Scandinavian taxation shows why region a haven in crisis-plagued world

Success has driven interest rates to record lows as Denmark and Sweden pay less than Germany to borrow

Success has driven interest rates to record lows as Denmark and Sweden pay less than Germany to borrow

NORDIC TAXES, the world’s highest and most rigorously enforced, were frequently maligned in the boom years as being anti-business.

Now, they’re part of the reason why Sweden and Denmark are deemed havens in a crisis-plagued world.

The Scandinavian countries “were considered behind the curve for a while”, Pascal Saint Amans, the director of the Centre of Tax Policy at the Organisation for Economic Co-operation and Development, said in an interview in Oslo. “Now you’re ahead of your time, saying tax is a means to an end to fund a model.”

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A failure to generate adequate revenue has helped swell government deficits in parts of the euro area and bloated debt burdens in nations such as Greece, revealing that effective tax collection is key to fostering sustainable economies.

The Nordic region’s success in this sphere has driven interest rates to record lows as Denmark and Sweden pay less than Germany to borrow.

The European Commission estimates that Sweden will post a budget surplus next year, while Denmark’s shortfall will be only 2 per cent of gross domestic product, compared with an estimated 3.3 per cent in the EU as a whole. Both countries will have public debt ratios less than half the euro area’s average.

Denmark had the industrialised world’s highest tax burden relative to GDP at 48.2 per cent in 2010, the OECD said last year. Sweden was the next highest at 45.8 per cent. Saint Amans argues that Scandinavia’s strength lies as much in its strict tax collection system as in the high rates.

Certainly, some countries have succeeded in coupling low taxes, fiscal restraint and economic growth. Switzerland, which enjoys the lowest borrowing costs in Europe, had a 2010 tax burden of 29.8 per cent of GDP, less than Greece, Italy or Spain, according to the OECD.

While the Nordic region’s taxation model alone does not explain its ability to escape Europe’s debt crisis, it has left the region in a better position to ward off contagion, Saint Amans said.

“What has happened in the other countries is that they have reduced the taxes, especially on the highly mobile activities, on the high net worth individuals.

“They do not want to change their models, their social models. And then you have the gap. And you’ve had the gap for years, decades, with deficits which triggered debt. When the crisis hit, you were already stressed and now you are in disarray.”

Greece and Ireland have tax burdens of GDP at 30.9 per cent and 28 per cent respectively, OECD estimates show. Ireland’s 10-year yield traded at 6.3 per cent yesterday while Greece’s 10-year bonds yielded about 26 per cent. Scandinavian debt markets, which are also backed by current account surpluses, are among the world’s safest.

While Norway can lean on its oil and gas wealth for fiscal health, Sweden and Denmark have relied on taxation systems that have sustained cradle-to-grave welfare systems without stifling business or growth. All three economies will outgrow the euro area in 2013, the OECD estimates. – (Bloomberg)