Even the world’s most egalitarian region is grappling with a rising gap between rich and poor.
In Sweden, Finance Minister Magdalena Andersson says she sees an “obvious risk” of a so-called K-shaped recovery taking hold, with a privileged elite getting even wealthier while the most vulnerable lose income.
The Nordic nations of Sweden, Norway, Denmark, Finland and Iceland have stood out as a model of economic resilience due to their cradle-to-grave social security systems, robust public finances and innovation success. Yet a key tenet of the Nordic model, equality, is now being challenged by years of extreme monetary policy that inflated asset prices and, more recently, the jump in unemployment in the wake of Covid-19.
Andersson’s warning adds toconcerns across the globe as gains in asset prices — propped up by endless waves of emergency central-bank support — favor the wealthy. Meanwhile, the services industry has bled mainly low-paying jobs held by younger workers, most of whom don’t own assets such as stocks or property.
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“Especially if we have an extended period ahead with lower rates, that will likely increase wealth inequality,” Andersson said in an interview. “Another thing that worries me is unemployed youth. We know from the crisis in the 90s that long periods of unemployment at the beginning of adult life can have more long-term effects. I see that as very worrying.”
Andersson is part of a Social Democrat-led coalition that has signaled it might use taxes as a way to improve equality. Indeed, “a widening wealth gap has already fueled some calls for action on taxes,” Johanna Jeansson of Bloomberg Economics said. But the options may be limited.
Raising Sweden’s property tax is an idea that’s “liked by economists, but would be very unpopular among the general Swedish population,” Jeansson said.
Sweden scrapped its wealth tax in 2007, amid evidence it didn’t work as intended. And Jeansson notes that average taxation of capital income “is already higher” than among Sweden’s European peers. At the same time, the government last year abandoned a tax targeting the highest income earners, amid pressure from its coalition partners. What’s more, the extra levy didn’t provide much additional revenue.
The key challenge, Jeansson says, is ensuring that “plenty of jobs are created.”
At the start of the pandemic, economists were predicting U- or V-shaped recoveries, implying a relatively fast and broad bounce. But almost a year in, the two diverging strokes of the letter-K are widely seen as the best depiction of the unequal fallout of the current crisis. The concern is that a deepening divide risks fomenting the kind of discontent that, in extreme cases, can triggerpopulist uprisings.
Last year, Sweden created at least 40 new stock-market billionaires, in krona terms, according to a survey by Dagens Industri. And the value of 169 individuals’ and families’ holdings increased by 295 billion kronor ($35 billion) to more than 1.3 trillion kronor. That’s equivalent to almost 40% of Swedes’ private savings in shares and equity funds.
The concern about rising inequality prompted Andersson to set up a commission for increased economic equality, which presented its findings in August.
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Though the Riksbank abandoned half a decade of negative interest rates in December 2019, its main policy tool is still at zero. Against that backdrop, Swedish benchmark stocks have gained about 50% since March, while house prices were up an annual 13% in December.
Meanwhile, unemployment is set to rise to 9% this year from 8.5% in 2020, the finance ministry estimates. And the latest jobless data show that almost a fifth of Swedes aged 15-24 were out of work in November.
The Riksbanksays monetary stimulus has fanned asset prices, but also helped the labor market. It also acknowledged the risk of “distributional effects.”
In her six years overseeing fiscal policy in Sweden, Andersson has gained a reputation as a proponent of frugality. She’ll now be the first woman finance minister to chair the International Monetary and Financial Committee — the primary advisory body of the International Monetary Fund.
For now, she said her priority will be to get through the pandemic. And “when it comes to fiscal policy, to make sure that when we restart the economy, we build an economy that is both greener and more equal than before.”
— With assistance by Charles Daly
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