The Swedish Model: Government Austerity


Sweden, like Norway, is often held up as a country which is “socialist and successful.”  For example, Sweden has high taxes yet also has had healthy economic growth recently.  In this century so far, Sweden’s total tax bite amounted to 52% of GDP, while the U.S.’s was 32%.  Yet Sweden’s real GDP grew 2.3% per year from 2001 to 2011, and ours grew only 1.6% per year.  Prima facie evidence that high taxes don’t kill an economy, right?

In July I deconstructed the Norwegian “Miracle,” the other “socialist and successful” country.  It’s Sweden’s turn now.

Sweden, like Norway, consists of a small, not very diverse, mostly white and Christian people.  Its population is 9.1 million — a bit less than North Carolina’s.  (There are 13 cities in the world with bigger populations.)  Not only are native Swedes white, but so are most of Sweden’s immigrants.  The CIA World Factbook lists its immigrants as “Finns, Yugoslavs, Danes, Norwegians, Greeks, Turks.”  And 85% of that population is Lutheran; 85% live incities — 22% in the Stockholm area itself.

But unlike Norway, which is swimming in oil, Sweden is not richer than the U.S.  On a GDP per capita basis (Purchasing Power Parity), the U.S. is 20% richer than Sweden.  So Sweden has enjoyed somewhat faster growth than the U.S., at least over some cherry-picked periods of time, but it has not caught up to us in over three decades.

In 1980, Sweden was 81% as rich as us; 31 years later, 83%.  That’s not much movement on Sweden’s part.  In fact, even that 2% difference all came in the last year, 2011 (the last year of available data), not exactly a banner year for the U.S.

The real story of Sweden is the exact opposite of a “socialist success story.”  The real story is that big government stifles growth and that what works is austerity.  The real story of Sweden comes in two parts: pre-1993 and post-1993, or the quasi-socialist years and the austerity years.

From 1980 through 1997, Sweden’s government spent more than all other advanced economies as a fraction of GDP.  It peaked at 68% of GDP in 1993, an all-time record for advanced economies.

And how did that “socialism” work for Sweden?  Its economy grew only 1.4% per year from 1980 to 1993, when the U.S. was growing 3.0% per year.  And over those last five years, 1988-1993, it stopped growing altogether — 0% growth.  It fell farther behind the U.S: from 81% as rich to 72% as rich.  Its debt grew to 70% of GDP.

In short, government spending in Sweden had the effect that free-market types always predict: slow growth and high debt.  Government spending does not stimulate; it stifles, and it sticks our kids with the bill.

Around 1993, Sweden’s government changed its behavior: it started spending less.  By 2011 it was spending “only” 49% of GDP.  While that is still pretty high, that represents a cut of  19% of GDP, or about what the entire federal government of the U.S. spent each year in most of the Clinton and Bush years.

By 1998, Sweden was no longer Europe’s biggest spender.  By 2011, it had dropped to 9th place of 34 advanced economies.  Sweden’s government is still big, but not near the biggest, and it lost a lot of weight — the equivalent of shedding the weight of the entire federal government of the U.S.

That is what I call “austerity”: the government simply spending less.  And how did that work out for Sweden?  Since 1993, its economy grew 2.8% per year, or double its previous rate, while ours grew only 2.5% per year.  Its debt was cut from a high of 73% of GDP to 37%.

Here is the Sweden Story in two charts.

I don’t know how it could be any clearer: austerity, properly understood, works.  And Keynesianism is voodoo economics.

wrote in July that economic growth is highly correlated, negatively, to government spending.  I said that economic growth will grind to a halt once government spends about 70% of GDP.  At what point did Sweden turn itself around?  At 68% of GDP.  And in the five years before that, from 1988 to 1993, Sweden’s real growth was absolutely flat — 0%. Sweden validates my growth model.

Sweden’s turnaround has not gone unnoticed.  The Pew-Peterson Commission on Budget Reform cited Sweden as one of the success stories in cutting government debt.

In the 1990s, following a financial crisis and the worst recession in Sweden since the 1930s, Sweden faced a deficit of over 11 percent of GDP in 1993. Soon thereafter, the government enacted a large deficit reduction plan to restore confidence in its currency and enhance its budgetary flexibility. It reduced its subsidies for medical and dental care, indexed certain taxes, and increased contribution rates for the unemployment benefit system. Ultimately, Sweden reduced its debt by establishing a goal to make surpluses equal 2 percent of GDP. By 2004 Sweden was running budget surpluses, and in 2008 the country’s debt was 38 percent of GDP.

Sweden’s debt was cut from 73% of GDP in 1996 to 37% in 2011.  Do you know what U.S. government debt did during those same years?  It rose from 70% of GDP to over 100%!  What’s more, the U.S. government did all that in just the last four years.

It took Sweden 12 years to cut its debt by 35% of GDP.  It took the U.S. just four years to increase its debt by 35% of GDP.  We are taking Sweden’s example and turning it on its head.

Look at Pew’s summary of what Sweden did and compare it to what the U.S. is doing now.

Sweden “enacted a large deficit reduction plan.”  The U.S. has had deficits in excess of a trillion dollars each year that Obama has been president.  President Obama’s latest budget plans for a debt that skyrockets to infinity.

Sweden “reduced its subsidies for medical and dental care.”  The U.S. passed ObamaCare in 2010, calling for a whole new class of subsidies.

Sweden “indexed certain taxes and increased contribution rates for the unemployment benefit system” (although it reduced the fraction of GDP it took in as revenues — see below).  Obama makes up tax policy as he goes along, increasing rates on everything from tanning beds to medical devices, and cutting payroll taxes, the very taxes that fund Social Security and Medicare, which actuaries expect to go broke in the next decade or two.

And, of course, Sweden simply cut government spending.  Government spending in the U.S. is at post-war record highs.  The federal government in particular has been spending over 24% of GDP in every year of Obama’s presidency, a significant increase over the 16 years that preceded Obama (which averaged 19.7% of GDP).

Sweden does have high taxes.  Government revenues were 49% of GDP in 2011.  (In the U.S., they were 32% of GDP, including federal, state, and local governments.)  But Sweden gets that revenue from everyone, not just “the rich.”  The top 10% of income earners in Sweden made 26.6% of all income, and they paid 26.7% of all taxes, for a ratio of 1.00 — perfectly flat.  In the U.S., the ratio was 1.35, the most progressive of all advanced economies.

If we want to imitate Sweden’s high revenues, we need to raise taxes most on the non-rich!

The real story of Sweden is that austerity works.  When Sweden’s government was the biggest spender, its economy totally stalled: zero growth for five years.  What grew was its debt.  And even with extremely high taxes, it ran huge deficits.

Then it changed its high-spending ways.  It cut spending, drastically, and over an extended period of time — going on 18 years now.

Keynesians tell us that cutting government spending will slow economic growth.  The exact opposite happened with Sweden.  Once it started cutting spending, its economy started growing: 4% in 1994 and 3.9% in 1995.  In the 18 years since it started cutting, Sweden’s economy grew at twice its previous rate, even faster than the U.S.’s.

And Sweden did not cut its debt and deficits by raising revenue levels.  Sweden’s government took 62% of its GDP at the high point (1987-91).  By 2001, government revenue was under 54%, and in 2011, it was under 50%.

Sweden cut spending and taxes.  And its tax system is as flat as a tax system can be.

Instead of imitating Sweden’s example of austerity, Obama and the Democrats are championing the exact opposite in every measure.  More spending, more taxes, more subsidies, a more progressive tax system, more Krugmanomics.  There’s a word for that: delusional.

Randall Hoven can be followed on Twitter or contacted via his web site,

Data sources: The source for most comparisons above, including the two charts, was the International Monetary Fund’s World Economic Outlook Database (dated April 2012).  The source for population characteristics was the CIA Factbook.  The source for U.S. federal government revenue and spending was the White House’s Office of Management and Budget.

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October 1, 2012 | 3 Comments »

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  1. In my last post the following qote from CIA fact book was left out

    Total spending on health care – public plus private – rose from 9.0% of GDP in 1980 to 17.9% in 2010.

    before the phrase (who got those increases?)

  2. This presentation compares apples and oranges. The article must be viewed in the context of an agenda: Increasing govt spending reduces growth therefore lets cut the medical and dental costs of govt spending. No mention of govt spending to bail out banks and businesses, no mention of govt spending on the wars in Iraq and afghan. Are we really to believe that our problems are caused by massive overspending on health as opposed to 1-the tech bubble debacle, 2-the banking finance sector debacle 3-the subprime mortgage debacle 4- massive war spending. None of the prime causes are related to medical and dental costs. Lets look at these charts a little more closely(although they are actually meaningless as there are many factors in GDP and the major one is personal consumption) On his chart from approx 1982-1988 govt spending steadily decreases and during the same period so does the GDP chart line.

    I don’t know how it could be any clearer: austerity, properly understood, works. And Keynesianism is voodoo economics.

    I dont know whether Keynesianism is voodoo economics but I know voodoo “scientific” analyis when I see it. In scientific method one does not assume that simultaneous, or even chronological, relationships prove a causal relationship, hence controled experiment.. Many factors would have to be considered to arrive at the conclusions peddled here, not just govt spending. Furthermore, even if the causal relationship were to be established between govt spending and real GDP growth in Sweden that does not prove a conclusion to reduces medical and dental costs in the US or Sweden. Furthermore, if it were to be proven that both govt spending and high medical and dental costs in Sweden produced negative GDP one cannot extrapolate the same for the US. Does Sweden have a high defense budget for conducting wars, did Sweden have a finance and banking bailout to the magnitude of the US? Furthermore, no mention is made of what the average Swedish citizen receives from the GDP as opposed to the average US citizen in health security,etc.. The author quotes the CIA fact book, following are some quotes from the same source re the US economy:

    The onrush of technology largely explains the gradual development of a “two-tier labor market” in which those at the bottom lack the education and the professional/technical skills of those at the top and, more and more, fail to get comparable pay raises, health insurance coverage, and other benefits. Since 1975, practically all the gains in household income have gone to the top 20% of households. Since 1996, dividends and capital gains have grown faster than wages or any other category of after-tax income……(US firms) face higher barriers to enter their rivals’ home markets than foreign firms face entering US markets…. Imported oil accounts for nearly 55% of US consumption. Oil prices doubled between 2001 and 2006, the year home prices peaked; higher gasoline prices ate into consumers’ budgets and many individuals fell behind in their mortgage payments. Oil prices increased another 50% between 2006 and 2008. In 2008, soaring oil prices threatened inflation and caused a deterioration in the US merchandise trade deficit, which peaked at $840 billion(cause of price increases, perhaps war?)……The global economic downturn, the sub-prime mortgage crisis, investment bank failures, falling home prices, and tight credit pushed the United States into a recession by mid-2008. GDP contracted until the third quarter of 2009, making this the deepest and longest downturn since the Great Depression.(who’s to blame, medical and dental costs, welfare recipients?)… To help stabilize financial markets, in October 2008 the US Congress established a $700 billion Troubled Asset Relief Program (TARP)…. In January 2009 the US Congress passed..$787 billion fiscal stimulus to be used over 10 years – two-thirds on additional spending and one-third on tax cuts -..(were the bailouts spent over 10 years?)….The wars in Iraq and Afghanistan required major shifts in national resources from civilian to military purposes and contributed to the growth of the US budget deficit and public debt – through 2011, the direct costs of the wars totaled nearly $900 billion,…. (who got those increases?)…Long-term problems include inadequate investment in deteriorating infrastructure, rapidly rising medical and pension costs of an aging population,(authors solution is reduce expenditure to aging populations medical costs) sizable current account and budget deficits – including significant budget shortages for state governments – energy shortages, and stagnation of wages for lower-income families.
    and for Sweden:

    … Sweden was in the midst of a sustained economic upswing, boosted by increased domestic demand and strong exports. This and robust finances offered the center-right government considerable scope to implement its reform program aimed at increasing employment, reducing welfare dependence, and streamlining the state’s role in the economy. Despite strong finances and underlying fundamentals, the Swedish economy slid into recession in the third quarter of 2008 and growth continued downward in 2009 as deteriorating global conditions reduced export demand and consumption. …..and the government is proposing stimulus measures in the 2012 budget to curb the effects of a global economic slowdown and boost employment and growth.
    People like simple charts and simple solutions.