Copy Sweden: Reduce government spending and prosper

Sweden has enviable attributes. For starters, The World Happiness Report places Sweden seventh globally, far ahead of the U.S. (19th). For the five years through 2017, Sweden’s economy has grown 2.8 percent, one of the fastest rates in the European Union and ahead of the 2.2-percent rate of the U.S. 

According to the World Economic Forum’s Global Competitiveness Index, Sweden is the ninth-most globally competitive economy in the world. By many other indices, education, poverty, equality, health, etc., Sweden compares well with other countries. What is the basis of such exceptional performance?

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According to the Swedish government official website, “Historically, the Swedish economy suffered from low growth and high inflation,” which the nation overcame with “inventive and courageous reforms” that “succeeded in maintaining control over public spending.

"First, in 1996, a ceiling for public spending was introduced. This was accompanied by the addition of the ‘surplus goal’ ... for the government budget."

Next, Sweden “scrapped inheritance tax in 2005 and a wealth tax in 2007.” What's more, according to the Swedish government website: “A key feature of the Swedish economy is its openness and liberal approach to trade and doing business.”

Swedish government spending reforms were the consequence of a financial crisis in the early 1990s that saw the economy collapse into three years of recession and the nationalization of two major banks.

Originally, Sweden had low government spending. From 1950 to 1970, according to the International Monetary Fund, government spending never exceeded 30 percent of GDP, and growth averaged 4.0 percent. (For comparison, the current U.S. government spending figure is 33.6 percent.). 

From 1971 to the 1990s crisis, Sweden experienced a mash-up of Green New Deal extreme government spending and “Modern Monetary Theory” loose money and enormous deficits. Government spending rose to over 70 percent and deficits rose to over 10 percent of GDP, while inflation soared to double-digit rates. 

From 1971 to 1993, growth averaged 1.6 percent amid this chaos. With the onset of reforms, Sweden reduced the relative size of its government back toward 50 percent, and average growth re-accelerated to 2.6 percent since 1994.

To be sure, Sweden’s government, at 49.1 percent of GDP, is far larger than in the U.S., and it provides many more services. Sweden’s balanced budgets mean this is financed with high tax rates. The top income tax rate is about 57 percent, including local taxes, which compares with the combined top rate of 49.3 percent in a high-tax state like California. 

In Sweden, the highest tax rate starts at the individual income equivalent of about $72,000. In the U.S., the highest federal rate kicks in at $500,000. Sweden’s tax scale kicks in with a 32-percent rate at $2,000, while U.S. taxes start at $9,000 with a 10-percent rate.

On top of dramatically higher taxes at all incomes, Sweden’s government is financed with a regressive value-added tax, a hidden sales tax, with a rate of 25 percent, compared with a U.S. average sales tax of 5.7 percent.

Sweden has trod the ground U.S. progressives wish to cover, and the only gains came when the social democratic fantasy was unwound. Important lessons for the U.S. are: 

  • Runaway government spending and deficits, combined with easy money, are catastrophic;
  • Swedes stagnated as government grew, and they prospered as it shrank; and
  • high government spending levels can only come from the pockets of middle and working classes, to be shuffled around by the government, returning as benefits less the enormous cost of bureaucracy.

Douglas H. Carr is an associate fellow at R Street, a free-market think tank. He is the president of Carr Capital Co., a financial and economic advisory firm.