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As a country, Sweden is known for its generous social system and high taxes. At one point, it even served as an inspiration for Slovak Prime Minister Robert Fico. By the mid-1990s, however, Sweden’s expansive welfare model had begun to show cracks. The lingering effects of a pan-European recession further deepened the strain on public finances.

The 1994 election brought the Social Democrats back to power — a party not known for fiscal restraint. The new finance minister, Göran Persson, inherited a huge budget deficit and soaring public debt.

Persson, later famous for declaring that “those who do not control public finances do not control politics,” prescribed Sweden a tough dose of fiscal consolidation. It worked.

How did Sweden’s consolidation differ from Slovakia’s — the third round of which was approved in September by the coalition of Smer, Hlas, and SNS?

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1. Why did the Swedes have to cut spending?

In the early 1990s, Sweden plunged into a deep economic crisis. Its generous welfare model had become unsustainable and uncompetitive in a globalized economy.

Between 1991 and 1993, the country’s GDP fell by five percent, while unemployment jumped from two to more than eleven percent. By 1994, the public finance deficit had ballooned to a staggering 15 percent of GDP, and public debt rose from 55 to 78 percent.

When a real estate bubble burst, the banking sector also collapsed — forcing the state to intervene with costly bailouts.

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2. How did consolidation proceed?

One key reason for Sweden’s success was that the previous centre-right government had already implemented major structural reforms — liberalisation, privatisation, and deregulation.

The incoming Social Democrats could build on these foundations instead of starting from scratch. Crucially, they began improving public finances immediately after taking office.

“All parties agreed that consolidation was needed and timed it correctly,” says Marcel Laznia, an analyst with the Slovak Banking Association (SBA).

The Swedish government adopted two austerity packages, in 1994 and 1995. Two-thirds of the measures targeted spending cuts. Social transfers were reduced, public-sector wages frozen for two years, and strict spending limits introduced.

At the same time, VAT was raised from 23 to 25 percent — while the corporate income tax was slashed from 52 to 28 percent to support competitiveness.

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3. What helped the government during consolidation?

Stockholm’s strategy was marked by openness and consistency. The government communicated clearly that the cuts would affect everyone — not just the rich, companies, or “others,” as the Slovak government now tends to claim.

Sweden also avoided the “salami-slicing” approach of gradual, piecemeal cuts. It needed only two comprehensive packages, while Slovakia is already on its third — with a fourth probably on the way.

Independent watchdogs monitored compliance with fiscal rules and spending limits, ensuring transparency and credibility.

Persson also surrounded himself with capable advisers, including economist Jens Henriksson, who later wrote Ten Lessons about Budget Consolidation in 2007. Henriksson stressed discipline, transparency, and political unity. “The hardest part of consolidation,” he wrote, “was not economic but political — keeping the trust of voters while taking away their benefits.”

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4. How did consolidation turn out?

By 1997 — just two years after the second austerity package — the budget deficit had fallen to 1.6 percent of GDP. A year later, the budget was balanced, and by 2000 Sweden recorded a surplus of two percent.

Public debt dropped to 50 percent at the start of the new millennium, and unemployment declined to five percent. GDP growth accelerated — from 1.7 percent in 1996 to over three percent in 1997 and 4.2 percent in 1998.

“Strong GDP growth was one of the most important factors behind successful debt stabilisation,” concludes Laznia.

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Successful consolidation manual:

• Focus on cutting spending rather than raising taxes.

• Protect investments, the engine of future growth.

• Right timing and determination – act immediately after elections.

• Share the burden across all social groups.

• Communicate honestly and consistently.

Source: SBA