Sweden’s much-lauded model of prosperity and social comfort is threatened by a lack of public investment.
The former United States president Ronald Reagan famously declared: ‘The nine most terrifying words in the English language are “I’m from the government and I’m here to help”.’ This is often rehearsed to assert that an active state, with high tax rates and extensive welfare commitments, is harmful to employment, innovation, private investment and entrepreneurship. But is an active welfare state really a hindrance to an efficient market economy?
Reality does not provide much support for this claim, despite the persistent efforts of business ideologues to depict Sweden and other developed welfare countries in a negative light. On the contrary, the Nordic high-tax countries consistently appear at the top of international rankings measuring everything from quality of life, democracy and wellbeing to productivity, competitiveness and innovation. This success is not a coincidence but rather the result of an efficient and equality-promoting economic system.
In recent years, the positive effects on economic growth of welfare policies favouring equality have been underlined by social-science research—including by staff at the Organisation for Economic Co-operation and Development and the International Monetary Fund. It has become increasingly difficult to hold on to outdated and disconnected theories while ignoring the reality. In Swedish public debate, however, this developing consensus has struggled to reach responsible politicians.
To contribute to a more constructive discussion about the future of the country’s social model, the five trade unions within Swedish industry have funded an Industrial Productivity Commission, a three-year project in collaboration with the union-oriented think tank, Arena Idé. It aims to increase knowledge about productivity and stimulate policy development from a trade-union perspective.
Within that framework, the commissionhas published a report (in Swedish), The democratic and investing welfare state: an irrigation system for growth. This addresses the new growth research, adding to our understanding of why Sweden and other welfare states have been so economically and socially successful.
A key piece of the puzzle is that investments promoting technological breakthroughs increasingly determine growth in mature economies. These breakthroughs, in turn, require substantial public commitments, which enhance the society’s human and intellectual capital. Tax revenues in Sweden have been extensively used for social and other investments, which the market needs to function well but which the private sector alone cannot generate (though public investment will engender multiplier effects in that regard).
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It has also become clear that small, open economies that foster technological development need more comprehensive social-security commitments if citizens are to accept the structural changes which technological advances bring in their train. Policies creating social security, redistributing life-chances and combating income inequality strengthen the long-term conditions for growth. Social trust—which, as the Swedish political scientist Bo Rothstein has demonstrated, is favoured by Nordic universal welfare states—is a cornerstone of economic development.
The increasing emphasis by researchers on the importance of social factors for growth has led institutions such as the OECD to question the former paradigm that lower taxes and a smaller state are the golden path to economic prosperity. More and more, the significance of the state guaranteeing high investment, supporting technological development, promoting social inclusion, ensuring good public health and fostering high education levels is being highlighted. It seems the Swedish economy has developed thanks to larger public commitments—not in spite of them.
At the same time, it is not a natural law that a larger public sector and more welfare policies provide better conditions for a productive economy. Ill-designed public commitments and corrupt institutions can be a leaking bucket for the economy. Wisely designed welfare commitments and public investments will however ‘irrigate’ growth.
The Swedish consensus approach, with a focus on a competitive market economy with far-reaching social policies, has been crucial to pool that political wisdom and achieve success. The consensus presumes the underlying public investments, benefiting business as well as citizens and social wellbeing. Yet it is being undermined by increasing social polarisation and broken welfare promises.
Today, we see serious threats to the continued success of the Swedish social model—notably the acceptance in the political system of a rapidly growing and significant deficit in investment (even maintenance), with instead the pursuit of fiscal economies. This underinvestment—despite a ratio of public debt to gross domestic product of only around 30 per cent, half the ceiling under the European Union fiscal rules—threatens economic efficiency and cohesion in the country.
From within the Swedish business community come calls for record investments in roads, railways, water and sewage systems, infrastructure, 5G telecommunications, electricity and energy. Additionally, there is an enormous housing shortage, we need to invest heavily in the climate transition and—with Sweden joining the North Atlantic Treaty Organization—the defence budget will have to reach 2 per cent of GDP. Finally, the country’s welfare systems are deeply anaemic, unemployment insurance only provides a basic income and schools and universities are significantly underfunded.
Clearly, today’s fiscal framework prevents the state from contributing its share of these investments. For ideologues in the business world, however, this presents an excellent opportunity to steer Sweden towards even more privatisation and deregulation, lower tax rates, reduced public commitments, greater income disparities and lower social mobility.
On this there is however a deafening silence from the pragmatic part of the business community and the trade unions—despite the fact that lack of investment threatens the competitiveness of business as well as real wages. This is crucial for Sweden’s future and more voices—clearer and more resolute—must join the debate.
Sweden can no longer rely on past achievements. The state must be allowed to borrow substantial funds for the social investments needed to ensure the prosperity, welfare and quality of life of future generations.
And that is a universal truth—not only for Sweden.