After decades as an envied model of prosperity, stability and social innovation, Sweden is faced with serious economic and political problems that threaten the future of its rich, egalitarian, welfare-state society.

Despite one of the world's highest tax rates, Sweden's economy no longer produces enough money for the generous social welfare benefits and large government bureaucracy that consumes two-thirds of its annual national income. The government budget deficit and foreign debt are growing at what bankers fear is a dangerous pace.

Bickering over what to do about this has broken up the three-party, right-of-center government that had cautiously ruled the country with a single-vote majority in parliament. The largest party in the coalition, the Conservatives, pulled out because of lack of support for its plan to stimulate the Swedish economy with radical income tax cuts over the next three years.

The farmer-based Center Party of Prime Minister Thorbjorn Falldin and the Liberals agreed with the opposition left-of-center Social Democrats that the tax cuts should be delayed and modified to keep the budget deficit from growing even larger. Falldin now is trying to put together a minority government to tide the country over until next year's scheduled national election. But the Social Democrats, who ruled Sweden for 44 years until 1976, are pushing for an immediate election, which opinion polls suggest they would win.

Either way, it appears the government will be politically unable for some time to take the decisive action many economists believe necessary to prevent the worsening economic crisis from undermining Sweden's welfare state.

"It's biological problem of a mature welfare state," said Nils Lundgren, chief economist for a large Swedish bank."The public sector can be financed this way only until it grows to a certain size. We've reached the stage where we don't dare tax people enough to cover public costs."

Suffering from low investment, high wages and stagnant productivity, Swedish industry is adjusting more slowly and painfully to changing economic conditions than in the past. Some parts of traditional industries like shipbuilding and steelmaking have been kept alive only by government takeovers and transfusions of taxpayers' money. This had not previously been part of Sweden's "middle way" model of financing government social welfare and income redistribution programs with a robust private sector.

Sweden, the first modern welfare state, is among the last to confront the uncomfortable necessity of making sacrifices now to protect its social welfare system in the future. In neighboring Denmark, even larger budget deficits and foreign debts have forced austerity measures that last year cut the Danes' standard of living by 5 percent and sent unemployment soaring to 10 percent of the work force. Scandanavians had thought such calamaties were confined to poorer industrial nations like Britain.

"We are traveling in the direction of countries like Denmark and Britain, and we must stop that," warned Ingvar Carlson, an influential Social Democratic member of parliament. He is supervising an economic crisis plan for his party, still Sweden's largest, should it regain power.

"If we don't take action soon, we could suffer more than just economic difficulties," Carlson said. Recalling last year's national strike, the first in a half century, he added, "The Swedish model already has been shaken. It just won't work unless the economic problems are solved."

All five major political parties agree something must be done, but they disagree over who should bear the burden of sacrifice. "The hard political decisions are not or cannot be made," said economist Lundgren, an adviser to the Social Democrats. "No one wants to be responsible for having to do things that might reduce people's standard of living."

As a example, there is wide agreement with Conservative party leader Gosta Bohman that the time has come to reduce Sweden's high marginal income tax rates of up to 85 percent, because they discourage working overtime or seeking promotions for more pay. But the Social Democrats want to couple a reduction in the marginal rates -- down to a maximum of 50 percent for most taxpayers -- with a crackdown on deductions used by upper-income Swedes to avoid paying taxes. Otherwise, Carlson contended, Bohman's plan only helps the rich.

The Social Democrats also are preparing a "crash program" of curbing government spending, freezing wages and taking other steps that would hold down the Swedes' standard of living for several years while shifting money away from wage earners and the welfare state into investment in industry.

"The problem is serious in Sweden and we need to prepare our people for the long haul," said Olaf Palme, the Social Democratic leader. If the Social Democrats regained control of the government, he claimed in an interview, "we would bve tough on spending. At the least, there would be no increase in private consumption. But at the same time, the industrial economy must grow."

Palme, who served as prime minister from 1970 to 1976, suggested the Social Democrats also could be tougher, with their labor union support, about withdrawing subsidies from failing industries, even if this increased unemployment. Economist Lundgren said Swedish unemployment could be allowed to rise to a postwar record of 4 percent of the labor force. It is currently being kept down near 2 percent by government subsidies and make-work training programs.

"Higher unemployment is not so politically dangerous as once thought," Lundgren said, noting the stable rates of more than 10 percent in Britain and Denmark. "The unemployed are no longer always heads of households or even voters any more."

Labor unions would be kept happy by the Social Democrats with a plan for profit-sharing in big industries that would enable union funds to buy shares in businesses. This would help provide needed new capital but business leaders who strongly oppose this proposal fear it would lead to union control of industry.

The Swedish Social Democrats are not saying just how they would hold down welfare-state spending. The minority Social Democratic government in neighboring Denmark has set a "social income" ceiling of about $20,000 -- which takes in consideration savings, real estate and other assets -- above which better-off families no longer quality for many of the government benefits they had previously enjoyed.

"There were hot debates about this," said Danish Social Affairs Minister Ritt Bjerregaard. She indicated Prime Minister Anker Jorgensen's government now will wait a year to test reaction before trimming the welfare state further. "You cannot solve all of our economic problems with reductions in social welfare programs, Bjerregaard said.

Her counterpart in Sweden, Social Affairs Minister Karin Soeder, has moved even more cautiously. Some charges for public health services have been increased, and housing and food subsidies reduced. Soeder said she is now studying ways to reduce government sickness benefits that pay all Swedes nearly 90 percent of their salary every day they are away from work while ill.

Economists and politicians in Sweden stressed that is still has a strong economic foundation in a number of robust diversified multinational industries. They also denied that the welfare state itself was to blame for Sweden's economic problems, even though its growth may now have to be curtailed.

"More work is done in Sweden and we have more workers as a percentage of our population than anywhere else," Lundgren said in answer to questions about the high rate of absenteeism among Swedish workers and complaints by industrialists that they have become pampered and lazy. "We are still producing new technology and innovations and absorbing advances made elsewhere."

"We face our problems with a very high standard of living," said a senior Swedish economic official, Lars Kalderen, who supervises the government's borrowing. "Technically, no great difficulties stand in the way of making the problems more manageable. It's a matter of adjusting one's expectations.

"We don't want to change course drastically," Kalderin added. "I don't see us as being ready yet for Mrs. Thatcher or Mr. Reagan.