Let's keep our eyes on the Swedes

Europe's biggest welfare state is in trouble. How it copes could hold lessons for the rest of us

It is early spring in Stockholm. The economy is growing and the city seems as clean, shining and prosperous as ever - yet people are concerned. Some, like the journalists, are so concerned that they are out on strike, but all Swedish wage-earners are finding that their living standards are being squeezed by higher taxation and a shading back of the resources available for public services.

The Swedish model of the welfare state is in trouble, and how the decent, left-of-centre Social Democrats now in power cope with this problem may carry a message for the rest of Europe. For while the pressures on the Swedish welfare system are the pressures on other European welfare systems writ large, so too is the ability of Sweden, with its excellent education and its social cohesion, to cope with these pressures.

The size of the Swedish state sector relative to the rest of the economy is almost as large as that of Britain's in the middle of the Second World War. One-third of all workers are employed by the state; about 60 per cent of GDP passes through the state system. Most of the additional employment created by the state has been for women, and a high proportion of women work even by Scandinavian standards.

But the Swedish birth rate is also the highest in Europe. In fact Sweden is the only European country where the birth rate is above replacement rate. A high proportion of women working and high birth rates are made possible by the lavish state-subsidised child-care system. The state pays about 90 per cent of the cost of day-care. So women work, earning money to pay the taxes that then fund the wages of other women who look after their children. The household sector of the economy, the things which in other countries are done informally in families, has been made into an economic transaction. One Swedish economist, Assar Lindbeck, said that Sweden had "nationalised the family".

But if Swedish people want to do this, why shouldn't they? If they are prepared to pay the taxes, then that would seem to be their choice and they should carry on.

The pat answer is that, whatever people say to reseachers, when it comes to voting, they vote for lower taxes. But that is not really true in Sweden. Taxes are certainly very high - VAT at 25 per cent; petrol 80 pence a litre; top income-tax rates, with local taxes, about 58 per cent. But my strong impression here is that, while people in the business community complain, there is general political support for the high-tax/high-spend system. People feel they get value for their tax money. And top tax rates have come down, so that they are now lower than in neighouring Denmark.

True, there is a tax shortfall at present. The Swedish budget deficit is now 7.5 per cent of GDP, and the plan to get this down to the 3 per cent Maastricht limit by 1997 looks shaky. The draft budget for next year was published last week and was the familiar mix of tax increases and trims and tucks to spending. Living standards will continue to be squeezed, people will try to offset that by demanding higher wages, and some of those who are disappointed will respond by going on strike. But the problem seems to me to be less one of taxation or political will, but rather one of the distortions to the economy that the tax/spend regime causes.

One distortion from the tax system is that it discourages the formation of new companies, another that it discourages increased employment by established ones. With the exception of Ikea and Tetra Pak, all the famous names of Swedish industry are old. Volvo, Ericsson, Scania were all built up before the rapid growth of the state sector, which really gathered pace in the 1960s. The big companies are wonderful, but they will not create much new employment. Indeed, the Swedish private sector employs no more people now than it did in 1960. Unemployment, if you add in government make-work schemes, is over 12 per cent. This is naturally deeply alarming to the young, well-educated people coming on to the job market for the first time.

So what will happen? Ask the sophisticated people in the financial services sector and they say that the economic need for change is clear, but the perception of that need for change has yet to sink in. So the country faces some more years of disappointment. It will be trimming, chipping and taxing.

That is a gloomy prospect because the underlying financial equation will become more adverse. As the population of Sweden, like that of the whole of Europe, ages, further resources will have to be switched into care for the old. Quite unfairly, the value for money offered by the state will appear to diminish, not because of any fall in efficiency, but simply because there will be fewer people paying money in, and more people taking it out.

Viewed from outside, though, I felt there were more encouraging signs. Here are five. One is the new Prime Minister, Goram Persson, who not only understands the problems of public finances but also understands the need to tell voters a story: to explain and to teach.

Another is that these voters are wonderfully educated right across the population. If things are properly explained, there is a thoughtful and cohesive audience.

A third is a growing appreciation of the need for personal savings. Swedish savings are very low at every level. A banker friend, who has just co- authored a book on the significance of global savings in the world economy, found, when it was launched this week, that many of the questions were about personal savings in Sweden. People are saying that as they cannot be sure they will be able to rely on the state in 25 years, they should start to make some provision now.

Next, Sweden has excellent banks and insurance companies that will be eager to develop ways of supplementing the state welfare system if that is what the customers want. The financial infrastructure is there.

And finally Sweden is, after the US and the UK, the most successful exporter of pop music in the world. This shows not only that the spirit of entrepreneurship is alive and well, despite the barriers put in the way of the growth of small businesses; it also shows that Sweden can develop new service sector exports, and in one of the fastest-growing fields of world trade.