The secret to Sweden’s success has been spending cuts

From Catalyst.

"The US is wallowing in trillion dollar deficits, and if the President’s recently-released budget is any indication, taxpayers won’t be seeing balanced budgets anytime soon. But, believe it or not, the grass is greener in the so-called “socialist paradise” of Sweden, where the budget is in surplus and taxes will soon be slashed. The secret to Sweden’s success has been spending cuts.  Not a concept that either political party is familiar with in the US.

The Nordic country’s flirtation with limited government may surprise some pundits and lawmakers intent on passing Sweden off as a living, breathing progressive manifesto. But conservatives and libertarians are increasingly finding a lot to like as Sweden embraces the principles that made it prosper. For an America that’s bitterly divided and seemingly out of policy reform ideas, maybe it’s finally time to look to our pickled herring-loving friends for guidance.

In fact, so drastic are these reforms that the Swedish government has some explaining to do to parliament. In America, Congress calling officials to testify usually means there was some alleged abuse of power and/or recklessness with taxpayer dollars.

But in this strange nation of 10 million, parliament wants to know why Sweden’s government isn’t spending more money! Bloomberg reports that “the National Financial Management Authority predicted that debt will sink below 35 percent of gross domestic product this year and breach 30 percent in 2021. Fiscal rules stipulate than any deviation of more than 5 percentage points from the 35 percent anchor requires an explanation to parliament.”

This isn’t some fluke engineered by a rogue right-wing government. The current Social Democratic government has run surpluses since 2016, and over the past two decades, surpluses and low deficits have been the norm, while spending has decreased. The International Monetary Fund reports that “Sweden’s national debt to GDP ratio fell from 80 percent in 1995 to 41 percent in 2017.” Keeping a government in surplus requires tough decision-making, and results in inevitable pushback.

As a part of a budget deal between the Social Democratic, Centre, and Liberal parties in January, the Public Employment Service will be closing redundant offices across the country and laying off a third of its 13,500 staff members. While staff reductions are always painful, it’s difficult to see why the government is so heavily involved in the job finding market to begin with. The rise of private job-finding companies and countless websites designed to match employees and employers show that markets can help job-seekers better than a government agency ever can.

The Swedish government’s dominance in the healthcare sector may be loosening as well, as physicians complain that the status-quo just isn’t working. Fortunately, private telehealth providers are coming to the rescue, partnering with supermarkets to open up “minute clinics” near grocery store locations. There are currently 8 of these clinics in the country, but a recent $54 million investment by ICA Group (which owns the largest supermarket chain in the country) will result in many more clinics setting up shop.

Health and employment budget discipline will likely pave the way for tax cuts, which will grow the economy and create more jobs for Swedes looking for a fresh start. A draft policy agreement amongst Sweden’s major political parties envisions broad-based tax reform lowering income and enterprise tax rates, and raising thresholds at which people have to start paying higher rates.

There are plenty of taxes to cut. Few politicians are eager to discuss Sweden’s top individual tax rate of 60 percent. Add that to the 25 percent value-added tax and a 22 percent corporate tax, and things suddenly become nearly unbearable for innovators. But at least there’s progress. Individual tax rates are far lower than the 80 plus percent rates that defined the seventies and eighties, and the Swedish corporate tax will once again be lower than the American rate in 2021 (when it drops to 20.6 percent from the current 21.4 percent).

The usual caveats apply to comparing a small homogenous nation to the bewildering behemoth that is the United States. But if left-wing Swedish politicians can boldly cut spending and taxes, the Trump administration and Congress have no excuse."

Budget Projections Need To Be Realistic About What Will Actually Happen To Discretionary Spending

See The Need for Discretionary Spending Restraint by Chris Edwards of Cato.

"The Obama administration released its 2015 budget this week. The budget shows federal debt held by the public falling from 74 percent of gross domestic product (GDP) this year to 69 percent by 2024. That reduction occurs even though entitlement and interest spending are projected to rise substantially as a percent of GDP. 

One of the tricks behind the projected falling debt is that the administration assumes that discretionary spending falls sharply as a percent of GDP in later years. Congressional Budget Office (CBO) projections show a similar decline in discretionary spending in coming years.

I favor large discretionary reductions, and I have proposed many specific cuts. But does the Obama administration really favor the reductions down the road shown in its own budget? I doubt it. After all, the administration’s new spending proposals would break existing budget caps, and that would come in the wake of both parties breaking caps under the Ryan-Murray budget deal. So projecting declining discretionary spending in later years is an accounting ploy to make the fiscal outlook look better than it really is.

If policymakers don’t restrain discretionary spending, deficits and debt will be higher in coming years than shown in official projections. Let’s call this the “business as usual discretionary spending” scenario.

Here are the implications of the scenario, based on the CBO baseline and my calculations. Let’s suppose discretionary spending remains at the 2014 level of 6.9 percent of GDP through 2024, rather than falling to 5.2 percent as shown by CBO. That higher spending results in interest costs 0.4 percentage points of GDP higher by 2024.



Under this scenario, total outlays would rise from 20.5 percent of GDP today to 24.5 percent by 2024. The deficit would rise to a dangerous 6.2 percent of GDP.

Under the CBO baseline, federal debt rises from 74 percent of GDP today to 79 percent by 2024. But under my business as usual scenario, debt would soar to 91 percent by 2024, as shown in the chart. It would keep rising rapidly after that.

In sum, I hope that discretionary spending as a percent of GDP falls, as shown in the CBO and Obama projections. But without proactive efforts to cut and terminate programs, that may not happen. Of course, entitlement spending also needs to be cut.

However, if business as usual prevails in Washington with entitlement spending gobbling up more of GDP and discretionary spending not cut, we’ve got a really big fiscal crunch coming."

Cutting Spending Is The Way To Sovle A Budget Crisis

See Most Successful Fiscal Rescue Plans Around the World Have Cut, Cut, Cut By Bridget Johnson of AEI.

"At today’s debt-crisis event with Senator Pat Toomey, AEI President Arthur Brooks referenced a fascinating study conducted by economic-policy heavyweights Kevin Hassett and Andrew Biggs in which they scrutinized the fiscal consolidations of 21 countries over the past 37 years. Published last December, the study serves as an especially pertinent tool in weighing the best options to solve the debt crisis and put our country back on sound fiscal footing, so it’s worth outlining again.

The keys of what they found:

— The typical consolidation that failed relied on 47 percent spending cuts and 53 percent tax increases.

— The typical consolidation that succeeded consisted of 85 percent spending cuts and 15 percent tax increases.

— The “most wildly successful” efforts by nations, as Brooks put it, went into tax cut territory: Finland in the late 1990s, pointed out by Biggs and Hassett as a model of successful consolidation, had 108 percent spending cuts along with modest tax cuts.

— In the third-rail department, they found that the typical successful consolidation allocated 38 percent of spending cuts to entitlements. In the howling unions department, they found that 25 percent of the cuts were in government salaries.

“If your problem is government spending, the solution is less government spending,” Brooks said today. Arguments against such cuts “generally are not practical,” he added, but instead are based on moral reasoning centered on notions of “fairness.”"

Spending Cuts, Not Tax Increases, Might Be The Right Way To Fight Debt And Lower Deficits

See What Obama Can Learn from the Swedes by Rohan Poojara of AEI.

"President Obama will lay out his plan to rein in the nation’s rising deficit in a speech this afternoon. While statements from the White House suggest that he will support GOP-favored steps such as reducing Medicare and Medicaid costs, his call to raise taxes on the wealthy is unlikely to be supported by the Right.

The Republicans have strong academic research backing their stance. Analysis of historical fiscal consolidations (that is, policies intended to reduce deficits and the accumulation of debt) of select OECD countries from 1970 to 2007 by AEI’s Andrew Biggs, Kevin Hassett, and Matthew Jensen show that successful consolidations consisted of 85 percent spending cuts. By contrast, the typical unsuccessful fiscal consolidation consisted of only 47 percent spending cuts and 53 percent tax increases. Additionally, the AEI analysis shows that the negative Keynesian effects of reduced spending can be offset if a large and credible fiscal consolidation generates confidence that more disruptive steps have been avoided down the road and actually lead to the creation of jobs and a boost in economic growth.

One of the countries that served as a model of getting fiscal consolidation right was Sweden in the 1990s. It was able to reduce deficits from 10 percent in 1994 to 2 percent in 1997. The cornerstones of their economic policies of the 1990s are still in place and helped Sweden get through the financial crisis without ruining public finances. AEI will host a panel on April 18 with Anders Borg, Sweden’s minister for Finance. Borg will offer insight into the lessons that the United States can learn from the Swedish model, and be joined by panelists Johnny Munkhammar, Carmen Reinhart, and Vincent Reinhart."

The Truth About Deficits and the Debt

This from Veronique de Rugy at Reason. Highlights and excerpts:

"Myth 1: Debt and deficits are a disease that can only be cured by raising taxes.

Fact 1: Debt and deficits are only a symptom. The disease is overspending. And tax increases are no cure. Besides, even if we could balance the budget by raising taxes it wouldn’t stay balanced so long as programs like Social Security, Medicare, and Medicaid remain unreformed.

... in the past, tax revenues have averaged 15.9 percent of GDP. During recent years, revenue collection has slightly increased, averaging 18.5 percent of GDP during the 1990s, and averaging 17.5 percent of GDP during the first decade of the new millennium. Notably, the federal government has never been able to collect 21 percent of GDP in tax revenues. It defies reality to think that it will be able to do so now. That’s why the CBO estimates that revenues will remain fixed at 19.3 percent of GDP into the future.

Yet the CBO anticipates that from 2012 through 2021, the federal government will spend, on average, 23.3 percent of GDP—a higher level of spending as a percentage of GDP than the government has ever been able to collect.

Myth 2: There is no relationship between high interest rates and deficits. And even if there was, interest rates remain at all-time lows.
Fact 2: That may have been true once, but the data now shows that investors anticipate an increase in both interest rates and deficits.

George Mason University economist Arnold Kling argues that economists haven’t seen a correlation between budget deficits and interest rates because foreign investment in U.S. assets has increased over the years, dulling the impact of fiscal policy. The real question is what happens if that investment slows or stops.

Moreover, deficits have reached a level that economists haven’t really studied before.

Myth 3: Debt and deficits may be a problem, but we don’t have to fix it now.

Fact 3: Debt and deficits are having an immediate negative impact on the economy.

Even in the absence of a crisis, the effects of persistent deficits remain substantial. As the government borrows, some people delay spending and investment in anticipation of future tax increases. Others will not invest in the economy or start new businesses as government borrowing consumes a greater portion of the available capital. All of this hurts the economy. Economists use the term “crowding out” to refer to this contraction in economic activity that follows from deficit-financed spending."

By 2080, Interest On The Debt Could Be 40% Of GDP

See Norquist Is Right, Coburn Is Wrong: Tax Increases Undermine Good Fiscal Policy by Daniel J. Mitchell of Cato. This is shown in a chart. Here is an excerpt:

"Milton Friedman was right when he said that “in the long run, government will spend whatever the tax system will raise, plus as much more as it can get away with.” In other words, if politicians think they can get away with deficits averaging, say, 5 percent of GDP in the long run, then the only impact of higher taxes is an equal amount of additional spending — while still retaining deficits of 5 percent of GDP.

The real-world evidence certainly points in this direction. We've seen "bipartisan budget summits" several times in Washington, and the result is more spending rather than lower deficits. Americans for Tax Reform has a good analysis of what happened after the two big budget summits in 1982 and 1990..."

John Taylor Says Budget Cuts Are Not Dire Since Spending Is Still Higher Than 2008

See 2011 is the New 2008 in Federal Budget Debate at his blog. Here is most of it:

"The simplest way to understand the proposed budget is that it largely (not completely) undoes this two-year binge and brings spending back to about what agencies had to spend in 2008. If the government budget was enough for federal agencies—such as the Weather Service—to operate in 2008, then how can one claim that they cannot operate with roughly the same budget now?

The two charts help illustrate this. They focus on the non-defense non-security discretionary part of the budget, which has been the focus of the 2011 budget debate so far. Of course the other parts of the budget must be addressed starting with the 2012 budget, but if we cannot have a fact-based principles-based discussion of the 2011 budget, it will be virtually impossible to resolve the longer term issues.

The first chart compares the 2011 House budget appropriations (passed the House this morning) with appropriated spending in the 2008 budget enacted in December 2007. Note how the proposed 2011 levels are close to but slightly higher than the enacted 2008 levels. In fact they are about 5 percent higher which is more than enough to keep up with inflation during this period. The chart also illustrates the recent spending binge with the 2011 levels proposed in the Administration’s fiscal year 2011 budget. Clearly the House budget proposal represents cuts from the binge but not relative to right before the binge.

"The second chart divides the appropriated spending into nine budget categories (other than defense, homeland security, and military construction). The chart shows how close the 2011 proposal is to 2008 for each category, with some higher and others lower. Of course there will be understandable disagreement between Republicans and Democrats about the composition of spending between and within these budget categories, and this will be a reasonable subject for debate with the Senate and the President. But I think these data show that a reasonable compromise would be to keep the overall totals as in the House proposal and thus take a first important step toward restoring fiscal sanity."

Boskin: The Time For Spending Cuts Is Now

See The Time for Spending Cuts Is Now: The White House argues that 'draconian' cuts will derail the economy. In fact, cuts are necessary to preserve tax rates that are compatible with economic growth. From the WSJ, 2-11-11, page A13. Excerpts:

"Yes, the president is calling for a freeze on nondefense discretionary spending (18% of the budget). But this would leave that spending more than 20% higher than already- elevated 2008 levels..."

"But government spending generally does little to boost the economy. Exhibit A is the failed 2009 stimulus bill, the president's American Recovery and Reinvestment Act (ARRA).

The strongest case for stimulus is increased military spending during recessions. But infrastructure spending, as the president proposes, is poorly designed for anti-recession job creation. As Harvard economist Edward Glaeser has shown, the ARRA's transportation spending was not directed to areas with the highest unemployment or the largest housing busts..."

"...Indeed, last September Wendy Greuel, the City of Los Angeles controller, shocked the country when she revealed that the $111 million in ARRA infrastructure money her city received created only 55 jobs—that's a whopping $2 million of federal stimulus per job created.

Why is this so? Modern, large-scale public infrastructure projects use heavy equipment and are less labor-intensive than they were historically (WPA workers digging ditches with shovels in the 1930s)."

"The nation certainly has public investment needs, but federal infrastructure spending should be based on rigorous national cost-benefit tests."

"Moreover, how will we pay for all this new spending? The CBO's 10-year projection sees the possibility of the debt-to-GDP ratio rising to an astounding 100%. Several recent studies (detailed on these pages in my "Why the Spending Stimulus Failed," Dec. 1, 2010) conclude that: 1) such high debt would severely damage growth, so fiscal consolidation is essential; 2) fiscal consolidation is likely to be far more effective on the spending than the tax side of the budget; and 3) substantially higher tax rates and spending cause permanent drops in income that are many times larger than the temporary fall caused by the recession."

"In the 1980s and '90s, federal spending was reduced by more than 5% of GDP to 18.4% in 2000—a level sufficient to balance the budget at full employment and allow for lower tax rates."

"I pointed out in 2007 that 42% of federal civilian workers were due to retire in the coming decade. Replacing half of them (with exceptions for national security and public safety) with technology could improve services and save hundreds of billions of dollars."

"Gradually move from wage to price indexing of initial Social Security benefits. This would eliminate the entire projected Social Security deficit without cutting anyone's benefits or raising anyone's taxes. Also, raise the retirement age over several decades..."

The 1993 Clinton Tax Increase Did Not Lead to the Budget Surpluses of the Late 1990s

This was a post by Daniel J. Mitchell The Cato Institue. Here are some excerpts:

"Proponents of higher taxes are fond of claiming that Bill Clinton's 1993 tax increase was a big success because of budget surpluses that began in 1998.

That's certainly a plausible hypothesis, and I'm already on record arguing that Clinton's economic record was much better than Bush's performance.

But this specific assertion it is not supported by the data. In February of 1995, 18 months after the tax increase was signed into law, President Clinton's Office of Management and Budget issued projections of deficits for the next five years if existing policy was maintained (a "baseline" forecast). As the chart illustrates, OMB estimated that future deficits would be about $200 billion and would slightly increase over the five-year period.

In other words, even the Clinton Administration, which presumably had a big incentive to claim that the tax increase would be successful, admitted 18 months after the law was approved that there was no expectation of a budget surplus. For what it's worth, the Congressional Budget Office forecast, issued about the same time, showed very similar numbers."

"Since the Clinton Administration's own numbers reveal that the 1993 tax increase was a failure, we have to find a different reason to explain why the budget shifted to surplus in the late 1990s.

Fortunately, there's no need for an exhaustive investigation. The Historical Tables on OMB's website reveal that good budget numbers were the result of genuine fiscal restraint. Total government spending increased by an average of just 2.9 percent over a four-year period in the mid-1990s. This is the reason why projections of $200 billion-plus deficits turned into the reality of big budget surpluses."