Work longer to pay for petrol, food: Swedish PM

Sweden's Prime Minister Fredrik Reinfeldt attends the Baltic Sea States Summit in Riga June 4, 2008.

BRUSSELS (Reuters) - Europeans should work longer hours and pay less income tax to cope with soaring food and fuel prices, Swedish Prime Minister Fredrik Reinfeldt said on Thursday.

Swatting proposals by some EU leaders to cap petrol tax or impose windfall taxes on oil companies to cushion the blow of energy and commodity price rises, the conservative leader said the right answer was to let market forces set prices.

"I am asking myself ... that we might ease up on income taxes to make work pay even further, so that people could react to the fact that an increase in the petrol price could be met by working some extra hours," Reinfeldt told reporters before a European Union summit due to discuss oil and food prices.

"It's a tough signal but it's the correct signal in the sense that if I could get, on the supply side, people to work more, it's also helping the central bank (to combat inflation)," he said.

Sweden, one of the world's most competitive economies, has some of Europe's highest income taxes to finance its generous welfare state and education system.

Reinfeldt, whose Moderate Party heads a centre-right coalition after years of Social Democratic dominance, said the answer was to put more money in consumers' pockets from work rather than give hand-outs or artificially lower food or fuel prices.

"It's a greater incentive to work and a better ability to meet the fact that some of the consumer goods are getting a higher price," he said.

The Swedish leader said the risk otherwise was that higher commodity prices would feed through into inflation in the economy, forcing the central bank to raise interest rates.

The longer-term answer was to reduce oil consumption, boost energy efficiency and switch to more renewable energy sources.

Some countries calling for short-term tax measures to mitigate the oil price were the same ones struggling with budget deficits, he said in a veiled reference to France and Italy.

"There is always a call for budget investments in different directions. A lot of European countries have actually deficits. This will also use capacity in their budgets. Is it really correct to use that to try to take down the price effect on energy usage?" he asked.