Friday, September 22, 2006
SWEDEN: MAKING ROOM FOR IMPROVEMENT IN ECONOMIC PERFORMANCE
The victory by Sweden's Conservative coalition in the September 17 general election was its first since 1991, and as the outcome became clear on a crisp fall night, it triggered ecstatic celebrations. Young people even stripped off their clothes and cavorted in the fountain at Sergels Torg, the gritty center of Stockholm.
Radical economic reforms are inevitable for Sweden. Free-market policies based on the continually-adjusted improvement for pro-business incentives will likely be the main platform for chargining up already strong economic growth (4,2% of GDP). Business sector needs to be free of rigid regulation in order to be more flexible in terms of faster hiring and firing of productive workers. If new promises are kept then small and medium-sized enterprises will be in for a better and freer ride in the future. Long-term prospects of economic growth should also get boost but it's quite impossible to say how much.
One of the most paramount concerns of current Swedish economic picture is very high unemployment. Officially its rate is equal to 5% but other resources are saything that actual Swedish unemployment is about 7,5% of the capable working force. Other sources are counting Swedish unemployment above 10%. By cutting taxes, employers pay wages to employees and trimming high incomes employers face difficulties in hiring the most productive participants in the labor market since employers are facing heavy burden with gradually imposed income tax rates on those labor force whose contribution to progress and change in dynamic environment is essential to dynamic business and growing economy as well.
Sweden should immediately cut some of very irrelevant elements of welfare state. Taxes on luxury should be immediately dismissed in order to encourge dynamic and productive entrepreneurship that will evaluate agendas for strong global growth. Swedish tax system is definitely one of the foremost disincentives to save, work and invest. Current Swedish system is geared toward stopping wealth instead of stopping poverty. In the 20th century Sweden succeeded in terms of strong economic growth and remarkable level of economic freedom. This enabled strong growth upon creating wealth. After Sweden was getting richer, it was more capable for spreading strong welfare-spending habits. On the opposite, marignal tax rates grew as well. Punitive taxes are now a serious threat to country's overall competitiveness. Sweden enjoys many benefits from sections such as excellent education system. If Mr.Reinfeldt's promises are kept country should progress faster towards massive privatization of state hospitals to private companies. It's essential to improve the efficiency of health-care system. Large public spending habits in health care invariably result in less efficiency compared to invested resources. Welfare state means a warfare state. Private welfare is what creates prosperity and wealth. In order to have welfare policy-makers need to adopt pro-growth and pro-business reforms outputting in people who are able to save, work, invest and take part actively in entrepreneurship and business.
Mr. Reinfeldt should avoid gradualist approach to economic policies and immediately remove government intervention completely. Costs of adopting free-market reforms are not lower than costs of gradual advancement in careful and slow-moving imposition of economic policies aiming to increase stimulative incentives to let free entrepreneurship grow.
In fact, the Scandinavian or Nordic countries are admired across Europe for their ability to combine respectable economic growth with generous welfare programs. A fine-tuning of the model will likely make their approach even more appealing.
The best way to fund tax cuts is to launch hefty, fast and efficient privatization program, floating government stakes in a portfolio of companies including Nordea, a major bank; TeliaSonera, the largest phone company; OMX, the stock exchange operator; and SAS, the airline. The value of these shares is about $30 billion. All of these issues rose briskly on Sept. 18, with the broad Stockholm market up nearly 1%.
It is true that Social Democrats left Swedish budget in surplus but economic performance and overall competitiveness declined. But their policies toward low employment growth and massive outlays for public sector produced disincentives in gearing productive pariticipation. According to Fraser Institute's "Economic Freedom of the World" Sweden, beside Slovenia, has the most extensive public sector spending compared to the portion of GDP contributed to financing public sector. The Swedish krona has already strengthened to $7.24 to the dollar on the morning after the election as investors anticipate higher growth and spending.
Sweden can gain many benefits from flat-rated tax system. Swedish decision-makers should accelerate stopping and cutting public consumption, the growth of which must not exceed the growth of GDP. Lower taxes will encourage people to work on more productive things than seeking loopholes. Investments and entrpreneurial project are not the matter of taxation. They are the object of growth and productivity.
Low taxes, minimal regulation and more flexible labor market are a key to creating wealth and long-term prosperity. Sweden has a great chance to show others how this simple formula works in practice.