Like other European countries, Sweden’s policy of cradle-to-grave welfare has been under pressure for some years. A recurring topic of debate among Sweden’s political, labor and business leaders is how to sustain Sweden’s generous welfare system while putting a halt to ever-increasing income taxes, which can be as high as 60% . Almost half the population are employed by the public sector or are dependent on various state benefits.
Sweden provides universal health insurance along with many generous family benefits, including a 16-month paid parental leave after the birth of a child (divided between both parents), tax-free child allowances, and education stipends for children. When a Swede reaches retirement at age 65, he or she is entitled to a hefty pension that rises with inflation. While far too many have retired before 65, others are choosing to remain employed until 67–a right employees earned in recent years.
The defeat in 2006 of the long-reigning Social Democratic Party by a right-center coalition was caused by the growing concern over the direction and the heavy-handed management of the country. The four-party alliance, led by Moderate Party leader Fredrik Reinfeldt, promised to reduce unemployment by cutting the tax burden on employers and employees, weaning people off benefits and shrinking the role of government in business. The first two of these measures have started well.
Challenges from a global economy
Today, Sweden faces a number of challenges in an increasingly global economy. Recent slowdown in exports is due to a weaker US dollar and the slowdown in the world economy, largely due to the American sub-prime housing market-related credit crisis. Conventional wisdom holds that capital will flee welfare states in favor of countries where labor is cheaper, government regulations are fewer and taxes are lower.
In many ways, Sweden is well equipped to handle these challenges. It has seen a growing shift from an economy characterized by traditional labor-intensive industries to a knowledge-based service industry. To improve their competitiveness, many of Sweden’s export-driven companies are shifting more of their activities to service-oriented ones as well as moving more of their factories to low-cost countries.
A look at the past is a good indication of how Sweden will respond to future challenges. For more than 100 years, the direction of Sweden’s economic and political system has often been the result of a close, if at times testy, partnership between companies and trade unions alongside the government.
This form of partnership has sometimes been referred to as the Swedish Model. It originally consisted of representatives from the blue-collar union confederation (LO), the major employer federation (SAF, which in 2001 became the Confederation of Swedish Enterprise or Svenskt Närginsliv) and often government, with representatives from the Social Democratic Party (usually in power since 1932 except for the years 1976-82, 1991-94 and since 2006). White-collar unions gradually joined the LO in this partnership.
Unlike many countries where major stakeholders are constricted by adversarial relationships, Sweden’s social partners met regularly since the SAF-LO Basic or Saltsjöbaden Agreement in 1938 to negotiate major economic and political agreements about taxation, collective bargaining, health and safety, education and training, and other issues that relate to economic growth and income equalization.
The origins of the welfare state
Some would argue that the origins of the Swedish welfare state as we know it today had its roots in the late 19th century before the Social Democrats came to power. In the 1840s, Sweden began to pass “poor relief laws,” taking the first step towards implementing the welfare state. The government also implemented an impressive number of liberalizing and business-stimulating laws and decisions between 1840 and 1870.
Collective bargaining in Sweden began with blue-collar workers in the private sector, who step by step organized trade unions, starting with graphical workers in 1846. The trade unions’ rights to negotiate and to take industrial action were recognized in 1906 through the so-called “December Compromise,” a pioneer agreement between SAF and the Swedish Trade Union Confederation (LO).
LO was founded in 1898 at a time of rapid industrialization and urbanization, which came to Sweden rather later than it did to Continental Europe, an advantage in that many mistakes could be avoided. From the 1910s, Sweden’s Liberal Party (non-socialist) government, with the added support of the population through universal suffrage, began broadening the range of social benefits.
The modern era
In the years following the 1938 Basic Agreement between workers and employers, a unique form of industrial relations developed in Sweden, often referred to as the “Saltsjöbaden spirit.” This was characterized by mutual trust, a willingness to cooperate and a joint belief in combining economic growth with income equalization.
Sweden’s neutral position during the Second World War allowed the country to concentrate on building its infrastructure and developing its markets for its expanding export-driven companies. Interestingly, the Swedish tripartite model in these early years did not necessary imply a very large welfare state, nor the taxes necessary to finance it.
On the contrary, in an international perspective Sweden's taxation levels were quite low until around 1960. Sweden’s increasingly heavy tax burden did become a strain in the 1970s when taxes were raised by a whopping 1 percent a year and the municipal sector, in particular, grew to staggering proportions.
Oil crisis triggers downturn
The Swedish welfare state began to hit rough waters in the 1970s, when its cradle-to-grave policies began to crack. The “social engineering” of the 1930s became intrusive rather than benevolent. Triggered by the oil crisis of 1973 and a world recession, Sweden experienced a couple of decades of ups and downs, characterized by excessive government spending, currency devaluations and inflation.
A fully developed banking and financial service bubble burst in the early 1990s, shaking the very foundation of the Swedish financial system, resulting in massive credit losses and a bail-out by the government to save the banking system. Important structural and austerity reforms were enacted, stabilizing the economy.
By 1993, Sweden’s economic growth rate was again in line with the average of other countries within the OECD. Since that time, inflation has been under control, helped by largely responsible collective pay agreements, with the manufacturing industry, competing in a tough environment, usually leading the way.
The state budget deficit more or less disappeared during the late 1990s and the public debt is today below 40 % of the GDP. Although Sweden, a member of the European Union since 1995, has not switched its currency, the krona, to the Euro, its strong financial situation would allow the country to join the EMU if approved by a majority of the population. There is still much to do regarding taxes, deregulation, labor law, but Sweden is well prepared to succeed in the global economy.