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When the dust settles the world will be stunned by what is planned
For nearly a decade Sweden has been stuck in a policy rut. The second Reinfeldt government made few economic reforms, given the background of the Financial Crisis and European debt crisis. Reinfeldt was followed by Löfven, a competent administration, but without a parliamentary majority, and one that flirted with anti-business sentiment, being tugged constantly by its partnership with the former communists in the Left (V) party.
Consequently, issues have banked up, with little done to resolve them. Now, a radical agreement between four centrist parties proposes to purge inaction with a flood of reforms. Mundus believes that there is a healthy chance that this will happen. By Friday, we should have a clear sense that it will.
Life in Sweden is pretty good. What needs to change?
“Hej, life in Sweden is lagom (pretty good). The economy is strong, Swedish start-ups are legendary, and we top all the social survey’s (that we care about). Why change?” It seems that the last two governments have heeded this advice.
But, the problem is that at a macro and micro level the socioeconomic strategy has run out of steam. To cope with an ever growing state, taxes attack those earning even moderate incomes. Labour laws are fixed for the factories of the 1960s, rather than to compete with Silicon Valley. The housing market is failing new arrivals, who can’t find rentals and don’t have the resources to buy at current, extreme market prices. Immigration law is more concerned with expelling talent for trivial administrative mistakes than attracting the best in the world. And unskilled refugees are locked out of the labour market, with their minimum wage set far above what can be afforded.
Despite this, there is a sense that Sweden has what it takes to fly high – a Nordic Singapore, if only the politicians can unleash the potential. Prior to the election, Mundus explored a number of issues relevant for expats and the businesses that they work for.
- Our introduction reported on business leaders’ demands for change (if that’s not enough, see today’s story, Wallenberg: “Sweden is useless at entrepreneurship”)
- A tax blog covered the tax policies of the political parties. The Social Democrats saw only increasing tax bills. The Moderates wanted to cut personal tax by SEK 22 billion.
- Our blog looking at the housing market explained why “market based rents” were political dynamite
What has been agreed, and by whom?
In case you missed the news, over the last few days it has emerged that two of the Alliance parties – Centre (C) and the Liberals (L) have struck a deal with the previous government parties of the Social Democrats (S) and Greens (MP). C & L have said that they will support the government in the Riksdag, but they won’t participate with ministries. What is highly unusual about the agreement is that C & L have struck a 73 point agreement with S and MP with clear conditions for their political support, and that these 73 points create a framework of liberal, market-based policies. In economic terms the agreement proposes a government far to the right of the previous Löfven government – some senior politicians even argue that the agreement is more radical than the (first) Reinfeldt government. Bizarrely, the policies are to be implemented by a Löfven government that must rapidly distance itself from its previous partners in the trade unions and communists.
- The austerity tax (“värnskatten”), which was introduced temporarily (!) in 1995 as part of the budget consolidation after 1990’s crisis, will be abolished as from 2020 worth SEK 6bn.
- Environmental taxes will be raised by SEK 15bn, to make room for tax reductions on labour.
- Labour market: Rules for dismissals will be more liberal and payroll taxes will be lowered
- High-speed trains, investments worth a massive SEK 700bn for 2019-2029, i.e. on average SEK 65bn a year, corresponding to around 1% of GDP.
- Better conditions for entrepreneurs.
- Improved rules for employee stock options, by, among other things, expanding the size and the personal circle so that “Swedish rules are competitive in an international perspective”.
- Reduced employer fees
- An end to talent expulsions. A special visa for highly qualified people who want to apply for a job or start a business to be introduced
- A major simplification of taxation and regulations for micro-enterprises to be implemented
- The tax on generational change in a company will be removed (ie when a family sells to its younger generation).
- The Law on Employment Protection, LAS, to be amended. An inquiry must also put forward proposals which, in particular for smaller companies, mean lower costs for redundancies, while at the same time maintaining legal certainty and protection against arbitrariness.
- The Public Employment Service (Arbetsförmedlingen) will be reformed and new labour market measures will be introduced, reducing costs to employ immigrants and long term unemployed persons.
- Rents for apartments will be liberalised. Market based rentals mainly new housing, while the effects on existing homes are unclear.
- Taxes on capital gains from residential housing should be abolished to increase mobility in the housing market.
Individually these proposals represent major changes to Swedish policy settings. Cumulatively they chart a direction for economic reform towards a lower tax, pro-growth Sweden. The new economic direction will be markedly greener, driven by tax disincentives on fossil fuels and regulations of other environmental evils (eg micro plastics).
Will it happen?
A wide variety of risks could prevent some or all of the agreement being implemented.
In the short term, the big risk is that the Left party refuses to let a Löfven government form, by actively voting against it in the Riksdag. However, that risk diminished this morning, when Jonas Sjöstedt (V leader) held a press to announce that V would not vote against the proposed government. Consequently Löfven should be voted in as Prime Minister on Friday.
The catch in Sjöstedt message was that should Löfven cross red lines, by presenting proposals for market rents or eroded labor laws, then V will call for a vote of no confidence. As this what Löfven has committed to do in the agreement with C & L, conflict is inevitable. But, it is not immediately obvious how policy tension will be resolved. It might be in right wing parties’ interests to have S pass contentious reforms, rather than bring down Löfven.
There is a significant risk that a second Löfven government will not implement the agreement in full, or in a way that the economic reformers in C & L intend. Doing so goes against the beliefs, emotions and principles of many social democrats. The unions hate the labour market proposals, and S is exposed to V ripping left-wing voters away from its support base. S will be torn in two by much of the agreement, so much rests on how much influence the left of the party has in governing.
To mitigate the risk, C & L will sit in opposition to the Government. With their support limited to votes of confidence and on budget cooperation they are free to attack the government if they feel it strays. And, if they lose faith in the direction altogether they can terminate the cooperation, although that would be an extreme option – throwing Sweden into political chaos.
Sweden is Open for Business
For businesses, the political agreement to form a new Swedish government represents a huge opportunity. Domestically, reactions have been clouded by the surprise, raw emotions and risk around implementation. Internationally, the event sits deeply in the shadows of Brexit mayhem. But, Mundus believes that as the dust settles, the opportunities for successful careers and corporate profitability will stand out like nuggets of gold.