The Miracle of Growth

A common critique in Sweden is that the right-of-center government has cut welfare in order to reduce taxes for the affluent. Indeed taxes have been cut sharply. In 2006 when the current government took power taxes were on average 48.0% of GDP, while currently they are below 44.7% of GDP. This is twice the relative size of the total Bush tax cuts.

But this doesn’t mean we can assume spending is down. Because the economy has grown, spending per person is actually up, not down, even after adjusting for inflation.

Government spending in 2012 is projected to be 1788 billion kronor, up from 1500 billion kronor in 2006. After inflation and population growth this is still an increase in total welfare state spending since 2006. Welfare state spending in 2012 per person is 20% higher than it was 15 years ago in real terms. When the left talks about “cuts” they might mean “slower expansion than we prefer”.

A more difficult figure is output of the public sector, rather than spending (a measure of input). Perhaps government costs are going up faster than productivity, in which case more spending doesn’t translate into improved welfare. But then again government too probably has productive growth as a result of technological innovation, especially since half spending is just transfers and not effected by Baumol’s cost Disease.

It is near impossible to determine if and to what extent the growth since 2006 was due to tax cuts. Even if it had nothing to do with tax rates, economic growth made it possible to cut Swedish taxes without cutting spending, a notion liberals often ridicule.

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