Don’t return Sweden to the high taxes of the 1970s and 1980s.
That warning comes from Sweden’s state-funded economic think tank as the Social Democratic-led government has been raising taxes on workers, while planning to cut levies on pensioners and those collecting benefits.
“There are big negative effects, at least in the longer term, of higher state income tax and the marginal tax rate,” Urban Hansson Brusewitz, director-general at the National Institute of Economic Research, said in an interview Tuesday in Stockholm. “Should things head in this direction too long it would be harmful for Sweden.”
Hansson Brusewitz joined NIER last year after working as budget chief at the finance ministry for seven years under both current Finance Minister Magdalena Andersson and her predecessor Anders Borg, who slashed taxes during eight years of the conservative Moderate Party’s stewardship. According to Hansson Brusewitz, the tax increases are a follow up on concern that the growing income inequality seen in recent years could harm the fabric of Swedish society.
Andersson leads a government with the Green Party, which has raised income taxes to fund more generous sick leave and unemployment benefits and spend more on jobs programs to cut unemployment. The government plans to have raised taxes by more than 40 billion kronor ($4.5 billion) by the end of 2018, after coming to power in late 2014, according to the Finance Ministry.
A large chunk of the increases is a reversal of the previous government’s payroll tax cuts for companies that hire young people. Hansson Brusewitz said that the decision to increase that tax was rather good since the reduction was ineffective.
Still, while boosting revenue for the state, it’s not clear that raising taxes on those earning the most will have the same effect in the long-term, according to the NIER chief. He also advised the government against repeating this year’s mistake of opening up its purse strings too much.
The government recently flagged that solid finances will be an opportunity to boost welfare spending. It expects the economy to expand 2.6 percent this year, after growing more than 3 percent in 2016 and topping out above 4 percent in 2015 amid a record inflow of refugees.
While Brusewitz Hansson credits the government in having returned state coffers to a surplus, it should now stick to keeping budgets balanced to return to a structural surplus target that NIER argues should be 0.5 percent of gross domestic product.
“The budget for 2017 is somewhat expansive,” he said. “It hardly improves production and doesn’t to a large extent affect employment to conduct an expansive policy in a booming economy.”
The government doesn’t necessarily need raise taxes down the road to improve the quality of welfare services given expected productivity gains, he said.
The minority government’s tax plans have been met with skepticism both inside and outside parliament. The coalition was recently forced to change a proposal to raise dividend taxes for small businesses. NIER along with others have also been critical of the outlines of a proposed aviation tax, arguing that it wouldn’t decrease carbon-dioxide emissions in Europe.
The coalition recently also put on hold plans for a tax on the financial services industry. It proposed that banks will instead have to increase the amount they pay every year into a reserve that will be used to rescue lenders in a financial crisis.
The government should consider putting that money into a fund that is separate from the regular budget as is currently the case, Brusewitz Hansson said.
It also needs to reconsider its goal of having the EU’s lowest unemployment by 2020.
“They won’t reach the target,” he said. “One should never say never but the likelihood is very, very low.”
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