Last week The Swedish National Institute of Economic Research (Konjunkturinstitutet) presented the monthly economic barometer for August. It is not an uplifting reading. It shows that both business and consumer confidence has been falling sharply over the summer and is now at its lowest level since 2009.
Growth has slowed down and Sweden seems to be heading into a recession.
It may be rational for individual companies and households to cut back on consumption and investment – and instead gather in the barns – when a harsh economic winter is approaching. It may be rational for the entrepreneur to fire a few employees if it can be assumed that incoming orders are going to decline. It may be rational to postpone the purchase of a new sofa for your living room if you are unsure if you are going to keep your job.
But a society’s economy does not work the same way as a corporate budget or household budget does. It is not very effective to try to starve a society out of a recession. What we need now is proper public investment to sustain production and consumption. Unfortunately, neither the Moderates nor the Social Democrats seem to have a real understanding of the seriousness of the situation.
The Moderate government proposal to cut restaurant VAT in half would at best create a few very expensive job. Even if you believe in finance minister Anders Borg’s calculations, each new job in the restaurant sector would cost more than 835 000 Swedish kronor (almost 88.000 euros) in lost tax revenues. For that amount you could hire two teachers or nurses.
But it’s most likely that a reduction of the restaurant VAT will just result in higher profits for the restaurant owners. Restaurants are in the service business and they will only earn money if they sell as much as they can. They therefore employ the number of employees that are needed. No more, no less. It is simply a matter of supply and demand. If the availability of open counters at McDonald’s is less than the need for such, customer will take their money to a competitor instead.
Thankfully, at least the Social Democrats have given up the election promise to reduce the restaurant VAT. It was a bad idea to beginning with and a concession to the Greens when the red-green cooperation was to be consolidated.
But instead of coming with aggressive proposals on how to keep the economic wheels rolling, the Social Democrats tied themselves to a tax reduction for pensioners, something that would cost almost half of an already small space for reforms in the government budget. It is a way to close the growing income gap between those who work and pensioners that have been created by the job tax credits that the centre-right government has implemented over the last five years. And it is reasonable that work incomes are taxed equally regardless of whether the money comes at the end of the month or after you have retired. But it is not the best way to stimulate the economy in a recession.
A cliché that was repeated ad absurdum when the economic crisis first hit three years ago is that the Chinese character for crisis is also the sign for opportunity. The Swedish “people’s home” (folkhemmet) grew out of the Great Depression of the 1920s and 30s. Instead of responding to the crisis with austerity and to let the market regulate itself the newly elected social democratic government decided to expand the public economy.
State subsidies for housing construction, unemployment benefits, pensions and child grants. They began building the welfare sector. The industry was restructured and streamlined, not least because of the increased availability of electricity when hydroelectric power was expanded. It was this process that laid the foundation for the social democracy that dominated the Swedish society for half a century.
In 1997 Göran Persson launched “the green people’s home” as the project of the future for social democracy. It was a farsighted idea that was largely forgotten when the economy was rehabilitated after the Swedish economic crisis in the 1990s. But it is time to take it up again. We face enormous challenges when we have to take on the climate and energy crises.
There are small steps that can be done immediately, as the introduction of a time-limited tax deduction to get started with the much needed renovation and climate proofing of the large public housing stock that was built in the 1960’s and 70’s (Miljonprogrammet). That would create jobs while it would give people a better standard of housing and lower energy bills. We also need extensive investments in the renovation and expansion of the railway. But a longer-term restructuring of the Swedish energy production is also needed.
According to a survey done by Swedish National Board of Housing, Building and Planning (Boverket) Sweden could produce about 75 percent (84 TWh) of its electricity needs through wind power. This is 50 percent more than the energy currently produced in all of Sweden’s nuclear power plants. It is also about 50 percent more energy than is produced by hydropower in Sweden. A large-scale investment in wind energy could mean new jobs in the manufacturing industry and new sources of income for Sweden’s rural municipalities.
It’s only by aggressive investments in infrastructure, education, welfare and the energy restructuring that we can get out of the economic and ecological crisis that Sweden is about to enter. It’s time to start building “the green people’s home”.
A version of this column was published as an editorial in the Swedish social democratic daily newspaper Västerbottens Folkblad.