Sweden’s secret recipe

Advice from a successful – and tax-cutting – finance minister

14 April 2012

When Europe’s finance ministers meet for a group photo, it’s easy to spot the rebel — Anders Borg has a ponytail and earring. What actually marks him out, though, is how he responded to the 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, it’s pretty clear who was right. ‘Look at Spain, Portugal or the UK, whose governments were arguing for large temporary stimulus,’ he says. ‘Well, we can see that very little of the stimulus went to the economy. But they are stuck with the debt.’ Tax-cutting Sweden, by contrast, had the fastest growth in Europe last year, when it also celebrated the abolition of its deficit. The recovery started just in time for the 2010 Swedish election, in which the Conservatives were re-elected for the first time in history.

All this has taken Borg from curiosity to celebrity. The Financial Times recently declared him the most effective finance minister in Europe. When we meet in his Stockholm office on a Friday afternoon (he and his aide seem to be the only two left in the building) he says he is just carrying on 20 years of reform. ‘Sweden was a textbook case of European economic sclerosis. Very high taxes and huge regulatory burden.’ An economic crisis in the early 1990s forced Sweden on the road to balanced budgets, and Borg was determined the 2007 crash would not stop him cutting the size of government.

‘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.’

Just as George Osborne took a hit for reducing the 52p tax to a 47p tax, so Borg’s party paid an political price for helping the rich. ‘If you are going to survive that politically, it is very important to cut taxes on low-income earners.’ He focused the tax credit on the low-paid, giving some the equivalent of a month’s extra salary every year. But there was still resentment. ‘We lost a lot of voters when we cut the property and the wealth tax, I don’t make any excuse for that. It was a severe blow to our support.’

This is the only time in the interview when Borg speaks like the politician he claims not to be. ‘When I look at other politicians I tend to see myself more as an economist,’ he says. This is true in that he is appointed, not elected, and was chief economist for SEB bank. But before this, he was a young libertarian longing to turn the world upside-down. Internet footage still exists of a denim-clad Borg declaring on television that if he was prime minister he ‘wouldn’t do a damn thing, so the people could do whatever they want’. When he later became a prime ministerial adviser, he caused a stir when it emerged that a government staffer backed drug legalisation.

When Fredrik Reinfeldt became party leader in 2003, he made Borg his right-hand man. It seemed a gamble at the time, but his faith in Borg’s expertise was absolute — Borg’s views had moderated, but his sense of urgency had not. ‘We came into government in October 2006 and we launched tax cuts in January 2007,’ he says, ‘so the first three months were extremely hectic.’ The Conservatives’ slogan was striking: ‘We are the new workers’ party.’ 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.’

Borg and Osborne have a good relationship, as do David Cameron and Reinfeldt (who keep in touch via text message). All are men in their early forties, who pick fights with the old guard of their parties to flaunt their ‘modernising’ credentials. But politics in Britain and Sweden are as different now as they were in the 1980s, except the roles are reversed. Sweden is the unlikely champion of supply-side economics, with ideas too radical for Brits. There is cross-party support in Sweden for profit-seeking state schools, which Michael Gove won’t attempt. Borg’s tax-cutting policy was accompanied by a 268-page book explaining the dynamic link between lower taxes and more jobs. Such a document would be unthinkable from HM Treasury.

Sound economics is simply a far larger part of the government mission in Sweden than in Britain. Cameron once observed that no one ‘gets up in the morning thinking “I wish the state was smaller”,’ which is perhaps true in Whitehall. But not in Stockholm where, on Reinfeldt’s 45th birthday, Borg presented him with a graph showing Sweden’s tax-to-GDP ratio dipping under the 45 per cent mark for the first time in decades. That is still, of course, one of the highest rates in the world.

In public, Borg is not in the least triumphalist — if anything, he’s trying to stir up a bit of pessimism. Success has meant he now has to manage expectations, and Borg has taken to warning in his speeches that ‘a future economic crisis is as much a certainty in life as death and taxes’. He could add another certainty: that high taxes will slow down any economic recovery, and fortune tends to favour politicians who do something about that.

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  • Mattias

    Well done. Sweden could also afford to reduce corporate taxes quite a bit. Let’s have a tax-level at par with Irelands – Borgs next challenge.

  • Jack Hindley

    Interesting because it’s so poorly written, incongruous and amusing. He says post 2007 European governments talked of “stimulus, stimulus, stimulus” when in actual fact deficits rose as a result of stalling economies not rising public expenditure. The message since 2009 has actually been the exact opposite – austerity – and the amusing part is that his ‘revolutionary’ idea for saving Sweden’s economy was, wait for it…. STIMULUS!! Stimulus in the form of massive tax cuts (not higher expenditure but stimulus all the same and still very Keynesian which he says would be naive). The only stimulus we indulged in here was to bail out the banks with public debt – not exactly a classic Keynesian stimulus! More like a monetary stimulus (a digusting phrase which would jar any economist anyway due to its incongruity).

    And the piece de le resistance, the final nail in the coffin of Fraser Nelson’s argument, the whipped cream of the dish (!!!) is when it states, quite unaware of its own irony that,
    “on Reinfeldt’s 45th birthday, Borg presented him with a graph showing Sweden’s tax-to-GDP ratio dipping under the 45 per cent mark for the first time in decades. That is still, of course, one of the highest rates in the world.”
    That is the beauty of ignorance, distilled. After all this man’s artistry at cutting government and, in doing so, saving the Swedish people from a life of servitude, or so we are led to believe, he still collects more taxes than any taxman in the world bar Kiribati, Denmark and Zimbabwe (based on 2012 data).

    Sweden’s typically Nordic style economy has been eroded further since their conservative government came in in 2006. Experiments with privatisation in education since 1999 have led to 18% of pupils being unable to read at ‘a basic level of comprehension needed for further learning’ in 2011 (not to be confused with being unable to read) from 13% in 1999. Borg has been emphasising the need for further privatisation in various sectors. My point here is that the modest cuts he’s made to government expenditure will also come at a cost. The education report is called PISA and was produced by the OECD. It says the equality of Sweden’s education is also rated as average now where in 1999 it was top of the rankings.

    IT’S JUST IDEOLOGY!!!!! Ireland also is a perfect illustration of the malaise in economics in Europe. In early 2011 Ireland was touted as the poster child for smart austerity, Milton Freedman style. They cut spending just like the IMF asked then received the thumbs up, then before the seasons have come round again they are in freefall once more, on the verge of bankruptcy and with zero growth.

  • JFK

    @ Mr. Hindley,

    In the vein of “the beauty of ignorance distilled”, if there are places equally as nice as Sweden with lower tax burdens (as a % of GDP) and places people tend to emigrate out of (e.g. Kiribati and Zimbabwe) with higher tax burdens…remind me again why I am supposed to favor a high tax burden over a low one? Perhaps you should focus on other justifications.

    Like education (since you brought it up); PISA Focus report No. 7 finds that privately educated Swedish students tend to do better than (or at least as well as, depending on the filter they applied) their public school compatriots on reading comprehension. Which would indicate that the increase from 13% to 18% in the lack of basic reading comprehension, seen since Swedish Conservatives started experimenting with for-profit education, is the fault of the public educators, not the private educators.

    I agree with you that, “It’s just ideology”. I’ll keep mine until you find a better way to justify yours.

  • Kristofer

    I live in Sweden. We can now borrow money for free (or at least the government can). But they don’t invest in anything important like infrastructure or housing.

    Our trains need huge investment to keep up with demand and to keep the system running during the long winter. Now it breaks down every year. The government will not spend any mony on this and only recently provided enough money to keep up with maintaince costs. So when you get a job in a nearby city you can’t commute there and count on the train actually arriving in time or at all during winter.

    Our housing market still hasn’t crashed, because we don’t build nearly as much as we need to. This is because there isn’t any subsidies anymore for building cheap housing and it is very expensive to build houses in our climate and because of heavy regulations. So when you get a job in a big city you can’t move there.

    The private schools have got all the best teachers and students, because nobody wants to go to a poor public school filled with immigrants and poor people.

    We also have record unemployment for the youth and the immigrants that keep coming.

    And a growing market of low-paying low-standard jobs because the goverment is providing tax-breaks and subsidies to these kinds of jobs. Meanwhile the research and development is moving abroad (Astrazenaca and many more).

    On the plus side those who still got jobs probably never had it better, cheap loans, bigger houses, more cars, more travels abroad.

  • Archimedes

    I like this idea of the ‘punk tax cutter’. Perhaps the occupy and socialist movements could be persuaded of tax cuts as opposed to benefits if it were made to seem like a youthful rebellious policy that’s, like, sooooo totally hip and all about overthrowing the system, like. I think George Osborne should glide into the commons for the next budget on his skateboard, sporting a jauntily angled cap and an earring, and kick things off by saying “Yo, my right honourable dudes! S’up in the House!”

  • Jack Hindley

    JFK – Is it not likely that the best teachers and pupils have flocked to the private system for better salaries and to be surrounded by better pupils? I believe that has always been the argument against private education, has it not? So I’m sure profiteers will point to such facts and blame the public system but what you can’t get away from is that Swedish pupils on the whole have lost out due to the privatisation.

    The first point that you made tells me that you have misunderstood my comment. If Borg’s answer to economic malaise was to savagely cut the state a la Milton Freedman then he didn’t do a very good job of it considering that Sweden’s tax burden is still the 4th highest in the world. He can’t lecture us on the virtues of low taxation while maintaining the second highest rates in the developed world!

  • tb

    And now the economy of Sweden in the first quarter of 2012 shrunk most in whole Europe.

    Why don’t you mention what happened to Ireland after tax-cuts and trying to get the debt down. Ireland got in trouble and needed help from the EU.

    Now you can see what will happen to Spain after big cuts, Spain is on the edge of becoming bankrupt.

    Of course it is bad to not stimulate the economy in bad times, people will be careful and not spend any money which results in a worse economy, more cuts needed, less spending from the people, and so on.

    The Netherlands is also paying now for the big cuts. Sweden was lucky not to have the Euro, but there it will also get worse now.

  • Len

    @Kristofer: Many people in Sweden use their ignorance to bat on the so called “private” schools. In Sweden those schools are called “free” schools, which says that they are organizationally not connected to the public system of education (driven by the municipalities). Economically they are under the same rules as the public schools since the tuition fee is following the pupil regardsless if she studies at a public school or a “private” school. Furthermore, there is a law against collecting any other fees for the tuiton. And, there is a law for the queues to all schools that clearly states that any school is not allowed to pick and choose among the tentative pupils in its queue. So, you can apply to go to any school you want and after the “private” schools have been common in Sweden, the “public” schools have been improving their performance. So, “private” schools is not what used to be private schools!

  • Filip Sjöstrand

    Well Len. The problem Kristoffer pointed to was that the free choice allows and causes people to enroll in “free-schools” (publicly financed, privately run). It’s primarily students from families with more educational background that change school. The municipal schools are left with poorer students, with higher preassure on teachers and declining performance as a result. This is in Sweden not however an uncontroversial view in Sweden but one which is heavily debated.

    There’s rising inequality in educational performance in Sweden. With family background, and things like number of books in the family home, becoming an increasingly accurate indicators of future educational succes. Rising inequality in education has contributed to the grading system falling a part, with teachers in result lagging schools compensating poor performance with lower grade requirements.

    The Swedish school system in many ways have been falling apart during the last 15 years or so. There are several factors in this, none of them unconctoversial or undisputed in Sweden (certainly not the free school explanation I provided above). Increasing segregation also plays an important part in all of this.

  • Filip Sjöstrand

    This article exaggerates the succes of Sweden, and the consensus that Borgs and the conservatives policies have been succesful. The feeling in Sweden is certainly not one of succes and perfect performance!! As Kristoffer previously pointed out there are many many problems, many of which could be expected to damage the growth record in the long term.

    @Len Also while “free-schools” have the same rules etc. they certainly do not have the same incentives. Attracting enrollments gives their owners increased profits. Result: heavy advertising and large marketing expenses, as well some would say as inflated grades with schools offering easier grades to attract students. Cutting costs also increases profits so there are strong incentives for free schools to keep a low teacher-student ratio, offer very limited extra-help etc.

    • Abir Mandal

      So? Fixed costs don’t affect the competitive price at all. The price is equated to the marginal cost. But I don’t expect a retard like you to understand.

  • Einar Emilsson

    I am a Swede living in the US since a year back.

    This article is not really showing what happend. The tax-cuts are not the important thing.. and the overall tax-pressure has only gone down a tiny bit. Borg have moved things around and focused a lot on balancing the budget. Tax cuts has taken its form in making it cheaper to hire people under the age of 25 to stimulate companies to hire the unemployed young people and also making the tax exemption for the first earned income of the year tax free. The made the amoung go up by a few thousend swedish kronors.. which is not very much.

    If the point of this article is that tax cuts lead sweden to where it is now, its totally wrong.

    • Abir Mandal

      “Tax cuts has taken its form in making it cheaper to hire people under the age of 25 to stimulate companies to hire the unemployed young people and also making the tax exemption for the first earned income of the year tax free. The made the amoung go up by a few thousend swedish kronors.. which is not very much.”

      Umm, do you know what marginal benefits are? Jesus. Leave the US before you pollute it more with your EUcentric leftist stupidity.

  • Swee

    Borg has also cut the welfare system. People with cancer are forced to work…

    • Abir Mandal

      How is those that work being forced to pay for people with cancer any more moral than that, even if your stupid notion is true?

    • Patrik1988

      Sweden has never spent more money on the welfare system. The very few outliers are roughly the same as under the Person era.

  • Greer

    It is pretty irrelevant how the school and railway system is performing in Sweden when Europe comes crashing down. Borg and Reinfeldt will have to deal with falling tax revenue and will use it as an argument for more labour reform and lower taxes – rightly so. The notion of what government ought to do is changing slowly, the welfare state is eroding worldwide and there is nothing else to do than complain about shrinking pensions, benefits etc – it won’t change the secular trend of smaller government and lower taxes when flat BRENT PRODUCTION is putting a cap on growth. Either you have a controlled shrinkage or it will be a default, Sweden has chosen the honest path of balancing the budget as well as shrinking the net debt. The biggest danger to Sweden however is the indebtedness among the private households, because when growth stalls house prices cannot continue to go up and home equity will dwindle which subsequently will put pressure on consumption. I am personally looking forward to higher interest rates and lower taxes in the future but for 2-4 years it will be tough once again until governments and households get their leverage in check in accordance to growth.

  • Thor

    Isn’t it clear we are out growing the monetary system? We as a world are so far in debt that there is no easy way out or any one fix for this. We on behalf of our leaders owe an impossible amount of money to the centralized banks of the world. But what happens when we can’t pay anymore? I know if I do t pay my car note or house payment those said things get taken from me…. But what happens in this case? Are they going to take our schools? Roads? Buildings? Cities? Countries?

  • Adde

    Mr hindley and Kristofer

    Swedens problems with education and railways started a long time before Anders Borg & co entered the govenment.

    The problem with the (elementary school) education started in 1991 when the Swedish school went from state financed to local government financed. Thats when the school results started to decline. Why? Beacuse Swedish politicians wanted to be progressive and modern and naive to believe it was going to work. A heritage from ca 100 years of socialdemocracy perhaps (wich have done many great things for Sweden though). Another problem is ofcourse that not enough resources have been invested in the education system. I think we will see reforms here though, there is a lot of debate about the school system in Sweden now.

    The railway problem is simple to: 25-30 years of under investments and the fact that it has been a playground for incompetent politicians during that time has taken its toll.

    So this is primarly a problem about underinvestment and low priority.

    • Patrik1988

      It could be good to point out that the railwayinvestment has increased a lot under the Reinfeldt regime.

  • JK

    They say that it has been lower taxes. What is B’s because we have the electricity prices, expensive petrol, high sales tax on consumer products. To make one thing clear is that it was the Social Democratic parties, which laid the foundation for managing banking crises o such a problem. Then they counted the Conservatives 90K of the jobs created by the Socialist bloc. And right bloc to get the credit for the things you have not done. It has also silenced critics in the press and in their own ranks.

  • GBS

    So how the hell did Swan get the gong for best treasurer?

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  • Ed Wapole

    I wish every Democrat in the USA could read this article with an open mind.

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