Labour has learned absolutely nothing from the Nordic miracle of the 1990s

Telegraph

11 hours ago

We know how to save a modern social democracy from runaway budget deficits and the disease of ever-expanding state subsidies.
Scandinavian nations did exactly that in the early 1990s when they were facing the imminent collapse of the Nordic welfare model and were in even worse economic shape than Britain today.
Sir Keir Starmer and Rachel Reeves seem to have learnt little from that great lesson. The Parliamentary Labour Party has learnt absolutely nothing.
Sweden had a fiscal deficit of 11pc of GDP in 1993 after decades of complacent drifting ended in an almighty crisis. It had a surplus of 3pc in 2000, by which time growth was running near 6pc and the world was talking of the Nordic miracle.
It was achieved by deep cuts to cash handouts with the lowest economic multiplier, but also by the sort of political grit and discipline that is completely missing in Westminster.
Göran Persson, Sweden's prime minister through most of these years, has some tart advice for leaders trying to grasp the nettle.
'You have two years. If you are not in command of the process by then, you will lose momentum and soon face the next election – where you will be replaced,' he said.
'Almost every area of the public sector has its own vested interests. Any sign that you might waver will doom the programme.
'If there is the slightest dissension between your ministers, if you cannot keep your team together, you will find yourself on a very slippery slope,' he told management gurus at McKinsey.
'You have to make it absolutely clear that you are putting your office at stake; that you are prepared to call new elections or resign if your parliamentary group is not behind you,' he said.
Well, indeed.
If you duck a fight, investors will write you off, something that Margaret Thatcher well understood.
'It wasn't until we cut unemployment benefits and got into open conflict with the trade unions that market interest rates started coming down,' Persson said.
Some say Labour's rot began when it choked on fuel duty, the lowest of low-hanging fruit. If a new government with a green agenda and the largest majority since 1832 cannot muster the courage to take that baby step, what can it ever do?
From there it has been a carnival of capitulations, from the about-turn on the winter fuel allowance for middle-class pensioners to the fatal retreat over the exploding cost of disability benefits.
Persson said the Swedish cure was one third higher taxes and two thirds spending cuts. Academics say it was nearer half and half. Fiscal retrenchment was 8pc of GDP over four years.
Pensions were cut by 2pc. Inflation-indexing ended. Access to early retirement was restricted. There was a big push to make people work longer.
Parental leave fell from 90pc to 75pc of former salaries. State-paid sick leave was cut from 90pc to 65pc for short absences, and employers were made responsible for policing it. Average sick leave plummeted from 25 to 11 days a year.
Unemployment pay and social housing was cut. The net was tightened on disability payments. You had to start paying for prescriptions. And so on.
It took guts because unemployment was over 10pc, the banks were bust and house prices were crashing. A fiscal squeeze risked an economic heart attack.
'We had no choice,' Persson said.
Overnight interest rates had reached 500pc in the currency crisis of 1992, though the krona was soon blown out of the exchange-rate system anyway. The Swedish debt ratio was double European levels and spiralling higher. 'Big money' thought Sweden had lost control.
It was shock austerity but not a chainsaw rampage in the manner of Argentina's Javier Milei. He has flattered the books by cutting investment, starving education and running down infrastructure. That is a dead-end.
Persson increased spending on education, job retraining and all things digital, as the only route out of crisis.
He freed up private schools and even helped fund them, the exact opposite of Labour's anti-education, class-war assault on private schools.
Persson said you have to start by telling the truth on the campaign trail otherwise you have no mandate.
'My party was elected in 1994 because we promised to carry out the harshest programme with the deepest budget cuts and the sharpest tax increases … The electorate must understand that drastic measures are required,' he said.
Labour did no such thing. It disguised the full cost of its spending plans. It shunned a necessary rise in income tax to cover those plans, instead smuggling through more destructive taxes on business and small firms that have further damaged the supply-side of the economy.
Persson said the cardinal political rule is that everybody must suffer pain together, otherwise the reforms will fall apart in parliament.
Why didn't Labour tear up the script once Reeves had blown through her 'fiscal space'? The Government should have declared a fiscal emergency, and then pushed through income tax rises for everybody to make it easier to sell disability cuts to Labour rebels.
Persson said you are doomed from the start if you try to muddle through with 'ad-hoc hodgepodge' measures. You must go big early and take your punishment upfront to win over the markets and earn the swift reward of lower borrowing costs.
Only then does a distressed debtor state move from a vicious circle to the sunlit uplands of a virtuous circle, where Sweden has been ever since. Its public debt is today 33pc of GDP. It is one of the last AAA states, with bond yields below German Bunds.
Ditto for Denmark which has gone through a similar story. Both have had faster economic growth than the rest of Europe over the last 30 years. Their capita income is in the top league.
Britain's woes are not as serious as those facing the Nordics in 1993. It has the second-lowest debt ratio in the G7. Its fiscal deficit is bad but not as bad as in the US or France.
Yet markets are still demanding a penalty premium on UK debt, beyond what can be explained by inflation differentials. The 30-year yield is trading at 5.4pc, far above peers.
Could it be that Britain's festering pathologies are in some respects worse than Sweden's problems 30 years ago?
The insanity of the UK welfare system is not my area but I have seen enough of the Motability scheme to know that the British state has been hijacked by political lunatics.
Leaving aside such cases as the woman caught scuba-diving in the Maldives after faking her way to £65,000 of car subsidies, why are taxpayers having to fund cars and insurance for people with such conditions as ADHD and anxiety in the first place?
Why has the cost of the scheme jumped another 40pc to £2.8bn in five years? Why have ADHD cases receiving car help risen 1400pc since 2016, and autism numbers by 700pc?
Why are taxpayers who cannot afford to buy a new car subsidising the purchase of new BMWs, Audis or Mercedes, up to a cost of £54,000, for those in the benefits system?
Sweden had some advantages. It devalued the krona by 23pc and launched its export drive during the white heat of Germany's reunification boom and just as globalisation was gathering pace. The Cold War had ended. The peace dividend made everything easier.
Sweden had hit psychological rock-bottom. The country knew that drastic cuts were needed. Cross-party consent was the glue that held it all together.
The UK has none of these tailwinds. The world trading order is disintegrating. Rearmament costs are soaring. The political class are at each other's throats. Too many Britons still seem to think they can have it all, and that Telegraph readers will pay for it.
Yet if the Swedes can cut state spending by 8pc of GDP in four years and march on to prosperity, surely Britain can cut 2pc without becoming a howling wasteland. I think the grievance industry doth protest too much.