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Low taxes work

23 September 2010

3:22 PM

23 September 2010

3:22 PM

I ration my writing about Sweden. As CoffeeHousers know, I can extol its virtues with
room-emptying conviction. But it’s now a few days since its election, and as far as I can tell no English publication has told the extraordinary story of its conservative victory – and the economic
turnaround driven by the largest tax cuts in Swedish history. It is now the fastest-growing economy in the West. I tell the story in the political column of this week’s magazine (subscribers, click
here), but I will summarise it for
CoffeeHousers here.

Normally, conservatives are elected in Sweden as a kind of light relief, to punctuate decades of leftist rule. They’re usually thrown out after one term, and the social democrats get back to taxing
the bejesus out of the country. But Fredrik Reinfeldt, a charmless bald bloke who keeps in touch with David Cameron by text message, has just won a second term – and with the greatest vote in his
party’s history. It’s an extraordinary moment, and it’s important that Conservatives in Britain draw the right lessons from it.

Since he was first elected, Reinfeldt has come up with a powerful slogan: "We are the new workers’ party". His policy has been to cut taxes for those in work, but not those on benefits.
The left moan about unfairness and the poor facing a higher marginal rate. But Reinfeldt appealed to voters’ innate sense of fairness – and frustration at the high level of welfare dependency.
Since his 2006 election he has introduced four successive tax cuts for earners. Crucially, he’d explain it. "This will increase employment permanently," Reifeldt would say. And he’d
quantify it: his Jul 2008 tax cut took his tax cut package to Skr15bn was forecast to create 110,000 jobs. Why? Because money is spent most effectively when left in the hands of people who earn it.
His tax cuts equate to about 2.3 percent of GDP.

Now, this logic is by no means accepted in a Sweden which tends to associate tax cuts with spending cuts. Reinfeldt’s poll rating slumped after his first tax cut, but he persevered. He cut taxes
charged on cleaners and baby-sitters (which had been almost all paid ‘black,’ as the Swedes say, because the tax was too high.) He abolished the wealth tax, which took 1.5 percent a year from
anyone worth over £125,000. It was justified in that, in this globalised world, the rich and their money move easily. Anders Borg, the finance minister, faced squeals about a Bush-style tax
cut for the rich. He replied: "The big winners are, in the long term, all Swedes, because we need to have the conditions for jobs and companies necessary to match global competition.
Globalisation makes capital harder to keep within national boundaries." An intellectually self-confident Tory party could have made the same case against the 50p tax, rather than staying stuck
in Brown’s groove.


When the recession came, Sweden was hit – as you’d expect of a tiny export-orientated country in the middle of stricken continent. But Reinfeldt’s "stimulus" was focused on a tax cut.
Corporation tax fell from 28 percent to 26.3 percent for the 2009 budget. While Brown was legislating to jack-up national insurance, the Swedes were doing the reverse. "If you tax work higher,
you will get fewer people in work, but if you tax work less you will get more in work," said his education minister, Jan Bjorklund. There was a bit of infrastructure spending, but fairly
minimal. In April 2009, Reinfelt’s party pulled ahead in the polls for the first time since his election.

So did those tax cuts work? Yip. Unemployment is falling 7.4 percent in August, down from 8 percent in July (forecasts of 12 percent made last year never emerged). Sweden’s economy is set to roar
by 3.2 percent next year, against our 2.2 percent, and its deficit will next year be 1.6 percrnt – a fifth of ours. Under Reinfeldt, Sweden has now overtaken Obama’s USA to become 2nd in the World
Economic Forum’s yearly competitiveness rankings – the outlook is good for business, and is getting better.

Go to Sweden, ask about the recession now – and they look at you blankly. Consumer confidence is at a 10-year high. The recession was steep, but shorter than the downturn after 9/11. Banks swiftly
cleaned up their own mess. Sweden had competently-regulated banks. It also had laws prohibiting running up the government deficits that Brown did.

I’m not saying Reinfeld is a blood-and-guts conservative. Last time I was in Stockholm, I overheard two voters in a supermarket queue moaning that there was no one to vote for because the two
parties are so similar. But the lack of choice is in large part due to the fact that the left now back the conservative ideas they once opposed. The Social Democrats did not propose to reverse any
of Reinfeldt’s tax cuts. They also now advocate allowing profit-making companies to run state schools. Here, below, is a poster from the social democrat party in Stockholm saying "pupils
should choose schools, and not schools choose pupils". Plenty of popular appeal to this Friedmanite proposal, but it’s coming from the left and the Greens as much as from the right.

 

Also, Reinfeld refused to cut some of the taxes that his party activists wanted. His policies went further than his rhetoric, but he managed to convince the Swedes that cutting taxes did not mean
cutting health and social service spending. His language was reassuring, rather than Thatcher-style messianic, which is why back in 2006 he was seen as proto-Cameron (and asked to address the
Bournemouth conference). Right now, Swedes regard his re-election as normal. It’s the election of 20 far-right MPs (led by a 31-year-old) that has hit the headlines – in Sweden, and worldwide.

In the election, Reinfeldt had another slogan: "We are the only labour party" – meaning that if you worked, the Conservatives were on your side by cutting your taxes and making you better
off. Things may have come to a pretty pass when the Swedes are teaching the Brits about supply-side economics. But the softly-spoken Reinfeldt has offered two important lessons. Low-tax policies
work even in recessions; and, with a little courage, you can prove it.


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