Jan. 9 (Bloomberg) -- Nobel Laureate Paul Krugman questioned efforts to rein in welfare in Scandinavia after Denmark abandoned its universal benefits model and Sweden started prioritizing tax cuts over spending.
“It’s not clear that the crisis required these actions,” Krugman said yesterday in an interview in Oslo after speaking at an annual conference held by Skagen Funds. “It’s not clear that anything that’s happened says that tax cuts should be a priority for the Swedes.”
Scandinavia, which investors treated as a haven during Europe’s debt crisis, has kept public debt at less than half the euro-zone average while providing citizens with free healthcare and education. Danes and Swedes pay for the services with the world’s highest tax burdens which, relative to gross domestic product, are almost double the 25 percent in the U.S., according to the Organization for Economic Cooperation and Development.
Yet some Scandinavian services, including jobless benefits, study grants and child support, were curbed during the crisis as governments said tax cuts were a more effective tool for creating jobs than public spending.
“We continually alter priorities and financing to optimize the model,” Danish Finance Minister Bjarne Corydon said Jan. 7 in an interview in Copenhagen.
Since coming into office in 2011, the Danish government has cut state aid for the unemployed and raised the retirement age. College and university students are means tested before gaining access to study grants. As of this year, families earning more than $130,000 a year won’t have the same access to child support as poorer households as the government ensures funds target those who need them most.
The welfare changes that have taken place in Denmark, which before the global financial crisis offered the same benefits to households across all income brackets, mark a “paradigm shift,” said Peter Kurrild-Klitgaard, a professor of political science at the University of Copenhagen.
In Sweden, the government of Prime Minister Fredrik Reinfeldt has cut income taxes five times since coming to power in 2010. Most polls suggest Reinfeldt’s coalition will lose elections in September as Swedes reject his tax-cutting platform and turn to a Social Democrat-led opposition promising a more traditional welfare model based on higher taxes and more expenditure.
“The lesson is actually that you can do fine with a generous welfare state as long as it has a sound fiscal base,” Krugman said. Even after being reined in, “all of the Scandinavian welfare systems are still beyond the wildest dreams of liberals in the United States,” he said.
Sweden, the largest Nordic economy and home to some of the world’s biggest companies in their field such as Volvo AB, Ikea and Hennes & Mauritz AB, will grow 2.8 percent this year, the European Commission estimates. Denmark’s economy will expand 1.7 percent, it said in November. That compares with 2.6 percent estimated growth in the U.S.
Scandinavia’s model hasn’t left a hole in its public finances. Compared with the 5.7 percent deficit of gross domestic product that the European Commission estimates the U.S. will post this year, Denmark will have a shortfall of 1.7 percent and Sweden’s budget gap will be just 1.2 percent.
Denmark’s government collects more revenue relative to economic output than any other nation, according to the Paris-based OECD. As of 2011, Danish tax revenue relative to GDP was 48.1 percent, followed by 44.5 percent in Sweden. The two nations, which both carry stable AAA grades at Moody’s Investors Services, Standard & Poor’s and Fitch Ratings, boast the world’s lowest default risk, after Norway, according to credit derivative traders.
“For people who like to claim that the welfare state was the source of the crisis, you can look at Sweden, which has done not great, but relative to almost anybody else in the world, has ridden out the crisis pretty well,” Krugman said. That’s “despite a welfare state that’s very generous.”
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