita disposable income than the
average Western European and also trail the U.S., Canada, and
several Pacific Rim nations.
And, although the official jobless rate is about six percent,
independent estimates suggest the real unemployment rate is between
incomes and a weak job market, it is not surprising that Swedish
voters chose a new government. It remains to be seen, however,
whether the incoming coalition of center-right parties is able to
deliver the change Sweden needs.
Costly Welfare State
spending consuming nearly 54 percent of GDP,
Sweden has the biggest burden of government in the developed world.
Not surprisingly, a bloated government also means high taxes. Taxes
consume nearly 55 percent of GDP, also a record for industrialized
The top personal
income tax rate is about 57 percent, which is punitively high,
though not as bad as the 87 percent top tax rate that existed as
recently as the late 1970s. Payroll taxes also are a significant
burden, totaling nearly 40 percent of income, including a 32.28
percent tax imposed on employers. Wealth is taxed, as are capital
gains. And, just in case a taxpayer has any disposable income left
after paying all these taxes, the value added tax is 25 percent,
the maximum rate allowed for European Union nations.
policy is not entirely punitive. The corporate income tax is 28
percent, which is not terribly high by world standards. Moreover,
Swedish policymakers earlier this decade eliminated the nation's
death tax. But, these positive features are in no way enough to
offset the economic damage caused by the high tax rates elsewhere
in the Swedish system.
High Joblessness and
Low Living Standards
traditionally has been a prosperous nation. During the early part
of the 1900s, the burden of government was low, and
laissez-faire economic policy helped create a prosperous
nation. Sweden also benefited by avoiding involvement in World War
II, which meant it was well-positioned to prosper in the post-war
environment, particularly since the aggregate tax burden at the
time was about 20 percent of GDP, comparable to the tax burden in
Hong Kong today.
subsequent expansion of the welfare state chipped away at Sweden's
competitiveness. By 1980, the aggregate tax burden had climbed to
more than 50 percent of GDP, and tax rates had reached confiscatory
levels. Excessive levels of government spending compounded the
economic damage by misallocating labor and capital.
bad policy had an effect on Sweden's economic performance. As
mentioned above, Sweden is no longer one of the world's 10 richest
jurisdictions. It now ranks as the 18th most prosperous
nation according to the World Bank,
which uses per capita gross national income. Using statistics that
more accurately measure living standards, such as per capita
disposable income, Sweden falls even further in the rankings.
According to calculations by the OECD, Swedes now have less
disposable income than the average resident of Western Europe. Even
Spaniards now rank above Swedes in terms of per capita disposable
meanwhile, have almost twice as much per capita disposable income
as Swedes, according to the OECD study. Even if the comparison is
made using pre-tax economic output, America remains far ahead.
Indeed, a Swedish think tank issued a report noting that if Sweden
were part of America, it would be the sixth poorest state.
statistics paint an equally grim picture. The jobless rate was
traditionally very low in Sweden, averaging about two percent. Over
the past two decades, however, the official unemployment rate has
more than tripled,
and the official numbers almost certainly undercount the true rate
of unemployment. The McKinsey Global Institute estimates that the
real unemployment rate is 15 percent.
A former Minister of Labor for the Social Democrats was even
gloomier, admitting that the jobless rate may be in the 20-25
A researcher for the nation's main trade union estimates the real
unemployment rate is 20 percent, and a senior fellow at a
Brussels-based think tank notes that "not a single net job has been
created in the private sector in Sweden since 1950."
With such dismal
numbers, it is not surprising that Swedish voters decided to oust
the incumbent government. It is not clear, however, that this will
lead to a change in policy. The leader of the newly-elected
center-right alliance was deliberately vague about reforms and
openly embraced the welfare state.
Sweden has engaged
in dramatic reform in the past, so there is some hope. Not only did
lawmakers abolish the nation's death tax, but the top tax rate is
now about 30 percentage points lower than it was 25 years ago.
Swedish policymakers have also partially privatized the country's
social security system,
and Sweden has an impressive school choice system based on
Combined with a
laissez-faire approach to trade and regulation, these
reforms have enabled Sweden to outperform some of Europe's more
statist countries. But, if Sweden hopes to regain its position as
one of the world's richest nations, it needs to return to the
small-government policies that allowed it to grow so rapidly in the
years before the welfare state wreaked so much havoc.
Daniel J. Mitchell,
Ph.D., is McKenna Senior Research Fellow in the
Thomas A. Roe Institute for Economic Policy Studies at The Heritage