Deficit cutting the Swedish way

Running Canada a close second as the current country of choice to look at for deficit cutting lessons is Sweden. As I previously looked at the Canadian experience, now it’s the turn of Sweden.

The think tank Bruegel has published a pamphlet from Jens Henriksson about the Swedish experience of turning a budget deficit of over 11% of GDP into a surplus. He was a policy adviser to the Swedish government during this period.

The pamphlet spreads over more than 40 pages, though politically the most important point is made by him right at the start:

[This] is not a paper about how to get rid of the welfare state. On the contrary, it is about how to strengthen the economic foundations for whatever kind of social model that is preferred. The budget consolidation in Sweden was dramatic but it preserved, and in many ways modernised and improved, the welfare system.

As with Canada, Sweden was able to tackle its budget deficit at a time of a much healthier world economy than the one that provides the backdrop to our own current efforts. Even so, it’s worth bearing in mind just how bad the Swedish economy had got:

Sweden experienced negative growth three years in a row between 1991 and 1993, averaging minus two percent. Over three years the debt almost doubled, unemployment tripled and the budget surplus turned into a large deficit. The combined effect of an exploding budget deficit, high interest rates and record-high levels of unemployment was staggering.

The ten lessons Henriksson lays out are:

1. Sound public finances are a prerequisite for growth. That does not have to mean an aversion to borrowing or major monetary expansion. Henriksson is happy with plenty of the former if the money is wisely invested and Sweden did plenty of the latter, but you cannot just forever put off dealing with public finances.
2. If you are in debt, you are not free. His underlying point is a sound one: if you are in too much debt then you end up in thrall to the international financial markets. However, becoming debt free is not the only way to avoid this problem; many countries (including Britain) have run manageable debts for long periods of time without running into that problem. So although the exact criteria may not apply to the UK, the basic point does – the less dependant you are on international borrowing to keep the government’s finances afloat, the more freedom you have to do what you want.
3. The one responsible must put her or his job on the line. The argument here is that this is what gets credibility with the public, financial markets, civil service and political colleagues. If they all know that person X is deadly serious, it then becomes easier to achieve the goals. For example, civil servants may be tempted to try to avoid having to make cuts in their budget and ride out the political impetus to curb the deficit. If they know that they can’t do that, they are more likely to offer up suggestions based on their detailed knowledge of the more obscure corners of the public sector.
4. Set goals and stick to them. Once again the theme of strong public commitments making the overall job easier features in Henriksson’s list. Here he argues that just as public targets for inflation make controlling inflation easier, so too do they for a deficit.
5. Consolidation should be designed as a package: “An ad hoc hodgepodge of measures will only have a limited chance of success. Presenting the consolidation measures in one package makes it clear to all interest groups that they are not the only ones being asked to make sacrifices … If a consolidation package consists of both tax increases and expenditure cuts the distributional effect can be fair. When studying the distributional consequences, do not only use the income distribution perspective. There are other dimensions that also are important, such as for instance gender, age and geography.”
6. Act structurally but be consistent. Perhaps the most surprising recommendation in the pamphlet, this point in Sweden meant a uniform 11% cut from all budgets – a very different approach from the Canadian one of looking at each area of government activity and deciding if it is necessary. The downside of a flat rate cut across the board is that there is no particular reason to believe that the least desirable expenditure is equally distributed across the board. Against this Henriksson argues that only flat rate cuts really get an understanding of the absolute need to find efficiencies seeping in to all corners of the state. It also avoid problems with some sectors feeling they have been picked on unfairly compared to others. In this respect, our coalition government, with its ring fencing of certain expenditure including the NHS, is going for the Canadian model rather than the Swedish one.
7. Do not leave the problems to the local authorities. Again, this contrasts with the Canadian approach of displacing many issues from the federal government to lower levels. Henriksson’s warning is based on the Swedish experience where local authorities faced a really tight squeeze: “In Sweden it meant that we saw big cuts in schools, healthcare and childcare because they are financed through local taxes. This created enormous political problems.”
8. Be honest to citizens and financial markets: “Never say that it won’t hurt. Never say that it is peanuts. Having been honest about the effects will not make it much easier, but being dishonest can lead to disaster. This will help ordinary people to plan ahead and to limit shocks.” The comments of Cameron, Osborne and Clegg neatly fit this lesson.
9. Stick to one message. Tackling a deficit is not simply about producing a list of items to cut or taxes to raise; it’s also a communications challenge to bring the public with you and to win confidence from the financial markets. That makes mixing in tax cuts with the rest of the package tricky: “At one time the government decided to cut down on expenditures to finance a tax cut in VAT on food. The result was that people became furious. ‘You are not cutting down because you need to. You are cutting down because you want to’. That was an impossible argument to handle, since the message was budget discipline, but the action was [making changes to the structure of the tax system].” On this point (and the linked argument against making any spending increases, even small ones in popular areas), the coalition government is taking a very different course from Sweden – looking to use tax cuts and targeted spending increases to garner wider support for the tough measures and also because they are justified in their own right.
10. Stick to it. Once you have sorted out the deficit, make sure you reform the systems that caused the problem in the first place.

Overall there are many similarities between Sweden’s approach and the current British one, but also some notable differences – no across the board percentage of cuts and a mix of the tough measures with tax cuts and spending increases. On both those fronts the British approach looks to better suit our circumstances, provided that the rest of the package delivers the necessary financial changes. Whether or not that is the case will be much clearer after the forthcoming budget.