The Nordic Model - Embracing globalization and sharing risks

it is debatable whether such a development could continue for long
without creating strong political pressure to restore a more “just”
or “reasonable” parity between pensions and wages.
Scenario B shows that the joint effect of 0.25 per cent more
volume growth in the provision of welfare services and 0.5 per
cent more rapid growth of productivity amounts to a worsening
of the primary balance, by an amount which is close to one per
cent of GDP in the long run. Thus, a rather small increase in the
growth rate for public services will have strong implications for
public finances and add considerably to the financial sustainability
problem. An increase in the volume growth of services of 0.5 per
cent is rather moderate from a historical perspective; this scenario
is by no means extreme but rather cautious in its assumption on the
underlying expenditure pressure (cf. endnote 1 in chapter 4).
In summary, provision of services poses a challenge to the
welfare state due to the combined effects of the rising costs of
producing welfare services and the increasing demand for them.
As noted above, the underlying forces do not depend on the way
in which services are provided (though their manifestation will be
different in the case of private as compare to public provision). The
reason they become a particular challenge for the Nordic welfare
state is that a large fraction of services are provided via the public
sector and are tax-financed. Not only will the Baumol and Wagner
effects as well as advances in medical services increase expenditure
pressure, but improvements in material well-being will tend to
undermine the financial basis for these services by reducing labour
supply (as a consequence of increasing demand for leisure).
5.6 WHY NOT INCREASE TAXES?
Are tax increases the solution to these financial problems? Raising
taxes may seem like a straightforward solution to a problem
caused by an expenditure drift, itself driven by demographic shifts
and increased costs of and higher demand for services. However,
increasing taxes to solve the problem may, for several reasons, be
a more problematic route than many people think.
Welfare services: rising costs and increasing demand · 93