LSE Public Lecture: "Getting Fiscal Consolidation Right: Lessons from Sweden"

Date: January 14, 2010
Host: LSE Film and Audio Team
Speakers:

• Anders Borg (Finance Minister of Sweden)
• George Osborne (Shadow Chancellor of the Exchequer, UK)

Episode Overview

This episode explores the critical lessons from Sweden’s fiscal crisis of the early 1990s and their application to fiscal consolidation strategies in the UK and Europe. Anders Borg recounts Sweden’s experience handling a deep fiscal crisis and extracting durable lessons for countries grappling with high deficits and public debt, particularly in the wake of the global financial crisis. George Osborne responds, navigating the UK context, and a lively Q&A follows focusing on policy translation, taxation, and social cohesion.

Key Discussion Points and Insights

1. Sweden’s 1990s Crisis: What Happened and What Was Done

[02:00–19:00, Borg]

• Crisis Scope:
  • Sweden faced a severe economic crisis from 1991 to 1994 with:
    • 11% drop in employment
    • Unemployment quadrupled
    • Deficit at 10% of GDP multiple years
    • Public debt rose from 45% to 80% of GDP
• Contextual Parallels: The UK and parts of Europe face similar challenges post-2008.
• Initial Conditions Built Resilience: Entering the 2008 crisis, Sweden had a budget surplus, allowing for a more expansionary policy without jeopardizing public finances.
• Fiscal Deterioration Elsewhere: Countries like the UK and Ireland face deficits of ≥10–14% of GDP.
• Warning: Such levels are “not sustainable long-term” ([06:11], Borg).

“If we have not put our public finances in order, we will not be able to counter that downturn when it comes.”
— Anders Borg [07:37]

2. The Ten Lessons from Sweden’s Response

[19:00–33:15, Borg]

a. Use All Available Means

• Balanced Approach: Use both spending cuts and tax increases—over-reliance on one side increases negative impacts (social or economic).
• Swedish ratio: 53% cuts, 47% tax rises.
• Tax Focus: Prioritise broad-based taxes (like VAT), carbon/alcohol/tobacco taxes (correcting externalities), and avoid income/corporation taxes where possible due to their economic drag.

“It is not possible to restructure a budget only on the expenditure side. The same goes for the taxes.”
— Anders Borg [10:13]

b. Protect Growth-Promoting Expenditure

• Avoid cutting education, training, and employment-linked benefits.
• Target structural and sustainable cuts, not one-offs or investment delays (e.g., infrastructure).

c. Curb Baseline Drift

• Control index-linked, automatic increases in benefits (“baseline scenario”) to prevent runaway spending.

d. Build Credibility and Market Trust

• Conservative forecasting, transparency, and readiness to do more if needed (“frontload” reforms for quicker credibility gains).

e. Prepare for Political Pushback

• Expect resistance from interest groups; use symbolic measures (e.g., leadership benefit cuts) to show shared sacrifice and legitimacy.

f. Keep Labor Force Participation High

• Challenge exclusion, invest in child care (especially for boosting female workforce participation), and structure systems and incentives to favour employment.

“Childcare—high quality childcare—can be very important to uphold a high degree of labor force participation.”
— Anders Borg [29:45]

g. Strong Starting Position Matters

• Sweden weathered subsequent crises better thanks to fiscal health rebuilt after the ‘90s crash.

h. Institutional Strength

• Fiscal targets and rules (e.g., surplus goals, expenditure ceilings, top-down budget process, balanced budget for local governments) enforce discipline and transparency.

i. Social Cohesion is Crucial

• Ensure burden-sharing is progressive. During Sweden’s crisis, the top 20% wealthiest bore 43% of the savings achieved.

“Social justice requires all to do our part, because if we're going to be successful, the citizens must have the feeling that we're all in this together.”
— Anders Borg [32:14]

j. Broader Applications

• While the Swedish model offers valuable guidance, every country must tailor it to local conditions and demographics.

3. Implications for the UK & Osborne’s Response

[33:27–45:27, Osborne]

Early Action and Market Confidence

• Echoes Borg’s call for urgent action to prevent market loss of confidence and rising interest rates.
• Notes UK’s 13% budget deficit is worse than Sweden’s at its crisis peak.

“The message could not be clearer: If you find yourself on the wrong road, you have to take the exit...and that is what we have to do.”
— George Osborne [34:38]

• Critiques UK’s planned public spending increases, labels them “simply not credible” with such a deficit.

Fiscal Institutions and Accountability

• Welcomes Sweden’s independent Fiscal Policy Council.
• Commits Conservatives to create an “Office of Budget Responsibility” to scrutinize public finances and spending plans.

“They create a rod for the backs of politicians...to make sure we stick to our promises on spending and borrowing.”
— George Osborne [38:32]

Fairness and Social Cohesion

• Cuts should be progressive; lower-income groups protected (e.g., targeted public sector pay freeze, retention of child tax credits for poorest, not abolishing 50p top rate).
• Introduces “pupil premium” and targeted health spending in deprived areas—borrowing from Swedish policy inspiration.

Welfare Reform

• Fix work incentives; get people off high marginal effective tax rates.
• Draws parallel between British and Swedish efforts to make work pay over benefits.

“We must not balance the budgets on the backs of the poorest. And that is a key lesson...for progressive governments across Europe.”
— George Osborne [41:12]

Takeaway

• The Swedish story as “a shining example of how fiscal consolidation can be successfully achieved by progressive government” and a template for sustainable recovery.

Audience Q&A: Highlights and Key Segments

Heterogeneous Societies and Applicability of Swedish Lessons

[47:04–48:30, Audience/Borg/Osborne]

• Question: Can the Swedish model apply to more heterogeneous societies (like the US, UK)?
• Borg: Acknowledges Sweden's changing demographics and immigrant population, but agrees every country must adapt policy to local conditions, not seek a blueprint.
• Osborne: UK’s political system facilitates government implementation of its budget; important to secure a public mandate for consolidation.

Eurozone Membership and Crisis Management

[46:02–51:01, Audience/Borg/Osborne]

• Query on the future of the Euro for Sweden and UK:
  • Borg: Politically, Sweden should eventually join, economic pros and cons exist, but current support lacking.
  • Osborne: Argues UK’s autonomy over currency and interest rates helped during crisis; points to Spain’s difficulties as an example of the Euro's limits for some.

Greece and Fiscal Credibility

[46:40–51:01, Audience/Borg/Osborne]

• On Greek deficit crisis:
  • Borg: Deeds, not words, now crucial for Greece; action lacking so far.
  • Osborne: Greek and Irish episodes show fiscal crises are very real, not abstract, reinforcing urgency for action in the UK.

Tax Structure, Consumption Taxes, and Equity

[53:54–59:10, Audience/Borg/Osborne]

• Are consumption taxes compatible with social cohesion?
  • Borg: OECD evidence—least harmful tax increases are broad-based; focus on equity and economic impact is necessary.
  • Osborne: Tax increases are inevitable, but majority of consolidation should come from spending cuts (cites OECD 20/80 split). Critiques UK government for choosing national insurance increases (income/labour taxes) over less economically damaging options.

“If you have a deficit, you must deal with it, otherwise you undermine the credibility of the whole economic policy...”
— Anders Borg [59:51]

Notable Quotes & Memorable Moments

• “As Benjamin Franklin pointed out, I mean, taxes and death are the only certainties in life. And I would like to add economic crises.”
  — Anders Borg [07:23]

• “Frontloading is important because...it’s much better to frontload and thereby also being able to gain some of the credibility gains during the process.”
  — Anders Borg [22:36]

• “The Swedish government demonstrated the benefits of taking early and decisive action...—turn a 10% budget deficit...into a budget surplus in five years.”
  — George Osborne [35:58]

• “We do this not for its own stake. We do this to keep interest rates lower for longer. We do it to bring stability and confidence to the British economy.”
  — George Osborne [44:27]

Important Timestamps

• Introduction/context: [00:00–01:52]
• Anders Borg main speech: [01:52–33:27]
• George Osborne’s response: [33:27–45:27]
• Audience Q&A: [45:27–60:46]

Episode Takeaways

• Sweden’s recovery from the 1990s crisis offers practical, evidence-based lessons for countries facing fiscal distress. Key insights emphasize the urgency and balance in consolidation, the necessity of credible institutions, the centrality of social cohesion, and the primacy of protecting growth and employment-spurring investments.
• Both speakers agree on the dangers of delay and the political, economic, and social dimensions of consolidation efforts.
• While the Swedish model is not a “one-size-fits-all,” its tenets—institutional discipline, prudent optimism, and inclusivity—offer a strong, adaptable framework for other nations navigating fiscal storms.