It is ironic that social democratic Sweden has become a Thatcherite icon. They say that cuts in public spending were the main cause of Sweden’s economic recovery from the slump of 1992-3. Most experts think that the 30% devaluation of the krona was rather more important.
Now Fraser Nelson has written a piece in the Daily Telegraph which reprises one called ‘Sweden’s secret recipe’, he wrote for the Spectator last year. Britain, says Nelson, is in such bad shape because Chancellor George Osborne has not taken a leaf out of Sweden’s book. Instead of stimulating the economy after 2009, Sweden’s centre centre-right finance minister Anders Borg transformed Sweden into ‘a land of sun, snow and supply-side economics’
Osborne should certainly learn from Borg, but not the lesson Fraser wants him to dig out of the snow. True enough, Sweden is doing much better than Britain. Average GDP growth between 2008 and 2012 was 1.5% higher in Sweden than in Britain. While Britain is struggling with a deficit of around 8% of GDP Sweden is enjoying balanced budgets. While general government gross debt is 88% in Britain, the equivalent figure for Sweden is 37%. Unemployment is high in both countries but the Swedish rate of 7.5% is somewhat lower than the corresponding number for Britain. Clearly, they got something right that we did not.
Contrary to what Nelson claims, the Swedish government has applied a pragmatic mixture of both supply and demand-side measures. Both Sweden and Britain stimulated demand in 2008-9. But whereas Sweden continued its growth Britain slid back into recession. The simplest explanation of this is that while Borg maintained public expenditure levels around 50% of GDP, Osborne reduced total managed public expenditure from 46.5% in 2010/11 to 43.4% in 2012/13 in the name of austerity.
This divergence particularly showed up in investment. In Britain, public net investment fell from 2.6% of GDP in 2010/11 to -0.2% in 2012/13. In Sweden, public investment remained around 3%. This does not only prepare the Swedish economy for the future by strengthening its competitiveness and ability to attract business, it also stimulates the economy today by creating jobs and thereby boosting growth. In October 2012, even the Coalition Government’s own forecasting agency, the Office for Fiscal Responsibility (OBR), admitted that Osborne’s ‘fiscal consolidation may […] have done more to slow growth than we assumed’. And the government’s semi-dissident Business Secretary, Vince Cable has been calling for more public investment financed by borrowing.
The primary lesson for Osborne is not to throw out what little demand-side leverage he has left but rather to follow Borg’s example of maintaining a steady level of public investment. Had Nelson had a chance to attend Borg’s speech at the LSE on the 16th of January, Borg could have told him so himself. In the Q&A session he declared himself a “long-term Keynesian”.