14 February 2018

The key to Finland’s success


If only we knew why Finland succeeds. The Guardian has kicked off a new series that aims to get to the bottom of that question. It is, along with the other Nordic nations, a nice enough place to live and raise a family after all.

The awkward fact for the Guardian is that it’s very much more free market and decentralised than the British Left would be comfortable with. In fact, those are the defining features that make it such a successful country.

The governments may take some ungodly portion of the economy (50 per cent or so as opposed to our own 40 per cent and falling) and then spend it on the all-embracing socially democratic welfare state. Not quite how I’d do things, but it does seem to work.

The free marketry can be seen in any of the usual rankings. Heritage, Fraser and the World Bank’s ease of doing business survey all tell the same story. And its true of Finland’s North European neighbours too. There’s even an entirely serious paper arguing that underneath the tax rates Denmark is the most classically liberal economy on the planet.

The insight here is that, just as I and other classical liberals insist, high tax rates do indeed reduce economic growth rates by undercutting incentives. So do interfering bureaucracy and state planning. And so if you’re going to go overboard on one of those two then you’ve got to be minimalist on the other point. In other words, you’ve got to kill off bureaucracy in order to leave room for the tax rates and still have a growing economy.

That is more or less how Finland and other Scandinavians do things. Get on with it, but just make sure to cut that cheque to pay for all the welfare.

The other important point is quite how decentralised they all are. The national income tax rates are rather lower than our own (in Denmark it’s 3.76 to 15 per cent to the central government). A much larger piece of the pay packet goes to the local government, variously the commune, municipality or possibly county. That money raised locally is then spent locally too. The health system in Finland is not a national monstrosity like the NHS. Local taxes pay for local health care.

This all thus becomes subject to what I’ve been known to call the Bjorn’s Beer Effect. If Bjorn is the guy who taxes and spends in a locality, we know where he drinks his beer – he knows that we know too – then gargantuan overspends are going to lead to more than a little disruption of that quiet supping. There’s thus an efficiency to the system, something that gets lost when 70 million people send their cash off to the national government to be distributed without that local accountability.

Versions of localism are often dismissed as the “postcode lottery”. Yet it is one of the reasons why places like Finland work in a manner that our own polity doesn’t.

I’ve already mentioned that this sort of all embracing state isn’t what I desire. But that’s fine, we’re all allowed to have different views on the Good Life. What isn’t OK is trying to insist that you want what they’ve got over there without understanding what it is that makes it all work.

Until and unless we copy the entire system we’ll not have something that works. If you want that Nordic social democracy then you’re going to have to put tax raises – and the subsequent allocation of the spending – into local hands. And we’re also going to have to clear out near all of the economic (mis-)management currently attempted by government and its tendrils. That is, exactly the opposite of what the British left-wingers so loudly insist we’ve all got to do.

Again, I’d prefer the exorbitantly free market ethos of Hong Kong to the Nordic disposition. But it is still true that if you want that Scandi life then you’ve got to do it as they do. Very local government and taxation plus a distinctly less economically interventionist government – that’s the only way you’ll still gain the growth which allows all that welfare spending.

Tim Worstall is Senior Fellow at the Adam Smith Institute.