Sweden shows the way

No Socialist paradise here but no disaster, if making good decisions counts

In a long interview with Chris Uhlmann on 7.30, Ken Henry almost admits that there was too much spending and not of a productive type. He stands behind the excuse, “if it’s fiscal stimulus the most important thing is to get the money out the door“. Yeah. don’t worry if it goes up in smoke on pink bats or badly targeted education revolutions.

What a contrast to Sweden when in exactly the same situation. Unlike Australia and the rest of Europe, it decided to radically reduce taxes. Cash handouts were a small part of its strategy. Today, Sweden has no budget deficit and is returning a real surplus. It is among Europe’s fastest growing economiues, with growth heading towards 4 percent, and certainly without the help of a mining boom.

How did it do it?  By NOT doing what Gillard did and is still doing.

When elected four years ago, leading a four-party coalition, [Swedish Prime Minister] Fredrik Reinfeldt  had a striking slogan. ‘We are the new workers’ party,’ he said, meaning he would cut taxes for those in employment, but not for those on benefits. When faced with protests about how the poorest would be paying a higher marginal tax rate, he appealed to voters’ innate sense of fairness – and resentment at the high level of welfare dependency. At every stage, his ministers would explain the basics of low-tax economics. Cut tax on wages, and you increase the incentive to work. ‘This will increase employment,’ Reinfeldt said. ‘Permanently.’

Not that he was believed – at first, anyway. The party fell 20 points behind in the polls, and braced itself for the ritualistic electoral ejection. It carried on regardless, with tax cuts for cleaners and baby-sitters (most home helpers were paid ‘black’, as the Swedes say, because the tax was so high). Tax on low-paid jobs fell sharpest. Nursing assistants, for example, saw their tax bill drop by a fifth. The aim was to make work compete more aggressively with Sweden’s famously generous welfare state.

Taxes for the rich also came down. Reinfeldt abolished the notorious wealth tax, which took 1.5 per cent a year from any Swede worth over about Skr1.5 million (£125,000). Anders Borg, the finance minister, faced predictable protests about a Bush-style tax cut for the rich. He replied: ‘The big winners are, in the long term, all Swedes, because we must create conditions for companies to match global competition.’ So while the Tories were endorsing Gordon Brown’s plan to increase the tax on the rich, the Swedes were cutting the tax rate – in order to collect more from the well-paid.

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