Higher taxes to protect Sweden's welfare

Politicians worrying about an upcoming election tend to avoid talk of tax rises - except in Sweden, the country with the world's highest tax take.

Although the next poll is not until 2006, Social Democrat Prime Minister Goran Persson, whose party has ruled for six of the last seven decades, has already set out his stall.

Unlike Liberal Danish Prime Minister Anders Fogh Rasmussen, set for re-election today with a tax cutting bias, Mr Persson has vowed to raise taxes if needed to protect the "Swedish model" of welfare.

"How many houses and apartments will have flat-screen TVs, how many more cars and how much more private consumption shall there be and how much shall we invest in what is common to us all?" he said in Parliament this week. "That is the question."

What might be political suicide in some countries could appeal to a society which has consistently backed the Social Democrat vision while opposition right-of-centre parties have urged tax cuts. These parties are now also moving to the left.

"Prime Minister Goran Persson and Finance Minister Par Nuder seem to have full confidence that higher taxes are a vote winner. The worst thing is that they might be right," said liberal economic business daily Dagens Industri.

The top marginal rate of income tax in Sweden is 57 per cent, and according to the OECD, taxes as a share of the economy were a world-beating 50.8 per cent in 2003. Denmark came second at 49 per cent. This compared with the United States at 25 per cent. But despite continued criticism from the right, Mr Persson can boast that Sweden had a higher pace of growth than major trading partner the euro zone last year, at almost four per cent. Unemployment of 5.3 per cent is above a government goal of four per cent, but well below the euro zone's 8.9 per cent. Government finances are also among the most sound in the EU.

Stefan Folster, chief economist at employers group the Confederation of Swedish Enterprise, said Mr Persson's confidence in his tax comments came from the fact many Swedes live off the state, either as public sector employees or welfare recipients.

Those benefitting from welfare include recipients of sick leave payments, pensions for early retirees and maternity and paternity leave benefits lasting over 12 months.

"It is easy to believe that one's own well-being depends on high taxes and that the Social Democrats are doing everything to support such ideas," added Dagens Industri.

Mr Persson's remarks could also appeal to voters who polls say are drifting away from ally the Left Party, the former Communist Party, partly because its new leader is unpopular, analysts say. While in Denmark, Fogh Rasmussen has pulled the Danish Social Democrats towards his tax easing position, in Sweden Mr Persson is pulling the tax-cutting right towards him. The Swedish Liberal Party, the second-biggest centre-right group, has dropped its demands for tax cuts and has called instead for a "tax stop", or a cap on taxes.

Top centre-right party, the Moderates, while sticking to demands for some tax cuts, has also emphasised more strongly a commitment to the welfare state.

"What we see now is rather a movement to the middle of the political spectrum," said Olof Ruin, professor of political science at Stockholm University.

Such changes may already be working for the opposition. Recent polls show right-of-centre parties, which formed an alliance last year, ahead of the Social Democrats and their allies. However, part of the gain has come from unhappiness with the government's perceived slowness in helping holidaying Swedes caught up in the December 26 tsunami disaster in the Indian Ocean region.

Despite the tax rise pledge, Mr Folster questioned how long the Swedish model could be sustained without reform in a society facing demographic challenges.

"Over time a larger and larger share of people are not in the labour market as you have a combination of a larger share of people above the age of 65 and a larger share of people that are unemployed or are on sick leave," he said.