Chuck out the deficit

27 May 10
Sweden's response to its 1990s fiscal crisis could provide the coalition government with an instruction kit on how to reassemble the UK economy. Alison Moore spoke to former premier Göran Persson about how to tackle the debt
By Alison Moore

27 May 2010

Sweden’s response to its 1990s fiscal crisis could provide the coalition government with an instruction kit on how to reassemble the UK economy. Alison Moore spoke to former premier Göran Persson about how to tackle the debt

Sweden has given us the joys of Ikea flatpack furniture, meatballs with lingonberry jam, and Abba’s lyrics: but could its experiences in the 1990s also provide a route map out of the recession and some hints on how to reform public services?

In the 1990s, Sweden faced an ­economic crisis with eerie similarities to our own. It had a high government deficit, partly due to the cost of nationalising banks on the point of collapse. The way it escaped the economic mire under former premier Göran Persson has fascinated many British commentators; both Labour and ­Conservatives met him last autumn.

The British appetite for a smorgasbord of all things Swedish extends to its public services. The Swedish model of ‘free’ schools has been adopted by the new ­coalition government,  and Chancellor George Osborne has shown interest in the ­Swedish plans for a tax on banks’ borrowing.

But Persson – premier from 1996 to 2006 – has some harsh messages for the new British prime minister: it really is all about money, money, money. Cameron’s government needs to tackle the problems immediately – or risk the markets making the decisions that the government avoids.

‘If you don’t do anything and just lie back, it will end up with a weaker pound and an inflation situation. You don’t have much time... the market will start to ­speculate,’ says Persson, who had a bruising encounter with what he described as the ‘sneering 25-year-old ­traders’ in the money markets in the 1990s. ‘I don’t think you will be rewarded if you wait. I don’t believe in those who say you should wait and take the measures at the right time… the best thing you can do is to restore your public finances. Don’t wait, do it – and don’t say it won’t hurt, ­because it will.’

Persson – who became prime minister in his mid-40s and is now 61 – is a colourful character. Leader of the Swedish ­Social Democratic Party from 1996 to 2007, he has a reputation for speaking off the cuff and being willing to depart from the script. He urges complete honesty with the public about the task ahead and says that British politicians were not ‘outspoken’ enough in the election campaign. ‘They have at least talked about it but they have not presented any programmes,’ he says.

He urges UK politicians to go for ‘front loading’ on the savings. Sweden’s first step was an 11% across-the-board cut in government spending, followed by similar cuts in local government. Smaller cuts then followed. But taxes were also quickly increased – with the pain split equally between increased taxation and reduced spending. This is not an easy message for the Con-Lib coalition, which favours spending cuts over tax increases. But it was felt to be important in Sweden because of the social effects of spending cuts, says Persson, who comes from a working-class background. 

‘The size of [the UK] budget deficit makes it important to go for quick major savings,’ he argues. Britain had a deficit of 11.4% of gross domestic product last year. In 1994 – when  Persson became finance minister – Sweden’s deficit was higher than 12% and the Organisation for Economic Co-operation and Development had predicted its debt would rise to 128% of GDP by 2000. It had also had three years of the economy ­shrinking and ­unemployment had trebled.

 Persson, one of the longest-serving Swedish PMs, has said his job was to ‘clean up’ after the centre-Right government of Carl Bildt. The deficit was virtually eliminated within four years and by 1999 the economy was growing by 3.6% a year and inflation remained low.

Persson is critical of attempts to shelter certain areas of public spending from cuts, arguing that the pain will still be felt. In Sweden, no area of spending was immune from the cuts and some increase in co-payments for the health service were ­included as part of the austerity package.

‘[The NHS] is such a big part of the public expenditure it will not be possible to save it... when you start cutting in other areas but not the NHS, you will see the opposition mounting.’

Persson suggests ‘bureaucracy’ should be targeted first, to send a message that no-one is being left untouched. But the mantra of efficiency savings won’t be enough – cuts will need to be made in the flesh of public services as well. ‘You need to be able to take whole parts away – not only at the margin – but to say that you will stop doing things.’

He urges the UK to look at pensions carefully. Sweden reformed pensions, which can cut future governments’ commitments. Public sector pensions and the age at which government employees can retire are both under examination in Greece, and Spain has announced plans to scrap automatic pension increases.

But Persson points out that changes to pensions are best tackled now before the demographics make it  even harder to get public support: in a few years time, many European countries will have a majority of voters over 50. 

He also urges looking at government spending over the whole economic cycle and aiming not just to break even but to make a small surplus. This means that government spending must continue to be squeezed even after the immediate ­financial situation has resolved.

The focus must not just be on structural deficit reduction, but also on the stock of debt countries already have. With interest rates at very low levels and likely to rise in the medium term, servicing that debt will become more expensive, he says.

In Sweden, the pain of spending cuts and tax increases was partly offset by interest rates falling. That sort of payback is not going to happen in the UK.

Persson admits it was not just government action that lifted Sweden out of recession – it  benefited from a strong world economy, which increased demand for exports and led to new IT-related jobs. As a strong pro-European, Persson saw the Swedish economy become more integrated with the rest of Europe, but the public voted against adopting the euro in 2003.

Critics argue that Sweden has been left with a core of long-term unemployed people and high youth unemployment, and has not escaped the current downturn. In 2009, its GDP fell by 4.9% and it had a deficit of 4.4% of GDP. Unemployment in March this year was 8.7%.

But Persson insists that political ­courage and a willingness to put one’s job on the line made it possible to at least tackle the 1990s economic crisis. There was certainly political fallout. His party’s support fell through the floor in the midst of the cuts, and in 1998 it had the worst electoral results for 70 years. It continued ruling as a minority government, but in 2006 it did even worse and a centre-Right coalition took over.

‘You must realise it is not an economic issue, it’s a political issue. It’s not so ­difficult to figure out what to do – the ­difficulty is to do it. It ends up in the political process,’ he says. The difficulty is building a majority in support of  harsh measures and structural reforms, which will endure for 10 or 15 years.

‘This is for real. If you mismanage this it will end up in a disaster. There is no room for making mistakes.’

Göran Persson is speaking at the CIPFA annual conference in Harrogate on June 8–10 on ‘Lessons from Sweden’

Freedom to choose – the Swedish experience

The Conservative-Liberal Democrat coalition is proposing to introduce ‘free’ schools, with parents, churches and charities setting up new non-fee-paying, state-funded schools. It argues this will improve parental choice and standards. Free schools were introduced by a Swedish centre-Right government in the early 1990s and now educate one in eight children aged 11–16.

Sweden had a very limited choice of schools before then and businesses were keen to invest in them – unlike in the UK, where businesses will not be allowed to run the schools for profit and parents already have a choice.

One problem will be common to both systems, however: what to do about schools that are left with empty spaces? In Sweden, few schools closed but lack of funding could damage unpopular UK schools.

The Centre for Economic Performance at the London School of Economics suggests there have been only small positive effects in attainment across the Swedish school system, which might not last. Some research has also suggested it might lead to greater social segregation, with free schools being favoured by better educated parents.

Sweden also introduced some element of competition into health care with greater use of private providers – although this varied between county councils – which led to significant cost savings. Spending was also capped by the local authorities.

A waiting time guarantee and patient choice were introduced and led to drops in waiting lists; but this was abandoned in the mid-1990s. Waiting times increased again. In 2005, the guarantee was resurrected. 

Persson admits to some concerns about privatisation and his government retreated from many of the market reforms of its predecessors. Big teaching hospitals are ‘more or less a national asset’ he says. ‘It’s not only buildings and equipment, it’s a culture which has been built up over hundreds of years. You can’t privatise that, it’s dangerous.’

But further downstream, private providers can play a role in the more everyday health services, he says. And it gets good outcomes by spending around 9% of GDP on health – a moderate amount by international standards.     

The difficulties of having half a market in a state-funded system are well-known but Sweden has managed to sustain co-payments (for example, while in hospital or to see a doctor) within its welfare system. It also has an exemplary record in keeping older people in their own homes with packages of help and integration between health and social services. But it achieves this by high tax rates and generous benefit payments. 

The proportion of income paid to the state at close to 50% is around 10% higher than in the UK: one part of the Swedish model that it is unlikely to be adopted here.

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