Global Insight Perspective

Significance

Sweden elected a new centre-right four-party Alliance for Sweden government in September this year, after 12 solid years of Social Democrat rule. Prime minister and leader of the main governing Moderate Party, Fredrik Reinfeldt, had campaigned on a platform of welfare reform and tax cuts, which appealed to a public swayed by the economic rationale for change.

Implications

The proposed changes to Sweden's sacrosanct welfare system have met with stiff union resistance. However, with the demise of the Social Democrats into the opposition, trade unions will also find their influence on government limited. The rationale for the reform is to encourage more Swedes into work, rather than bear down on those who are unemployed, but it will take time for people to see tangible results of the changes.

Outlook

Political opposition to the reform package is predictably high, indicated by the close vote in parliament. The changes will take effect from 1 January 2007, but reduced payments will only begin from March next year to allow a period of adjustment. Coupled with the increased incentives to push people into work, these welfare changes are expected to bring down Sweden's rather excessive "hidden unemployment".

To Resist or Not to Resist?

Far-reaching, yet contentious reforms to Sweden’s welfare system have passed an important hurdle in the national parliament. Deputies approved the proposed government plans in the Riksdag yesterday with a narrow majority—158 for and 151 against—with 40 abstentions, an indication of the divisive nature of the reform. Indeed, the opposition parties had managed to get the vote on the draft proposals delayed by one day to allow themselves extra time to force a retreat, or, at least, postpone endorsement. Nonetheless, yesterday’s parliamentary decision, although expected, was the first major test for the Nordic country’s recently elected centre-right Alliance for Sweden government, led by Prime Minister Fredrik Reinfeldt of the Moderate Party. Resistance to the reform package had taken the form of trade union protests across the country, led by the umbrella organisation LO (Swedish Confederation of Trade Unions) and, although protesters upped the ante in the days preceding the vote, they stopped short of calling a full general strike in the country, evidence of the recognition of the broad public acceptance of the changes. The nature of the demonstrations, however, backed by a 250,000-signature petition from the public, demonstrates to some extent the ambivalent nature of the debate on welfare reform in the country. Sweden’s official unemployment rate is enviably low, at just 4,3% in November, but “hidden unemployment” is much higher, with few incentives to find work amid generous welfare payouts.

What Changes?

Under the proposed reforms, crucially the qualifying criteria for unemployment benefits will be reviewed and financial contributions payable into the system will be raised. These will be negotiated by trade unions on behalf of employees, but are expected to triple, on average. Further, and most contentiously, the payouts to the jobless will be decreased, from the current maximum of 730 Swedish krona (US$106) per day to 680 Swedish krona per day, with a review factored in after 300 days. The benefit will be a maximum 80% of lost income for the first 200 days, falling to 70% and then 65% thereafter, as enshrined in next year’s draft budget.

Outlook and Implications

The centre-right government of Fredrik Reinfeldt was elected on a platform of reform and change, both in the policies as well as the attitude, from the previous left-leaning Social Democrats. Businesses and employers are optimistic about the programme of tax cuts for small and medium-sized companies, as well as the ambitious privatisation programme that the government has already set in motion. Public support for reduction in the tax burden as well as incentives to return to, or indeed begin, an active working life is also encouraging, despite the predictable resistance towards tinkering with the country’s famously generous welfare provisions. Despite the enviable unemployment and economic growth figures, the number of people claiming unemployment, sick leave or early retirement payments, or taking part in full-time government retraining schemes, makes the figures much higher.

As well as the changes to the welfare system approved yesterday, Reinfeldt remains committed to attracting the unemployed back into work, offering incentives to employees as well as employers. Under draft proposals for next year’s state budget, employers' contributions will be waived for new employees who were previously receiving unemployment benefit, or sickness and disability benefit for more than one year. Also from 1 January 2007, the government has proposed to reduce income taxes for low and middle-income earners by between 500 and 1,000 Swedish krona per month, expected to cost an estimated total of 38.7 billion krona (US$5.2 billion).

The government is moving to deliver what it promised during the election—namely by reducing unemployment and the number of people reliant on the state for subsistence. It is also seeking to increase the dynamism of the economy, by encouraging entrepreneurship and job creation, particularly in the underdeveloped service sector. To do this, it has opted to cut taxation, and reduce the administrative burden on businesses, thereby increasing the incentives towards participation. For the new government’s policies to be successfully implemented, the four-party alliance will need to maintain a sense of unity in the face of expected turbulence. Although public support for reform is high, the opposition Social Democrats, for so long the only party of government in Sweden, are also, polls suggest, resurgent, following their humiliating election defeat. Welfare reform changes will come into force on 1 January, but reduced payouts will commence from March 2007.

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