Sweden's welfare meltdown has lessons for Labour

Stockholm - On the surface all is glitter. The city is dressed for Christmas with fairy lights, the streets are full of evening shoppers, and the restaurants are packed with office parties singing (actually rather doleful) communal ditties. But the Swedes are worried.

They are worried about unemployment, for despite three years of decent growth, headline unemployment is still nearly 8 per cent, and if you add in state-paid, make-work schemes to keep people off the register, it would really be about 15 per cent. They are worried about social exclusion: the way the gap has widened between professional dual-income families and blue-collar no-income families. They are worried about stagnation in the standard of living even of people in jobs, for despite economic growth, consumption is only inching upwards: less that 1 per cent last year, about 1.5 per cent this.

"People of my age," explained a 35-year-old professional, "cannot earn enough to think of buying a second home. So we all have to spend our holidays in our parents' ones." In the land that 25 years ago was indubitably the richest in the world, this is a hardship indeed.

To cap all this, the Swedes are worried that the government, despite the advice of an official commission that looked at the proposition, might join the single currency. This gives a certain solidarity with Britain, for Swedes vie with Brits as the most sceptic of the European family of nations. According to the polls there is a solid majority against joining the single currency, and perhaps more surprisingly since Sweden has only been a member of the EU for less than two years, an apparent majority who wished she hadn't joined in the first place.

But there is a crucial difference. In Sweden, opposition to Brussels comes mainly from the left, not the right. The fear is not the British worry that the EU will impose onerous regulations that will undermine the competitiveness of industry, but rather that EMU membership will require deregulation, particularly of the labour market.

Beyond this there is a wider fear that the closer integration into the EU will undermine the still-elaborate social security system, of which most Swedes remain understandably proud. There is a deep fear that this system, the most extreme version of it in Western Europe, will have to be cut back in a much more radical way than it has to date. True, there have been cutbacks in the funding of the welfare state, cuts in hospitals and day-care nurseries. True, opponents claim the pruning has protected the administrators while hitting the front-line staff, a familiar concern. But it is still remarkably universal.

The problem is affording the welfare state in an ageing society. There are interesting implications here for a future UK Labour government. The practical question is this: can a centre-left government, as in Sweden at the moment, re-fashion a welfare system more effectively than a government of the right, because it has more sympathy towards its aims and is therefore more trusted?

The answer seems to be "maybe not". There is in Sweden a powerful arithmetical problem that confronts any government seeking to push through reforms. Some 8.8 million people live in the country. At any one point, 6.7 million of those are net recipients from the social welfare system. The other 2.1 million pay in. Self-evidently, they have to pay in proportionately more per head, and these payers, at a different stage of their life, may well become recipients. But in practical voting terms the arithmetic is always in favour of higher spending. Only when the government cannot borrow more, because the interest rates become prohibitive as happened in the early 1990s, is reform forced on it. As a result the cuts imposed by the previous centre-right coalition have largely been maintained by the present government.

Opposition to these cuts has been mounting in recent weeks. The government faces something of a populist rebellion. Helena Rajaniemi, a woman with no previous political profile - "an unmarried mother of four" said a friend who is one of the 2.1 million net payers - led a demonstration of 4,000 in the Stockholm streets which received enormous publicity. There is a conflict within the labour movement, which in general supports the government. It is hard for the outsider to judge, but if anything the opposition to reform seems to be gaining ground.

The harsh reality is that the government has no option but to continue cutting its deficit: the discipline of the financial markets applies here as elsewhere. As the country continues to age - fewer people of working age, more pensioners - the underlying tax/spend balance will continue to move against the people. Explaining this, even to an electorate as well-educated as Sweden's, is desperately difficult. I suspect a UK Labour government would find itself in exactly the same bind.

This leads to an uncomfortable conclusion. Even with enormous public spending - above 50 per cent of GDP - you cannot stop rising inequality. A lot of people in Sweden, and not just on the left, are deeply concerned about this, for Sweden's easy egalitarianism is something special and attractive. If you cannot spend money to fix problems, what do you do? Boost skills? Change behaviour? And if that is not enough, what then? How Sweden will continue to come to terms with this conundrum matters to us all.

One idea being mooted here is that they may start to rebuild the family - to take back from the state some of the functions of the family which it has assumed over the two previous generations. This is not a moral agenda, but simply a financial necessity.