Swedes Seek Regime Change as Tax Cuts Turn Into Poison Pill

Photographer: Alfredo Estrella/AFP via Getty Images

Swedish Prime Minister Fredrik Reinfeldt at the National Palace in Mexico City on Sept. 27, 2013. Close

Swedish Prime Minister Fredrik Reinfeldt at the National Palace in Mexico City on Sept. 27, 2013.

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Photographer: Alfredo Estrella/AFP via Getty Images

Swedish Prime Minister Fredrik Reinfeldt at the National Palace in Mexico City on Sept. 27, 2013.

Swedes are preparing to punish the government for cutting their taxes.

Prime Minister Fredrik Reinfeldt, whose main policy thrust over the past eight years has been to let voters take home more of their pay, looks set to lose September elections. Instead, Swedes are poised to back a Social Democrat-led bloc promising more tax-funded welfare. According to some polls, the opposition stands to defeat Reinfeldt’s coalition by more than 10 points.

Swedes are returning to their welfare-first roots as the global financial crisis and turmoil in Europe over the past half-decade served as a reminder of the fragility of the social contract. Southern Europe has suffered deep unrest and record unemployment, reigniting faith in the Nordic model for welfare and equality.

“We should keep it so that we can fix society,” Samir Laroussi, a 27-year-old who has a job in information technology, said while walking down one of Stockholm’s main shopping streets. Sweden needs revenue so it can spend more on health and education, he said.

Reinfeldt has prioritized tax cuts as a path to job creation. Though he’s managed to keep Sweden’s budget deficit well within the European Union’s 3 percent limit, relative to gross domestic product, unemployment rose to 8 percent in November, and is the highest in Scandinavia.

Five Rounds

To help pay for five rounds of income tax cuts since 2006, Reinfeldt has reduced unemployment and sickness benefits. His government has also lowered corporate taxes by 6 percentage points to 22 percent, below the EU average of 22.85 percent.

“If we can show that we’ve implemented reforms that have created jobs and also had an ability to lead Sweden through a difficult crisis, and that we emerge stronger than other countries, then I think people have an ability to value that,” Reinfeldt said in an interview.

A poll in December showed nearly six in 10 Swedes opposed further income tax cuts.

Finance Minister Anders Borg said last week and over the weekend that the government wouldn’t now seek more tax cuts, and could consider raising taxes to pay for education.

Sweden’s tax revenue has dropped to 44.3 percent of GDP, from a peak of 51.5 percent in 1999, when the Social Democrats were in office. That compares with 24.3 percent in the U.S., according to the Organization for Economic Cooperation and Development. A little more than 4 percent of Swedes received direct financial assistance during 2012, half the level in 2000, according to the National Board of Health and Welfare.

Tax Burdens

Sweden now boasts the fifth-highest tax burden relative to GDP in the developed world, the OECD estimates, after nations such as France and Denmark. The taxes pay for a bevy of services including free schooling and only small fees are needed to pay for childcare, to visit the doctor or the hospital.

“Swedes value their autonomy a lot and have a strong sense of equality,” said Ulf Bjereld, a political science professor at Gothenburg University and a Social Democrat. “That combination means that instead of being dependent on family and friends they want to safeguard their independence by letting the state provide a safety net. The price they have to pay, and are willing to pay, is taxes.”

After education, job creation is the most pressing election issue for Swedes, according to a poll by United Minds released last week. Taxes came in seventh and the economy ranked ninth.

Protecting Welfare

“The tax level is OK the way it is now,” Emelie Maartensson, a 25-year-old university student, said while standing outside the Sturegallerian shopping mall in Stockholm’s Oestermalm neighborhood. “We should now focus on protecting our welfare.”

Instead of tax cuts, Swedes want the government to focus on improving standards at schools and universities. Education became a subject of national debate after a survey by the OECD released in December showed Swedish students had the worst deterioration in math and science skills in the developed world between 2009 and 2012.

“The Swedish school has become a sort of lottery depending on what school your child attends,” Jonas Sjoestedt, leader of the Left Party, said in a Jan. 10 interview. He wants to form a government led by the Social Democrats and the Green Party. “This is not worthy of a modern welfare state.”

The opposition blocked a proposed tax cut for the highest wage earners in a special parliamentary vote last month. The three-party group, with the help of the anti-immigration Sweden Democrats, broke with tradition in the budget process and used its majority to prevent the cut.

Tax Returns

Swedish business said cutting taxes is the best way to boost growth. Sweden is home to some of the world’s biggest corporations in their fields, including Volvo AB (VOLVB), Hennes & Mauritz AB (HMB) and Ikea.

“The best way to boost growth is to cut the right type of taxes, such as capital and income taxes,” said Ann Oeberg, chief economist at the Swedish Confederation of Enterprise, the nation’s biggest business group. That “will increase incentives for savings, investments, to work and get a higher education.”

Wrong Thing

Any deterioration in welfare can’t be blamed on tax cuts, since both tax revenue and investments in health care and education have risen since 2000, Oeberg said, citing a report due this month.

The Social Democrats say it will try to increase the government’s revenue base to pay for more unemployment and sickness benefits. It’s also promised to invest more in education and jobs. The party says it wants Sweden to have the EU’s lowest jobless rate by 2020.

“The government has done completely the wrong thing when they have pushed through big and ineffective and expensive tax cuts instead of making important investments in jobs and education,” Magdalena Andersson, economic spokeswoman for the Social Democrats, who aspires to become the next Finance Minister, told reporters today in Stockholm.

In Sweden, unlike in most other countries, “you don’t have to win on a pledge to cut taxes,” said Carl B. Hamilton, economic spokesman for the Liberal Party, a junior partner in Reinfeldt’s coalition. “People have felt they have received a decent return on their tax money.”

To contact the reporters on this story: Johan Carlstrom in Stockholm at jcarlstrom@bloomberg.net; Niklas Magnusson in Stockholm at nmagnusson1@bloomberg.net

To contact the editor responsible for this story: Jonas Bergman at jbergman@bloomberg.net

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