The ‘Scandinavian Model’ is revered on the left, held up as a beacon of socialism delivered; a utopia of high taxes, large public sectors, cradle-to-grave welfare and happy populations. Though it is certainly true that tax rates are extortionate (in Denmark, the tax take is 49% of GDP), benefits are exorbitantly generous and especially the Danes always come out on top of happiness surveys (despite having one of the worlds highest consumption of antidepressants), this is not the full picture. Two questions need to be answered. First, is the model really an implementation of socialism? A number of factors point to a more free-market approach than Britain has adopted. Second, is the model as successful as perceived? Maybe not, the prosperity enjoyed now might be a relic from the past. The Nordic countries have given up ground to other rich countries over recent decades.
Let’s start with a look at some inconvenient comparisons:
- Economic Freedom: Denmark outscores the UK and US on Business Freedom 93.9 to 89.9 (UK) and 84.4 (US). Sweden is also higher @ 90.8. Denmark (85.8) also handsomely beats UK (72.8) on Labour Freedom though US outscores them (91.0). Neither Denmark, Sweden or Norway has a politically determined minimum wage. National wage negotiations are left in the hands of employer and employee unions with minimum state interference. Other factors contributing to the high scores are very low levels of corruption and solid rule of law. The World Bank ranks Denmark 3rd and Norway 6th for Ease of Doing Business. The UK and US in 7th and 8th just outscores Sweden in 8th position.
- Open economies: The Nordic countries are open to trade. In the International Chamber of Commerce’s Open Markets Index, Sweden is 18th, Denmark 20th and Norway 11th. The UK is 28th and the US is 40th.
- Flexible labour markets: The Danish labour market is famously flexible and unregulated. Employers can hire and fire employees relatively unhindered. No consultation periods and employment tribunals here. As a result the labour market is dynamic. Between 25% and 30% of the Danish work force change job every year.
- Less dogmatic approach to private delivery of public services: Especially in Sweden, the last 15 years have seen large scale outsourcing of public services, as private companies have taken over the running of schools, hospitals and social services. Around 20 per cent of public hospital care and 30 per cent of public primary care is provided by private companies – for comparison, the NHS spends around 6% of its budget on private providers. Private equity owned Capio runs several successful hospitals in Sweden. They also have a presence in Norway. In Denmark, ambulances are operated by private companies, the majority by the listed company Falck.
- It’s not all about income tax: According to the World Bank, an average medium-sized business in Denmark pays 25% of profits in tax. In the UK, the number is 30.9%. Scandinavian employer social contributions are low, around 2% in Denmark versus 11.5% average in the UK. Direct income taxes are higher in Scandinavia but total taxation of salaried income is not that different. Sales taxes, a more regressive form of taxation, are higher. VAT rates are 25% in both Denmark, Norway and Sweden. In Denmark VAT is applied to food also.
A picture emerges of relatively nimble, open, liberal economies, where it is easy to start a business, easy to hire and fire employees, and with a higher tolerance for the dreaded profit motive in delivery of public services (and efficiently run services makes it easier to accept high tax rates). These are not the attributes highlighted by the left when they praise the Scandinavian model.
On to our second question: how successful is the model really? The Scandinavian countries have been dropping down the rankings of the richest countries in the world for the last 40 years. In 1975 Sweden were 6th and Denmark 10th. The UK was in 31st position and the US 11th (IMF rankings). In 2016 Sweden ranked 15th and Denmark 20st. The US was 11th and the UK 24th. An argument can easily be made that the current high-tax, big state societies have been squandering wealth built up during a period when policies were much different. Sweden and Denmark used to be free-market, low tax economies. In 1960, Denmark had a marginal tax rate of 25%, compared to 27% in the US. Sweden was marginally higher at 29%. From 1850 to 1950 Sweden enjoyed the highest productivity growth in the world! Sweden changed course and famously had a marginal tax rate of 102% in 1976 (as described by Astrid Lindgren, a famous author). Between 1970 and 1990, Sweden dropped from 2nd highest to 2nd lowest economic growth in the OECD. It has since then partially recovered, hand in hand with deregulation and tax cuts. In Denmark, where capital gains are taxed @ 42%, a company with more than 1000 employees has not been created since 1996.
It is worth mentioning that while Government debt to GDP ratio is remarkably low @ 37.8% in Denmark (87.6% in the UK), household debt is a massive 120% against 87.6% in the UK. The household debt to income ratio is 241% in Denmark, almost double the UK @ 126%.
There’s a 3rd question worth pondering: if the Scandinavian model could be implemented in a country like the UK? A high-tax model works best in cohesive societies. People have to buy in to the idea of the collective (a family is the ultimate socialist group: parents work and children share the spoils equally; there is total buy-in). The citizens have to like and trust each other – and Denmark, Norway, Finland and Sweden occupy the first 4 places on OECD’s trust index. The UK is number 101. The Scandinavian societies are small and their populations homogenous – though mass immigration is rapidly changing this in especially Sweden. With a modest colonial history, throughout the build-up of the welfare state Scandinavia was a relatively low immigration region. In other words, Scandinavian citizens look and act like each other (as mentioned, this picture is changing). The empathy this creates in society helps explain why the populations accept stratospheric tax levels to a higher degree than would be possible in a diverse and multi-cultural society like the UK. The dominance of the Lutheran church across Scandinavia, with its strong focus on the community, undoubtedly also has influenced a culture which prioritize the collective.
And perhaps whatever success the region may enjoy is down to something unique to the Scandinavian makeup: call it genetics, tradition or heritage, but according to the Institute for Economic Affairs, the poverty rate amongst Americans of Swedish ancestry is only half of the national average. They even enjoy incomes an average of 50% above their brethren still living in their ancestral homeland. Maybe if the Swedish state was more like the American, Swedes would be even richer, even happier?
Finally, and extremely inconveniently for the left, the famous Swedish income equality actually evolved during the first 80 years of the 20th century, largely explained by a drop in capital income driving down the wealth of the richest. Swedish income equality developed to a large extend before the build-out of the welfare state! What about Denmark? In a study of the years 1870 to 2010 a similar conclusion is reached. Equality of outcome may not be down to redistribution at all and cannot simply be politically engineered.
All in all, the question of if and why socialism works better in Scandinavia is complicated and even misleading. Scandinavia is far from a pure implementation of socialism, but a mix of largely collectivist and more free market policies. Before the left swoons further over these perceived socialist paradises in the North, they need to ask themselves how high their tolerance is for liberalizing labour markets and further opening up the British economy to world trade and the competition that implies. How willing are they to compromise on their staunch opposition to outsourcing of public services to private companies? On the other hand are they willing to see the UK drop down the ranks of rich countries in the name of egalitarianism? And can the model even work in the UK? The answers could force them to remove the rose-tinted glasses when looking for the Northern Lights.
1 It has been argued that the causality is the other way around: equality leads to trust. This is the thesis in the book The Spirit Level by Kate Pickett and Richard Wilkinson. We beg to differ on this point. We believe a society without trust would not be able to reach Scandinavian levels of equality. The Scandinavian countries are small and objectively homogeneous. We understand people who look like us and live like us. We trust who we understand. Witness the breakdown of the model that mass immigration will eventually lead to, first in Sweden.