Wed, 16 Feb 2005

Op-ed by Jim Peron - Director of Institute for Liberal Values

Clark's praise of Sweden misplaced by Jim Peron

Helen Clark wants New Zealand to emulate Sweden. The high tax, welfare state appeals to her. She even argues that high taxes do not effect economic growth. According to press reports Clark said Sweden's tax rates had not stopped the nation growing rich.

Sweden's welfare state only came into its own during the 60s. Swedish economist Peter Stein notes that in 1960 the tax rates in Sweden were "about equal to US levels". Sweden's "high tax" status is relatively new.

It is deceptive for the Prime Minister to imply that Sweden grew rich in spite of its high tax rates when the period of wealth accumulation predated the high tax rates and stagnated after them. Stein says: "Sweden's rapid economic growth occurred before the imposition of the welfare state. As government control became more pervasive and entrenched, previous gains were eroded and were insufficient to maintain Swedish prosperity."

Olle Krantz, of the Department of Economic History at Umeå University of Sweden, investigated when it was that Sweden was doing well, in comparison to various other groups of nations. The first comparison group was 16 industrialised nations, the second was the six wealthiest nations, and the third group was all European small industrialised nations. The patterns that emerged with each were very similar.

Starting in 1875 Sweden's GDP per capita grew are rates significantly above the average of all three groups. It remained above average most of the time until mid-century when it started to decline. Krantz noted: "there is not only a slow-down of the economic growth relatively seen but also a relative retardation for Sweden in the second half of the 20th century. "

Swedish economist Assar Lindbeck of the Institute for International Economic Studies of Stockholm University divides Swedish economic history into distinct periods as well. He says that from 1870 for a century Sweden was primarily "a decentralised, capitalist market system" with a relatively small government. "During most of this period, government spending and taxes as fractions of GDP seem to have been only between half and two thirds of the average of other countries that are highly developed today. It was not until 1960 that total public-sector spending in Sweden had reached the OECD average, then about 31 percent of GDP‹as compared to less than 10 percent at the turn of the century and 25 percent in 1950."

Even though Lindbeck wrote his paper in 1998 it was as if he were directly rebuking the claims of the Prime Minister: "The sequencing of events‹first relatively rapid economic growth over a very long period of time, later gradually more ambitious welfare-state spending‹is important to observer for those who regard Sweden as a blueprint.... Sweden was already a rich country when it embarked on the road to generous welfare-state spending."

The effects of the new welfare state that was growing in Sweden were detrimental for Swedish wage earners. Peter Stein writes: "An average worker could pay as much as 60 percent of his income in taxes. Adding the 25 percent value-added tax and the 40 percent payroll tax results in a wedge of about 80 percent. Such a tax system, together with a flat salary scale, erodes the incentive to work, train, and save." And recently Sweden¹s ruling Social Democrats said higher taxes may be necessary to keep the welfare state rolling.

After the Swedish welfare state came into it's own the effects on the economy were quickly felt. In 1970 Sweden had the fourth highest GDP per capita among developed countries with income about 6% above the OECD average. By 1997 it was at fifteenth place with an average GDP per capita 14% below average(excluding Turkey and Mexico two OECD members that were developing countries). From number 4 Sweden dropped to the bottom-third. This hardly verifies the Prime Minister¹s optimism.

Clark must have been misinformed when she sang the praises of the Swedish welfare state. Contrary to what she implied Sweden grew rich before it became a welfare state and has been in relative decline since. The welfare state, and high taxes, were not as benign as the Prime Minister implies. If anything they are a slow, torturous descent into stagnation.

ENDS

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