TCS Daily

Sweden: Beaten At Its Own Game

By Fredrik Segerfeldt - November 29, 2004 12:00 AM

Sweden is the country in the world where people give up the largest share of their income to the government. And it has been so for decades. But the Swedish public is not too displeased with taxes. Rather the contrary. It has given the leftist parties -- largely responsible for and the symbol of the big government system -- a majority in election after election. "After all, the high taxes have given us the best welfare services and the best income security in the world." That is what the Swedish people believe after having been told so by their leaders for many years. A recent survey showed that 77 percent of all Swedes believe that their country has a better welfare system than the rest of Europe. The country also ranks high in many international comparisons of quality of life, so there is little reason to doubt the supremacy of the Swedish cradle-to-grave model.

The question that naturally comes to mind, then, is whether this is actually true. Does the Swedish government spend the most euros per person on welfare? For purposes of clarity, let me just explain what I mean by public social expenditure, or welfare spending: cash transfers to families or individuals for social purposes as well as social services such as health, child and elderly care. Education spending is not included.

Let me also say that I think that the welfare state is immoral. Public redistribution of money in Sweden is largely (82 percent) redistribution from one individual to the same individual over time. But in this piece I ignore all the moral aspects of the welfare state as well as the devastating effects of government monopolies and the rationing of welfare services such as health care. Instead I take the utilitarian perspective of a welfare state lover, assuming that as big government spending as possible on welfare is desirable. Therefore, let us look at what the Swedish system actually produces in resources devoted to welfare, compared with six other West European countries: Finland, Denmark, the Netherlands, Germany, Austria and Ireland.

Swedish tax pressure, i.e. fiscal revenue as percentage of GDP, is the highest in the world, and therefore also higher than in the other six countries.

Table 1

Fiscal revenue as share of GDP, 2000 (%)

Source: OECD

Also, as expected, Sweden devotes the largest share of its GDP on public social expenditure.

Table 2

Public social expenditure as share of GDP (%), 2000

Source: Eurostat

However, an unemployment benefit or a surgery is not paid for with percentages of GDP, but with real money. Even if Albania spent its entire GDP on health care, it would not be superior to that of the US. So, if we really want to compare how much the government in each country spends on welfare, we need to look at the expenditure in terms of real money, per capita.

As we can see in Table 3 below, the Swedish government, despite the highest taxes, does not have most euros to spend on welfare. Instead, Denmark and Austria do. Lower economic growth has diminished the Swedish tax base in comparison with the other countries. A large share of a shrinking pie soon gets smaller than a small share of a growing pie.

Table 3

Public social expenditure per year and capita, 2000 (euro)

Source: Eurostat

The other countries have 86 percent of Sweden's taxes, but 95 percent of its social spending. (Here, we ignore Ireland, with much lower taxes and lower government social spending). A welfare gap has appeared between Sweden and the other countries.

Table 4

The Swedish welfare gap, 2000 (%)

(taxes and welfare in other countries, Ireland excepted, as percentage as Sweden's)

Source: OECD and Eurostat

This has not always been the case. In 1980, the Swedish government had far more resources to devote to social spending than in other countries. In 1998, despite the fact that Sweden raised taxes more than other countries, this advantage was all but gone. 18 years of high taxes and low growth made other rich countries catch up with Sweden's welfare spending.

Table 5

The Swedish welfare loss

(public social expenditure in the other countries as percentage of Sweden's (%))

Source: OECD

The conclusion is obvious. It is not sustainable to rely on raising taxes to ensure enough revenue for an expensive and extensive welfare system. Good welfare states depend on a growing economy. And high taxes impede growth. Welfare states are therefore a contradiction in themselves.

Ok, many readers will probably say, this is nothing new. Well, it is. In many other countries, leftists still refer to Sweden as a role model, as a country being able to combine an extensive welfare state with acceptable economic growth and high income levels. Free-marketeers have always answered that the system inhibits freedom and growth, but we have not been able to show them that high taxes also limits government social spending. Now we can show them that the biggest welfare experiment ever in the free world has been caught up and surpassed on its own home turf. The highest taxes in the world do not produce the world's best welfare. In fact, Sweden has been beaten at its own game.


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