The secret behind Sweden’s success

(Image credit: Getty Images)

The apologists for the relentless expansion in the size and cost of Britain’s public-sector debt like to point out that other major developed economies face a similar predicament.

Although government bond yields have risen further and faster in the UK than elsewhere, they have also increased sharply in the US, Germany, France and Japan, countries with – except for Germany – higher debt relative to GDP. If Britain is on the wrong path, then it is a path endorsed by everyone else.

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However, the government found lockdowns to be popular, enjoyed the micro-management of people’s daily lives and relished the task of crisis management. Only reluctantly did it lift all restrictions at the end of 2021, having incurred vast financial costs.

This was the greatest political, financial and social disaster for more than 100 years, instilling in the population a culture of hypochondria and dependence on the state that has proved extremely difficult to shift. The benefit to the nation’s physical health was, at best, doubtful.

Only one country broke ranks and followed a very different path with no lockdowns: Sweden. So, perhaps Sweden, rather than the US, Japan and the rest of Europe, can teach us how to manage our economy?

In the 1980s, leftists saw Sweden as a socialist utopia for its all-embracing welfare state, stringent regulation and high taxes. Moreover, the country remained a democracy, although the same party, the Social Democrats, had been in power almost continuously for 50 years. Why couldn’t Britain follow the Swedish example?

How Sweden turned its economy around

While Britain’s national debt-to-GDP ratio has risen from 79% to 96% in the last ten years, Sweden’s has declined from 46% to 34%. Swedish ten-year government bonds yield 2.5%, compared with 4.7% in Britain, so its debt-servicing costs are a fraction of the UK’s. Sweden certainly benefited from having largely avoided the extravagance of lockdown spending, but the UK’s debt ratio had been rising steadily since 2000, from 28% to 77%.

The gulf in yields and debt loads has come about because Sweden suffered an economic crisis in the early 1990s and made a radical change of course. With a fiscal deficit of 11% of GDP in 1993, a debt-to-GDP ratio of 90% and the economy in deep recession, the Social Democratic government made deep cuts to public spending.

Fiscal retrenchment was 8% of GDP over four years, two-thirds from spending cuts, notably to benefits, and one-third from tax increases. The currency was devalued, interest rates fell, and economic growth returned. Mass privatisations followed.

The economy ground to a halt in 2023, but real growth in GDP per capita has averaged more than 1% for the last ten years, compared with 0.75% and slowing for the UK. Swedish inflation is a little over 1%, the UK’s is nearly 4%.

Sweden’s tax-to-GDP ratio, according to the OECD, is high at 41%, but the government has just announced $3 billion of tax cuts, bringing it down. Adjusted for population, this is equivalent to nearly £15 billion in the UK. The UK’s tax-to-GDP ratio for 2024-2025 is estimated at 39%, but with UK public spending accounting for 45% of GDP, the UK’s tax take will inevitably leapfrog Sweden’s.

VAT, at 25%, is higher than in the UK, but since 2005 there has been no inheritance tax, and since 2007, no wealth tax. Moreover, “the Swedish welfare system is based on the general principle that everyone contributes and everyone gets equal access”. The tax system is progressive, but does not try to load the burden as heavily as the UK on “those with the broadest shoulders”.

The Swedish stock market is in rude health. In the ten years to March 2024, 501 companies listed in Sweden, more than the number in France, Germany, the Netherlands and Spain combined and lagging only the UK at 765.

Since then, there have been more flotations in Sweden than in the UK, although Klarna, the $50 billion Swedish fintech company, chose to float in New York rather than Stockholm this month. The number of listed companies has fallen by a third in ten years.

About 40% of the Swedish stock market is owned by domestic pension funds, while 25% of adult Swedes invest directly; 70% own mutual funds. The equity market has doubled in the last ten years, while the UK’s All-Share index is up 50%. No British leftist advocates following the Swedish example nowadays.

This article was first published in MoneyWeek's magazine. Enjoy exclusive early access to news, opinion and analysis from our team of financial experts with a MoneyWeek subscription.

Max has an Economics degree from the University of Cambridge and is a chartered accountant. He worked at Investec Asset Management for 12 years, managing multi-asset funds investing in internally and externally managed funds, including investment trusts. This included a fund of investment trusts which grew to £120m+. Max has managed ten investment trusts (winning many awards) and sat on the boards of three trusts – two directorships are still active.

After 39 years in financial services, including 30 as a professional fund manager, Max took semi-retirement in 2017. Max has been a MoneyWeek columnist since 2016 writing about investment funds and more generally on markets online, plus occasional opinion pieces. He also writes for the Investment Trust Handbook each year and has contributed to The Daily Telegraph and other publications. See here for details of current investments held by Max.