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- [00:00]
A
Ladies and gentlemen, good evening and welcome to the lse. In our APCO Worldwide Perspectives on Europe series, we introduced today, I hope, a debate between Anders Borg, who is the Finance Minister of Sweden, and George Osborne, who is the Shadow Chancellor of the Exchequer and one of two people in about a half year was going to have to sort out a bit of the problems that we have in the UK at the moment. The context is quite simple. Almost 20 years ago, Sweden faced a financial crisis all on its own for about three years. GDP fell constantly. By the end of 1994, the Swedish economy seems to have come out of that. And by the middle of the 1990s, the Swedish economy seemed to have been doing well again. Today we face a very similar situation in the UK and in the rest of Europe, as you all know. And our hope is that the insights that we have from the Swedish economy, and especially from the resolution of the Swedish crisis in the early 1990s, could offer us some lessons for the years to come in the rest of Europe, and especially in the uk. The way the evening will proceed is that Minister Borg will start off with a speech, I think, and a PowerPoint presentation, after which George Osborne will reflect and possibly discuss some of the points that were raised there. And then we will open the floor to the rest of the people in the room here. We are supposed to stop by about 7. I would like to ask you at that moment to please remain seated until all the speakers have left the platform. Many thanks.
- [01:52]
B
Thank you very much. It is a pleasure to be here at the London School of Economics. It's obviously one of the most prestigious academic institutions in Europe and also obviously on a worldwide basis. The title of my comments remarks is Getting Fiscal Consolidation Right. The lessons from what we learned in Sweden in the early 90s, Sweden went through a quite dramatic period during those years. We saw an 11% drop in employment, we saw a quadrupling of unemployment, we saw deficit running at 10% several years in a row, and our debt rising from 45% to 80% of GDP during this period. I will also highlight some of the experience from how we have handled the recent crisis. What have we learned from fiscal restructuring? My own experience from this area comes from the period in the 90s when I was working as a political adviser to the government in that period and also from the years after when I've worked in the financial markets and followed the basically tried to convince people that Sweden once again is a credible and safe country to invest in. I will highlight some of the cornerstones of the policies that we have implemented during this crisis. As we can now see in the data coming out and in the forecast, it seems like Sweden has done on a relative basis, taken a little bit less damage than some other countries. And I do believe that this has to do with two different features of our policy. One is that we have underlying the work incentives in our benefit systems, in our tax system, which meant that we've seen unemployment and also hours worked and tax revenues developing a little bit more favorable than expected. But I think even more importantly, we went into the crisis with a very, very high surplus, which meant that we have been able to be pursuing expansionary policy while at the same time keeping our public finances in good shape. Today, obviously we are standing after a period in the world economy that has been very, very dramatic. A year ago, the world was standing on the brink to another depression. So the collapse of Lehman Brothers, the meltdown of the financial system, the drying up of credit, obviously made it necessary and justifiable for the policymaker on a global scale to introduce a very, very expansionary economic policy. But while we've been able to avoid an outright recession, and I do think that we now have the worst behind us, that has also created a challenge for for all policymakers in Europe and worldwide that will be with us for at least the coming years and the decade. I think one could describe the challenge by looking at the deficit level. For Europe. The average deficit level in 2010 for the EU member states will be 7% of GDP. There are countries that are worse off. Ireland, the UK, Greece and some other countries are running deficits above 10%. This is also true for several of the other major players in the world economy. The US, Japan, India are also running deficits of around 10% of GDP. Obviously this is not long term sustainable. The debt level in Europe has jumped from 60% to 80% of GDP. And on the assumption of unchanged policy, the Commission has calculated that in 2020 will reach the level of 120% of GDP in debt level. This is basically not long term sustainable. It will push out other items from the state budgets and it will put us in a position that is very problematic if we would see a second downturn. The UK is obviously one of the countries that has been severely hit by the crisis and also that have among the worst public finances in Europe. The OECD is calculating that the deficit level will be reaching some almost 14%. We will see a 90% debt level in 2010. And on the same assumption of no change policy, the Commission is expecting 160% in debt level in 2020. My point will be that I will argue that this cannot be a sustainable situation. And I will give you four arguments for that. First, and most obviously, the costs of running these high debt levels to society is severe. There will be risk premiums in bond markets eventually and you will be crowding out private investments. And it will also be the case that a larger and increasing amount of the public budgets will have to spend on dealing with paying debt service rather than paying for welfare services and education. I think it is important that we realize that the situation is also quite. It's urgent that we start to deal with the situation rapidly because as Benjamin Franklin pointed out, I mean, taxes and death are the only certainties in life. And I would like to add economic crises. Now we've had an economic crisis and we will see another downturn coming soon. And if we have not put our public finances in order, we will not be able to counter that downturn when it comes. It will limit the room to maneuver in terms of fiscal policy in an unacceptable way. There's also the case that if we are looking to the demographics of Europe, it is quite clear that this is quite challenging. Most of the European countries are seeing now an aging population. The ratio between people in the working ages and above 65 are going from 4 to 1 to 2 to 1. And obviously this will create costs for welfare services, healthcare costs, pensions, but also will decrease our tax revenues. On average, the cost for Europe will be around 5% of GDP in the coming years. And that's also true for the uk. So if we want to deal reasonably and seriously with the upcoming demographics, we must realize that we need to have strong public finances as a starting point position. I also believe that there is a great risk if we don't deal with the deficit and debt situation, that we will have a threat to full employment and to an increasing level of structural unemployment coming out of this crisis of public finances. Obviously it will put pressure on social system, but it will also mean that we do not have the muscles to deal with an upcoming future crisis in the degree that we we need. Looking then at Sweden, I put down 10 lessons. We had a deficit that increased very, very rapidly. When I started out to work for the government in the late early part of 91, we noticed that we were expecting a small deficit, maybe a percentage point so for 92. In the spring of 92, we were expecting 3 to 4%. In the autumn the numbers had worsened to maybe 6,7% of GDP and we ended up at around 12% of GDP. The currency peg had to be abandoned and we basically then had to take fiscal restructuring that was equal to 12 to 13% of GDP between 1992 and 1997. So it was a very dramatic period for the Swedish society and we underweight a lot of great changes that I think is both been tough and costly for society, but also important by laying foundation for stronger future growth. One obvious conclusion is that any country that will be dealing with a deficit in the magnitude of 10, 11 or 12% will have to be using all available means to deal with the crisis. If you would argue that you would only use expenditure cuts, you would have an excessive negative social impact of people worse off in society. Because it's well known that people that are worse off in society are more depending on the welfare system and on the welfare spending. And it's also clear that if you want a dynamic welfare state, we need to invest in education, active labor market policies and other areas which are productive when it comes to growth. So it's not possible to restructure a budget only on the expenditure side. The same goes for the taxes. If you would restructure a budget purely by raising taxes, it is quite largely that the distortion of the economy, especially on the labor market, would be quite substantial. So given that you need to work with both sides of the budget, both tax cuts and expenditure cuts, and this is not only a Swedish experience, it's also a general experience that the most successful fiscal restructuring programs that we have seen has been divided on both tax cuts and expenditure tax hikes and expenditure increases. In the Swedish case, we had a program with active measures where around 53% came on the expenditure side and around 47 on taxes. When it comes to taxes, I think the general lesson from any government dealing with tax increases is that we need to talk about broad based taxes, taxes such as consumption taxes that are least harmful for the economy. There are obviously taxes that are actually not at all harmful for the economy, but rather correcting externalities and excessive social costs. And that would obviously be the first option, I think, in terms of dealing with taxes, carbon taxes, alcohol taxes, tobacco taxes, different kind of taxes that are actually correcting externalities in the economy. The OECD has made a very thorough study of the experience and the research on taxes. And what we know from that literature is that immobile tax bases are the ones that have the least impact. And the most harmful taxes to use in restructuring is obviously income taxes, especially those that are directed towards low income earners and that have an impact on the Threshold corporate taxes are also quite painful for the economy because it's a very elastic tax base. But I mean, tax policy and fiscal restructuring cannot only be a matter of economic efficiency. We must also take into account a balance between efficiency, equity, the revenues that we can gain, and also the political considerations that are necessary to find support and legitimacy for the process. In Sweden, as I mentioned, we restructured some 12 to 13% of GDP and around half of that was tax increases. So obviously there was substantial tax increases in Sweden. To some extent. I would argue that we relied a little bit too heavy on tax on income tax payments. But on the other hand, we've seen quite large income tax cuts in the years after the fiscal restructuring. The third lesson is on the expenditure side. I would like to underline a few arguments there. First of all, I think we should think about what we are not cutting on. We have public expenditures that are very, very important for upholding work participation, but also creating a well functioning and a growing dynamic society. So obviously, as long as we can, we should try to safeguard things as education, training and things that has an impact on employment prospects. It's also important that we try to work more heavily with transfer payments and the different welfare payments. That has also an impact on work participation. During the Swedish restructuring, there were changes made to the pension system that strongly has increased the pension age. Early retirement benefits were restructured, housing subsidies were cut back, social and unemployment insurances were restructured to reduce costs, but also to improve the functioning of the system. I would argue that it is important that at least a large part of the restructuring comes from structural measures rather than one off measures. And I would also argue that by postponing investments in infrastructure, maintenance of roads or even research and development, you will only have short term gains. And some of these spending cuts will also probably have a detrimental impact to your growth prospects. So the experience from Sweden is that a quite large part of the fiscal restructuring needs to be taken on the expenditure side. And while trying to safeguard the core of the welfare state, the education system, health care, childcare system, we did more of the restructuring on the transfer payments and a lot of that was structural and has also improved the work participation in the long term perspective. One of the experience we had was with the baseline scenario. We used to have a budget where a lot of the grants were indexed to wages and inflation. I remember back in 92 when we constructed one of these programs to cut back spending, we noticed that in nominal terms, after we've done all this work and had long night negotiations and a Lot of media discussion. We basically had increased the nominal spending somewhat because we were working against the baseline that increased automatically in many cases. What we've done in Sweden is that we have set substantial parts in the budgets in nominal terms. I'm talking about grants to local governments, important other things that childcare allowances and also student grants might be controversial in this forum, but this means that you don't have this same kind of drift in the baseline scenario. And if you would run into problems, the effect from inflation would mean that you basically strengthen automatically your public finances. We have also introduced a feature where when we calculate the wage and cost compensation to the different public authorities in Sweden, we also introduced a productivity adjustment. We take the 10 year average of the service sector productivity and deduct that from the compensation from inflation and wage indexation. This also means that you have a strong pressure and incentive for the public sector to have the same kind of productivity development and dynamic pressure to adjust towards more efficiency as you have, at least to some extent, in the private sector. The importance of setting those grants in nominal terms and introducing this new system for calculating the cost compensation for public authority has been quite important because it means that we will automatically have a tendency to strengthen our body without decisions taken. A further, quite important lesson, I think, is that you should not be disappointing towards the markets. It's very, very important that you gain credibility. Economic policy today, when it comes to efficiency is a credibility game when it comes to interest rate spreads, currency development, but also to the household's behavior. If you have a very, very large deficit, there is a clear risk that the household will start to save more money. And if policy becomes credible, it's more likely that they would be willing to start to consume to a greater degree. And that is obviously also true for the business sector. Investment is depending on stability and credibility of policy. So don't be disappointing. Have a conservative baseline scenario. When you're forecasting growth and expenditures, you must build this on a conservative and cautious forecast. It's also very important that when you calculate the effects from the different measures taken, that you don't go into exaggeration or taking optimistic scenarios as the basis for calculating the effects. Be transparent on the measures that you're doing and on the effects of them, and try to achieve your goals. It's better to set goals that can be achieved and overachieve them than to set goals that you're quite likely to miss. And I think a very, very important part of the Swedish fiscal restructuring was also that there was a clear readiness to come back from the political side. If the measures weren't enough, both in 93 and also in 95 and 96, the governments were able to put forth further programs when we did not achieve our targets. And the willingness to say that we are evaluating and ready to do more, I think is when there are unexpected events is quite important to build credibility. And this is also something that we could see in evaluations of the Swedish restructuring process. Both the OECD and and the commission has underlined that the forecast made from the Swedish Ministry of Finance tends to be on the conservative side. And I do think that that is something that is actually quite helpful. The sixth lesson from the Swedish crisis management was that it's important to front load these decisions for political, economic and psychological reasons. Frontloading is important because if you want to have these credibility gains in terms of change saving behavior, interest rates, reinvestments, it's much better to front load and thereby also being able to gain some of the credibility gains during the process. This was also, I would say, very, very much a keystone of the process. In Sweden. We had the crisis starting in 1990, going on to to 1991, 92, but already in 92, 93 we were starting to implement substantial decisions in terms of housing subsidies, welfare payments and also when it comes to taxes to deal with the problems. This meant that we had the peak of our deficit level in 94 at around 11 12%. But already in 97 the deficit level was again down to 2%. And that kind of front loading and rapid action, I think was very, very important to regain credibility of the financial markets and the outside world. I do think one of our lessons is that it's very, very important to calculate the political costs. We know from economic research, such as the public choice research, that well organized interest groups will be quite difficult to deal with. We did, for example, in the early stages some cutbacks on culture subsidies that were very symbolic and quite costly political, while other measures that were more broadly based did not provoke the same kind of reaction. I also think it is not only for political reasons, but also for legitimate reasons important that we are dealing with symbol issues. During this period. A lot of the benefits and compensation in the meant for members of Parliament and member of government in Sweden was changed to become more transparent, more open and more based on independent decision making. That might sound as a populist take on this issue. It is very important that the citizens are perceiving that the leaders are also taking part of the burden of the system when it comes to the current crisis. And that is the eight lessons that I would underline, both when it comes to the crisis in the early 90s and during this period, and that is to safeguard labor force participation. We all know that in high tax societies, and Sweden is a high tax society, which all of the European countries are, we do have the situation that one hour work will have a very, very strong impact on public finances. So we could get a person out of social exclusion or unemployment back to the workforce. The net effect of this will obviously be quite dramatic. I would argue that during the 90s and also during the last few years, we have strongly reinforced the incentives to work in Sweden, partly by changing the welfare systems. We have introduced stronger systems for control and oversight, stronger gatekeeping functions in early retirement and sickness benefits, and that is important. And at the same time, we've been able to invest money in terms of education, but also active labor market policies. So it goes both in cost control, but also in what you spend money on active policies. And I would especially underline when it comes to female labor force participation, that childcare, high quality childcare can be very, very important to uphold a high degree of labor force participation. We have also introduced substantial tax cuts. When we have, during this crisis tried to strengthen the demand, we have used measures that are also structurally important. If we go back 10 to 15 years, Sweden would be on the high end of threshold taxes. The tax rates, combined tax rates that low income earners are meeting today, the Swedish tax rates for low income earners are on the same level as in the U.S. also, the combined threshold defects, when you take into account the benefits are today on the same level as the US when we look at the OECD calculations. So targeted earned income tax cuts can be quite important. I would argue that what we are now seeing in the Swedish economy is that we are coming out of this crisis in a better shape than many other European countries. And I will give you a few, few arguments with that. The first one is that unemployment has increased substantially less than we were fearing and forecasting. We are currently seeing unemployment at the level of around 8% and it might continue to increase, but we were expecting unemployment to go up to maybe even 12%. So if we look at the consensus forecast, the Central bank forecast and our own forecast, it's quite likely that we will see unemployment at least 1 to 2 percentage points lower than we were expecting at the outset of the crisis. A second feature is that the cost for the unemployment has been reduced substantially. When we look at the early forecasts for these unemployment levels, we can see that the actual costs have been around 10 to 15% lower. We have used some of that money to spend on active labor market measures. But that has meant that even with the high degree of ambition we have, costs are 7, 6, 7% lower than we expected. We have also seen countering effects, especially in sickness, cost for sickness and early retirement. And that is a substantial shift between 2006 and 2012. The difference is around. It's above a percentage point in gdp. So those two factors are very important. A third factor is that we're also seeing that hours work is developing substantially stronger than we have expected. We had expected a drop in almost 3%. And given that we are a high tech society, the fact that we are now expecting from the period 2009 and 2012 a slight increase in hours worked, that has a tremendous impact on our public finances. The fourth reason why I think we have been able to live through this crisis in a better shape than many other European countries is that we started out in a much stronger position. We have been able to work with an expansionary fiscal policy combined with an expansionary monetary policy and very substantial measures to deal with the financial crisis without running into a situation where the deficit becomes a problem. We will be back in balance around 2012. We will be back in a percentage point surplus in 2014 without any fiscal restructuring during this crisis. And I think that has been very, very important to keep up the consumer confidence and also to keep the economy working. Another issue I think is that has been very, very important in the Swedish case, that is to strengthen the fiscal institutions. If we go back to the early 90s, Sweden had, together with Greece and some other countries, the weakest fiscal institutions among the European countries. The control of the grants was limited. We had the bottom up process where the spending department had a very, very strong position, where the Ministry of Finance was quite weak and where we didn't have very credible targets for our fiscal policy. What we've done is to introduce a surplus target. We are currently trying to achieve a percentage point in surplus. We have expenditure ceilings that are set three years ahead, which means that you have a very, very strong limit on on the budget negotiations for the years to come. And that I think has been very, very helpful. We now have a top down process with a very, very strong role for the Ministry of Finance where the ministry not only make the forecast, but also has a strong role in suggesting a whole budget that is the basis for negotiation inside of the government. We have a balanced budget requirement for local government. We used to have the problem that a lot of the local governments were running deficit, and that is a problem that is quite severe because at the Ministry of Finance then you can't control the situation for public finances. And the balanced budget requirement has worked very, very well for us when it comes to local government. And we also have instituted an independent fiscal policy council that are reviewing to what extent the government's policies consistent with long term fiscal sustainability and also dealing with a lot of other issues. And obviously an independent fiscal policy in council will increase the degree of transparency in policy. The shift in Sweden has been substantial. We have gone from a situation where we had an 80% debt level to a situation where we are around 40%. Our debt will have peaked this year and we will once again see the debt level coming down in 2011 and 20. This means that we have room to maneuver, we can pursue an active policy to stabilize and safeguard employment because we are starting from a strong position. And I think that is probably one of the key lessons to learn for future economic crises. We need strong economic policy because we will see a lot of international turmoil also in the future. And therefore you need to have a strong starting point. A tenth point that I would like to underline for a successful policy to restructure public finances. That would be that we need to maintain social cohesion, a fiscal restructuring process. There is always a risk that you would hurt the poorest members of society, because most of our spending in our budgets are welfare spending and money that are used to create a good society and good welfare for all people. And therefore it is very, very important for the legitimacy that we try to keep social cohesion at the forefront when we're talking about fiscal restructuring. 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. And I do believe that that was a key part of the Swedish fiscal restructuring, that we also were able to safeguard the people in society that was not best off. So the two richest deciles, the 20 richest percent of the economy, accounted for 43% of the savings that was done in the economy. And I think that is something that contributed to making this process legitimate. So these 10 lessons, what are the main conclusions for Europe, for the uk, for the US and other high deficit countries? Well, I do believe that a prudent economic policy must not be a source of instability. Stability dynamics is important, growth is important, distribution is important, but also stability. What we've learned from the Asian, from the Russian, and now from this Crisis is that the cost for society of big disruptions in economic growth is very, very high. If we want to safeguard a stable economic environment. Stable public and robust public finances is a key issue. And especially for European countries such as Sweden, that is a well developed welfare state. If we want to have an active economic policy and also a well developed welfare state, we need to have robust public finances. We also have a challenging situation not only for Sweden, but for the whole of Europe when it comes to sustainability in the long term situation. The debt levels that we have now come up to is in Europe are quite problematic, especially if we take into account the demographics. So I do believe that the lessons learned from Sweden that all means must be used, that we must be ready to use taxes, especially taxes that are least harmful for the economy. That we must be ready to cut expenditures structurally while safeguarding the most important spending when it comes to welfare and growth, being able to restructure transfer payments. That we improve our baseline scenarios so that we don't have a fiscal drift that will undermine fiscal restructuring. That we work with conservative baseline so we build credibility for the restructuring, that we are ready to front load the consolidation. I think those are some very, very important lessons. And also obviously to take into account the effects on labor force participation. Not only because labor force participation is so important for public finance, but also for cohesion in society. Probably the best indicator of a just and well functioning welfare state is that we are working towards full employment and don't leave people in social exclusion. A key lesson from Sweden is also that we need to strengthen our fiscal institutions and while doing the keeping up the social cohesion of society. I'm confident that the UK and Europe and other countries has a very, very tough period ahead. But we also know that during crisis period many good decisions are taken that sometimes, as in the case of Sweden, create a quite long period of good growth and also a more stable economic development. Thank you very much.
- [33:28]
C
Well, Anders, thank you for that excellent presentation. I'm not going to use a PowerPoint presentation. I'm just going to make some remarks about what Anders has just said and then we can both take some questions. We've got to know each other well in recent years met each other on a number of occasions, both here in London and in Stockholm. He has made more of an effort than I to breach the cultural divide between us. He speaks excellent English, as you've just heard, but I have yet to grow a ponytail or put an earring on, which I'm not sure would be the best electoral strategy for me at the moment, but it is good to be here with you and I'm very grateful to you for coming to the LSE and making this presentation. And of course, each country is different, even in Europe, and all of us have different economic and fiscal and indeed political and cultural contexts. But I think, as that speech shows, and indeed our conversations over recent years has shown, there is a growing consensus about how we tackle some of these problems that are common to all of us and that does transcend national boundaries. And that consensus covers issues like public finances, like welfare reform, like social cohesion and fairness. And let me illustrate that by turning to some of the specific remarks that you made and opening that up as a discussion for later on. The first thing I'd say is I was struck about how you spoke about the fiscal consolidation and how that needs to start as soon as possible, particularly in countries with weak public finances, and has put it so well, the longer bond waits with the heavy lifting, the more difficult it becomes. And I agree with him and the emerging international consensus that acting early helps to establish international cross credibility and that in turn will help Britain and other countries keep interest rates lower for longer and support a strong recovery. And the message could not be clearer if you find yourself on the wrong road, you have to take the exit, you have to come off that road and choose another path. And that is what we have to do. I believe in this country the Swedish government demonstrated the benefits of taking early and decisive action. And during the 1990s, this approach enabled them to turn a 10% budget deficit, as you've heard, into a budget surplus in the space of just five years, staving off a fiscal crisis and helping deliver strong economic growth. For many years now here in the UK we have been arguing consistently that we need to start dealing with our deficit later this year. Can't afford to put off these dispositions decisions until next year. According to the latest OECD forecast, the UK will have a budget deficit of over 13%, the worst in the developed world. 13%. We've just been hearing from the Finance Minister about how Sweden dealt with a 10% budget deficit in the 1990s. We currently have a projected budget deficit of 13%. And of course that is more than four, four times what Sweden has had to deal with in this current crisis. And that is because of another important lesson. Sweden fixed the roof when the sun was shining. Sweden took the measures during the periods of strong economic growth in the last decade to mend their public finances. And indeed he sets himself an ambition of building up A surplus in a couple of years time, which is something that we're not yet in a position to even contemplate. Of course, as I say, he's stressed and has stressed the importance of acting early. The OECD too has recently talked specifically to the UK about the importance of acting early. This is their most recent advice to the United Kingdom. By developing and announcing more ambitious fiscal consolidation plans early and supporting them with a strong and credible medium term fiscal framework, the government would strengthen the recovery. That is the external advice to the British government at the moment. And as the flood of comments from analysts and credit rating agencies show, there is a clear and present danger that the world will lose confidence in British economic policy unless we change direction. And that would push mortgage rates up, that would lead more businesses to go bust and the recovery would be undermined. And yet, of course, the pre budget report actually increased public spending in the next financial year, starting in April. And total spending is planned to go up by £31 billion in nominal terms, or more than 2% in real terms. And during a period when the treasury, the British treasury, forecasts the economy to be growing by at least 2%. And with the largest budget deficit of any developed economy, I think that is simply not credible. Now, everyone knows that the government spending plans for the next year are driven more by the looming general election than by economic reality. So with the date of the election increasingly likely to be beginning after the next financial year, that means we will have to make early in year reductions in those spending plans. Of course, our planned public sector pay freeze doesn't begin until 2011. But let me give you some examples of changes we could make much earlier in order to establish international credibility for the United Kingdom and support a sustainable recovery programs that represent poor value for money. Excessive spending on things like advertising, the enormous consultancy budget in government spending on tax credits for people earning over £50,000, spending on child trust funds for the two thirds of the population who are better off and therefore don't receive the additional top up. All of these things will have to be cut during the coming financial year. And the second point that Anders made in his speech that I'd like to pick up on is the importance of credible fiscal institutions. Again, Sweden provides us with evidence to support plans that we are developing. The government that he's part of created a fiscal Policy Council that independently evaluates the sustainability of the public finances and future spending plans. And this fiscal architecture has played an important role in a successful deficit reduction strategy going forward and maintaining market confidence in the Swedish economy. In spite of the global downturn. And the benefits of this type of independent institution are clear. They provide markets with greater reassurance about the credibility of fiscal plans. And they create a rod for the backs of politicians like myself and Anders to make sure we stick to our promises on spending and borrowing. And the net effect is lower interest rates and greater economic stability. So we will follow Sweden's lead. A Conservative government will create an independent Office of Budget Responsibility that will be up and running on a shadow basis before a first Conservative budget. And this Office for Budget Responsibility will make recommendations about how much fiscal tightening or loosening it thinks is necessary to have a better than 50% chance of meeting the Chancellor. Chancellor's mandate for the public finances. At every budget and at every pre budget report, the Chancellor will have to give an account to Parliament about whether his plans or her plans are consistent with the Office for Budget Responsibilities recommendations. As the independent Institute for Fiscal Studies here in the UK says, creating a new independent body to forecast the public finances could help keep the interest rates at which the government is able to borrow low. We've been engaging with the Swedes on the design of this institution. The chair of Sweden's Fiscal Policy Council recently spoke at an Institute for Government event with Sir Alan Budd, who was a former chief economic adviser to the treasury and who I've asked to oversee our implementation plans. The third point I'd like to just quickly draw on from Anders speech is the importance of of maintaining social cohesion and imposing necessary fiscal discipline. As he said it, we're all in this together and clearly achieving fiscal consolidation will not be a straightforward process. Here in the uk, many difficult decisions lie ahead, irrespective of who wins the next general election. Again, I think Sweden provides an important role model during their process of fiscal tightening. They worked hard to ensure that the spending cuts were equitably distributed. And our approach must be the same. It's because of the emphasis we're putting on social cohesion that the spending cuts I've already announced have been carefully designed to avoid hitting the poorest in our society. That's why, for example, the public sector pay freeze does not apply to the million lowest paid people in the public sector. That's why I said we're going to concentrate government spending on child trust funds on the poorest third of families. That's why we're going to keep child tax credits, but we're going to stop paying them to people who earn more than £50,000. And as I said at our party conference last year, we couldn't even contemplate abolishing the incoming 50p rate on the richest in our society, while at the same time I'm asking many of our public sector workers to accept that pay freeze to protect their jobs. So that same commitment to fairness must inform our approach to the public services. That's why much of our policy involves, for example, a pupil premium in education as part of indeed Swedish inspired style school reforms, so that funding is weighted towards poorer pupils. And indeed, this week we were talking about public health resources being directed now to more deprived areas. Now, as I know from my discussions with Anders, we must not balance the budgets on the backs of the poorest. And that is a key lesson, I think, for progressive governments across Europe. The fourth point that Anders raised, and which I briefly want to mention, is the importance of welfare reform to boost growth and get people back to work. As you said, Anders, cutting marginal tax rates and improving incentives to work must play a key role in this process. It can't be allowed to stand that here in the uk, people on low incomes face marginal tax tax rates of up to 95%. There was an outrage in this country in the 1970s when the richest people faced a 98% tax rate. Today, the poorest people in this country in work face a 95% tax rate. And that is clearly unacceptable. We need to overhaul our welfare system and provide people with targeted support to find work if they're out of work, and of course to stay in work. And the plans we've developed with the help of David Freud, who was the government's welfare advisor, I believe will help us to do this. Let me finish by saying this. Britain faces one of the most difficult fiscal challenges in our modern history, indeed arguably the most difficult fiscal challenge we have known in our modern history. But if we're going to get through this, we will have to pay heed to the lessons that have been learned by other countries that have overcome similar crises. And the clear leadership and the decisive action taken by Sweden now and in the past is a shining example of how fiscal consolidation can be successfully achieved by progressive government. 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. We do it to avoid a fiscal crisis which, with all the massive damage to our reputation that that would bring, we do it to create a sustainable recovery, not just to pump up another bubble. And the emerging international consensus will be an invaluable source of ideas and support as we tackle the pressing Issues at home and abroad. We look forward to continuing this conversation in the weeks and months ahead as we strengthen and broaden this coalition of interests. Thank you very much.
- [45:27]
A
Well, one of the tasks of being a chair is that you have to manage time. And time is like a budget. If there is a lot of it, it's easy to manage it. If there's not a lot of it like there is now, it'll be a lot more difficult. We have about 10, 12 minutes, not more than that, for questions. What I would like to do is start with two questions from the balcony, because those are usually forgotten when we do these things, and then come down here for two questions. So who in the balcony has the gentleman second or third row in the back there?
- [46:03]
C
Thank you for your both of your speeches. Neither the UK nor the Sweden have.
- [46:09]
B
Yet to start using the euro or.
- [46:12]
C
Join the European Monetary Union. How do you see the future related to this issue with regards to both of your countries? Thank you.
- [46:27]
A
Do you want to answer that now or shall we take a few questions and you can reflect on those? Right, is there anybody on this side? Yes, the lady in the front row here, please.
- [46:39]
C
Thank you.
- [46:40]
B
I was just wondering if you had any thoughts concerning the Greek deficit problems. What measures either the European Commission or the European Central bank should be taking to restore credibility in Greek public finances?
- [46:54]
A
Thank you. Maybe one more there, right next to the poll. Yes, I appreciated the remarks, but I.
- [47:01]
C
Quite question seriously how Sweden can be.
- [47:04]
A
Used as a general example. One of the striking things about the.
- [47:09]
C
Swedish people is that is the homogeneity. Everybody is pretty much the same. Well, you know, I lived in Sweden for a while and there were maybe 10 last names that covered 90% of the population.
- [47:23]
A
As an American and resident Britain, I can't say how in extremely heterogeneous societies. Look at what the Senate is now.
- [47:32]
C
Doing with the health care bill. Reaching the kinds of consensus that may.
- [47:36]
A
Be relatively easy in Sweden or to.
- [47:39]
C
A lesser extent in the UK seem totally impossible.
- [47:42]
A
So I just question to what extent.
- [47:44]
C
You believe your successes could be paradigms for future activities in more heterogeneous countries.
- [47:52]
A
Okay, thank you. Why don't you start with these three and in the meantime we'll shift our focus down here.
- [47:57]
B
Well, I will start with the last question first and work my way upwards. I think it obviously has been true that Sweden is a very homogeneous society, which goes for all of the Nordic Scandinavian countries, but it's also basically gradually changing. We have a very, very large degree of immigrant population. We are probably among at least the higher part of European in that respect. I mean we've. There's been a war for example in Iraq where we've taken basically the bulk of refugees from that has come to Europe. And that was also to a large degree true for the Balkan war. So today we can clearly argue that the Swedish society is to some degree not as homogeneous as it were. But I think we should respect the essence of your question. I must say I agree with you. I mean countries are different. Some countries are more heterogeneous, some are federal and, and obviously world policy advice must be basically be something that you're looking at drawing from others experience. But then you have to implement it in a UK fashion or a French fashion or a US fashion. I don't think we should look for a blueprint for societal models when it comes to Greece. I've been quite clear in my comments that it's not necessary that the Greek government is getting very, very serious about their deficit situation. It's completely unacceptable that you have this kind of deterioration when it comes to the reporting of deficit as we saw in Greece over the last few years. We are now, we will have a thorough discussion on this issue in the Ecofin Council on Tuesday because we will now start to evaluate the new Greek government's convergence program which is their multi annual plan. To me, when it comes to this issue we are now in a situation where it's good with plans and it's good with word, but eventually they will have to restore credibility by their acts because we have now heard from the Greek government for some time, obviously from the previous Greek government also that they will take serious action. But there has been a lack of actions coming after the plans and it is deeds, not words that we now need to see. Well, we had a referendum on the Euro in Sweden a few years back and there was a majority against joining. So what we need in Sweden is obviously to see a stronger public support before the issue could come back on the agenda. I represent the part that do believe that for political reasons and also for economic reason, it would would be an advantage for Sweden to join. We are a very, very small country and we do believe that Europe needs to be strong and work together. So at the end of the day, for political reasons I do think that the economic case is a little bit two sided. There are some stability arguments against that, there are some structural arguments pro. But for political reasons I do believe that Sweden eventually should join.
- [51:00]
A
Okay, thank you.
- [51:02]
C
Well, I don't think Britain should join the Euro and I think in a way the crisis has partly demonstrated and I make no, you know, each country must make its own decision. And country with the size of the economy, the uk, I think it has been useful being in charge of our interest rates during this period. And I think also the value of the currency is also a useful tool, even if you're not directly managing it as well. And if you want to see some of the challenges, put it like that of being a member of the euro at the moment, if the policy being pursued by the central bank is not ideal for your situation, then look at Spain. And I think they are going to face some very considerable challenges in the next couple of years where they are locked into a high currency, high value currency, relatively speaking, and are facing a fairly alarming increase in unemployment there. That brings me on to Greece. I mean, I think Greece, obviously, Greece again has its own problems and its own environment. But I think it's a warning lesson to people who think that these debates are academic, that somehow fiscal crises only happen in the textbooks. Actually Greece, and indeed what's happening in Ireland where they're having to introduce fairly draconian reductions, for example, in the pension benefits of public employees. This is what happens when a country starts to lose international confidence. And the point I've made in the UK is you just have to read the broker notes and the market reports around the world about the UK at the moment and indeed the warnings from the credit rating agencies about the UK's AAA rating to understand that we have a problem that we have to address. And you can look around other countries in Europe to see what happens if you don't get on top of the problem. And the. The final point I make to the gentleman, I don't pretend to be an expert on Swedish society, and of course we are not as homogenous society as some others, but we have an advantage in this country which is that the political system is such that it tends to allow a government to deliver on its budget. So there is not the process you see in the US of the negotiations with Congress and the White House. So governments tend to get the budgets that they want. What's incredibly important is to have a public mandate for that, particularly in the current situation. And one of the things we've been trying to do, indeed at events like this and elsewhere, is create that debate before the election so that there is a sense that whatever the outcome of the election, people have voted for the outcome, people. And if our party wins, we have a mandate to do what we think is necessary to sustain the recovery, keep interest Rates low for longer, keep people in work.
- [53:46]
A
Okay, thank you. I have time for two questions and I already have the two people who are going to speak. So the gentleman in the back there.
- [53:54]
C
I'd just like to ask Mr. Borg.
- [53:56]
B
First of all, doesn't he see some apparent contradiction between raising consumption taxes, which he emphasized, and maintaining social cohesion? Because obviously consumption taxes hit less, well off more. And the second point, really following on from that is to Mr. Osborne, does he agree with Mr. Borg about raising consumption taxes? Obviously, I don't expect him as a putative Chancellor to go into detail on exact taxes, but the general philosophy of raising consumption taxes, including vat, because as Deborg said, we have to raise taxes as well as cut spending.
- [54:28]
A
Okay, thank you. Thank you. And the gentleman on the third row there.
- [54:31]
B
Yes, thank you very much. And thank you for our two speakers, it was very enlightening. You mentioned that when you tried to consolidate fiscally, you raised tax by about 43%, I think you said, and you decreased expenditure by 57%.
- [54:46]
C
How high can our taxes go before.
- [54:48]
B
We start driving business away? And it gets a bit counterproductive and it gets ridiculous in this country?
- [54:57]
A
Maybe Mr. Osborne can answer these questions first.
- [55:02]
C
I won't comment on when it gets ridiculous in our country, but I think as the minister was unable to arrive in this country yesterday at the time he wanted to because about 2cm of snow had fallen over one of the areas. We can learn from Sweden there as well. Let me do. I mean, they're both questions about tax. I think tax has to be part of the equation, which is why we've accepted that the new 50p rate, which is coming in in April and therefore will be probably enforced right at the beginning of a Conservative government is not something we can get rid of or pledge to abolish, not least while we're asking people, for example, in the public sector on higher incomes to accept a wage freeze. And there are associated tax rises, for example, over the taxation of pensions for better off people that we've said the same thing about. And what I've said, however, in the UK is that the bulk of dealing with the problem has to come from expenditure restraint. And I would argue that the problem in the UK in recent years, before the crash, was that during a boom year, during the boom years, we were running deficit when we really shouldn't have been. And so therefore the problem has been one of overspending, not one of over taxation. And therefore the bulk of dealing with the problem, not the entirety of dealing with the problem. The Bulk of dealing with the problem has to come from expenditure restraint. And again, you know, every country has to choose its own path. And I think Anders referred explicitly to Sweden as a higher tax economy. Traditionally, studies done by, for example, the OECD have shown that a good mix of tax increases versus expenditure cuts is roughly 20%, 80% for fiscal consolidations around the world. In other words, 80% of the effort has to be borne by expenditure restriction restraint and 20% by tax increases. Now, as I say, that's a general lesson the OECD has drawn from different countries around the world. And that is something I've paid particular attention to on the question about what type of taxes, tax increases and the like. Now, I'm not going to write a first conservative budget here at the lse, although I'm sure I'll take lots of inspiration from the good work that goes on here. But I think it's fair to say that the. I thought it was a rather odd choice for the current government to choose national insurance, which is in effect an income tax, and increase that and increase national insurance on employees and employers. So it was both a business tax increase and an income tax increase, which I note were the two things that the minister here said were the two taxes one should generally try and avoid when you're doing these sorts of fiscal consolidations. So I note what the government has done rather than spell out what a conservative budget might look like. But I would just. From the day I took this job almost five years ago, I have not ruled out tax increases. And I don't think anyone can responsibly do my job, let alone do the job of Charles Exchecker by ruling out tax increases, although I've often come under pressure to do so.
- [58:17]
B
If I could add a few points, I think I basically think that most European high tax economies would be better off in terms of labor force participation, competitiveness on a global scale with lower taxes. The government that I represent are trying to cut taxes. That's an important part of our agenda. But we do believe that tax cuts must always be an integrated part of the fiscal policy where you have sustainable public finances. And therefore when you're in a situation where you have a high deficit, you. You obviously must consider both expenditure cuts and taxes. What I was referring to was the OECD ranking of taxes, where OECD has made clear that the most harmful tax is obviously the most elastic, which is probably corporate taxation and capital taxation. The second most harmful is obviously income taxes that would be increasing marginal taxes and especially thresholds. For low income people to stay on the labor market. The third most harmful or least harmful would then be different kind of broad based taxes, for example on consumption or immobile property. And fourthly, you have some taxes that are actually dealing with externalities and those are the ones that probably have the least negative impact on the economy. Obviously this kind of grading and ranking is what you also have to have in mind. Mind when you're talking about tax increases, you should do the least on the most harmful and try instead to work with taxes that are not so harmful. What I was referring to when it comes to broad based tax assessments with VAT was that I was underlining that any government would at the end of the day at least have to consider those kind of measures in this kind of process. But as I said, I mean a balance in the restructuring progress must also take into account count, equity, efficiency, political, legitimate and so forth. So I wasn't writing a recipe for the UK by referring to these arguments, but in my mind there are some taxes that are much more harmful than others. And in general, I think most of our European economists need to reduce taxes. But if you have a deficit, you must deal with it, otherwise you underline the credibility of the whole economic policy and, and you will not be able to deal with growth issues in an efficient way and you won't be able to stabilize the economy when we are coming to the next business downturn. So it is an extraordinary circumstance when you are running a very, very large deficit.
- [60:47]
A
Many thanks, ladies and gentlemen. This was the event for which you all came out. I would like to thank both Mr. Borg and Mr. Osborne for their very interesting and, and in fact even lively debate about what the fiscal consolidation process would look like. And you for the interesting questions and the attention you've given us. I would like to ask one thing that is that while we leave the room, that you remain seated. Security reasons these days are apparently everywhere. So many thanks. Until next time.