| STOCKHOLM, March 17
STOCKHOLM, March 17 To glimpse Swedish angst
under its picture postcard prosperity, look no further than film
director Lisa Ohlin, who has enjoyed years of tax cuts in an
economy the envy of Europe. Homes in her Stockholm neighbourhood
cost around $1 million.
But this leafy, well-heeled area is a microcosm of Sweden,
where eyes are on a struggling school with strained finances,
not enough teachers and poor results. Like many Swedes, Ohlin
wants her cherished welfare state back.
"Classes are more about storage (of kids) than anything.
Teachers cannot handle the workload they have in some classes,"
said Ohlin, a mother of two. "There is poor discipline and poor
attention. There is a huge fear of going over the budget."
Voters like Ohlin are returning to faith in cradle to grave
welfare after eight years of centre-right Prime Minister Fredrik
Reinfeldt, who cut income, wealth and corporate taxes. Sweden's
tax burden has fallen by four percentage points of GDP - now
lower than France.
In the eyes of many Swedes, the welfare state withered.
Sickness and unemployment benefits were cut. Private firms
started to run tax-funded schools and hospitals. But a tipping
point may have come as a September general election approaches -
and many now point to a U-turn.
To win over voters, both the government and opposition are
campaigning to end tax cuts months before a general election.
"We do not see that there is room for any broad tax cuts in
2015 and 2016 and also when we look ahead, there's limited
room," Finance Minister Anders Borg told Reuters.
By any standards, Sweden is healthy. Its public debt is
around 40 percent of GDP, half of Germany's.
But Sweden has one of the world's most generous welfare
states - like subsidised child care with up to 480 days of
parental leave per child. Its Nordic model depends on keeping to
a strict national bookkeeping unusual in much of Europe.
At the same time as demands grow for more spending on
schools and hospitals, Sweden's public finances have worsened.
The country may now be heading for years of rising tax burdens
if it wants to keep its public finances in order.
"There isn't as much money as people think," said Torbjorn
Hallo, economist at the Swedish Trade Union Confederation, which
has links to the Social Democrat opposition. "Swedish voters do
not want more tax cuts. Neither do they want tax hikes."
"Whatever government will have to find money for missing
billions," Hallo added, saying Sweden could need to raise 70
billion Swedish crowns ($11.02 billion), or around 2 percent of
GDP, just to keep the current welfare ticking over.
It contrasts to the heady days when Borg gifted Reinfeldt,
on his 45th birthday, a framed graph showing the tax burden
falling to 45 percent of GDP for the first time in decades.
Flush from income tax cuts, middle classes have also enjoyed
cheap loans and a property boom. As wealth grew - with clusters
of Michelin star restaurants in Stockholm - Sweden remained one
of the few economies in Europe with the top AAA credit rating.
It also has the fastest growing economic inequality of any OECD
Those days of market reform have faded. Week-long riots last
year in Stockholm from largely poor immigrants put inequality
under the spotlight.
But if there was one event that swayed opinion it was the
OECD's PISA survey last year where Swedish 15-year-olds racked
up the biggest decline in results of any participating nation.
Swedish children ranked below OECD averages in many areas.
One of the biggest private education firms in Sweden went
bankrupt in 2012, leaving 11,000 students in the lurch. Other
state run schools have seen class numbers rise and teachers'
salaries fall behind. There is only one Swedish university
classified in the world's top 100 rankings, according to the
Times Higher Education.
The angst also extends to health - where private firms run a
fifth of hospital services. Scandals surfaced at elderly care
homes with reports about residents being locked up in closets
and some people not being fed for nearly a day. Staff switched
off alarm systems at night so as not to be disturbed.
Hundreds of nurses also protested over poor resources for
"There's simply no reason in cutting taxes in a country
where neither the school system nor health care works," said
Polls show the Social Democrat opposition, campaigning for
more spending on welfare, should trounce the government.
The concern is whether Sweden can afford demands of people
like Ohlin. More spending on education and health may come amid
a fiscal squeeze. That may leave any future government with less
room to spend as tax cuts have eaten into public finances.
When Reinfeldt came to power, the structural budget surplus
was 2 percent of GDP. By 2014 a deficit of 1.2 percent of GDP is
expected, according to state-run National Institute of Economic
Research (NIER). It says the government may need fiscal
tightening of 2.4 percent of GDP to balance the budget by 2017.
"The Swedish economy is in a good position," said Mats
Dillen, NIER head. "But the most likely scenario will be for
taxes to rise. It will be difficult to increase welfare spending
without tax rises. There will be pressure on fiscal policy."
That may prove a conundrum for the Social Democrats, running
on a ticket of increased welfare spending.
"I am really worried about the state of public finances,"
said Magdalena Andersson, economics spokeswoman for the Social
Democrats and widely tipped to be Sweden's next finance minister
if the opposition wins September's election.
Mindful of the deficit, the government has already announced
increased taxes on alcohol and private pensions. But these are
low lying fruits. Other decisions, such as whether to increase
taxes on the rich, will be more controversial.
"The opposition and the government have said that they are
not interested in any significant tax increases. Then a really
tough policy will be needed to get back to surpluses," said John
Hassler, chairman of the Swedish Fiscal Policy Council, a
Dillen said Sweden could see marginal tax rates on high
incomes gradually rise to 60 percent, from 56 percent, if the
government phases out tax deductions.
Some businesses are worried.
"What puzzles me is that you sit in a government with a
strategy to cut taxes," said Jorgen Rasmusson, CEO of Lodde
Plat, a construction company based in Malmo. "Then you start
saying that you should not lower taxes, but rather retain and
then possibly announce hikes."
The government and the Social Democrats have already
announced more spending on schools. Few see a return to the
Sweden of the 1970s, when marginal tax rates of the wealthy were
over 80 percent.
But with an election looming, taxes may soon rise.
"I don't think we are going back to the past," said Arne
Karlsson, chairman of Ratos, a Swedish private equity
firm. "Both sides understand Sweden needs to be competitive. But
yes, things will change."