So Long, Swedish Welfare State?

The model is already a thing of the past. But as this week’s election will show, Sweden will need to keep reforming.

By Nima Sanandaji, the director of the European Centre for Entrepreneurship and Policy Reform. He has written more than a hundred policy papers on subjects ranging from integration and women’s career progress to the changing geography of successful enterprise and the future of jobs.
Political posters in Stockholm, Sweden, on Sept. 1, ahead of the Sept. 9 general elections. (Jonathan Nackstrand/AFP/Getty Images)
Political posters in Stockholm, Sweden, on Sept. 1, ahead of the Sept. 9 general elections. (Jonathan Nackstrand/AFP/Getty Images)

To outside observers, Sweden seems to have it all. It combines a high living standard with a strong social security net, some of the most progressive values in the world, and generous systems for paid sick and maternity leave. Health, education, and elder care are mainly publicly funded, yet competition and choice are encouraged, because private firms play an important role in providing these services. Many Swedish voters, however, are dissatisfied with the trajectory of their society. Of particular importance during this vote will be immigration, rising crime, sluggish economic growth, and, perhaps surprisingly, the welfare model itself. General elections on Sept. 9 will likely see the current government, led by the Social Democrats, kicked out of office. Meanwhile, extreme parties on the right as well as on the left stand to make big gains.

To understand Sweden’s problems, it is helpful to first look at its strengths. In many ways, it is an unusually successful country. To begin with, Sweden is the European Union member state with the highest share of the workforce employed in so-called brain business jobs. Fully 9 percent of the Swedish workforce holds such roles, that is to say jobs in fields like technology and creative services. This is nearly twice the EU average.

Sweden’s achievements as a knowledge economy should come as no surprise. The public and private sectors both invest heavily in research and development. And although Swedes have largely abandoned Christian religious views, Nordic Protestant business culture, which stresses hard work, individual responsibility, and punctuality, lives on.

Meanwhile, as the World Values Survey shows, Protestant countries in Northern Europe have gone furthest in the world in growing to value secular rationalism and self-expression. And Sweden stands out even among them for its progressive values. These principles are in line with the country’s open-borders immigration policies, which, in 2015, led it to set a record among developed economies for most refugees welcomed per capita.

Despite all its advantages, Sweden still faces turmoil. The same government—a center-right administration led by Moderate Party leader Fredrik Reinfeldt—that encouraged Sweden’s open-border immigration policies also transformed the country by pushing through extensive tax cuts, reductions in the generosity of welfare programs, and a widened role for private enterprises in public service provision. Although these moves were initially contested, they were, in time, largely accepted by the public.

Open borders, however, were never as popular, and in the 2014 elections, many voters turned from Reinfeldt’s Moderate Party to the far-right, anti-immigration Sweden Democrats. After the vote, a minority government, led by the left-leaning Social Democrats under party head Stefan Lofven, took over.

Lofven initially continued Sweden’s open-borders policy and proclaimed in the midst of the 2015 refugee crisis: “My Europe does not build any walls; we help each other.” And so, according to the Organization for Economic Cooperation and Development, in 2015 Sweden accepted 163,000 asylum-seekers—a rather high figure for a country with a population of 10 million, and the highest per capita inflow into any OECD country.

Soon after Lofven’s remarks, the Social Democrats under him and the Moderates under new leadership suddenly shifted away from favoring open borders toward preferring more controlled migration. The sudden turnabout might seem odd, but it came in response to some real problems. Over the past several years, Sweden has by some measures experienced a rise in violent crime, linked in part to gangs with immigrant origin. The problem is concentrated in Malmo, Sweden’s third-largest city, where nearly half the population is foreign-born or has foreign-born parents. Two local newspapers calculated that, in 2016, there were 3.4 murders per 100,000 inhabitants in Malmo. That is slightly higher than the murder rate in New York state for the same year.

Alternative right-wing media sometimes gives an exaggerated picture of the level of crime in Sweden. In truth, Sweden is still a relatively safe society. However, issues such as rising gang violence and car burnings have increased voter support for the Sweden Democrats. The party—which was associated in the 1990s with a then-growing neo-Nazi movement but has since moderated its platform—campaigns on a tougher stance on immigration and crime. It gained less than 0.1 percent of the vote in the 1991 election, but it has about doubled its voter support between each election since then. In the 2014 vote, the Sweden Democrats won 12.9 percent of the total. This year, it is polling at 18.9 percent.

The Sweden Democrats may have moved on from their neo-Nazi past, but Sweden is again grappling with rising support for neo-Nazi groups. One openly racist party, Alternative for Sweden, is campaigning on sending home immigrants who have Swedish citizenship. Another new party, Borgerlig Alternativ, is attempting to gather center-right voters who wish to see tighter immigration policy. These two groups, as well as the left-oriented Feminist Initiative party, are gaining attention but have little hope of passing the 4 percent threshold to enter the parliament. Yet on the extreme left, the Left Party, which is already in parliament, could very easily continue to do so. At the moment, nearly one in 10 voters is supporting this former Communist Party in the polls. It campaigns on socialist distribution policies and on ending the ability of private firms to provide publicly funded education, health, and elder care services.

Voter enthusiasm for the two largest mainstream parties is, on the other hand, limited. The Social Democrats dominated political life in Sweden for much of the 20th century and early 2000s—so much so that, until their loss in the 2006 elections, Sweden was sometimes called a one-party state. As late as 2002, the party routinely controlled some 40 percent of the votes in parliament. Currently, support is at 26 percent and falling. The Moderates, the mainstay center-right party, peaked at 30 percent of voters in 2010 and fell to 23 percent four years later. Currently, the party is polling at 17 percent of the vote and declining.

One reason the two main parties are increasingly unattractive to voters is that stagnating economic growth has undermined voter confidence in the parties that have actually held power. Sweden is unique in its knowledge-intensive economy, but it also stands out for pursuing an economic policy based on negative interest rates. Cheap money is flooding the economy and driving up household borrowing. In 2017, household debt was at 185 percent of household incomes, nearly double what it was two decades ago.

Negative interest rates were seen as a way of temporarily boosting growth after the global financial crisis. However, the rates have persisted and, according to the latest Eurostat data, Sweden’s GDP per capita only grew at a meager 0.9 percent in 2017. Besides Luxembourg, this is the lowest rate in the EU.

There are many explanations for why Sweden’s economy is stagnating in a time when it should be growing. One is that the high taxes are undermining firms’ interest in expanding in Sweden. Other parts of Europe have significantly lower tax rates, lower wage levels, and are catching up in the knowledge-based economy. Tech-firms are drawn to central European cities such as Bucharest, Budapest, and Prague, where many young individuals graduate with skills in programming, engineering, and other desired areas of expertise—and are less expensive to employ. Consider, for example, that the Slovak capital region of Bratislava has already surpassed Stockholm in terms of its proportion of knowledge-economy jobs.

Another long-term challenge is that Sweden’s municipal finances are gradually failing. Internationally, Sweden is often seen as proof that a big welfare sector and high levels of taxation can be combined with a thriving economy. But the reality is not as encouraging.

Since 2002, a dozen studies have been written on the long-term survivability of the Swedish welfare state. In summary, they paint a bleak picture: The Swedish model is simply not sustainable. Sweden faces the same basic difficulties funding the welfare system as many other countries in Europe do. The problem has two roots. The first is an aging population and the second is the gradual buildup of inefficiencies in the public sector. In turn, welfare services become more expensive—and need to employ more people—each year.

One recent paper pointed out that, between 2017 and 2025, all new jobs in Sweden will have to be created in the public sector if that sector is to keep up with demand and retain the same staffing practices. This is of course not feasible in a country with an already large public sector and high taxes, and it reflects the problem of gradually rising inefficiencies in the public domain relative to the private one.

Reinfeldt’s decision to allow for-profit companies to get involved in welfare provision was not only about increasing patient choice and competition, as one might expect from a right-leaning politician, but also a way for the Swedish welfare state to shift the burden of future investments in welfare to the private sector. While public-private partnerships helped, they have not solved the problem.

For example, the Swedish National Audit Office, a parliamentary control unit, published an alarming report in late 2017 after examining the government budget for 2018. According to the NAO, between 2020 and 2030, the municipal sector needs a budget hike of 200 billion Swedish krona ($22 billion) in order to keep functioning at its current level. The auditing office points out that the government itself made this calculation but hid it from the public. The long-term difficulty of funding the Swedish welfare model is well known, yet politicians are still uncomfortable owning up to the facts.

Sweden’s welfare problems affect people’s daily lives. Average earners in Sweden pay half their income in direct and indirect taxes. Yet, the famous Swedish welfare state is plagued by difficulties in accessing health care. Some individuals and companies are therefore turning toward private health insurance. At the end of 2017, 643,000 individuals in Sweden were fully covered by private health insurance. This is an increase of over half a million users compared to 2000. The public pension system has over time become less generous, which has pushed citizens to set up private pension funds through their employers or otherwise. Unemployment insurance has similarly become less generous, leading to the creation of complementary private insurances.

International observers will largely point to voter dissatisfaction with immigration policies to explain the results of this week’s election, but Sweden’s sluggish economic growth rates and the gradual buildup of inefficiencies in the public sector also play an important role. The latter challenge, which will only become more pronounced if the economy faces another downturn, needs to be tackled through structural reforms.

In other words, Sweden’s generous welfare model is already a thing of the past, but the country still needs to keep reforming. Otherwise, the system will not be up to the challenge of integrating large immigrant groups, boosting growth, and stabilizing government finances.

Nima Sanandaji is the director of the European Centre for Entrepreneurship and Policy Reform.