The success of Scandinavia owes nothing to high taxes or welfare

September 11, 2012, 01:20am

SCANDINAVIAN nations are often regarded as role models. Egalitarian Richard Wilkinson once said that, if you want to live the American dream, you should live in Denmark. Sweden often gets envious glances from social democrats in the Anglophone world.

Scandinavian societies are characterised by high living standards, high life expectancy, low crime rates, high social cohesion and an even income distribution. But, are these attributes caused by large welfare states? If you study Sweden’s history in depth, much of its success is explained by a unique culture, as well as reliance on free-market policies for much of its history.

It has historically been difficult to survive in the cold Scandinavian climate. The population therefore adopted a culture with a great emphasis on individual responsibility. Research has shown that these homogenous Nordic societies had strong social cohesion, high levels of trust and a strong work ethic – attributes which pre-date the welfare state. These Scandinavian norms allowed welfare states to be expanded and taxes to rise, with limited avoidance and shirking.

But things began to change as the welfare state became embedded. In the World Value Survey of 1981-84, almost 82 per cent of Swedes said that “claiming government benefits to which you are not entitled is never justifiable”. By the 1999-2004 survey, only 55 per cent held the same belief. In recent years, Sweden has debated the need to limit the misuse of the welfare system and to move towards less generous welfare benefits and lower taxes to encourage hard work.

A popular notion is that Sweden’s strong growth is closely tied to a period dominated by Social Democratic party rule and high taxes. In fact, between 1870 and 1936 (before the start of the Social Democratic era), Sweden had the highest growth rate in the industrialised world. The period was characterised by the development of a market-oriented economy. As late as 1950, Swedish tax revenues were only around 21 per cent of GDP. The shift towards a big state occurred during the following years, as taxes increased by almost one per cent of GDP annually. Then, from 1975 to 1995, economic development was stagnant.

Another popular notion is that high equality levels are a direct result of high taxes. However, in 1920, well before the existence of a large welfare state, Sweden had among the lowest levels of inequality in the western world. Swedish economist Andreas Bergh recently concluded that “most of the decrease in income inequality in Sweden occurred before the expansion of the welfare state”. Indeed, the combination of high taxes and benefits and labour market regulations made it difficult for the foreign born and the young to enter the labour market in the social democratic era. In the last few decades, about 20 per cent of Swedes of working age have been supported by benefits.

Lately, things have improved. Reforms have moved Sweden towards lower taxes and less generous welfare benefits. This has resulted in a reduction in government dependency – a remarkable feat during a period of global economic instability. The state in Sweden is back to about the same size – if measured by government spending as a proportion of national income – as that of the UK.

Not only Sweden, but other Scandinavian nations have gradually increased their economic freedom in recent years. Economic freedom rankings show that Nordic nations have moved considerably towards free markets, while the UK and US have reduced their levels of economic freedom. In recent rankings, Denmark ties with the US and surpasses the UK on economic freedom. The Danish social democratic government is pursuing lower taxes as a route to strengthening long-term economic development. Even the famously high Swedish tax burden has been reduced – from 51.4 per cent of GDP in 2000 to 45.2 per cent in 2010.

Sweden and other Nordic countries are moving tentatively back towards the free-market policies that served them so well in the past. The period of left-leaning radicalisation was made possible by the pre-existing strong social norms. It was not responsible for them. It was a failed experiment.

Nima Sanandaji is author of The Surprising Ingredients of Swedish Success – free markets and social cohesion, published by the Institute of Economic Affairs (IEA). Philip Booth is editorial and programme director of the IEA.

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