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Thursday, 20 February 2014 | MYT 9:40 PM

Swedish government to raise taxes, woo voters with more spending on schools

STOCKHOLM (Reuters) - Sweden's centre-right government will raise taxes on private pension savings and cut student grants to boost public finances and free up spending for services such as schools ahead of September's election.

Raising taxes is usually unpopular, but Finance Minister Anders Borg hopes spending more on public services can steal the thunder of the Social Democrat led-opposition and turn around polls showing support for the centre right at 20-year lows.

The Alliance government has won what for the centre right is an unprecedented two terms in power thanks to its tax-cutting agenda - reducing the tax take by around 140 billion Swedish crowns ($21.57 billion) since it took office in 2006.

But income disparities have been growing faster than any other country in the OECD and newspapers daily highlight understaffed maternity units at hospitals and scandals over failures of privatised welfare services.

Sweden's ranking in international education rankings has slumped over the past 10 years.

The country's suburbs were also hit by a week of rioting in May last year, highlighting a growing divide between the well-off majority of Swedes and a minority of often young people with immigrant backgrounds, who are poorly educated.

Mindful of voters concerns, Borg said tax revenues would be redirected to key areas.

"It is central for us to prioritise certain important reforms, schools, jobs and competitiveness and naturally this financing ... will be used improve the situation for schools and jobs," he said.

Borg said the government planned to reduce tax breaks on private pension savings and raise taxes on cars, alcohol and tobacco, measures that will bring in up to 9.2 billion Swedish crowns (851.57 million pounds) a year over the coming four years.

The Social Democrats, the biggest opposition party, said they supported most of the reforms, but not a plan to cut student grants.

"I have a hard time understanding why students should borrow money to cover the gaps in Anders Borg's public finances," Magdalena Andersson, the Social Democrat's economic policy spokeswoman said.


Analysts say the fact that the welfare system is such an anchor in Swedish society may make the tax rises more palatable.

"All groups of voters perceive that they have something to get out of the welfare state, and that increases the willingness to pay taxes," Jonas Hinnfors, professor at Gothenburg University, said.

Sweden has recovered relatively quickly from the economic crisis partly because strong public finances have meant that the government has been able to cut taxes and increase spending to boost growth.

Despite the downturn, public debt levels are expected to fall to around 35 percent of GDP in the coming years. Average debt to GDP levels in Europe are around 90 percent.

Nevertheless, Borg said public finances needed to be strengthened.

"Everything speaks for Sweden having sufficient barriers in place before the next downturn," Borg said. "These savings should happen if we don't want to get caught with our pants down next time."

A poll for daily Svenska Dagbladet this week showed Sweden's centre-left opposition parties were supported by 52.8 of voters, compared with to 36 percent for the centre right.

Social Democrat leader Stefan Lofven has said that if his party won the election it would raise VAT on restaurant bills and force high-earners to pay more income tax.

The Social Democrats want to raise unemployment insurance payments, spend more on schools and fund recruitment of more nurses for hospitals.

"The argument of the Social Democrats is substantially that they have just lowered taxes for high earners ... and it is this argument the government are now trying to head off," Folke Johansson, professor emeritus of political science at Gothenburg University said. ($1 = 6.4911 Swedish crowns)

(Additional reporting by Mia Shanley, Sven Nordenstam and Johan Ahlander; Writing by Simon Johnson; Editing by Alistair Scrutton and Alison Williams)


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