Thursday, February 10, 2005

Monbiot grapples with Swedish model

When it comes to burning taxpayers’ money, Sweden is in the Champions’ League. Tax and spend runs at around 60% of GDP, compared to our 40%. But big government is surely bad for your wealth, so how come those Swedes have such a high income level? It can’t all be Abba’s royalties, surely.

Anti-market types always like the Swedish model, and good old George Monbiot is no exception:
‘The surprise, for anyone who has swallowed the stories about Britain’s unrivalled economic dynamism, is that, in terms of gross domestic product, Sweden has done as well as we have. In 2002 its GDP per capita was $27,310, and the UK's was $26,240. This is no blip. In only seven years between 1960 and 2001 did Sweden's per capita GDP fall behind the UK's.’

As always you have to check George’s facts, and the latest OECD figures (for 2003) actually put us on $29,000 with the Swedes on $28,100. And those seven years he mentions were actually the most recent years, which kind of suggests their success is waning. But still, they’ve only fallen a bit behind so let’s hear him out:

‘For countries hoping to reach the promised land, there is a choice. They could seek to replicate the Swedish model of development - in which the benefits of growth are widely distributed - or the UK's, in which they are concentrated in the hands of the rich.’


Well, where to start?

Let’s look a bit more closely at the history. Up until the sixties, Sweden’s public spending (as a percentage of GDP) was actually lower than ours. In the thirties it was only about half, and in the forties they saved loads more by contracting out of the fight against fascism. Even in 1960 they were only on 31% compared to our 32% (source: Public Spending in the Twentieth Century, Tanzi and Schuknecht).

And guess what- it was during that period that Sweden overtook us in terms of GDP per head. The crossover year was 1957.

Of course, in the swingin’ sixties, most western governments started binge spending, with the appalling Wilson ramping us up to 37%. Even so, by 1970 Sweden was still ‘only’ on 42%.

It wasn’t until Abba came along that things really started going haywire. Guided by the insights in Money Money Money (‘ah-ha, ah-ha, there’s a lot I could do, if I had a little money- it’s a rich man’s world’), Swedish tax and spend soared through 60% by 1985, eventually peaking at almost 70%! Only the Soviet Union was higher.

And that’s when the bills started to come in. By the early nineties the fiscal position was collapsing, growth had slowed and unemployment was rising.

It was no passing aberration, but a crisis of a kind that Britain had faced two decades earlier. The Swedes were forced into an anguished public debate, and all credit to them, they decided to confront reality. A savage programme of fiscal retrenchment began. Cash limits were imposed, and welfare payments cut.

But history shows the debilitating effects of fiscal indulgence last for years. The body economic becomes very fond of its welfare diet. Arteries get clogged, and the desire for ten-mile runs or even just getting off the butt dims. Wriggling back into those electric blue sateen culottes takes a superhuman effort.

Sweden had a quarter century of world leading tax and spend. During that period it enjoyed the fruits of its strong industrial base, which had actually been built up during an era of much lower taxes. It apparently had its cake and ate it.

Now the process has gone into reverse, it will be very interesting to see whether Sweden can stick at 60% or will need to get down closer to the European average. I wouldn’t want to be Swedish and poor.

In any event, for George or anyone else to hold us up as the model of small government, to be compared to redistributive big government Sweden, is grossly misleading. Predictably, Britain under New Labour is muddling along somewhere in the middle, quite possibly getting the worst of both worlds.

The real choice is between the Swedish model, with 60% tax, and the United States with 30%. Sweden certainly has much lower income inequality, but only at the cost of per capita GDP that is 25% lower. And that gap is growing.

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