Financing ‘Big-Tax’ Welfare States: Sweden During Crisis and Recovery

In the years to come, the Swedish welfare state will face a number of important challenges to the financing of its system of social protection, perhaps the most important of these being changing demographic structures. The proportion of people between sixteen and sixty-four years of age will decrease, which will reduce the relative size of the labour force and thus also reduce the number of potential tax payers. At the same time, the proportion of people above pension age will increase. This group has a high demand for social services, such as health care, and they consume a large part of the resources devoted to social insurance. Consequently, Sweden will have to cope with a situation where a larger portion of the population will have to be supported by a shrinking one. But the support burden issue is not just a question of demography; it also relates to how many of those in their active years choose to work. In this respect, incentives to work are of utmost importance to the financial viability of the Swedish welfare state. Many also predict that the globalization and internationalization of the world economy will put important constraints on the financing of social protection, in terms of both what overall level of taxation is feasible to sustain and the rate at which different tax bases can be taxed.