Sweden’s Secret Recipe: Advice from a successful – and tax-cutting – finance minister

Commentary, Taxation, Frontier Centre

When Europe’s finance ministers meet for a group photo, it’s easy to spot the rebel — Anders Borg has a ponytail and earring. What actually marks him out, though, is how he responded to the crash. While most countries in Europe borrowed massively, Borg did not. Since becoming Sweden’s finance minister, his mission has been to pare back government. His ‘stimulus’ was a permanent tax cut. To critics, this was fiscal lunacy — the so-called ‘punk tax cutting’ agenda. Borg, on the other hand, thought lunacy meant repeating the economics of the 1970s and expecting a different result.

Three years on, it’s pretty clear who was right. ‘Look at Spain, Portugal or the UK, whose governments were arguing for large temporary stimulus,’ he says. ‘Well, we can see that very little of the stimulus went to the economy. But they are stuck with the debt.’ Tax-cutting Sweden, by contrast, had the fastest growth in Europe last year, when it also celebrated the abolition of its deficit. The recovery started just in time for the 2010 Swedish election, in which the Conservatives were re-elected for the first time in history.

All this has taken Borg from curiosity to celebrity. The Financial Times recently declared him the most effective finance minister in Europe. When we meet in his Stockholm office on a Friday afternoon (he and his aide seem to be the only two left in the building) he says he is just carrying on 20 years of reform. ‘Sweden was a textbook case of European economic sclerosis. Very high taxes and huge regulatory burden.’ An economic crisis in the early 1990s forced Sweden on the road to balanced budgets, and Borg was determined the 2007 crash would not stop him cutting the size of government.

‘Everybody was told “stimulus, stimulus, stimulus”,’ he says — referring to the EU, IMF and the alphabet soup of agencies urging a global, debt-fuelled spending splurge. Borg, an economist, couldn’t work out how this would help. ‘It was surprising that Europe, given what we experienced in the 1970s and 80s with structural unemployment, believed that short-term Keynesianism could solve the problem.’ Non-economists, he says, ‘might have a tendency to fall for those kinds of messages’.

He continued to cut taxes and cut welfare-spending to pay for it; he even cut property taxes for the rich to lure entrepreneurs back to Sweden. The last bit was the most unpopular, but for Borg, economic recovery starts with entrepreneurs. If cutting taxes for the rich encouraged risk-taking, then it had to be done. ‘In most cases, the company would not have been created without the owner,’ he says. ‘There would be no Ikea without [Ingvar] Kamprad. We would not have Tetra-Pak without [Ruben] Rausing. They are probably the foremost entrepreneurs we have had in the last few decades, and both moved out of Sweden.’

But they were not rich, I say, when they were starting out. ‘No, but they were becoming rich. If you have a high wealth tax and an inheritance tax, people emigrate because it becomes too costly to own a company. Ownership is a production factor. Entrepreneurs are a production factor. Yes, these people are rich and you can obviously argue that we want to encourage social cohesion. But it is also problematic if you drive out entrepreneurs from your country, because they are the source of job creation.’

Just as George Osborne took a hit for reducing the 52p tax to a 47p tax, so Borg’s party paid an political price for helping the rich. ‘If you are going to survive that politically, it is very important to cut taxes on low-income earners.’ He focused the tax credit on the low-paid, giving some the equivalent of a month’s extra salary every year. But there was still resentment. ‘We lost a lot of voters when we cut the property and the wealth tax, I don’t make any excuse for that. It was a severe blow to our support.’

This is the only time in the interview when Borg speaks like the politician he claims not to be. ‘When I look at other politicians I tend to see myself more as an economist,’ he says. This is true in that he is appointed, not elected, and was chief economist for SEB bank. But before this, he was a young libertarian longing to turn the world upside-down. Internet footage still exists of a denim-clad Borg declaring on television that if he was prime minister he ‘wouldn’t do a damn thing, so the people could do whatever they want’. When he later became a prime ministerial adviser, he caused a stir when it emerged that a government staffer backed drug legalisation.

When Fredrik Reinfeldt became party leader in 2003, he made Borg his right-hand man. It seemed a gamble at the time, but his faith in Borg’s expertise was absolute — Borg’s views had moderated, but his sense of urgency had not. ‘We came into government in October 2006 and we launched tax cuts in January 2007,’ he says, ‘so the first three months were extremely hectic.’ The Conservatives’ slogan was striking: ‘We are the new workers’ party.’ Tax rates would be cut for workers, and welfare cut to pay for it. High welfare levels, he says, can inflict cruelty in the name of compassion. ‘People emigrate from the labour market. Unemployment traps capture a lot of people in social exclusion.’ Tax cuts are not spoken of as an ideological aim, but as a tool to cut unemployment and advance social justice.

What even Borg did not expect was that his tax cut for the low-paid would increase economic growth so much that it has almost entirely paid for itself. Borg had created something that Osborne’s critics say does not exist: a self-financing tax cut. ‘There was some criticism at the time that we were borrowing to finance tax cuts,’ he says. But Sweden could do it, because it was expecting to return to surplus soon; Britain has no such luxury, he says. His main advice to Osborne is: ‘Keep on dealing with the deficit, because deficits destroy everything else.’

Borg and Osborne have a good relationship, as do David Cameron and Reinfeldt (who keep in touch via text message). All are men in their early forties, who pick fights with the old guard of their parties to flaunt their ‘modernising’ credentials. But politics in Britain and Sweden are as different now as they were in the 1980s, except the roles are reversed. Sweden is the unlikely champion of supply-side economics, with ideas too radical for Brits. There is cross-party support in Sweden for profit-seeking state schools, which Michael Gove won’t attempt. Borg’s tax-cutting policy was accompanied by a 268-page book explaining the dynamic link between lower taxes and more jobs. Such a document would be unthinkable from HM Treasury.

Sound economics is simply a far larger part of the government mission in Sweden than in Britain. Cameron once observed that no one ‘gets up in the morning thinking “I wish the state was smaller”,’ which is perhaps true in Whitehall. But not in Stockholm where, on Reinfeldt’s 45th birthday, Borg presented him with a graph showing Sweden’s tax-to-GDP ratio dipping under the 45 per cent mark for the first time in decades. That is still, of course, one of the highest rates in the world.

In public, Borg is not in the least triumphalist — if anything, he’s trying to stir up a bit of pessimism. Success has meant he now has to manage expectations, and Borg has taken to warning in his speeches that ‘a future economic crisis is as much a certainty in life as death and taxes’. He could add another certainty: that high taxes will slow down any economic recovery, and fortune tends to favour politicians who do something about that.