The Economy of the Swedish Municipalities and Their Challenges

The Swedish economy is up to a number of challenges. Many of them have their roots more than almost 50 years ago even though they are made worse by the current large immigration and the subsequent need to support a large portion of the population who is not working. In this blog we will discuss some of the challenges and we start with an interview of Hans Jensevik.

Hans Jensevik, started his career as Assistant Professor in political economics at Gothenburg University, was sent by SIDA (Swedish International Development Agency) to Zimbabwe to help writing a new municipality law, worked for the Swedish Government 1989 - 91, has been Head of Planning in Uppsala municipality (City), and is now founder and CEO of Svensk KommunRating, a kind of ’Standards & Pour’ for Swedish municipalities.
Please see http://www.kommunrating.se/blog/ for more information (in Swedish) from Hans Jensevik and Svensk KommunRating.

The interview addresses three critical areas: 1) The municipal autonomy, 2) The economical space for reforms, 3) The public spirit

For those of you that understand Swedish, you may watch 4 lectures by Hans Jensevik that details how Swedish municipalities are financed and what challenges they will meet with the current influx of immigrants. Please go to:

https://www.youtube.com/watch?v=BA1Sc-MrP_4

https://www.youtube.com/watch?v=ZPJS78Q5ODc

https://www.youtube.com/watch?v=Z-4hP_Vuzaw

https://www.youtube.com/watch?v=Lkl8unO323Y

The interview (in Swedish), that summarizes the lectures, can be watched at full length (40 minutes) here and the video abstract (12 minutes) is available at Fairshare Media World with the following English translation:

Abstract and translation of Patrik Engellau’s interview with Hans Jensevik

Patrik Engellau (PE) interviews Hans Jensevik (HJ) about what will happen when the immigration to Sweden reaches the ’shop floor’ i.e. the municipalities, who must take care of the new inhabitants.

After a short introduction of Hans Jensevik, similar to what you find above, Patrik Engellau asks:

PE: What did you learn in Zimbabwe?

HJ: 1983 when Zimbabwe still was South Rhodesia, it was the African country with the best welfare in Africa. Then I observed how the clan society destroyed a modern welfare nation. Similar tendencies can now be seen in Sweden. If we don’t do the right things now in Sweden, it may be even worse, because the clans now moving into Sweden, also have religious undertones, they are Muslims.

PE: Which are the three headlines we shall talk about?

HJ: They are:
1) The municipal autonomy, which we had before 1970, is now gone and most power is now centralized to the Parliament (Government). A municipality is able to control very little of its economy, about 20%, the rest is regulated. We would very much need the autonomy now!

2) The economical space for reforms. Available money for reforms is growing too slowly (or not at all!). The municipalities are getting more inhabitants and would need more money to support them, but with no growth of the economy, money must be taken from other tasks, i.e. we have to re-arrange the welfare.

3) Public spirit. Before 1970 Swedish economy was growing faster than most other countries, we were a ’Tiger Economy’. Growth was better than 4 % per year. 1968 (Student ’revolution’) everything changed and the Growth Policy was replaced by an Allocation Policy. Resources should be re-allocated from the rich, who could pay, to the pour, who needed support by the society. Growth was no longer in focus and the politicians’ most important task became to provide for the ’weak people’ and ’weak groups of people in the society’.

The Municipal Autonomy
HJ
explains: The Swedish municipalities have little power to control their economy. The local tax (kommunalskatt) all goes to the state, which then pays back to the municipality an amount based on average taxable income for all Swedes and the actual local tax rate, which is decided by the municipality and varies between 29.19% and 35.15% (average 32.12%). The local tax is flat after certain deductions.
This means that if there is a very rich person, who pays, say 1 million SEK (~$120,000) in tax, the municipality where he lives, will only get about SEK 65,000 (~$7,500) i.e the same as for every other inhabitant in the municipality. (Editors’ comment: Calculated as ’Average taxable income’ [SEK 201,828 for 2017] times ’Average tax rate’ [32.12% for 2017])
Therefore it is not economically profitable for a municipality to make people to get a job and become a tax payer. The municipality will get the same money for someone on social welfare or for a person with low income (less than SEK 201,828 in local taxable income).

Editor: Such a system does not provide incentives to the municipalities’ politicians or management to invest in e.g infrastructure to support businesses to create new jobs.
If you want to read more about this serious problem and understand Swedish you may go to: https://timbro.se/skatter/kommunalra%CC%8Ad-utan-ansvar/ and read the report by Isak Kupersmidt and Gustav Karreskog. Published 18 October 2016

(If you use Google Translate on the report you may get a fairly comprehensible translation into English.)

The Preface of the report reads like this:
Every year the Swedish municipalities together have a turn over of about SEK 500 Billions. They have to take a great responsibility for the challenges of the country: Schools, housing, jobs, and business climate. An important basis for the work of the municipalities is the ’Equalization System’. The authors analyse this system and reach the conclusion that the design of the system undermines the driving forces of the municipalities to take responsibility for the economical development. They also show how the system can be reformed to reduce the tax wastage and to create conditions for structural reforms such as educational initiatives and improved conditions for enterprises.

HJ continuous: Municipalities have responsibility for and can control the operation of schools, welfare, child care, geriatric care, local culture, and technical infrastructure (roads, water, sewage, garbage collection), but have not in all cases the full economical control.
The latter is already much under-financed and cannot be trimmed without serious consequences. In reality the municipalities can only control the local tax rate and the resources spent on geriatric care. Everything else is heavily regulated by the Government, when it comes to economics.

The Economic Space for Reforms
HJ
: The growth of the GDP per capita is zero (0) since 2009! (Editor: GDP has increased but due to the increase in number of inhabitants the growth per head is zero.)
Therefore, there is no economic space for reforms and no space for increased costs, e.g. for allowances to people without job and subsequently without own income. Statistics show that it takes in average 9 years for an immigrant to become self-supporting, which means that the welfare costs of all municipalities will increase.

The Government, during budget work, usually only look at the income, which is increasing, but normally do not calculate with increased costs. Therefore the official figures look good and the Government recently announced that we have an economic space for reforms of 70 Billion SEK.
Unfortunately, if we calculate with realistically increased costs, there is a deficit of 50 Billions instead! This was done by Riksrevisionen (Swedish National Audit Office).

Much more money must be allocated to the municipalities. Already today there are 40 municipalities (of total 290) that have a big deficit. In 8 years (to 2025) all Swedish municipalities will have a deficit according to available statistics if nothing is done.

What can be done?
When we had the last big finance and real estate crisis in the beginning of the nineties, the local tax rate was increased about 5% to an average of 30%. No one should pay more in local tax. The rates have been in principle unchanged since then although the average has increased to 32.12%.

(Editor: In addition there are state taxes, value added taxes on sales, capital gain taxes, payroll taxes, and various energy taxes etc. On yearly incomes of about SEK 650,000 (~$75,000) the effective marginal tax is about 75%)

Therefore we cannot increase tax much more without serious effects on total tax income of the state. Already now we impose taxes so people chose to take leisure time instead of getting more salary. It is not enough profitable to work more!

The only alternatives are increased GDP per capita or redistribution of costs (or both). The latter means less welfare for everyone living in Sweden. The first alternative is difficult and requires tough decisions by the politicians in a number of areas.

(Editor: If you want to get more information on some possible actions, you may read here, which is an article with the heading: Sweden is lagging behind in wealthiness.)

Public Spirit
The third headline is about attitudes and values.
HJ: Something happened around 1968 with our societal climate. From a mentality where the responsible person was the hero we got a squander moral where the looser is the model and the society must do everything to help.
We got a short sighted society. One ask: ’Where is the money?’ Get it fast (borrow) and spend.

Now also came the materialism and the idea that the man has no choice. The spending person cannot do anything else. Therefore the state shall take care of everyone and especially the ’weak groups’ and the ’Welfare State’ was invented.

We take money from the responsible (individuals and municipalities) and presumably ’rich’ people and give to the weak and maybe irresponsible people and organisations. In reality this means that we punish those who are responsible!

This is an attitude revolution and a metamorphosis in values.
Previously we discussed what we should use the money for and we had a strategic economy, exactly the kind of planning economy that gives high growth.
We must return to such an economy in order to preserve our wealthiness!