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UK follows Sweden's lead

October 20, 2010

The Brits are cutting down on their welfare state in an attempt to tackle deficits and save the state. The UK Chancellor of the Exchequer George Osborne claims the cuts of £83 billion ($130 billion) will bring the country back from “the edge of the economic abyss” and put an end to ten years of deficit spending. This may be an exaggeration, but is a welcome comment these days when destructive Keynesian economics seems to have been revived. In either case, attempting to balanced budget and cut down 490,000 jobs in the public sector is certainly a step in the right direction. The cuts of welfare payments is also a step on the road leading away from disaster (but perhaps not for the people who have been made dependent on the state’s welfare payments).

What is interesting to note in this is that the UK, by cutting public spending and altering the incentives of the welfare system, follow the path taken by the socialist mecca Sweden since the early 1990s. Sweden was truly on the edge of the economic abyss in 1992 when Sveriges Riksbank (the Swedish central bank) raised interest rates to 500% in an attempt to protect the fixed currency exchange rates. At the same time, the parties in parliament got together to cut large chunks out of the national budget to save the country from economic free-fall.

The attempt was unsuccessful in that it didn’t save Sweden from a deep financial and economic crisis, but successful in the sense that the welfare state was fundamentally reformed over the next decade and a half. The latter is the reason Sweden has been relatively unaffected by the present global financial crisis (a point I argue and elaborate on here).

It is safe to say that Sweden is still a social democratic welfare state, but – compared to 1990 – with much sounder incentive structures and lower taxes (but still the highest in the world). The UK, if they end up pulling the same trick and going beyond the reforms made in the Swedish welfare state, can potentially rise to again be the dominant economy in Europe and lead the way for reforming (and ultimately taking down) the European Union. But that is perhaps hoping too much. I’m not holding my breath.

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