As the old saying goes, “the grass is greener on the other side.” Thus many Singaporeans think that the Scandinavian welfare states provide an alternative to the kind of society we have here in Singapore. But is this true?
In the article, I wish to provide a reality check. The truth is that the Scandinavian model is in decline and has been for some time. The governments there are trimming the welfare benefits following the financial crisis in the early 1990s. In this article, I will focus on just one country - Sweden. I chose Sweden because it has been touted as one of the world’s most generous welfare state. Government spending on social services is the second highest in the world at 27.3% of GDP. France is the highest at 28.4% and that is why they are in deep doo-doo.
Sweden went through a financial crisis in the 1991, much like what is happening in southern Europe today. It suffered from slow growth, high unemployment and high government debt. Like Greece today, its huge government debt was built up over decades of government over-spending on the welfare state. Despite high taxes, the Swedish government had to borrow money to pay for all the “free stuff” they gave the people to win their votes.
Sweden’s welfare state actually started sometime in the 1970s. Prior to that its economic model was more like ours. In 1968, Sweden was the third richest country in the world (which is where Singapore is today. See this table for per capita income. )
It practised what Americans call “small government” or what we call “meritocracy”. Free markets were encouraged and there was prosperity. In a meritocracy, each individual is responsible for his own well being. How much money you earn is determined by your own merit. Nobody owes you a living. This makes everybody work hard. More government social spending means higher taxes. Higher taxes rob you of your incentive to work hard or take entrepreneurial risks. But in the 1970s, Sweden became a welfare state where the government took care of people from cradle to grave. This is based on the Socialist idea of equality of outcome for all regardless of the individual’s efforts or ability. The message the Socialist politicians gave was that you are entitled to a good life no matter how hard you work and no matter what your abilities. This was popular.
As a result, government spending grew in the 1980s to pay for all the “free stuff” the people wanted. But it was not really free. Swedish taxes rose to confiscatory levels. But even that was not enough to keep the promises made by politicians to buy votes. So they borrowed. Economic growth slowed down and Sweden’s standard of living fell from 3rd to 17th by the early 1990s. Then reality hit them in 1991 just as it has hit the Greeks and others. You cannot sustain a luxurious life by borrowing money. Try to do that with your credit card and see what happens.
There is a limit as to how much you can borrow. Luckily, the Swedes were smart enough to realize they made a mistake and they cut spending. Here is a chart to show Swedish government spending as a percentage of GDP from 1980 to 2012:
Graph courtesy of the American thinker
From the graph, you can see that Swedish government expenditure hit a high of 67% of GDP in the early 1990s when the financial crisis hit Sweden. Then it decided to cut spending. It has fallen to below 50% recently.
Swedish growth rate improved as can be seen from these two charts:
As you can see, Sweden’s growth rate fell behind that of the OECD and the EU during the twenty year period between 1972 and 1992. These were the years when Sweden expanded the welfare state. Following the crisis, Sweden reversed course and cut spending. This is the result:
The second graph shows that Sweden has done better than the OECD and the EU on the average following cut-backs on their social spending after the crisis. The lesson from this is that high government spending and high taxes mean slower growth. You will end up poorer than others who have lower government spending and lower taxes. The relationship between economic growth and government spending is discussed here by two Swedish economists:
Lessons from the Swedish welfare state.
Sweden’s government spending is still high by Singapore standards but they have not finished cutting yet. It is not possible to do everything all at once when people are accustomed to so much free stuff. So it has to be done over the long term and the Swedes are heading in the right direction. But I doubt they can cut their spending and taxes down to Singapore level.
Now let’s take a look at what Swedes have to say about their welfare state. Swedish finance minister, Anders Borg said, “Like many societies, we went too far in our welfare-state ambitions.”
Swedish Finance Minister Anders Borg
He is pursuing an agenda of cutting taxes to stimulate growth. To save money for the government, he did some unpopular things like cutting back on the very generous unemployment benefits and sick leave. As a result, the number of unemployed or sick Swedes living on a government cheque has come down to 20% of the population from 25%. Sickness absentee rate have fallen from 40 days per year to 35 days.
With less people goofing off on taxpayers’ money, it is no wonder that Swedish growth rate has improved. People need to work for a country to generate wealth. The welfare state does not create wealth. It only redistributes wealth from those who work to those who do not. But Swedish taxes are still high. Their income tax rate can be as high as 57% while their VAT (equivalent to our GST) is a shocking 25%. To attract business investments and create jobs, they have cut the corporate tax rate to 22%.
In contrast, Singapore’s top income tax rate is 20%. Our GST is 7% and our corporate tax rate is 17%. As a result, Singapore tax revenues amount to only 15.9% of GDP as compared to a massive 52.2% for Sweden. Singaporeans who complain about high taxes do not know what they are talking about. The figure of 15.9% includes COE, ERP, GST, property tax, income tax and company tax. That’s very light compared to nearly all OECD countries and especially the Nordics with their extravagant welfare states.
Those asking for a Swedish style welfare state are only asking for higher taxes. Do you want to pay 25% GST? Despite the cuts and with more to come, the Swedish welfare state has survived. Other welfare states with less generous welfare benefits like Greece, Italy, Spain and Portugal are failing and the EU are demanding cuts. Those who point out Sweden as an example of a successful welfare state fail to point out the far more numerous failures. So this beg the questions.
Why has Sweden’s welfare state survived and can Singapore imitate their model?
It must be remembered that the welfare state does not create wealth ie earn money. It only redistributes money earned by the more successful people to the less successful ones. So you have to create wealth first. How does Sweden create wealth?
Firstly, Sweden has natural resources - such as hydroelectric power, timber, iron ore - which Singapore does not have. Secondly, Sweden has a creative hardworking workforce. Singaporeans are a hardworking people, but we still lack creativity. We are improving on this score but we are not there yet. For example, Sweden can earn money from the world by exporting cars, trucks and furniture made by Swedish companies like Saab, Volvo, Scania and Ikea. All this requires brainpower which is the biggest creator of wealth.
With the possible exception of SIA, we do not have similar world class companies. With the money earned, Sweden can pay for their welfare state. But nothing stands still. With Asian countries climbing up the technological ladder, the Swedes may not earn enough to pay for such generous welfare benefits in the future.
Thirdly, Sweden has a relatively high birth rate for a developed country. Its fertility rate is 1.9 babies per woman as compared to 1.2 for Singapore. Both are below replacement. Birth rate is important especially for a welfare state because we need young workers to pay high taxes to fund free healthcare and pensions for old retirees. At 1.2, Singapore can forget about a Swedish style welfare state unless we can convince enough immigrants to come in to pay high taxes to support old Singaporean retirees now that a silver tsunami is hitting us. By why would highly qualified, well paid foreigners migrate here if taxes are so high?
Fourthly, the people must be willing to accept high taxation and also be honest so that welfare abuse is kept to a minimum. Even in Scandinavia where people are generally honest there are still people who abuse the system by making fraudulent claims. The south Europeans are less honest. They abuse the system more and also cheat on taxes more than the Scandinavians. If there is too much dishonesty, the system will collapse. Perhaps that is why the Greeks are in bad shape even though they are less generous on welfare spending than the Scandinavians.
A welfare state is easier to implement in a homogenous society where everybody is of the same race, religion and culture. When the welfare state in Sweden first started in the 1970s, Sweden was nearly all white and mostly Christian. Why is homogeneity important? Its because of human nature. We are genetically programmed to care more for people who share our genes. Thus most of us have no problem sharing our money with our brothers and sisters when they need help. We are more willing to help our kin than a stranger. Similarly, people are less likely to cheat their own kin. Thus there is less abuse of the welfare system in a homogenous society.
People do not mind so much paying high taxes if they think people like themselves (same culture and race) are benefitting. Unfortunately, different cultures have different economic capacities. So in a culturally mixed society, one group of people will do better economically than another. The group that does better will end up subsidizing the other. Knowing human nature, people will end up unhappy because their money is going to people who are not like them. They will see the other group as lazy and thus resent the high taxes they pay. Resentment will lead to more tax cheating.
Things are changing in Sweden. It is not so homogenous any more. Poorly educated immigrants from North Africa, Middle East, Pakistan and elsewhere have migrated to Sweden. They were allowed in to do the jobs that the Swedes no longer want to do. Some were asylum seekers or pretended to be. Sweden attracts welfare bums who come in for the free stuff. These lack the work ethics and honesty of the traditional Swede and so abuse the welfare system. They also lack interest for education. Their children are not well educated even though they were born in Sweden.
What do you think the reaction of traditional Swedes would be when they see these images on their TV:
Somalis protest against Swedish welfare: A three room house is not enough.
Today, the non-traditional Swedes form the majority of the unemployed underclass who depend on welfare cheques from the government. Some are welfare cheats, taking more money than they are entitled. I think the Swedes would have been better off importing Chinese or Indian immigrants who have better work ethics and respect for education. After one generation, their kids would have gained an education and become highly productive citizens.
(But the best policy is to do what Singapore has done. Admit as citizens only those who are well educated or highly paid. You hire temporary workers to do the jobs that Singaporeans no longer want to do and send them home when their contracts expire. We also do not admit asylum seekers. Singapore has more sensible immigration policies than Sweden. )
Returning back to the main topic, traditional Swedes increasingly resent these immigrants in their midst. It means their welfare state is gradually becoming less viable. That’s because Swedes have to be taxed to pay for the welfare benefits for these poorly educated immigrants who cannot find jobs. I think this loss of homogeneity will make Swedish welfare state less viable. Take a look at this Youtube video made by a Swede complaining of the problems caused by immigration of the wrong kind of people:
Sweden, a nation in decline. The Social Welfare system has collapsed.
While I think that this video is an exaggeration of the problems Sweden faces, it does make a valid point that there are serious problems with its recent immigrants. It also made me ask the question whether the Swedes are better off than Singaporeans as some people seem to think. I will judge both nations by using the following criterias: per capita income, education, health care, unemployment rate and suicide rate.
Are the Swedes better off than Singaporeans?
According to the IMF, Singapore has the third highest per capita income (ie third richest country) in the world as compared to 14th highest for Sweden. According to a study by the OECD, Singapore kids are ranked 2nd and 3rd for Math and Science as compared to 38th for Sweden for both subjects. So our schools are better or perhaps our kids are smarter.
According to the WHO, our healthcare system is ranked 6th best in the world as compared to 23rd for Sweden. I know Sweden’s health care is free. But free does not mean it’s good.
The Swedes pay high taxes for their generous welfare benefits. But high taxes mean businesses are discouraged to invest and people less incentivized to work. This has a negative impact on the economy. You get higher unemployment. According to the CIA, Singapore’s unemployment rate is 1.9% as compared to 8% for Sweden.
But life is stressful here right? So Singaporeans must be more unhappy than the Swedes who are taken care of from cradle to grave by the best welfare state in the world. Swedes do not have to worry about losing their jobs. The state will take care of you. This thinking is false. Living in a generous welfare state does not give you happiness.
How do we assess the happiness of a people? It is not by asking people how they feel which was what the Gallup poll did. Singaporeans are whiners and we finished at the bottom - the most unhappy people in the world. The best way to judge happiness of a nation is by looking at the suicide rate. The higher the rate the more unhappy people there must be because only unhappy people kill themselves.
According to WHO, 12.9 men killed themselves out of every 100,000 people in Singapore as compared to 18.7 for Sweden. Going by this, Singaporeans are happier than Swedes. I am not surprised because Sweden has high unemployment. You see, the welfare state may take care of your physical needs but we all need a purpose in life.
Being jobless takes away your self worth. Life loses its meaning when you are only existing and you become unhappy. The high taxes that Swedes pay for the extravagant welfare state also kills jobs as businesses migrate elsewhere. Work gives you a purpose in life. I have a friend who became depressed after he retired.
Therefore, the answer to my earlier question is “No. The Swedes are not better off than Singaporeans.”
We are richer than they are and have better schools, healthcare and more jobs than they do. And if you are poor in Singapore, you have the sun to keep you warm. It’s very cold in Sweden during winter.
Finally, here is one final parting shot. Sweden also has homeless people. No matter how generous your welfare state is, it is not possible to look after everybody. There is just not enough money. Some people will fall in between the cracks. See the youtube video below about what it’s like to be homeless in a Swedish winter:
BBC: Sweden is not a welfare state
Cass Owary
TRS Writer