Issues

Is Northern Ireland ready to embrace the Nordics?

Esmond Birnie Small countries are often out in front when it comes to reform and particularly when it comes to reforming government and the public sector. Thatcherism and privatisation did it for the UK in the 1980s, Singapore was the 1990s poster child for reform and now the Nordic countries are easing into the lead in the race to become the latest economic new kids on the block.

That’s because the Nordics or at least the four main ones – Sweden, Demark, Norway and Finland – are doing pretty well. Sweden cut public spending as a percentage of GDP from 67 per cent in 1993 to 49 per cent exactly two decades later. In the three decades since 1983, the marginal tax rate has plummeted by 27 percentage points, and last year it slashed 4.3 per cent off the equivalent in corporation tax, bringing the rate to 22 per cent.

And that’s before it cut public debt from 70 per cent of GDP in 1993 to 37 per cent in 2010, with an 11 per cent budget deficit becoming a 0.3 per cent surplus over the same period. Little wonder other Northern European finance ministers want us all to become Vikings.

And they do. Back last August, Northern Ireland’s then new Finance Minister, Simon Hamilton, told the CBI annual lunch that places like Sweden, Finland, Denmark and Singapore had “utilised the power of the public sector to shape their economies into what we aspire to, as well-innovative, competitive, export-orientated economies.”

So, could Northern Ireland vanquish the Vikings and fight off the Finns to become the next small country to transform its economy using the public sector as a driver and, just how good are they anyway?

Actually, they are pretty good. According to OECD’s 2013 Compendium of Productivity Indicators, where the OECD average is 100, the Nordics are way ahead of both the average and the UK’s paltry 101; Sweden and Denmark are close to 120, with Norway delivering 180. The PwC Women in Work Index rankings, which measures the key indicators of female economic empowerment for 27 OECD countries, consistently puts Norway, Sweden, Finland and Denmark in the top five and has done so for more than a decade.

Indeed, in international comparisons of global competitiveness, the Nordic countries are almost always found near the top. In one meta-index comprising an aggregate of 16 different global indices (including competitiveness, quality of life, equality and suchlike) the four main Nordic countries top the list.

Of the first question, the answer is that the Nordics are pretty good when measured by most global measures of competitiveness, inclusion and quality of life. So, that leads to the next question. Did their envious position as the best in class really come from the efficiencies of their respective public sectors? And could Northern Ireland “go Nordic” and keep a relatively big state sector while still being economically successful? The answer to that one is more complex.

For most of the 20th Century, while industrial giants like Volvo and Ericsson created Sweden’s wealth, successive governments kept spending it. Treating business as an always-giving ATM, public spending as a percentage of GDP nearly doubled between 1960 and 1980, peaking at 67 per cent in 1993. The country fell from the world’s fourth richest in 1970 to 14th in 1993 and, when Astrid Lindgren, the inventor of Pippi Longstocking, found herself actually paying more than 100 per cent of her income in taxes, Sweden was clearly in trouble.

So too was Norway, which had to cope with a property and credit boom in the 1980s. In Finland, unemployment rose to 20 per cent following the loss of the traditionally vital export market in the former Soviet Union. However, there was a relatively rapid and tough response through a variety of policy disciplines. For example, central banks in Sweden and Norway were amongst the first to move towards tough inflation targets. Denmark and Finland became members of the euro zone, while the Nordics generally adopted a range of budget deficit rules.

EU Capitals-Stockholm Fundamental reform

A hard look at the last 40 years of Scandinavian economic reform suggests that embracing the Nordic model as a comfort blanket to make the case why Northern Ireland’s public and private sectors do not need root-and-branch reform, won’t hold up. Indeed, as Simon Hamilton seems to have recognised, the reverse is actually the case and the Scandinavian example reinforces the case for fundamental reform.

Sweden employs around 30 per cent of the national workforce in the public sector, compared to an OECD average of around 15 per cent – but because Sweden is successful and has a relatively large state sector it is not an argument that we should be relaxed about Northern Ireland’s public spending as a percentage of GDP.

In shaking off the effects of years of what some American conservatives have erroneously described as ‘Swedenisation’, the Nordics have embraced public sector reform in a manner that might alarm public sector unions. So long as public services are efficient and effective, they don’t really mind who provides them. Norway and Denmark let private sector organisations run the state hospitals. Sweden encourages public and private sector schools to compete and offers a universal system of school vouchers to fund them. Denmark has vouchers too and these can be ‘topped-up’.

And the Nordics have embraced perhaps one of the most transparent performance regimes around, where the performance of everything the public sector touches is measured. Schools, hospitals, clinics – even tax collection – all have tough key performance indicators and these are published with citizens having unfettered access to official records. Efficiency, innovation and transparency are encouraged and technology is an enabling device, even permitting the Scandinavian tax-payer to pay his or her taxes with a SMS message.

The Nordics’ pragmatism is not restricted to the public sector; they have equally tough performance demands for private business that permitted the collapse of Sweden and the acquisition of Volvo by China’s Geely, without state interference. The same pragmatism holds with the labour market and Denmark’s renowned system of labour market ‘flexicurity’ that permits employers to downsize labour numbers and move workers in response to changing market conditions. However, the social contract element of the system is balanced with comprehensive state-supported training and retraining.

Various commentators – and most notably Will Hutton and the Work Foundation – have argued for a Danish flexicurity system in UK and such a system might appeal in Northern Ireland where employers are currently disinclined to recruit even when the evidence of recovery is driving recruitment and growth in similar sectors in other UK regions. However, such programmes do not come without cost. In 2008, Denmark spent the equivalent of 2.6 per cent of its GDP on active labour market policies compared to an OECD average rate of 1.4 per cent.

Returning to Simon Hamilton’s aspiration that the Nordics “utilised the power of the public sector to shape their economies into what we aspire to,” even a superficial review of the Nordic model demonstrates its attractiveness as a model but hints at the pain of transformation. It’s also worth noting that the reforms flowed from crises and challenges during the 1970s, 1980s and early 1990s, but the responses came in the form of resolute reform programmes that were radical and daring and driven through the objections of unions, business lobbies and vested interests. Regrettably, radical and daring are not characteristics that may readily be attributed to the Northern Ireland Assembly.

But radical and daring or not, they worked for the Nordics and the lesson from that is that they are popular with their citizens because they work and are seen to work. A recent critique of the Nordic model noted that a Swede pays tax more willingly than a Californian because he or she gets decent schools and free healthcare. The state is popular because it works.

pwc_master_logo_shortform Esmond Birnie is chief economist with PwC in Northern Ireland.

Esmond can be contacted on 028 9024 5454 or esmond.birnie@uk.pwc.com

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