The policy debate in the United States is presently focused on solving serious budget problems. This situation has deep roots in the debt crisis - so far hitting Greece, Ireland and Portugal the worst. What should the U.S. do?
Today, northern Europe is leading its region out of the recession. The region is open to trade and has flexible markets, innovative industries, well-functioning institutions and a high degree of social cohesion. Protectionism is very limited; structural change in the business sector is welcomed even by trade unions.
The Swedish economy is performing well, with a GDP growth rate of 5.5 percent in 2010 and employment growth of 2.5 percent this year. While other countries struggle with deficits of five to ten percent of GDP and debt levels approaching 100 percent, Sweden will achieve a budget surplus this year and the debt will fall below 40 percent. If the United States had the same unemployment level as Sweden, several million fewer people would be out of work today.
What explains the Swedish success story? Why was Sweden, according to the World Economic Forum, the world's second most competitive country in 2010? The answers can be found in our socially cohesive reform strategy, based on four key parts.
The first priority of the current center-right government has been to move people from welfare into work. When elected in 2006, nearly a fifth of the working-age population was outside the labor market and faced very high marginal tax rates. To help this group back into employment, we have made work pay by substantially reducing income taxes - particularly, through the introduction of earned income tax credits, for low- and middle-income earners - and reforming benefits systems. Employment is now growing faster than in most other OECD countries, and total employment is reaching an all-time high.
Second, we have focused on reforming the educational system and improving the situation of groups with weak employment prospects. Schooling and vocational training must impart individuals with the knowledge and skills to make them productive in a modern economy. We have reduced the employer costs of companies, especially for those who hire workers who have been unemployed for long periods, making those workers more attractive. Marginalized groups have thus been helped to establish themselves in the labor market.
Third, a strong commitment to sound public finances meant that Sweden entered the down-turn with a surplus. This allowed the government to pursue an expansive but responsible fiscal policy, while letting extensive automatic stabilizers work. At the same time, our reforms have reduced transfer payments by two percentage points of GDP between 2006 and 2011.
The fiscal policy framework, with an expenditure ceiling and a surplus target, introduced in the mid-1990s, remains a corner-stone of economic policy. Achieving the surplus target of one percent of GDP over the business cycle is the overriding priority, and the expenditure ceiling has never been breached. With a credible fiscal policy in place, households and firms have not had to adjust investment and consumption decisions. Sweden has been able to avoid the cuts to public services and welfare provision which are now taking place in most OECD economies.
Fourth, pro-growth reforms have been pursued. Markets have been de-regulated, state-owned companies sold, competition introduced in health care and education - through school vouchers - and reforms to the pension system have made it demographically sustainable. The wealth and inheritance taxes have been abolished. Furthermore, we have initiated reforms stimulating entrepreneurship as well as research and development.
Social inclusion matters, especially in tough times. Our reforms have targeted both the demand side and supply side of the economy, and the ultimate objective has been to improve the position of socio-economically weaker groups. Strengthening social cohesion by increasing labor force participation has been our mantra.
During our reform process we have learned from others, just as Sweden hopefully has illustrated that successful reform is possible, and that it brings both economic and political advantages. The current government was re-elected in 2010 with a greater share of the votes, a phenomenon which is more common than sometimes believed.
Some strategic lessons: Be well-prepared and launch reforms soon after an election, so results will materialize well before the next election. Make significant changes in order to have substantial results. Focus on real problems that citizens perceive as important, and never lose the grip on sound public finances.