Scandinavian success is not due to high taxes and welfare spending
23 June 2015
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New report debunks the myth that positive social and economic outcomes in Scandinavia are a result of a generous welfare state and high taxes
Free-market policies and pre-existing cultural norms were responsible for the economic and social success of Scandinavian countries. Contrary to popular belief, high taxes and extensive spending on welfare then stunted economic progress and eroded the region’s previously strong work ethic.
In Scandinavian Unexceptionalism: Culture, Markets and the Failure of Third-Way Socialism, Nima Sanandaji debunks the belief commonly held by those on the political left, that the impressive social and economic outcomes of the Nordic region is justification for increased welfare spending and higher taxes.
The desirable aspects of Scandinavian societies, such as low income inequality, low levels of poverty and high economic growth predated the development of a generous welfare state and the explosion of taxation over the 30 years from 1960 had a damaging effect on business and job creation.
Key figures:
Sweden fell from 4th to 13th richest nation in the world between 1975 and the mid-1990s
Key findings:
Business and job creation – Economic growth in the Nordic region was dampened by high levels of welfare spending and a heavy tax burden. Despite a population increase in Sweden of two million between 1950 and 2000, net job creation in the private sector was zero and the rate of business formation has been weak at best.
Taxation – Until 1960, tax levels in Sweden were similar to elsewhere in the developed world. Over the past five decades Scandinavia has seen a substantial escalation in both direct and indirect taxes. Between 1965 and 2013, the level of direct tax in Finland rose from 30 to 44 per cent of GDP and the level of taxes raised indirectly rose from 8 to 22 per cent in the same period. A similar trend can be seen in Denmark, Norway and Sweden.
Social outcomes – A generous welfare state has led to a deterioration in the population’s impressive work ethic and individuals have become increasingly dependent on state welfare. Since the early 1990s, around one-fifth of working age Swedes have been supported by unemployment, sick leave or early retirement benefits. Despite being a country with unusually good health, Norway spends on average 5 per cent of GDP on disability and sickness benefits compared with 2.4 per cent in the UK.
Health outcomes – Social democrats argue that Scandinavia’s health outcomes are a result of the extensive welfare state. There is no evidence for this. Before the development of the extensive welfare state in the 1960s, Scandinavian countries occupied four of the top five places in the OECD mortality league table. By 2005, after 40 years of extensive welfare provision, they had slipped back dramatically relative to other countries.
Inequality – Scandinavia enjoyed low levels of inequality long before the introduction of a large public sector, high levels of welfare and high taxes. The belief that high spending on welfare leads to greater equality fails to stand up to scrutiny as countries such as Slovenia and the Czech Republic enjoy even income distributions whilst having lower taxes. Furthermore, in 2008 Sweden exhibited a higher level of wealth inequality than the UK, US and Canada.
Social norms – The welfare state has eroded social norms. In the 1981-1984 World Value Survey, 82 per cent of Swedes agreed with the statement that “claiming benefits to which you are not entitled is never justifiable”. By the 2010-2014 survey, only 55 per cent agreed with this statement.
Migrant workers – The development of the welfare state has eroded opportunities for migrants. Even the most qualified immigrants struggle to find suitable jobs in Scandinavian countries. Highly educated immigrants in Finland and Sweden have an unemployment rate over 8 percentage points higher than native born Finns and Swedes of similar educational background. In Anglo-Saxon countries, the unemployment rates of the respective groups are similar.
Comparisons with emigrants – It is a consistent finding that descendants of Nordic migrants to the US have higher incomes and lower poverty rates than those who remain.
Commenting on the research, Professor Philip Booth, Editorial and Programme Director at the Institute of Economic Affairs, said:
“The Scandinavian experience illustrates just how harmful high taxes and an overbearing welfare state can be. Despite many seeing the region as a bastion of socialism, where a large welfare state has led to many desirable economic and social outcomes, in reality this success is a consequence of the policies that were adopted prior to the development of the social democratic welfare model. It is very clear that Scandinavia is not an exception to the general rules of economics. Culture is very important in determining economic success but the welfare state has undermined cultural norms and economic prosperity.”
Notes to editors:
To arrange an interview about the report please contact Camilla Goodwin, Communications Officer, cgoodwin@iea.org.uk or 07821 971 443.
The full report, Scandinavian Unexceptionalism: Culture, Markets and the Failure of Third-Way Socialism, can be downloaded here.
Nima Sanandaji is a Swedish author of Kurdish origin who holds a PhD from the Royal Institute of Technology in Stockholm. He has published 15 books on policy issues such as women’s career opportunities, integration, entrepreneurship and reforms which encourage innovation in the provision of public services. Nima is a research fellow at the Centre for Policy Studies in London.
The mission of the Institute of Economic Affairs is to improve understanding of the fundamental institutions of a free society by analysing and expounding the role of markets in solving economic and social problems.
The IEA is a registered educational charity and independent of all political parties.
In Scandinavian Unexceptionalism: Culture, Markets and the Failure of Third-Way Socialism, Nima Sanandaji debunks the belief commonly held by those on the political left, that the impressive social and economic outcomes of the Nordic region is justification for increased welfare spending and higher taxes.
The desirable aspects of Scandinavian societies, such as low income inequality, low levels of poverty and high economic growth predated the development of a generous welfare state and the explosion of taxation over the 30 years from 1960 had a damaging effect on business and job creation.
Key figures:
Sweden fell from 4th to 13th richest nation in the world between 1975 and the mid-1990s
- Annual working hours in Denmark fell by 32 per cent between 1950 and 1990
- Between 1950 and 2000, Sweden’s net job creation in the private sector was zero despite a population increase of two million
- Wealth inequality in Sweden exceeded that of the UK, US and Canada in 2008
- Before the development of the welfare state in Sweden – from 1870-1936 – Sweden was the fastest growing economy in the world.
Key findings:
Business and job creation – Economic growth in the Nordic region was dampened by high levels of welfare spending and a heavy tax burden. Despite a population increase in Sweden of two million between 1950 and 2000, net job creation in the private sector was zero and the rate of business formation has been weak at best.
Taxation – Until 1960, tax levels in Sweden were similar to elsewhere in the developed world. Over the past five decades Scandinavia has seen a substantial escalation in both direct and indirect taxes. Between 1965 and 2013, the level of direct tax in Finland rose from 30 to 44 per cent of GDP and the level of taxes raised indirectly rose from 8 to 22 per cent in the same period. A similar trend can be seen in Denmark, Norway and Sweden.
Social outcomes – A generous welfare state has led to a deterioration in the population’s impressive work ethic and individuals have become increasingly dependent on state welfare. Since the early 1990s, around one-fifth of working age Swedes have been supported by unemployment, sick leave or early retirement benefits. Despite being a country with unusually good health, Norway spends on average 5 per cent of GDP on disability and sickness benefits compared with 2.4 per cent in the UK.
Health outcomes – Social democrats argue that Scandinavia’s health outcomes are a result of the extensive welfare state. There is no evidence for this. Before the development of the extensive welfare state in the 1960s, Scandinavian countries occupied four of the top five places in the OECD mortality league table. By 2005, after 40 years of extensive welfare provision, they had slipped back dramatically relative to other countries.
Inequality – Scandinavia enjoyed low levels of inequality long before the introduction of a large public sector, high levels of welfare and high taxes. The belief that high spending on welfare leads to greater equality fails to stand up to scrutiny as countries such as Slovenia and the Czech Republic enjoy even income distributions whilst having lower taxes. Furthermore, in 2008 Sweden exhibited a higher level of wealth inequality than the UK, US and Canada.
Social norms – The welfare state has eroded social norms. In the 1981-1984 World Value Survey, 82 per cent of Swedes agreed with the statement that “claiming benefits to which you are not entitled is never justifiable”. By the 2010-2014 survey, only 55 per cent agreed with this statement.
Migrant workers – The development of the welfare state has eroded opportunities for migrants. Even the most qualified immigrants struggle to find suitable jobs in Scandinavian countries. Highly educated immigrants in Finland and Sweden have an unemployment rate over 8 percentage points higher than native born Finns and Swedes of similar educational background. In Anglo-Saxon countries, the unemployment rates of the respective groups are similar.
Comparisons with emigrants – It is a consistent finding that descendants of Nordic migrants to the US have higher incomes and lower poverty rates than those who remain.
Commenting on the research, Professor Philip Booth, Editorial and Programme Director at the Institute of Economic Affairs, said:
“The Scandinavian experience illustrates just how harmful high taxes and an overbearing welfare state can be. Despite many seeing the region as a bastion of socialism, where a large welfare state has led to many desirable economic and social outcomes, in reality this success is a consequence of the policies that were adopted prior to the development of the social democratic welfare model. It is very clear that Scandinavia is not an exception to the general rules of economics. Culture is very important in determining economic success but the welfare state has undermined cultural norms and economic prosperity.”
Notes to editors:
To arrange an interview about the report please contact Camilla Goodwin, Communications Officer, cgoodwin@iea.org.uk or 07821 971 443.
The full report, Scandinavian Unexceptionalism: Culture, Markets and the Failure of Third-Way Socialism, can be downloaded here.
Nima Sanandaji is a Swedish author of Kurdish origin who holds a PhD from the Royal Institute of Technology in Stockholm. He has published 15 books on policy issues such as women’s career opportunities, integration, entrepreneurship and reforms which encourage innovation in the provision of public services. Nima is a research fellow at the Centre for Policy Studies in London.
The mission of the Institute of Economic Affairs is to improve understanding of the fundamental institutions of a free society by analysing and expounding the role of markets in solving economic and social problems.
The IEA is a registered educational charity and independent of all political parties.
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