At Election Time, Sweden Looks Less Socialist

Max Hansson remembers how much time he used to spend figuring out what taxes he and his company owed before a probusiness coalition won control of Sweden's government in 2006. Hansson, chairman of PayEx, a payment services provider, ticks off the levies that have since been lowered or abolished: payroll taxes. The corporate tax. The wealth tax. "Things have become very good in Sweden," he says.

So many other Swedes share Hansson's opinion that the ruling coalition of Prime Minister Fredrik Reinfeldt (left) and his Moderate Party has a good shot at winning a second term on Sept. 19. If that happens, Reinfeldt will be the first Moderate Party leader to gain a second term since 1908—an amazing feat, given the power of the Social Democrats.

The Social Democrats created Sweden's fabled welfare state, with its enviable cradle-to-grave benefits. Yet the cost of such largesse kept rising. Reinfeldt came to power by convincing voters that lowering income taxes and benefits would increase the number of jobs and actually boost the tax revenues necessary to keep the welfare state intact. Once in office, Reinfeldt's coalition cut income taxes by 70 billion kronor, or about 2.3 percent of gross domestic product; tightened the budget; and trimmed jobless benefits to nudge people back to work. Reinfeldt has stressed gradual change, not the wholesale attack on the welfare state that earlier conservative leaders had called for.

The economy has cooperated. After contracting last year, GDP will probably grow 4.5 percent this year, making Sweden one of Europe's top performers. The country's exporters, like Germany's, have thrived as Asia's appetite for heavy equipment and sophisticated consumer goods increased. The ruling coalition this year will likely deliver the smallest budget deficit in the region. "The fiscal story is certainly better than the rest of Europe," says Jonathan Fayman, a fund manager at BlueBay Asset Management in London, which oversees about $38 billion.

The Social Democrats have tried to convince voters that Reinfeldt's coalition is much more conservative and scarier than it lets on. Yet the Moderate Party-led alliance holds an eight-point lead in polls, which points to a government victory in the election, says Sören Holmberg, a political science professor at the University of Gothenburg. "The focus has been on taxes and the economy," he says. "White-collar workers, primarily from the big cities, have deserted the opposition for the government."

The Moderate Party's decision to abolish the wealth tax, which nicked 1.5 percent of a citizen's assets above $215,000, has appealed especially to the affluent. Christer Gardell is founder of investment firm Cevian Capital, which controls 5.5 percent of the voting rights in truckmaker Volvo. He says eliminating the tax has been the "most important change" the government has made, since it means "capital dares to stay in Sweden and dares to invest in Sweden." Reinfeldt wants to cut taxes by an additional $4.2 billion if he wins.

One wild card is the extreme right, which is strongly anti-immigrant and has been accused of espousing racist ideologies. The right-wing party, known as the Swedish Democrats, may secure seats in Parliament for the first time. If the conservatives don't win outright, the Swedish Democrats may try to play kingmaker in any effort to form a government. Reinfeldt's alliance has sworn it will not cut any deals with the hard right and will turn to the Green Party instead.

The bottom line: Sweden's voters, known for their left-wing tilt, may reelect a tax-cutting, fiscally hawkish conservative government.

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