[Yun Suk-myung's Perspective] Sweden, Which Is Strict About Fiscal Deficits — Korea, Which Is Indifferent to the Country's Debt

[JoongAng Ilbo · Yun Suk-myung's Perspective · November 17, 2022]

Yun Suk-myung, Research Fellow at the Korea Institute for Health and Social Affairs (KIHASA), former President of the Korean Pension Association, and Head of the Pension Division of Reset Korea

"A beautiful contradiction, the Sweden Paradox."

This is the title of the preface to "The Sweden Paradox," written by Kenji Yumoto and Yoshihiro Sato. In the preface, the two authors wrote that "despite being a high-burden country where the national burden ratio—that is, the tax burden ratio and social security burden ratio—reached 64.8% as of 2007, and the maximum tax rate combining national and local taxes approached 56%, its economic growth rate and labor productivity significantly exceed the OECD average." They emphasize that Sweden knows well through bitter past experiences that 'there is no welfare without growth.'

At one time, the Swedish model enjoyed sensational popularity within our political sphere. It was a frequent topic for National Assembly members' research groups and appeared in campaign speeches for presidential candidates. However, at some point, the Swedish model stopped being mentioned. This seems to be because, while trying to use the Swedish model—which provides high welfare benefits—for elections, they could not ignore the high burden on the other side.

Sweden mandates determining policy implementation priorities within expenditures; total debt ratio increased due to COVID-19 but is expected to decrease this year. Korea's ratio has continued to increase from 44.2% in 2019 and is expected to be 46.8% this year. Korea should refer to Sweden, which increased fiscal sustainability through pension reform.

Since "The Sweden Paradox" was published at the end of 2011, more than 10 years have already passed. What does Sweden look like now? The indicators in the OECD's "OECD Economic Surveys: Sweden 2021" are surprising. Sweden's total government debt, which were 35% in 2019, increased to 39.9% in 2021 due to the impact of the COVID-19 pandemic. However, it is projected to decrease to 39.4% in 2022.

Sweden's left-wing government values corporations more than workers

In contrast, the OECD's "OECD Economic Surveys: Korea 2022" projected that the national debt ratio, which was 44.2% in 2019, would increase to 46.8% in 2022. Unlike Sweden, which is reducing its debt, we are increasing ours. I wonder where the judgment of our political sphere—that 'the country's debt is still low, so we can borrow more to spend'—comes from. We are taking a different path from Sweden, which we once studied diligently.

The reason I came to reread "The Sweden Paradox," which I first read in 2011, was because of Kim Il-cheon, former Director General at the Ministry of Health and Welfare. Despite being ousted three times for opposing government policies, he expresses deep concern for the country. "Dr. Yun, the country will go bankrupt at this rate. Compared to the financial projection process of the Japanese pension system, our reality—where the voices of non-experts are so loud—is truly pathetic. Do you know why Sweden's national debt decreased? It is because they establish multi-year budgets; if they spend more in one year, they must spend that much less the following year. Please make sure to read "The Sweden Paradox," written by someone who truly experienced Sweden, at least three times."

A few days later, he called again. "The 'Society for All' speech given by Stefan Löfven, leader of the Social Democratic Party, at Almedalen 2012—a political gathering founded by Prime Minister Olof Palme—is surprising. He said that one must first fulfill their duties as a citizen before claiming rights. As for policy priorities, he listed first preschool children, second corporations, and third workers. When asked why the leader of the Social Democratic Party, who values workers, placed workers last in priority, he replied that workers can only exist if there are corporations." Despite being an older person nearly 90 years old, former Director General Kim said he would visit Japan soon to research the latest trends there.

There is no freedom for those in debt

As former Director General Kim mentioned, Sweden's multi-year budget system is highly effective in ensuring fiscal soundness. "The Sweden Paradox" introduces it as follows: "Legal binding force was strengthened through a constitutional amendment in 1994 and the Fiscal Act of 1995. The total expenditure ceiling for three years and the targets for 27 sectors are determined by the parliament. After classifying all expenditures into 27 categories, ceilings are set for each individual sector—including mandatory expenditures such as social security—to determine policy implementation priorities within the total expenditure limit."

"Expenditure limits for three years are determined and operated, but no changes are made to the limits during the first two years. If any expenditure item exceeds its estimated expenditure in a given year, that excess amount must be cut from the corresponding expenditure item in the following year or the year after. The 'Pay-As-You-Go principle (a rule where an amount equal to the expenditure exceeding the ceiling is offset by an equivalent expenditure cut or tax increase)' is applied uniformly within the limit."

Through this measure, over a four-year period from 1995 to 1998, they reduced a massive fiscal deficit amounting to 8% of GDP. This was the result of Prime Minister Göran Persson, who became leader of the Social Democratic Party in 1996, appealing to the public about the necessity of fiscal reconstruction, stating that "there is no freedom for those in debt."

On September 9, 2013, after the publication of "The Sweden Paradox," a Memorandum of Understanding (MOU) on health and welfare cooperation between Korea and Sweden was signed, and a pension-related forum was held at the Seoul Press Center. Following keynote speeches by Minister Jin Young of the Ministry of Health and Welfare from our side and Minister Ulf Kristersson of Social Security from Sweden, there were two presentations from each side.

As a presenter for the Korean side at the time, I found Minister Kristersson's keynote speech and the presentation by Director Odmark of the Social Insurance Agency impressive. This was due to the Minister's profound knowledge of pensions and the expert-level presentation by the Director. Later, during a dinner at the Swedish Embassy residence in Seongbuk-dong, Seoul, then-Ambassador Lars Danielsson came and sat next to me. Thinking it was an opportunity to satisfy a curiosity, I asked, "How does the Minister possess such extensive knowledge of the pension field? Is he from a professional background?" He replied, "A politician." He said it was the result of growing up while receiving systematic training within a political party since childhood.

Swedish Pension Reform Considering Future Generations

I also asked how the 1999 pension reform, called the "reform of the century," was possible and what differences he thought existed between Nordic and Southern European countries. Ambassador Danielsson said, "Pension reform was possible because of the trust built over a century of developing the system, the sense of responsibility among politicians, constant adaptation to environmental changes, and the fact that they contemplated the direction of system improvement while thinking as far ahead as the children, grandchildren, and great-grandchildren generations."

To the second question, he replied, "Sweden focuses on the right to work rather than the job itself, whereas Southern Europe seems obsessed with the specific job once it is secured. Greece has a low union density of 9%, but Sweden's union density reaches 77%, and unions have a strong sense of social responsibility." He explained, "In Sweden, workers also feel bad when they are fired. However, there is a fundamental difference from Southern Europe in that when someone is fired, the unemployed person is retrained toward higher productivity to provide continued opportunities to work." I felt quite envious of the qualifications of the Swedish Ambassador, who possessed enough expertise to answer immediately at such a level, not just the Minister and Director.

Sweden's economic environment, which relies on the export of high-value-added products due to a small domestic market, is similar to ours in that it is an export-led nation. While Sweden's national debt has decreased significantly, Korea—whose future is bleak due to a plummeting birth rate—has a national debt ratio about 10 percentage points higher than Sweden's. With a demographic structure incomparably better than ours and revolutionary pension reform, Sweden's pension expenditure will be much lower by 2060 than it is now. This stands in contrast to Korea, where all pension schemes are no longer sustainable.

The Korean Political Sphere Focused Only on Votes

Kim Jung-hoon, President of the Fiscal Policy Research Institute and a fiscal expert who served as President of the Korean Association of Public Finance, provided a good comparison between our situation and Sweden's. He explained, "In the early 1990s, Sweden faced an economic and fiscal crisis more severe than Korea's IMF foreign exchange crisis, with national debt increasing by 30 percentage points over five years. To overcome this crisis, they extensively overhauled the budget processes of the executive and legislative branches and moved to suppress the statutory expenditure growth rate." President Kim emphasized, "Among various elements of these reforms, what stands out most is the will of the political sphere (the parliament) to prioritize the national burden ratio over standing committee budgets. For Korea to avoid following in the footsteps of a lethargic Japan, it is essential to reach a political consensus to first determine an appropriate level of national burden and then compile standing committee budgets based on that premise." This is a point that must be carefully considered in 'Fiscal Vision 2050,' which is currently being led by Second Vice Minister Choi Sang-dae of the Ministry of Economy and Finance.

Despite strong warning bells ringing everywhere about a bleak future, the Korean political sphere remains indifferent. Joo Myung-ryong, Chairman of the Korea Association of Retired Persons (KARP), a stakeholder in pension reform, criticized at a Basic Pension policy forum hosted by the Korean Pension Association on the 11th: "Even if civil society or expert groups propose good alternatives, decisions are ultimately made based on party interests. The Democratic Party's seven priority bills are a prime example. Among them, the 'Basic Pension five-piece set' is a plan to pay 400,000 won per month to all older people. Because of votes, the ruling party will follow suit." Chairman Joo's lament, "How can our political sphere be inferior even to the citizens?", lingers in my ears.

Source: JoongAng Ilbo (original article)