STOCKHOLM When Swedish Prime Minister Fredrik Reinfeldt celebrated his 45th birthday, his finance minister gave him a framed graph showing the tax burden falling to 45 percent of GDP for the first time in decades. It still hangs in his office.
The gift reflected the celebratory mood of a centre-right government boosting economic growth while reducing taxes and cutting unemployment and sickness benefits, shrinking a welfare state that is among the most generous in the world.
Three years later, engulfed in the worst riots in decades, that optimism is questioned. The torching of cars and battles with masked youths from poor immigrant suburbs has exposed another side of Sweden's welfare reform.
Still, given globalization and the need to be competitive, the fact that people live longer and that state finances need to be kept sound, Sweden and other Nordic states face more reforms, a lite version of austerity forced on many European nations.
"We are far more aware that Sweden is part of a competitive environment," said Minister for Social Security Ulf Kristersson.
Sweden is eyeing more cuts to pensions and sickness benefits, but it is not alone in the region. Denmark too is cutting benefits. Finland is under pressure to raise the pension age. Even oil rich Norway has concerns it is becoming uncompetitive.
But Sweden faces political headwinds before a 2014 election. Cuts have pushed the Danish government to historic poll lows. In Norway, reforms are on a back burner.
THE NEW SWEDISH MARKET MODEL
For a glimpse of a market-oriented culture that increasingly permeates Sweden's state, look no further than St. Goran's hospital, Stockholm's only privately run emergency hospital.
From the offices of chief executive Britta Wallgren, it can be difficult to know she is talking about running a hospital. A video compares emergency checkups with Formula 1 pit stops and her conversation is littered with words like "lean" and "flows".
Stockholm council pays St Goran's, privatized in 1999 and owned by private health provider Capio, on a formula based on the number of patients and treatments.
The contract has been renewed this year. Costs are around 8 percent lower than other Stockholm hospitals. But they lead other hospitals in many indicators, including reducing hospital infections and waiting times.
"We believe the drive for efficiency also means a drive for quality," said Wallgren. She pointed out how simple changes in treatment - making sure teams included specialists as well as nurses - cut costs and reduced waiting times.
She is proud of one reform in particular - placing yellow stickers on floors to locate defibrillator saved some 40 hours a week of wasted time searching for them.
The Nordics enjoy some of the world's most generous welfare. Sweden has subsidized, universal child care with up to 480 days of parental leave per child. It spends 12 percent of GDP on family, housing, sickness and labor market policies, compared with an OECD average of under 9 percent. Denmark is at 14 percent.
Reforms have helped economic growth outstrip most of Europe and accelerated entry of private companies into the public sector. Private firms run a fifth of hospital services and many publicly-funded schools. Stockholm has ostentatious wealth - Michelin star restaurants, top end fashion - rare decades ago.
But Sweden also has the fastest growing inequality of any OECD nation - so much so that last year one group offered "class war safaris" so Swedes could see how the other half lives.
"The extent of the cuts would surprise many people outside Sweden," said Ola Pettersson, economist at the LO trade union federation. "We can see the early signs of a backlash."
The market model has also been overshadowed by scandal, including reports workers at homes for the elderly run by one private equity firm were told to weigh adult diapers and not to change them until they were full in order to keep costs down.
Recently, hundreds of nurse also protested over poor resources for maternity wards.
Reinfeldt's government has been forced by popular anger to close tax loopholes used by private equity companies, some of them active in running health services. Some centre-left opposition parties want to ban profits being made by companies in tax-payer funded sectors.
In immigrant suburbs where May's riots exploded, benefits cuts have come, but not jobs. At the same time, a growing minority of Swedes complain about the cost of asylum seekers on welfare. Foreign-born unemployed rates, at 16 percent, compare with 6 percent for native Swedes.
"Conditions for receiving welfare are now much tougher, so it's very hard to get it, and even when you do the payments are meager," said Mia Paarni a local opposition politician in the IT hub of Kista, close to May's riots.
Poverty rates have risen in Sweden, being most pronounced among immigrants and single mothers.
In the university town of Uppsala, Charlotte Bjornstrom says she was paid sick leave for 10 years, with a host of ailments, before reforms introduced a two-year limit, forcing many to transfer to unemployment payments and look for a job.
"That was torture, especially the first time, because I was so ill then and I didn't know what it was," she said.
Denmark, nearly in recession, has been forced to make changes to its welfare system. Two highly publicised social benefits scandals accelerated the reform.
One involved "Poor Carina", a single mother of two picked for a television programme meant to expose hardship. But that backfired when it turned out she received around $2,700 a month - more than many full-time workers.
Later in the year, a man labelled "Lazy Robert" further fuelled the debate when he told his story of being on welfare since 2001 with no plans to take a lower-paid job.
While Denmark enjoys a triple-A credit rating, at least 18 percent of the population is over 65.
But reforms such as cutting unemployment benefits from four years to two years and reducing student grants and early retirement scheme have proved costly in political terms.
Prime Minister Helle Thorning-Schmidt's standing is under 20 percent in polls, a historic low.
"The crisis is not a small detour that can be solved through a fiscal fix or a quick cuts," she said in parliament on Wednesday. "We live in a new reality where all tools must be pulled out of the toolbox in our bid to change Denmark."
In Norway, worries have emerged that oil wealth and generous welfare means many can afford not to work and that competitiveness is suffering from rising wages.
Norwegians have even added a new word to their vocabulary - "to nave", or to get benefits from NAV, the labour and welfare agency. It was named word of the year for 2012 after it became popular shorthand among youngsters, as in: "I am going to ‘nave' this year rather than work."
But while there have been efforts to rein in high sick leave levels, tax rates have remained elevated and the opposition Conservatives, likely to win September elections, see little impetus for major reforms.
"I don't think we'll make any major changes to our welfare benefits, such as sick leave, as long as the economy is faring well," said Conservative leader Erna Solberg.
That aspect of faring well is one which is key to future reforms in the Nordic countries.
While finances for now are better than elsewhere in Europe, long-term challenges remain to maintain traditions of a strong, protective state, said Stephanie Janet, head of the Denmark and Sweden desk at the OECD economics department.
"While they do not have the urgency of many European countries, reforms are something they need to do in order to ensure they can continue with their welfare model," she said.
(Additional reporting by Philip O'Connor in Stockholm, Mette Fraende in Copenhagen, Jussi Rosendahl in Helsinki, Gwladys Fouche in Oslo; Editing by Janet McBride)