Sweden must reform to stay afloat

While Sweden's economic future looks bright in many respects, it will soon lose its competitive edge without major reforms to the role of the public sector, argues Nima Sanandaji of think-tank Captus

In some respects the future of the Swedish economy looks bright. Although Sweden has a low rate of entrepreneurship, many Swedish companies are growing rapidly. At the same time, the new government is slowly introducing work and business-friendly reforms.

However, recent studies show that reform of the Swedish economy remains urgent. A number of long term structural problems still exist within the welfare system that must be dealt with sooner or later if Sweden is to remain a competitive economy.

One such problem is the simply massive extent of the public sector. Since the public sector is not exposed to the forces of competition in the same way as private businesses, the productivity of public services increases more slowly than in the private sector.

As time passes and the economy develops either the tax rate must be increased to maintain the quality of public services or the quality of public services must be reduced in order to keep the taxes constant.

Recently the Confederation of Swedish Enterprise ordered a report from the governmental National Institute of Economic Research that looked at this dilemma. The report came to the conclusion that in 2035 we can either keep the tax rate at the same rate today and reduce the production of public services by 17 percent, or increase the taxes in Swedish municipalities to 46 percent from around 33 percent today.

Given that Sweden already has the highest tax rate among OECD countries, a significant tax increase is most likely not a viable choice. Taxes already comprise more than half of the Swedish economy. How much higher can they climb?

A reduction in public services with a constant tax rate is not really possible either. Already many people are asking themselves why they are paying the highest taxes in the world at the same time as they are dissatisfied with public health care and schooling.

So what is then the solution? The most realistic option is for services currently provided by the public sector to be provided increasingly by the private sector. Private funding of services must probably also increase. On paper it might seem simple to implement these reforms, but given the political climate in Sweden it will be anything but easy.

It is worrying that even one of the few right-of-centre governments to be elected in modern Swedish history is not pushing a strong reform agenda. In the long term structural reforms seem to be a necessity rather than a choice. The question is if Swedish policy makers are aware of this?

Nima Sanandaji

Nima Sanadaji is CEO of Captus, an independent Swedish free-market think-tank