Musings by Swedens governing Social Democratic party that it may raise what are already Europes highest tax rates have dismayed the countrys business community and raised fears that the move will backfire.
Last week Pär Nuder, the finance minister, said he saw a need to increase tax rates to meet voters expectations for better public services such as education and healthcare. Sweden has the highest tax burden in the Organisation for Economic Co-operation and Development, estimated by Eurostat at 51.4 per cent of GDP in 2003.
Mr Nuder said he expected other European countries to consider higher taxes to cope with ageing populations and weak public finances.
But Per Edin, former chief economist at LO, the main blue-collar trade union organisation, said higher taxes made it "difficult to get the economy to function well". Among independent economists the tone is sharper. Ingemar Hansson, head of the National Institute for Economic Research, a government agency, said there was a risk "people will work less", while Jan Häggström, chief economist at Svenska Handelsbanken, described the idea of raising already high taxes as "absurd".
The fear is that higher income taxes, the most likely target for increases, will lower incentives to enter the labour market, therefore undermining the governments attempts to raise tax revenues. This at a time when the size of the workforce will already be under pressure because of demographic trends.
Mr Nuder appears keen to emphasise traditional SDP values - for example, scorning "well paid advisers" who have told the government to sell state assets that generate solid revenues. Sweden had "no plans in the near future to make any major privatisations", he told the Financial Times in an interview last week.
Instead the government is trying to bring down the number on sickness benefits and at the weekend launched an initiative to tackle fraud in the social security system.
For Mr Nuder the security provided by Swedens benefit system plays a key role in creating the preconditions for growth. Businesses are less convinced and highlight the movement of jobs to countries with more competitive tax regimes, among them the new EU members.
But Mr Nuder dismisses the threat of eastern Europe. "I am absolutely convinced that as people [get] richer in these countries they will follow the way western European countries have gone. "People will demand more from society, they will demand a stronger public sector. They want not just to have new cars but to have better roads to drive on".
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