Sweden’s amazing supply-side, tax-cut experiment

Can we replace Tim Geithner with Anders Borg, ASAP?


Mega-thanks to my pal Mark Perry at Carpe Diem for pointing out this article detailing Sweden’s amazing supply-side experiment in tax cuts (bold for emphasis):

When Europe’s finance ministers meet for a group photo, it’s easy to spot the rebel — Anders Borg has a ponytail and earring. What actually marks him out, though, is how he responded to the crash. While most countries in Europe borrowed massively, Borg did not. Since becoming Sweden’s finance minister, his mission has been to pare back government. His ‘stimulus’ was a permanent tax cut. To critics, this was fiscal lunacy — the so-called ‘punk tax cutting’ agenda. Borg, on the other hand, thought lunacy meant repeating the economics of the 1970s and expecting a different result.

Three years on, it’s pretty clear who was right. ‘Look at Spain, Portugal or the UK, whose governments were arguing for large temporary stimulus,’ he says. ‘Well, we can see that very little of the stimulus went to the economy. But they are stuck with the debt.’ Tax-cutting Sweden, by contrast, had the fastest growth in Europe last year, when it also celebrated the abolition of its deficit. The recovery started just in time for the 2010 Swedish election, in which the Conservatives were re-elected for the first time in history.

‘Everybody was told “stimulus, stimulus, stimulus”,’ he says — referring to the EU, IMF and the alphabet soup of agencies urging a global, debt-fuelled spending splurge. Borg, an economist, couldn’t work out how this would help. ‘It was surprising that Europe, given what we experienced in the 1970s and 80s with structural unemployment, believed that short-term Keynesianism could solve the problem.’ Non-economists, he says, ‘might have a tendency to fall for those kinds of messages’.

He continued to cut taxes and cut welfare-spending to pay for it; he even cut property taxes for the rich to lure entrepreneurs back to Sweden. The last bit was the most unpopular, but for Borg, economic recovery starts with entrepreneurs. If cutting taxes for the rich encouraged risk-taking, then it had to be done. ‘In most cases, the company would not have been created without the owner,’ he says. ‘There would be no Ikea without [Ingvar] Kamprad. We would not have Tetra-Pak without [Ruben] Rausing. They are probably the foremost entrepreneurs we have had in the last few decades, and both moved out of Sweden.’

But they were not rich, I say, when they were starting out. ‘No, but they were becoming rich. If you have a high wealth tax and an inheritance tax, people emigrate because it becomes too costly to own a company. Ownership is a production factor. Entrepreneurs are a production factor. Yes, these people are rich and you can obviously argue that we want to encourage social cohesion. But it is also problematic if you drive out entrepreneurs from your country, because they are the source of job creation.’

What even Borg did not expect was that his tax cut for the low-paid would increase economic growth so much that it has almost entirely paid for itself. Borg had created something that Osborne’s critics say does not exist: a self-financing tax cut. ‘There was some criticism at the time that we were borrowing to finance tax cuts,’ he says. But Sweden could do it, because it was expecting to return to surplus soon; Britain has no such luxury, he says. His main advice to Osborne is: ‘Keep on dealing with the deficit, because deficits destroy everything else.’

2 thoughts on “Sweden’s amazing supply-side, tax-cut experiment

  1. There are some quite interesting points to make from Sweden’s example

    but it is still a social-democratic welfare state, with the world’s second highest taxation (right behind Denmark) filled with rules and regulations. Certainly the overall tax pressure has been reduced by the Reinfeldt conservative administration, but it is certainly not a tax hawk government. Borg’s main focus has been on moving money around in the budget (sometimes in a beneficial direction, as the tax cuts to companies for employing young under the age of 25) and keeping the budget balanced. The government may have its house in order, but ordinary Swedish citizens don’t, with a high degree of personal debt.

    The economy of Sweden in the first quarter of 2012 shrunk most in the whole of Europe, which is not that surprising as the economy is dependent on foreign trade that produces 60% of the GDP. This is not entirely the fault of the government’s policies, but it shows that the country’s economy has a strong dependency on factors the Swedish government cannot influence – for better or for worse.

    The center-right government’s policies have generally been in a good direction, but I am tempted to note that it is rather easy to become the poster boy of fiscal conservatism and liberalization today. You become a tax punk rocker by not being a tax hiker.

    PS. Conservative governments have been re-elected before, as in 1979 but not with the same good results as the present.

  2. I guess those tax cuts for the rich didn’t work out after all, did they? Don’t worry, they didn’t work in the USA, or in Italy or Spain or Greece either.

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