Economic Lessons from Scandinavia (PDF)

*) The Scandinavian economies have performed strongly over thepast 15 years, leading many to believe that the Nordic Model defieseconomic theory –...

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*) The Scandinavian economies have performed strongly over the
past 15 years, leading many to believe that the Nordic Model defies
economic theory – which suggests that bigger government means
lower growth and/or a lower level of income.

*) This report shows that one of the primary reasons for the recent
strong performance of the Scandinavian economies has been a
retreat of government – in terms of public spending, taxation and
product market regulation.

*) Over the 15 years prior to the 2008 Great Recession public spending
fell by more than 20 percentage points of GDP in Sweden.The
smallest fall in the share of public spending in GDP was in Denmark,
where it still managed to fall by 10 percentage points. These are
stunning figures.

*) The reductions in public spending suggest the private sector was
being crowded-in, thereby raising productivity and output growth.
The reduction in the size of the state in Sweden may have added
one to two percentage points to the long-term potential growth
rate. The comparable figures for the other Scandinavian economies
are 0.9 to 1.8 in Finland, 0.7 to 1.4 in Norway and 0.5 to 0.9
percentage points in Denmark.

*) The fiscal performance of the four leading Scandinavian economies,
both prior to and during the Great Recession, has been outstanding.
The headline budget deficits for all four economies peaked below
three percent of GDP – compared with 11 percent of GDP in
the US and the UK. The underlying budget balance – adjusting
for the economic cycle – remained in surplus in three of the
Scandinavian economies and was only slightly negative in Norway.
The comparable US and UK deficits were nearly nine percent of
GDP. Much of this success can be attributed to pro-market reforms,
such as the introduction of fiscal rules, following the early 1990s
Scandinavian economic crisis.