Everything is Connected – the Swedish Example

Four minus two equals one in the national budget!

The government has to realize that everything is connected. If costs increase, revenues are often decreasing.

The suggested decrease of the ROT deduction (a tax reduction for people hiring carpenters for repairs, conversions and extensions) in the national budget amounts to 5 570 M.SEK. The number of jobs that will move to the black economy is estimated at 7 901, at the least. This will result in lost government revenues in terms of income taxes, value-added tax (VAT) and unemployment funds amounting to 2 360 M.SEK, resulting in a budget deficit.

The suggested increase of the youth employment tax is forecast to give 10 300 M.SEK. Decreased tax and VAT revenues as well as increased transfer payments will be 4 900 M.SEK, which will also be a budget deficit.

The suggested increase of the taxes on gasoline and diesel are estimated at 3 820 M.SEK. However, there will be no increased tax revenues should the number of kilometers driven decrease by 5,67 percent for gasoline-driven cars and 7,74 percent for diesel-driven cars. While such changes are unlikely as most people need to use the car as they do today, this reduces the consumption capacity which reduces VAT revenues by 1 000 M.SEK. Moreover, those with lower disposable incomes will suffer the most.

When the ROT deduction and the RUT deduction (a tax reduction for people hiring someone for cleaning, maintenance and laundry) were introduced, 8 000 M.SEK was reserved for covering the costs. This amount was later increased to 14 100 M.SEK. However, the positive effects of the tax deduction have been estimated to be at least 16 000 M.SEK, and probably as much as 20 000 M.SEK, in increased governments revenues.

What happened was that part of the black economy became regulated, which gave these effects.

Politics has increasingly become focused on separate political issues. Fair income taxes; that is, identical social-security contributions and VAT rates. Downsizing the national defense. Investments in healthcare, education and welfare. Female representation in company boards for gender equality. Increased immigration to save the world and show solidarity. Increased fuel taxes to shield and preserve the environment. Et cetera, et cetera.

When running a company, you always have to see the broader picture to succeed. This also applies to a municipality, a county council or a country.

If you reduce maintenance costs in a company to save money, you will later experience more production stalls hurting customers. They will then choose another supplier, which reduces sales. Likewise, if you reduce product quality to make some extra money you will succeed for a while, but then your customers will realize it and then you have a problem.

If the restaurant and catering industry VAT, which was lowered in 2012, is raised again unemployment will increase and in this case we are talking about many jobs, perhaps as many as 100 000. The costs of society will increase more than the potential tax revenue. While this VAT raise did not enter the actual national budget, it was for a long time part of the agenda.

The national defense can be viewed as a pure expenditure. But if the security situation changes and rearmament is needed after many years of arms reduction, as is now the case in Sweden, the rearmament will cost more as earlier investments have been sold or destroyed.

Take the Swedish shipbuilding industry as an example: in the 1970s, the industry was given 60 G.SEK to keep it floating, after which it was shut down anyway at enormous costs. In Denmark, no support was given and all employees were dismissed whereas the boatyards were mothballed. When the shipbuilding industry began to bounce back and the market became promising again, the boatyards were re-opened. The Swedish support, however, was built on the premise that tax money could take the industry through the downturn – which, of course, turned out to be longer than expected – and that the government could reshape an entire industry.

As much as 80 percent of all carriage of passengers is by car. The car and the fuel are heavily taxed. Efforts to develop other means of transportation have required large investments, but without results. Efficient logistics is the key to the growth of a country. The relatively low tax on transportation in the United States is fundamental to its continuously strong economy.

Sweden seems to be the only country in the world that does not care whether company headquarters and domiciles move abroad. Former Prime Minister Göran Persson said, when Volvo Cars was sold to Ford, that it was a good thing. However, experience shows that, even though it might take some time, job opportunities move together with company headquarters. In 1990, Pharmacia had some 20 500 employees in Sweden. As a result of selling the company and moving its headquarters, there are only 1 300 people left today. Compare this to Finland, where everyone is helping in creating the right prerequisites and structures, as in the creation of Metso. Or consider Huthamäki, which moved to the Netherlands but was later tempted to return. The key is obviously reasonable conditions for companies and their employees in a global comparison, as well as constructive governmental initiatives.

Today, not many – especially in the political culture – understand how a company works and what forces affect decisions made within the company. Left-wing politicians such as Prime Minister Stefan Löfven dream of creating “real industry job opportunities”. But there will be no new industry job opportunities. While industry production continues to increase, industry job opportunities will continue to decrease. Increased industry productivity, however, spreads like ripples. The IT, service and consulting industries all essentially exist owing to a strong traditional industry. Who else should they be supplying their services to? If the prerequisites are not right, everything stops.

Finally, immigration: it contributes and can contribute a lot to Sweden and has done so for centuries. However, previous immigrants came here to work and started working for ASEA or Volvo immediately even though they could only speak Finnish, Italian, et cetera. Today, the Swedish kindheartedness has resulted in us having to take care of immigrants, which also have to learn Swedish before entering the workforce. This has made the system crackle. If you do not realize this or are unwilling to deal with the problems, you get the present political situation. Here, salary formation is a key factor.

Olof Palme once said – when Alva Myrdal, before the referendum about the Swedish nuclear power in 1980, decided to support Policy 3 (to phase out all Swedish nuclear power within ten years) – that “Alva is always singing with the angels”. We should preserve the Swedish kindheartedness, but we have to face and deal with the problems using a holistic approach.

Political decisions in one area that seem reasonable can have devastating consequences in another area.

We have to want and dare to see the connections and entirety of the matters discussed above and dare to take the consequences.

The outcome deficit in 2016 will be larger than predicted in the national budget. Then again, you can always cover this up by blaming the international conjuncture instead of analyzing the situation and dealing with the problems in their entirety!

The Logic of Taxes

To start with an observation concerning government. If you cut down on expenses or raise taxes it has consequences elsewhere. Which means that the outcome in the budget normally will not be what you think. Most European Government does not seem to have understood this.

 

If you cut VAT a couple of percentage ,people consume more and VAT income increase. If you raise social cost fewer people will be hired and personal tax income will go down and social costs go up.

 

You think this is simple! It isn´t. Most Prime Ministers and Finance ministers I have met does not understand this. When the deficit occurs one year later they will say: “The international conjuncture was against us! Sorry, we have to raise taxes.”