Re-establishing the Swedish Model

Speech by Anders Borg, Minister of Finance, at The Economist's Business Roundtable with the Government of Sweden

Thank you for your invitation and the opportunity to present my view of the Swedish economy and discuss the Government's economic policy. The Swedish economy has grown vigorously in the last decade, both from a historical perspective and in comparison with other countries. Sweden has gradually climbed from fourteenth place 1997 to ninth place 2007 in OECD measurements of GDP adjusted for purchasing power parities (New ranking based on revised figures). Even though estimates of this type should be taken with a grain of salt and the changes that have occurred in recent years should be interpreted with great care, the trend is gratifying.

In my speech I will describe the reform process that the Swedish economy has undergone in the past few decades. The growth and stability oriented economy we have today in many respects resembles the economy we knew in the 1950s and 1960s when the Swedish model was created. The development during the years in which this model gradually took shape stand in stark contrast to the problematic years of the 1970s and 1980s. Today Sweden's economy has a strong foundation with stable, low inflation, sound public finances, a well-educated labour force and good productivity growth, viewed over time. The confidence that has been established means that periods of economic uncertainty today have less impact on Sweden, with its small, open economy. The Swedish krona no longer takes a roller coaster ride when international financial markets are troubled. The confidence built up during several years is something we must always nurture.

The work that we in the Alliance Government have taken upon us is to reinvent the Swedish model. Our principle objectives are to restore full employment in Sweden, re-establish salient parts of the economy and overcome the exclusion and mass unemployment that sprang up over a number of years. By improving the incentives for getting a job, making it easier and less costly to hire new employees and creating better conditions for starting and running a business, we are reinventing the Swedish model. Sweden will be a country with full employment, good conditions for growth and a well developed social welfare system.

We know that full employment is by far the best antidote to the growing rifts and inequalities in society. Only by being employed will people have the resources to set their own course and shape their own lives as they themselves see fit. By attracting more people into the labour force, we are establishing a stable basis for our social security systems and a strong position for taking on the challenges that lie ahead.

This work will take time and require important reforms. In a relatively short time, we have made a number of improvements to get more people working. We are gradually beginning to see results. It is particularly gratifying to see that more and more people who previously were the most detached from the labour market are finding jobs. Now we in the Alliance Government would like to press forward with measures to improve social welfare and the conditions for growth. Our discussion focuses mainly on quality in pre-school, taxes, climate policy and infrastructure, which is so important for growth. We will further suggest reforms to strengthen the Swedish position as a knowledge based economy.

The rise of the Swedish model

Let me begin by going back a few decades. In the 1950s and 1960s Sweden experienced years of rapidly growing prosperity. Between 1950 and 1973 the annual increase in GDP came to 3.7 per cent, which was more than 1 percentage point higher than it had been from 1918 to 1950, when it was 2.74 per cent a year (In comparison, growth in Sweden, 4.65 per cent a year, in the two decades following the Second World War was actually almost 1 per cent lower than the average for countries in Western Europe). Varying between 1.5 and 2.0 per cent, unemployment was lower than the European average and much lower than the U.S. average. The strong and stable growth experienced by the Swedish economy in the 1950s and 1960s gave Sweden the fourth highest per capita GDP adjusted for purchasing power parities in the early 1970s.

The Swedish model was during these years not based on any miraculous solution but on a number of fundamental economic principles that are still valid today:

- Flexibility and mutual understanding. A labour market and labour market legislation that are characterised by understanding between the social partners and ensure that there is a reasonable balance between employees' legitimate demands for job security and employers' need to be able to adjust the labour force and the organisation of production in response to changes in competitive conditions.
- The work-first principle applies to all the social insurance systems. The social insurance systems are to be designed so that there are clear incentives to work at the same time that they provide security in the event of change.
- Publicly financed welfare systems accessible to all and ensure a high level of labour force participation and high productivity growth.
- Low and stable prices. The international exchange rate cooperation decided at Bretton Woods, which lasted until the early 1970s, had a stabilising influence.
- Sound public finances. Public finances during those years were stable. However, a gradual expansion of public transfer systems made the budget increasingly sensitive to swings in the business cycle.
- A business sector that is open to international competition and in which interventions in the free price mechanism are few.

Historically, these components of the model was the foundation on which our broad economic development was constructed. A model based on work-first principle, supported by a focus on knowledge and education are vital for a sustainable society with equal opportunities to all.

Likewise, in my view, problems of low growth and increasing macroeconomic imbalances in the 1970s and 1980s, like the employment problems that manifested themselves in the wake of the crisis in the early 1990s, were in large measure the result of abandoning fundamental principles in the Swedish model. The economic policy in the 1970s in particular created institutions and structures that, owing to their rigidity, were incapable of dealing with either new economic realities, such as a growing international economic integration, or with the negative effects on the economy in general that were a consequence of neglecting the need for flexibility, dynamism and economic incentives.

Developments in the 1970s and 1980s: Why did the model stop working?

What then were the factors that made the Swedish model stop working? The international recession that followed in the wake of the two oil crises in the 1970s naturally had a negative impact on Sweden. But these shocks also affected other industrialised countries and it is difficult to assert that Sweden would be so sensitive to the international business cycle that this could explain why Sweden fell from fourth place in the OECD's ranking of countries by per capita GDP around 1970 to ninth place in 1990 and fourteenth place in 1997 (New ranking based on revised figures).

Instead I would argue that the explanation can be found in the economic policy conducted during the 1970s and 1980s. Five factors are generally emphasised as being particularly significant:

- Budget deficits and high inflation undermined macroeconomic stability.
- Tax and benefit systems weakened the work-first principle.
- A weak competition policy and ignorance of entrepreneurship and the capacity for renewal in the business sector.
- An uncertain investment climate in the wake of macroeconomic imbalances.
- A fragmented political system together with a weak institutional environment made a long-term economic policy more difficult.

These problems had to be addressed if Sweden were to turn the tide.

Let me also say that the compressed wage structure that existed as early as the 1950s and 1960s, together with rising employer's social security contributions and consumption taxes in the 1970s, created tax wedges and pushed up the cost of employing people with low productivity in particular, people who most often had difficulty getting a foothold in the labour market. To simplify a little, the Swedish model with strong trade unions and a compressed wage structure was not compatible with the high tax wedges that arose in the 1970s.

The economic crisis in the 1990s forced reforms

In the late 1980s the negative effects of the policy became clear. High inflation and low productivity growth created a situation which weakened many households' purchasing power and weakened the competiveness of Swedish companies. All of this leading to persistent economic efficiency losses. The credit market had been deregulated in the mid-1980s, followed by the abolition of the foreign exchange restriction. Several attempts were made to halt the inflationary spiral and some years later work began to reform the Swedish tax system, which many critics from both the left and the right of the political spectrum condemned as "perverse". In addition a Productivity Delegation was appointed in 1991 to develop proposals for improving Swedish productivity. Productivity growth in Sweden had lagged behind since 1970. The rate of increase fell from about 6 per cent a year in the 1960s to about 2 per cent a year in the second half of the 1970s and in the 1980s. The decline can be attributed in part to the economic policy, which proved not to be sustainable in the long term. Instead it caused inflation. Frequent devaluations to manage these problems resulted in little pressure for structural change in Swedish industry. In addition sharp tax increases weakened the incentives for investment and for individuals to get an education. On top of all this, the oil price shocks caused a worldwide fall in GDP and investment.

In the early 1990s, Sweden and a number of other European countries experienced a severe economic shock that, together with the unsolved structural problems, both put an end to full employment and led to a sharp downward turn in public finances. Between 1990 and 1993 open unemployment increased from 1.6 per cent to 8.2 per cent of the labour force. The employment rate among the working age population (aged 16-64) shrank from 83.1 to 72.6 per cent in the same period. The public finances weakened in an equally dramatic manner. Public sector net lending changed from a surplus of 3 per cent of GDP in 1990 to a deficit of 11 per cent in 1993.

The economic crisis strengthened what many analysts and decision makers had become aware of in the latter part of the 1980s, namely that the serious situation in which the Swedish economy found itself was not temporary in nature, but required a fundamental reorientation of economic policy. The embryo of an economic and political reform programme that had its beginning in the 1980s was strengthened and several reforms were introduced in the early 1990s. The reforms included both structural policy and the framework for stabilisation policy. In addition wage formation was gradually changed, a crucial step in creating stability in the economy.

Structural reforms in the 1990s

The structural reforms implemented in the 1990s aimed at increasing efficiency through more competition and better incentives to work. While economic policy, particularly in the 1970s, had been aimed at selective industrial policies and attempts to bridge recessions with various forms of support for investment and stockbuilding, the policy was instead aimed increasingly at the factors of production by putting the emphasis on promoting education and stimulating capital formation. Thus better conditions were created for companies to compete internationally.

A major tax reform carried out in 1991 included reduced marginal taxes, simplified regulations and a broader tax base. The corporate tax was gradually reduced to 28 per cent. In a reorientation of housing policy, interest rate subsidies were reduced and the aim of housing policy over time has shifted from support for production to financial support for consumers. The main feature of the policy was that both producers and consumers had to shoulder a greater share of both the capital and production costs.

In 1993 a stricter competition law was introduced and several product and service markets, such as transport, telecommunications and electricity, were deregulated during the 1990s. Sweden was given full access to the internal market in 1994 under the Agreement on the European Economic Area and a year later became a member of the EU. In the 1990s labour legislation was also amended to meet the demands for greater flexibility. One of the changes, agreed fixed-term employment, has made it easier to hire on a temporary basis.

A broad policy agreement was reached on a new pension system with a closer link between contributions and future benefits. The pension system was introduced in 1994 and applies in its entirety to those born in 1958 and after.

Macroeconomic stability with functioning framework for fiscal and monetary policy
The crisis of the early 1990s also helped increase understanding of deficiencies in economic policy and its framework. A consensus developed on the need to improve the regulatory framework and review the goals of economic policy. The result was a number of reforms aimed at greater stability and increased predictability. Under the reforms, both monetary and fiscal policy were given clear goals as well as the conditions for achieving them.

Since 1999, price stability has been well anchored in legislation and the Swedish central bank, the Riksbank, has been given greater independence in maintaining the target for low and stable inflation of about 2 per cent.

After the crisis in the early 1990s, the public finances were consolidated. In total, measures consolidating the budget came to 7.5 per cent of GDP, according to IMF estimates (Bennett, A. et al, (1995), "Challenges to the Swedish Welfare State", IMF Occasional Papers, No. 130). The then Social Democratic government completed the consolidation of the public finances. (A savings programme totalling SEK 118 billion was presented in 1995. The next year it was expanded to include budget reinforcements totalling SEK 126 billion up to and including 1998. Expenditure reductions accounted for SEK 66 billion. This savings programme was ambitious in an international perspective. Henriksson, J. 2007, Ten Lessons About Budget Consolidation. Bruegel förlag. Jens Henriksson, the previous state secretary, in this publication emphasises the guiding principles that steered the government of the time in its work consolidating the public finances.)

The total consolidation programme came to about 15 per cent of GDP and stabilised the unsustainable debt situation and enabled public finances to begin showing a surplus again.

The credibility of the consolidation programme was strengthened by the reform of the budget process. Sweden went from having one of the weakest budget processes to having one of the strongest. Sound public finances is today firmly entrenched in policy. The target of a surplus in general government net lending of 1 per cent of GDP in average over a business cycle also has the aim of lowering the debt ratio. This is warranted by the expected burden that an ageing population will impose on the public finances. Sweden, as an EU member, has agreed to follow the terms of the Growth and Stability Pact on central government net lending and indebtedness, an undertaking that also strengthens fiscal policy credibility.

The policy of maintaining budgetary surpluses is supported by three-year central government nominal expenditure ceilings and a new statutory requirement for municipalities and county councils to balance their budgets was introduced in 2000.

Employment remained a problem

The Swedish economy was in most respects in better shape at the end of the 1990s than it was at the beginning. The public finances had been consolidated, the inflation had been shifted down to more sustainable levels and the conditions for production were more favourable.

While Sweden has succeeded in rectifying a number of important problems, the labour market problem remained unsolved. The labour market was characterized by weak development in private employment and growing exclusion, with an increasing number of people on sickness absence or in early retirement. The percentage of the population with sickness or activity compensation (disability retired) has risen continuously from just over 3 per cent in the early 1970s to over 8 per cent in 2006. Open unemployment has increased from about 2 per cent of the labour force in the 1980s (up to about 1990) to over 5 per cent in 2006. In the early 1970s there were about a half million people who were dependent on various benefit systems, in the 1980s there were about one million and in the 2000s they exceeded one million.

The reason for the weak growth in the labour market is that policy in past decades has created serious structural problems. As a result, the labour market has functioned poorer and the equilibrium rate of unemployment has increased. Too high taxes, too generous benefit systems, ineffective labour market policies and too high employers' social security contributions have tended to make labour supply and demand too low. They also cause matching in the labour market to function poorly. The incentives to work or to move from part-time to full-time work were much too weak and it was too expensive to hire. In addition the business climate was much too poor. Few people have been prepared to start a business and get it to grow rapidly. Being an entrepreneur simply has not been sufficiently attractive.

Employment problems have been particularly evident in certain groups - young people, older people, women and people with a foreign background. This has contributed to increased income disparities and it has become more difficult for people to exercise control over their own life.

The Alliance Government's foremost goal is to overcome this exclusion that has been allowed to grow for thirty years and get more people working.

The challenges ahead

Overcoming exclusion and getting more people working means that we as a nation are able to make the most of the potential that exists within our national borders. Sweden's economy faces a number of important challenges in the long term. I have in mind the ageing population, globalisation and increasing competition, but the environmental challenges, not least climate change, are also global and affect living conditions everywhere.

As the population ages and incomes rise, the demand for welfare services will increase. The number of people aged 65 or over will increase rapidly in the next 30 years at the same time that the increase in the group aged 20-64 is expected to be more modest. To meet the growing demand for welfare services, the surplus target for general government net lending must be maintained as long as it is needed to ensure sustainable public finances. In addition, steps must be taken to improve the efficiency of the public sector. In order to get more resources for welfare services, it is crucial to increase the number of hours worked in the private sector.

Globalisation puts the Swedish economy's adaptability and flexibility to the test. Employees who lose their job today cannot in the same way as earlier be sure to find a new in the same occupation or sector. Thus there is a risk that an individual's knowledge and experience will now decline in value more rapidly than before (Ljungqvist, L. & Sargent, T. J., (2006), "How Swedish unemployment became more like Europe's". Paper presented at SNS/NBER Conference, "Reforming the Welfare State", 9-10 September in Stockholm). The ability to adapt easily is necessary in a globalised economy. It requires not only lifelong learning but also social security systems designed so that the incentives for re-entering the labour market are strong. Only then is it possible to reduce the risk of individuals becoming trapped in permanent exclusion with few possibilities of affecting their income development.

The reforms we implement now to reduce emissions over the next two or three decades will largely decide the long-term global temperature increase and thus the expected impact.

I believe that a good basis for meeting these challenges is an economy of full employment in which all who want to work are able to do so.

A policy for full employment

The Alliance Government went to the electorate in September 2006 with a clear strategy tackling Sweden's major remaining structural problems - the weak growth in employment and the high level of exclusion - and at the same time, safeguard and develop the many successful reforms implemented by both the non-socialist and the Social Democratic governments in the 1990s.

Before I go into these proposals, I want to mention a few principles that formed the basis for this policy:

- Sound public finances are the basis for a successful reform policy: Sound public finances and stable prices form the corner-stones for a successful reform policy to achieve good long-term growth and employment. Sound public finances and a surplus in general government net lending are also necessary in order to achieve stable public finances in the long term as the population ages.

- Safeguarding the Swedish model in the labour market: In the Swedish model, conditions in the labour market are primarily regulated in agreements between the social partners. It is important that the social partners are engaged in - and shoulder their share of the responsibility for - the development of modern and well-functioning labour legislation. The Swedish labour market model has delivered stability, predictability and industrial peace and it should therefore be kept.

- Welfare systems must be jointly financed and distributed according to need: A central feature of the Swedish model is that health care and social services are jointly financed and distributed according to need. Maintaining this principle is essential. In order to be able to maintain the Swedish welfare model in the future, it is important to undertake reforms that increase the labour supply and employment and take measures to increase efficiency in the production of publicly financed services. Our jointly financed welfare must at the same time be open to new ideas. Strong new incentives can contribute to the provision of welfare that is better at meeting the individual needs of patients and care recipients. Reforms aimed at increasing diversity and competition among different actors in health care and social services increase the freedom of choice, but they also contribute to more employment in these sectors.

A broad reform programme

The Government's policy for sustainable higher employment and a reduction in exclusion takes a broad approach and has a long-term orientation. The different parts of the economy are interconnected and reforms in one area have a greater impact if reforms are implemented in other areas at the same time. A broad programme is also expected to have a greater impact on employment when its various measures complement and reinforce each other. Measures that increase the demand for labour but not the supply tend to lead to rising labour costs and thus limit the impact on employment. Measures to increase the labour supply in the absence of proposals making it easier to leave unemployment run the risk of having a delayed impact and negative distribution policy effects. Instead the aim is to carry out measures to increase the labour supply and at the same time, create the conditions for business to increase its demand for labour.

The reform strategy for increased employment and less exclusion has three elements:

1.More incentives to work
2.Simpler and less costly to hire
3.Easier and more attractive to start and run a business

Most of the measures in these areas are of a general nature. For some particularly vulnerable groups in the labour market, especially young people and people born outside Sweden, general measures are not sufficient. Therefore reforms targeted at improving the possibilities for these groups to enter the labour market are also being undertaken.

-More incentives to work-
Swedish and international experience shows that a policy that makes it more worthwhile to work plays a decisive role in increasing employment and reducing unemployment. The design of the tax system and the design of unemployment and sickness insurance are of major importance in an individual's incentives to move from exclusion to work or from part-time to full-time jobs.

The threshold effect in the labour market - for having a job or not - is critically important for the labour supply and for a reduction in exclusion. If we lower taxes for those earning the most at the margin, there is a relatively small impact on the employment. It may be wise to do so for other reasons, for example, for improving the premium on education, but it has relatively little impact on employment. If we lower taxes on the lowest incomes, it will become more worthwhile to shift from not working to working. In that case there will be a substantial impact on exclusion, as shown by the experiences of other countries that have introduced a similar deduction.

By changes to the income tax, the financial returns on working may increase, which will encourage an increase in the labour supply. The Government has introduced an in-work tax credit of about SEK 50 billion. The aim is to strengthen the incentives to work, particularly for low- and middle-income earners, and to create better conditions for those outside the labour market. But by lowering marginal taxes, it will also help increase the labour supply from broad groups of those who already have a job.

Unemployment insurance is meant to be an adjustment insurance. Generous insurance for a short or normal period of unemployment can oil the wheels of the labour market, promoting increased mobility by giving more people the courage to then try out new jobs. If the period of compensation drags out, a high replacement rate can, however, reduce people's chances of finding a new job. Unemployment insurance must be designed so that work should always pay better than unemployment insurance and so that bottlenecks in the labour market are eliminated.

The aim of sickness insurance is to provide security to those who suffer illness. Sickness insurance should not drive people far from the labour market and create situations in which there is exclusion with weak economic growth. Instead sickness insurance should provide security in the labour market for people who fall ill and for that reason are unable to work. The Government has proposed a number of measures to provide more ways to return from sickness absence to work and workmates. The link to the labour market while on sick leave has been strengthened and the risk of long-term absence has been reduced. Improving the conditions for returning to work has been important in light of the steady increase in sick leave and early retirement during the past thirty years.

More worthwhile and easier to hire...

We want to increase employers' interest in employing people whose ability to work employers may feel is uncertain. We are improving the opportunities for hiring such people and making it easier for them to enter the labour market by providing financial support to reduce the obstacles that this uncertainty may present.

A structure of labour costs in which the labour costs of people with low qualifications and low productivity are comparatively high will mean that their risk of unemployment is higher. It also means that people with relatively low qualifications or people who have lost some of their skills owing to a lengthy exclusion will have difficulty finding a job. In addition rigid job protection provisions put those outside the labour market at a disadvantage and favour those with a strong position in the labour market. Job protection thus has a redistributive effect on unemployment and hence contributes to a lingering high level of exclusion. However, there is not any clear-cut proof that job protection legislation would have any observable impact on the average level of unemployment.

We have introduced what we call new start jobs, which mean that people who have been unemployed, in early retirement, on sickness absence or dependent on social assistance for at least one year, contributing to increased uncertainty about their qualifications, will be able to have the employer's social security contribution waived for a period equivalent to the time that they have been away from the labour market. We have lowered employers' social security contributions for young people and older workers. We have made it easier for asylum seekers to enter the labour market quickly via step-in jobs. We have lowered the tax on the purchase of household-related services. It has also become easier to hire people for up to twenty-four months and the option of seasonal employment has been re-introduced. These measures will pave the way for those who have been hidden and forgotten in big systems. Now we are giving these people a chance.

&and better matching in the labour market

Measures for facilitating and improving matching in the labour market, that is, the process whereby jobseekers and businesses wanting to take on employees are put in contact with each other, can contribute to lower unemployment and higher employment. These matching measures include strengthening the incentives to look for and find work, for example, by adjusting taxes and the benefit levels in unemployment insurance. Another important factor in boosting the labour supply and improving matching in the labour market is how the requirement for the unemployed actively to look for work is followed up and what sanctions are available if this requirement is not met. Here employment offices play an important role. It is important that the application of sanctions be explicit. At the same time, it must be possible to apply sanctions without making too large an intervention in the individual's benefits.

Labour market policy can and must serve to oil the wheels of the labour market. It must help enable people to move as speedily as possible from one job to another or from unemployment to a position in the regular labour market. In such a way, labour market policy can contribute to better matching. Efficient employment offices, which provide contacts with employers and actively coach the jobseekers, increase the possibilities for the unemployed to find jobs. Likewise labour market training that is adapted to the employers' needs can contribute to better matching. Labour market policy resources must have a clear focus on matching jobseekers with vacancies, increased competition in the employment service and improved control and more consistent application of unemployment insurance rules.

The Government's reform strategy to streamline labour market policy includes emphasising job search activities, giving priority to support for hiring over labour market training and focusing measures on those most excluded from the labour market.

A Job and Development Guarantee is replacing the Activity Guarantee Programme, which had obvious deficiencies in both quality and effectiveness. We want to get those participating in the Job and Development Guarantee into the labour market with individually designed measures such as job searching activities with coaching, clearer routes into the labour market with job training, work placement, employment opportunities and skills enhancement. The number of labour market policy programmes has been reduced, making it possible to focus more on quality.

More worthwhile and easier to start and run a business

The way to full employment and rising prosperity is through a dynamic business sector in which entrepreneurs and business leaders want and dare to take new ventures. The conditions for entrepreneurship are good in Sweden in many respects. Swedes are well educated and they have been quick in adopting new technology. The business sector is innovative with extensive research and development and a good financial capacity. In recent years, Sweden has risen steadily in international rankings of competitiveness and business climate. Even though conditions are good in many respects, there is a need for further improvements in the business climate, not least for smaller companies. It is also important to make continuous improvements in the overall business climate so as to maintain the strong position of Swedish business in an increasingly integrated world economy.

The entrepreneur is the most important instrument of economic renewal and therefore measures creating favourable conditions for entrepreneurship are key in a successful economic policy and a country's adaptability.

A number of factors perceived as obstacles to entrepreneurship in Sweden have been found repeatedly by several business climate surveys conducted in recent years. Among these obstacles are the access to risk capital for small and new enterprises, high taxes and social contributions, labour market laws, the regulatory burden on enterprise, distortion of competition in markets in which the public sector is active, bankruptcy laws and difficulties finding workers with the right skills.

Private ownership and private capital are essential for entrepreneurship. Research shows that having private capital affects the probability that an individual will become an entrepreneur and expand his or her business activities. Venture capital companies have an important role to play in the successful commercialisation of a new product. However, in the very earliest stage, the informal risk capital markets in the form of one's own private capital and business angels may be at least as important as formal markets. The riskier the activity, the more important it is to have one's own capital. Investing one's own capital in the activity also indicates to creditors that the investment has a high expected return. The previous government abolished inheritance and gift taxes. To further stimulate private capital formation and thus more entrepreneurship and higher growth, the Government has abolished the wealth tax and changed the 3:12 rules on the taxation of close companies. Together these measures mean a substantial cut in private equity taxation.

In addition to these reforms, a number of measures have been introduced to make it more worthwhile and easier to start and run enterprises: Employer co-financing of sickness benefit costs on and after the fifteenth day of absence has been abolished, the VAT accounting period has been changed, the regulatory burden will be reduced by 25 per cent, there will be more competition in the production of welfare services, and bankruptcy and insolvency legislation is under review.

What effects are the reforms having?

The reforms being carried out by the Alliance Government aim at a durable increase in employment by getting the Swedish economy to function better. The reforms are expected to have considerable impact in the next couple of years and take full effect in about five to ten years.

So far, we can establish, that exclusion measured as full-year equivalents fell by about 130 000 people in 2007, according to the Ministry of Finance's preliminary results, the largest decrease measured since the time series began in 1970. The number of people in all the groups for which there are estimates of exclusion fell - people on sickness absence, the unemployed, the early retired or those receiving social assistance. Such a drop has never happened before. Economic developments certainly are an important factor, but we can also see that our policy is gradually yielding results.

The progress made, particularly among groups that have had difficulty getting a foothold in the labour market, is clear: more are getting jobs and more are leaving exclusion. Approximately 40,000 young and a good 35,000 foreign born were employed during 2007. The growth in hours worked were, both in absolute and relative terms, greater among women than among men.

Looking at the cumulative effects over a longer period, we at the Ministry of Finance estimate that the policy will lead to an increase of over 140,000 (3.3 per cent) in the number of people employed and open unemployment will fall by 1.0 percentage points in the long term. The number of hours worked in the economy is expected to increase 4.1 per cent

I want to point out that economic policy can affect growth and employment through other channels than those described here. The Government has introduced and is planning to introduce measures in a number of areas that may have an impact on growth and employment. Education policy and investments in infrastructure may contribute to stronger growth ahead. Also changes in the supply of risk capital and the abolition of the wealth tax can contribute to stronger economic growth. The effects of such measures are not included in the assessments, as they lie far ahead and/or are less well documented in economic research.

External forecasters' assessments

A number of external assessments of the Government's package of labour market reforms have been made. However, comparing them is difficult. In most cases not all parts of the Government's policy have been taken into consideration in these assessments, which accordingly should be viewed as partial analyses of the effects of a limited number of reform measures. It is therefore not surprising that the Government's own estimate of the cumulative effects of the reforms on employment and GDP is higher than other estimates.

The National Institute of Economic Research:
The National Institute for Economic Research estimates that the measures proposed by the Government in the 2007 Budget Bill and other proposals presented in autumn 2006 will contribute to increasing the potential labour force by 1.3 per cent in the long term. According to the Institute's estimate, the reforms will reduce the equilibrium rate of unemployment by 0.2 percentage points. This means that potential employment will increase by 1.5 per cent in the long term. (The National Institute of Economic Research, (2007), The Swedish Economy - March 2007, The National Institute of Economic Research, Stockholm. The National Institute of Economic Research, 2008, The Swedish Economy - January 2008, The National Institute of Economic Research, Stockholm.

The National Institute for Economic Research has also estimated the effects on employment of the proposals the Government presented in the 2008 Budget Bill. It estimates that the strengthened job tax deduction introduced in 2008 will increase the total number of hours worked in the economy by 0.3 per cent in the long term. The impact of other reforms is so difficult to estimate that they have not been quantified. However, the National Institute for Economic Research thinks that the six measures for which estimates have been provided will probably have little impact on the number of hours worked. If a large number of municipalities introduce the municipal child-raising allowance, the cumulative effect of the reforms for which there are estimates could be some decrease in the number of hours worked.

EEAG Report on the European Economy 2007
The EEAG has estimated that the reform proposals presented in the 2007 Budget Bill will reduce open unemployment by about 0.5 percentage points. Regular employment is expected to increase by between 1.5 and 2 percentage points in the long term. (European Economic Advisory Group, 2007, ibid.)

The IMF Sweden Report
The IMF has welcomed the Government's reform package. The Government's reforms will contribute to strengthening the increase in employment during the current economic upswing. Total unemployment, including people in labour market programmes, is expected to fall. The IMF endorsed the reform package's focus on changes in the tax and social insurance systems and noted that the measures in these areas will contribute to higher employment. The Government's reforms will mitigate the negative impact that the compressed wage structure has on low-skilled people's possibilities of getting jobs, even though the size of the effects is uncertain. (IMF, 2007, Sweden, Article IV Consultation - Staff Report.)

The OECD in its Economic Outlook for December 2007 wrote that the reforms carried out by the Government and the additional measures announced in the 2008 Budget Bill will have a considerable impact on employment in the long term. The OECD also thinks that the effects on the labour supply may possibly even occur in the short term. This could make the labour market work better and make a more rapid expansion of production possible.

The EU Commission
Every year the EU Commission conducts an evaluation of Member States' policy within the framework of the Lisbon Strategy. According to the Commission, Sweden has made good progress from 2005 to 2007 in addressing the challenges involved in increasing the labour supply. The latest reforms have focused on increasing the incentive to work, labour market policy and the education system. The Commission also thinks that Sweden has made good progress in the areas that the 2006 Spring European Council identified as priorities, namely, knowledge and innovation; enhancing business potential; employability; and energy/climate change.

As a result of these favourable opinions, the Commission for the second year in a row has chosen not to give Sweden, unlike the majority of other Member States, any specific formal recommendations.

The SNS Economic Policy Group estimates in its latest report that the reforms implemented by the Government will increase the number of hours worked in the long term by 1.8 per cent. It finds that the reforms have the greatest impact on the lowest income group, whose number of hours worked would increase by 16.2 per cent. The main reason for the sharp increase is the considerable number of people in this group who, owing to the reforms, will move from not working to a job. The estimate for the group with the highest incomes is that the reforms will instead reduce the labour supply by 0.2 per cent. This is due to the fact that for individuals with high incomes, the job tax reduction only has an income effect and thus they can afford to work fewer hours. The report also discusses how the reforms affect various income groups. The job tax deduction has a marked impact on low- and middle-income earners. According to the report, low-income earners' increase in income (8.6 per cent) will be double that of high-income earners (4.2 per cent). The job tax deduction also has marked income distribution effects between women and men and may help smooth the differences between men and women's working hours and incomes. The explanation for this is that more women than men are expected to elect to work more and thus increase their income more. ( Lundgren, S., Behrenz, L., Edquist, H. & Flood, L. 2008; Vägar till full sysselsättning, SNS Economic Policy Group, SNS Economic Policy Report 2008. SNS förlag, Stockholm.)

Concluding remarks

In 2006 the Alliance for Sweden went to the voters with an ambitious reform programme to increase employment and reduce exclusion. The reform programme is based on preserving and building on the strengths of the Swedish model in all essentials. Our reforms will provide more jobs, higher employment and lower unemployment. Less unemployment and less exclusion are of major importance to smooth income differences and thereby achieve income distribution policy goals. In addition to the income distribution effects, increased employment will lead to increased welfare and to greater means with which to finance important welfare services in the long term. The latter is of considerable importance since access to welfare services of good quality is a way of smoothing consumption between individuals and helping those who, for various reasons, end up outside the labour market or who have low incomes.

The Government's employment policy is ultimately based on the understanding that the opportunity to work has a value in a broader sense. By offering more people the opportunity to move from exclusion to employment, there will also be more people who can provide a livelihood for themselves and their families. Having a job affects one's sense of well-being. In the workplace, one is part of a larger social community and is capable of achievement, development and a sense of participation. Without a job, the risk of financial, social and health problems increases. For the individual and for welfare in general, the value of work is fundamental. A policy for increased employment and less exclusion is thus a moral imperative and not just a financial necessity.