Tuesday, 24 February 2009

The Swedish experience - lessons to be learned?

Peter Connell: Last week David Begg, in outlining ICTU's 10 point pact in response to the current economic crisis, referred to the Swedish experience of the 1990s and some of the strategies that contributed to its economic and fiscal crisis. He specifically referred to a paper by Jens Henriksson entitled 'Ten Lessons About Budget Consolidation' on how Sweden dealt with its fiscal crisis in the early 1990s. Henriksson worked as an advisor to the incoming social democratic government from 1994 onwards and, arising from that experience, constructed his ten lessons. The article is worth a read, but I suggest it shouldn't necessarily be taken as a template for how we get ourselves out of the mess we're in. The interesting thing is that his lessons are essentially political rather than economic or financial. Lesson 5, for example, is that consolidation should be designed as a package and this is one of the arguments in the paper that is reflected in ICTU's 10 point pact.

The point also found a huge resonance amongst many of the public sector workers who marched on Saturday's protest. Because the government failed to introduce the levy as part of a package (and apart from the fact its provisions are grossly inequitable) a huge amount of political energy has been misspent. Brian Cowen is unlikely to be a great fan of Henriksson's Lesson 3 either - 'the one responsible must put her or his job on the line'.

Since last week a number of commentators, including Jim O'Leary in the Irish Times of Feb 20th, have dug a little deeper and pointed out that Henriksson emphasises the key importance of 'sound public finances as a prerequisite for growth' (Lesson 1). Over at http://www.irisheconomy.ie/, O'Leary approvingly cites the Swedish government's cuts in social welfare benefits as part of its budget consolidation programme and links this policy to Henriksson's Lesson 2 - if you are in debt you are not free.

The question is, though, just how useful are these fairly general statements as policy tools in getting us out of the particular situation we're currently in? Sweden arrived at a situation in 1994 of having a budget deficit of 11% of GDP under a specific set of circumstances. The early 1990s witnessed an international economic downturn, but nothing like the global crisis we're experiencing today. Until just a few months ago the OECD preached fiscal consolidation and promoted pubic spending cuts as the way to do it. Now, governments have other priorities including saving enterprises and jobs, and avoiding the spectre of mass unemployment. It's fine to quote the neat maxim - if you are in debt you are not free - but exactly where that leaves the Irish economy over the next 5 - 7 years isn't exactly clear. And, of course, there are other perspectives on the Swedish experience. What role, for example, did Sweden's history of social solidarity play in how it addressed its crisis? Others have pointed out policy tools beyond fiscal consolidation that contributed to Sweden's success - see O. Emre Ergungor. He writes about how the Swedish government addressed the issue of creditworthiness in the real economy - how to get credit to perfectly viable businesses which can sustain and create jobs.

Dare one suggest that in the smart economy we're supposed to be building this might be a greater priority than cutting wages?

Peter Connell is a member of the TCD Pension Policy Research Group

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