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Once a European star, Sweden heads to vote with reform fatigue

By Alistair Scrutton and Johan Ahlander

STOCKHOLM (Reuters) - When Sweden's leftist opposition leader, a former welder, visited a disused factory in an old industrial town on his campaign trail, it was not to lament a bygone era but to tour new luxury apartments selling at around $6,000 a square meter.

Stefan Lofven's inspection of the results of this new housing in Eskilstuna, once the heart of Sweden's industrial working class, shows leftist politicians are embracing the low taxes and cheap loans spawning such luxury developments.

"We're more accepting of this kind of development than 10 years ago. We've been forced to look at things with new eyes," said Hans Ekstrom, a Social Democrat lawmaker, as he accompanied Lofven on the tour.

Promising no more cuts to welfare, Lofven is expected to win a September election with a centre-left coalition, ending eight years under a centre-right government. The shift to the left is foreseen in part because voters feel the drastic cuts to their welfare system overseen by Prime Minister Fredrik Reinfeldt went too far.

Anecdotes of crumbling schools and falling student standards have alarmed many Swedes. Private firms running schools have gone bankrupt and private equity firms that now run a fifth of hospital services have been beset by scandals.

Swedes, envied across Europe for their long parental leave and generous child subsidies, have been deeply shocked by reports that staff at elderly care homes locked up patients in closets or neglected to feed them. They also raised fears that many more people may have fallen through the system's widening cracks as unemployment and sickness benefits were slashed.

"I have worked and paid taxes since I was 15. I have hardly been sick before," said Bo Jireteg, a 51-year-old truck driver. Jireteg had his license withdrawn due to heart problems, but is deemed too healthy for sick benefits after rule changes.

"While I am not terminally ill, I am too sick to work."

But Lofven's party is not alone in promising an end to maintaining lower income taxes. Reinfeldt told Reuters his government had no further plans to cut taxes.

"We are very competitive, very effective now, so I think the need for more tax cuts is not as important as it was when we started," Reinfeldt told Reuters.

INEQUALITY

A decade ago Sweden was one of the world's most taxed nations, but the government has since cut income taxes and abolished inheritance taxes. The government says the cuts as well as strong government finances have helped triple-A rated Sweden outpace much of European growth since the 2008 crisis.

The tax burden had fallen to 44 percent of GDP in 2012, less than France or Belgium and roughly on par with Italy, according to Eurostat data.

Swedes with jobs have seen their disposable income soar and startups like Mojang - creator of computer game Minecraft - have blossomed.

House prices in the once drab capital Stockholm are nearly as expensive as in London and the city now boasts Michelin-starred restaurants, more luxury cars and designer offices in fashionable districts.

But not everyone is benefiting equally. The share of people in Sweden who have less income than half the national median rose to 9 percent of the population in 2010, from 5 percent in 2004, according to the OECD.

The displays of luxury in Stockholm and towns such as Eskilstuna belie a growing sense of inequality from an underclass, increasingly made up of immigrant families

In May last year, riots erupted in Stockholm in which hundreds of youths - mostly from immigrant families, according to the authorities - burned cars and fought with police.

"Growing inequality also means you can get growing tensions. We just don't accept inequality will grow," Lofven told Reuters.

In Eskilstuna, unemployment is around 15 percent, almost double the national average. Immigrants living in the older working class suburbs are seen as a threat to jobs and the town has become one the strongest support bases for the anti-immigrant Sweden Democrats (SD).

Listening to Lofven address a crowd while he toured the site, construction worker Rickard Heikkila, 30, said he was worried he would be out of work in the future and that Latvian immigrant workers were taking black market construction jobs.

"If they don't pay taxes, we don't have money for our hospitals," he said.

Sentiments like these may complicate life for any centre-left coalition. The SD have risen in support to around 10 percent in polls, drawing many blue collar workers, and could hold the balance of power after September.

LIMBO DANGER

Polls show many voters have turned to fringe leftist and rightist parties as the two major parties move to the center. Some fear a left minority government would struggle to pass any important bills with a strong far right showing in parliament.

"There is a general trend of reform fatigue in Sweden," said Fredrik Erixon, director of the European Center for International Political Economy, a think tank in Brussels. "There is a sentiment in Sweden that now is time to take a holiday for the next four years."

Such a limbo would be risky given one of the most pressing issues facing Sweden today: household debt at over 170 percent of disposable income.

Despite warnings from the IMF, a banking sector four times the size of the economy, and property prices tripling in the last 20 years, few politicians have shown willingness to introduce policies like mandatory mortgage amortization or trimming tax breaks for interest payments.

Reinfeldt told Reuters reforms were simply too expensive:

"What now lays ahead is bringing back the public finances to a surplus and that is not possible to combine with hugely costly reforms," he said.

Sweden's fiscal strains are prohibitive. The country may need to raise 70 billion crowns, some 2 percent of GDP, to keep current welfare ticking over and keep to budget targets over the next few years if growth keeps to projections.

"After the election Sweden may no longer be the star pupil of organizations like the OECD and IMF," said Erixon. "It may instead become more of a typical EU government with political gridlock and little reform impetus."

(Additional reporting by Daniel Dickson; Editing by Raissa Kasolowsky)

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