Swedish Business Climate in Need of Reform

PanelOn Thursday October 1, 2015 Swedish Entrepreneurship Forum arranged a seminar when Augusto López-Claros, Director of Global Indicators and Analysis at the World Bank, visited Sweden. He gave a presentation of the main findings from two reports on the Swedish business climate that the World Bank delivered on demand from the previous government. Even though Sweden is doing well, there is room for improvement; not least in the education system, tax levels and regulations and the labor market. The panel of commentators strongly agreed.

 

Room for improvement

Augusto López-Claros, Director at the Global Indicators Group at the World Bank, explained the starting position: Sweden has done quite well with a good growth performance, low levels of inequality and sustainable public finances. But that said, there is room for improvement.

 – There are still significant potential efficiency gains from improving regulations on starting a business, paying taxes, labor markets and getting credit.

Concerning the ease of starting a business, Sweden is ranked at 32nd place, 4 places lower than earlier because other economies have improved. Sweden doesn’t do fantastically well, but is fine, Augusto López-Claros said.

The minimum capital requirement is relatively high in Sweden. Around the world, more than 100 of 189 economies and close to half of OECD members, have eliminated minimum capital requirement.

Augusto Lopez Claros

The tax rate is where the numbers really jump at you, López Claros continued. Sweden’s total tax rate as calculated by Doing Business declined from 54.1% of commercial profit in 2005 to 49.4% in 2013, yet it is still one of the highest among OECD high-income economies.

Nearly 72% of the total tax rate is accounted for by labor taxes. Since higher labor taxes paid by employers are associated with higher unemployment and less entrepreneurship, Sweden should shift taxes from profits and labor towards property taxes, López-Claros said.

 – In terms of the labor market, Sweden is much more rigid than other OECD countries. There is a risk for a dual labor market, actions for narrowing the gap between permanent and temporary contracts should be implemented.

Regarding urban planning and construction permitting it was surprising to me that this is such a contrast to otherwise reasonable and well-thought out areas, López-Claros continued. Weak spatial planning results in an unpredictable and inconsistently applied process that may vary significantly across municipalities. The lengthy processes provides a substantial shortage of housing in Sweden.

 – Half of all the housing projects are subject for appeals that take years to resolve. I haven’t seen anything quite like it in any other industrial country.

Finally Augusto López-Claros expressed concerns regarding the remarkable drop in the results from the Programme for International Student Assessment, PISA. He emphasized that the skills and status of teachers matter more than the overall level of spending in education. PISA scores have a strong positive correlation with the ratio of primary teachers’ salary to the salary of other workers with a tertiary education.

Jennie Nilsson, Chair of the Committee of Industry and Trade (Social Democratic Party), was the first of two political commentators. She started out by expressing that Swedish politicians are aware of the problem regarding urban planning. She also mentioned that the political parties do not have conflicting views in this area.

Jennie Nilsson

– When focusing on education, it is most important to create stability for the future. How to turn the negative PISA-trend is a clear priority for the Swedish government.

She said that improved education results is not a quick fix and that you have to work at different levels. Jennie Nilsson also stressed the importance of how to be competitive when it comes to taxes and regulations. Without mentioning which taxes should be subject to change, she said that some are crucial and some are not, at least in the short term.

Niklas Wykman, Group Leader Committee on Taxation (Moderate Party) and a former Political Adviser to Minister for Finance Anders Borg first showed what government measures that the last government used to strengthen the business climate: improved functioning of internal market, a tax system to promote growth, investment in infrastructure, education and research and lower cost for business and entrepreneurs.

 – We have failed to have a good debate about education. We almost always talk about the size of classes. The real problem is the quality of teaching.

Niklas Wykman

Wykman also addressed Swedish taxes: they are too high and, especially for entrepreneurs, too unpredictable. It is random what tax rate you need to pay at the end.

Another problem observed by Niklas Wykman is the difficulty to enter the labor market coupled with the difficulty for an expanding company to hire. Also, women in particular have a low return on education.

Finally, Niklas Wykman promoted going back to a system that taxes property. Ha also added that he thought that Sweden could lower the most harmful taxes without raising any others.

In the following discussion Augusto López-Claros commented on the gender issue noting that women’s strong participation in paid work has not been enough to close gender gaps. The wage-gap has been broadly stable the latest 15 years. The gap is also larger than in the other Nordic countries.

 – You pay a cost for having gender disparities. If more women were on company boards we would see fewer scandals including bribery and fraud.

Panel 2

 

Tax levels – a balancing act

In the following expert panel discussion, World Bank Senior Economist Hulya Ulku highlighted some of the areas where Sweden could improve. In the labor market, she pointed to the lack of skills in the work force and restrictive labor laws as the most pressing for Sweden’s private sector. Also, high taxes, high cost of labor and inflexible work hours were underlined as issues for Sweden to address. Another worry for Hulya Ulku was the fact that Swedish workers work less hours per week than the average in similar economies. This coupled with the high cost of labor and high taxes could create problems for Sweden’s competitiveness and give Swedish companies incentives to move business abroad.

Hulya Ulku

– Sweden has the highest labor cost combined with the highest taxes. This is problematic for Sweden when competing with other economies.

Christer Ågren, Executive Vice President, Confederation of Swedish Enterprise, pointed out that most international studies on Sweden are pretty consistent when identifying problems facing Sweden. Ågren’s main concern however is the threat that Sweden is moving towards an inside/outside market. The young, unskilled and Sweden’s growing immigrant population have a hard time entering the labor market.

– An increasing part of the labor force cannot enter the market. We have a lousy integration process, poor matching and the lowest number unskilled jobs in the EU coupled with a high influx of immigrants, out of which 50 percent have a maximum of nine years of education.

Christer Ågren

According to Christer Ågren the high minimum wage, compressed salary structure, high taxes and high cost of labor is at least partly to blame.  The solution, he thought, was to learn from other countries. Sweden cannot simply sit back and be happy to have exited the crisis in a relative strong position. We are way too relaxed.

– If you want to keep your relative position you need to run fast all the time. We need to examine our weaknesses.

The housing market is one of the things that the World Bank highlights as extra problematic. Christer Ågren strongly agreed that Sweden need to figure out a way to create a functioning white rental market for housing, which today is made impossible by rent control.

Elisabeth Thand Ringqvist, Chairman SVCA, pointed out that the Swedish legislation and government response is lagging behind the current economic development. For instance, Thand Ringqvist said, many start-ups are struggling to hire due to the cost of labor, difficulty in finding a good match and having problems with access to finance. Also problematic she thought is the fact that 50 % of the equity in Sweden comes from abroad, thus not loyal capital. The fact that it’s not profitable for lenders to work with start-ups is another concern.

Elisabeth Thand Ringqvist

– How can entrepreneurs say that it’s hard to find capital in Sweden? We have plenty of capital! It’s just that few are willing to lend to entrepreneurs.

Thand Ringqvist also stressed the need for a continuous debate around these issues and to keep up to date in order to not be left behind in the digitalized economy.

Augusto López-Claros pointed out that too high taxes can create perverse incentives and that, in some case, lower taxes have had very good results. What is needed is a balance where levels need to be high enough for the state to function well but low enough to not disincentivize business.

Panel 3

 

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