Facts about Sweden’s economic system may surprise social democrats in Australia

According to a recent poll, 40 per cent of Australians agree that socialism is the ideal economic system, as defined by increased government spending and/or a guaranteed annual income. In many ways, the poll responses, particularly from younger people, mirror the arguments made by self-described “social democrats” who believe Australia should be more like Sweden. But there’s one problem—Australians are highly unlikely to accept Sweden’s taxes.

Simply put, Sweden has a larger government than Australia. According to data from the International Monetary Fund, government spending in Sweden (as a share of the economy) was 46.8 per cent compared to 38.4 per cent in Australia in 2022, meaning that Sweden’s government sector was almost 22 per cent larger than Australia’s (again, relative to the size of the economy).

The challenge for social democrats in Australia is how to pay for this larger government. In Sweden, contrary to rhetoric that the wealthy pay a disproportionate share of taxes, government spending is paid for by much higher taxes on middle-class workers and families.

For example, Sweden’s top personal income tax rate of 52.3 per cent is higher than Australia’s top rate of 45.0 per cent. In addition, Sweden’s top rate applies to income starting at roughly US$62,000 compared to Australia’s top rate, which kicks in at approximately US$120,000. Clearly, the top personal income tax rate in Sweden applies to many average Swedish workers and families.

Moreover, Sweden’s national sales tax rate (25 per cent) is one of the highest in the industrialized world, which again applies to average workers and families, and it is significantly higher than Australia’s GST of 10 per cent. And Sweden also has comparatively high payroll tax rates at 31.4 per cent.

The consequence of Sweden’s tax policies is clear—average Swedes bear the burden of higher government spending.

The polling data is also clear—Australians do not want to pay higher taxes to finance more government spending. Consider that only 39 per cent are themselves willing to pay higher personal income taxes to pay for increased government services and even fewer favour a higher GST (23 per cent).

In response to this aversion to higher taxes, governments in Australia have chosen to borrow money to finance more spending, meaning future generations will have to pay for these programs.

However, many social democrats in Australia may be surprised to learn that this type of borrowing is not permitted in Sweden. According to Swedish economist Johan Norberg, Swedish government spending is constrained by fiscal rules that the Swedish people strongly support. Specifically, the national government is required to establish spending targets three years in advance that result in a small surplus over the business cycle, thus avoiding debt accumulation over time. Any spending increases must be offset by equivalent spending cuts in other areas to remain within the overall targets. In addition, municipalities and regions are prohibited from running deficits. In other words, the rules in Sweden require current taxpayers to pay for current government spending, which means higher levels of spending require higher taxes.

Finally, according to the recent poll, most Australians agree that other Australians—particularly higher-income workers—should pay more taxes to fund government spending. But further disproportionately taxing high-income earners, along with increasing government borrowing to finance current spending, is not sustainable and is certainly not based on the Swedish experience, where the middle class bears the burden of higher government spending and fiscal rules prevent the type of borrow-to-spend polices we see in Australia.

All Australians, including social democrats, should understand the fiscal realities in Australia and beyond when advocating for larger government and increased spending.