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12 July 2017
Can the Welfare State survive?

One of the paradoxes of contemporary politics is that the richer societies become the less willing many of them are to fund their welfare states. The creation of the welfare state has long been hailed as one of the most significant achievements of the last hundred years. Building a strong welfare state has been taken as a sign of success and political and economic maturity, the most visible expression of the reconciliation of democracy and capitalism. Yet for the last four decades, since the stagflation crisis of the 1970s, the welfare state has been subjected to unrelenting pressures to reform and cut costs. It has suffered from perpetualausterity and underfunding, amidst anxieties over the financial burden of ever increasing entitlements, and the quality of services. This has produced continual restructuring of public services in the search for efficiencies.

Do we still need welfare states? Or do they belong with socialism, trade unions,collectivism and planning to an earlier era? The dominant neo-liberal discourse of the last forty years argues that individuals should be free to make the irown choices about the services they use and to pay for the quality they want.The state should not interfere in these choices or tell individuals what they should do. It has no more need to be providing welfare (whether health,education, pensions, social security) than it has to be providing steel. However much the welfare state may have been justified in the past it is no longer needed in today’s economy, except as a safety net for the very poorest.More extended forms of the welfare state have become positively harmful, a major drag upon prosperity and growth because they are inherently wasteful and inefficient and require high levels of taxation to fund them. In this way welfare states are portrayed as the last bastion of command economies inwestern societies, characterised by misallocation of resources, a lack of market disciplines and no budget constraints. The welfare state is depicted asa giant parasite, sucking the life out of the private sector, with its insatiable appetite for additional resources. It has long retreated from the original insurance principle, and instead is now funded from general taxation.A ratchet has developed with ever increasing costs, demands, and entitlements leading to ever increasing demands for higher funding from claimants and public service employees who push their special interests. In the eyes of its critics there is no end in sight. It is leading to fiscal crisis and the collapse of the public finances.

Arguments like these have been made for forty years, and yet welfare states continue to exist.But since the financial crash of 2008 pressures have intensified. The weak recovery from the recession and poor growth prospects have triggered fiscal adjustments marked by a strong emphasis on austerity and the cutting of public spending. Welfare states have been squeezed, and in some countries,particularly the US and the UK, radical plans to reduce permanently the size of the state have been discussed. Yet despite this the position of the welfare state is stronger than it sometimes appears. There is still a broad coalition of support for welfare services which are universal and free at the point of use. It also remains true that capitalism needs the welfare state as much as the welfare state needs capitalism. There is a mutual dependence. The imagery of parasitism and dependency which the critics of welfare states often deploy is seriously misleading, and fails to reflect the historical complexity of actual welfare states, which came about originally as projects of the right rather than the left. The right advocated welfare programmes both as a means to incorporate and pacify organised labour, and as a means to moderate extremes of inequality and achieve a healthier, better educated workforce. The new collectivism of the early decades of the twentieth century in which both right and left shared,promoted nation building and common citizenship. Welfare states became one of the defining characteristics of national communities, and an important source of democratic legitimacy and fairness. By the 1950s the consensus of CentreLeft and Centre Right across the western democracies was that the secret of stable and prosperous democratic capitalism had been discovered, and a significant part of it was the establishment of a welfare state founded on universal programmes of social security, health, education and housing, and funded through much higher levels of taxation, allowing redistribution between classes and between individuals at different stages of the life cycle.

This proved temporary. During the long stagflation crisis of the 1970s the welfare state became a major target of attack, and the internal politics of states produced a range of responses. There was a growing divergence in welfare states, famously analysed by Esping Anderson as the three worlds of welfare capitalism. The greatest contrast was between the Scandinavian extended welfare states which maintained generous provision funded by high levels of taxes, a decommodifiedsphere protected from the free play of market forces, and the Anglo-American residual welfare states, which put the emphasis on various kind of conditional income support, and sought to subject the welfare state to market forces through privatization and marketisation. But even in the residual welfare states there were still programmes to combat in security arising in the life cycle or the labour market and important universal programmes like the British National Health Service. The political resistance to welfare retrenchment was marked, which limited the success of radical right governments in rolling back the state. What did occur almost everywhere was significant reshaping of welfare states through the introduction of the techniques associated with the new public management – quasi-markets,targets, and the audit culture. There were also signs in some countries of along term erosion of support for the welfare state, particularly fornon-universal benefits such as social security. In the post-crash era old stigmas and binary distinctions have been revived – shirkers and strivers,makers and takers, benefit cheats, the deserving and the undeserving poor.

Whether welfare states can survive depends on how governments respond to four interrelated challenges- affordability, competitiveness, new social risks, and demography.The challenge of affordability arises from the gulf between what people will pay in taxes and the services they expect. In many welfare states voters want only to pay US taxes but enjoy Swedish public services. There has been a marked growth in tax resistance with governments increasingly ruling out increasing many taxes, particularly income taxes. When this is combined with the growth of tax avoidance and tax evasion by individuals and companies the result is a tax base that is too low for the demands placed upon it. In the Anglo-American democracies and in some EastEuropean countries there is support for the idea of eliminating progressivityin taxation, abolishing inheritance taxes and introducing flat taxes. This trend towards reducing or at least freezing levels of taxation comes up against the rising tide of expectations about citizen entitlements, and rising costs in the public sector. The attraction of open-ended universal benefits to citizens makes politicians eager to promise more of them. Once granted they are hard to claw back, and their cost can soar, for example as the result of the introduction of new health treatments or the maintenance of the value of pensions.

The challenge of competitiveness arises from the impact of a more interdependent international economy, the weakening of organized labour, and an end to full employment. This has bred anxieties about a race to the bottom in relation to labour standards and welfare standards.Capital and labour have both become more mobile, and a key part of the financialised model of economic growth, which has been promoted around the world, has been the encouragement of immigration. Economic migrants, bothlow-skilled and highly skilled, are very attractive to employers, both because they may possess skills which are not available in the home population, or because they are prepared to work for pay and conditions considerably below the expectations of home workers. Large flows of migrants are seen by many citizens of national communities as making demands on schools, housing, and health services which reduce access to these services. Welfare states are inherently national, reflecting the priorities and values of national communities defined territorially and culturally. Capital on the other hand is increasingly transnational, and seeks to avoid the costs of national welfare states.Taxation of companies to pay for national welfare states, and restriction on the ability of companies to employ whom they choose, increases their costs and makes them more ready to outsource key parts of their production chain to jurisdictions with lower costs. This creates pressures on governments to make their economies as welcoming as possible to inward investment and to keeping down business costs. Governments come to see their main role as accommodating the preferences of international companies, and seek to strip out whatever costs and regulations get in the way of doing that. One consequence is that national governments cease to protect domestic employment and living standards as a leading priority. From this perspective the higher wages and standard of living, of which an important component is welfare, are privileges underpinned by the extraction of economic rents. The austerity programmes introduced since the crash aim to strip out various kinds of costs and make the economy competitive again. One of the most important of these costs is welfare, and this has become a major focus. Living standards have been static or declining for the majority of working people fora period which goes back before the crash to the early 2000s.

The challenge of new social risks arises from the new patterns of work and households which have grown up in recent decades. The underlying structural shift is from manufacturing to services and accompanying this has been the financialisation of economic activity and everyday life. The new market societies are peopled by autonomous financial agents who are expected to take on ever higher levels of debt (education/housing/pensions) to navigate the life cycle. The participation rate of women in the work force has risen, so too have the number of single parents and workless households. Much attention has been focused on the rise of the low paid, insecure jobs in the service sector, and the increasing dependence of the elderly on social care. Amore individualistic society and political culture has emerged as a result of the weakening of many of the institutions which in the past nurtured solidarity– trade unions, churches, extended families, large factories and working class communities. There is some evidence that this is associated with the hardening of attitudes to the poor and a weakening of support for redistribution. To the extent that such trends exist in national societies, it weakens support for a universalistic, redistributive welfare state.

The challenge of demography arises from the trendsto ageing societies as a result of decreasing mortality and increasing life expectancy. These are outcomes which reflect in part the success of welfare states over the last sixty years in reducing insecurity and promoting well-being. They increase the costs of the welfare state, because the elderly are heavier users of some of its key services. Older people tend to vote in much larger numbers than younger people, so politicians have as a result offered increased benefits to pensioners, and this has led to concerns that there is a disproportionate redistribution of resources from the young to the old. The reduction in the number working and paying taxes as a proportion of the total population exacerbates the problem. At the same time Governments do not generally seek to fund the increased services and benefits for the old by raising taxes on the young, although that has happened in some instances. What tends to be cut are the services and benefits which the young currently enjoy.Solutions to this growing imbalance and generational inequity include pushing back the retirement age, raising the birth rate, and increasing immigration.All have been tried but all meet significant political resistance.

The welfare state can survive but its survival is not guaranteed or inevitable. The moraland political challenge is how to renew the social contract which lies at the heart of the welfare state. This means unavoidably making a case for higher taxes to fund it. The alternative is its gradual residualisation. Without a sense of community and solidarity the welfare state will not survive and the re will be a continuing growth in inequality and social fragmentation. But the question can also be turned round. Can capitalism and can democracy survive without the welfare state? The historical importance of the welfare state in the development of capitalism is that it created a sphere which was not commodified, in which social rights were given precedence over market performance. This decommodified sphere is under attack, and needs protection.Some battles are being won. Obamacare in the United States, limited reform a sit is, embeds new entitlements and brings into play new interests to defend them politically. There are also many new directions in debates on public policy which can strengthen the institutions of the welfare state and citizens commitment to them. What is required is a new vision of democratic citizenship,utilising new thinking on full employment, basic income and capital grants. The aim must be a welfare state which not only helps individuals to adapt to circumstances and opportunities but which actively shapes those circumstances and opportunities. This means developing the political will to regulate labour markets, financial markets, housing markets, and reform corporate governance.Not every individual benefits equally at every point in the life cycle from the programmes and services of the welfare state. But all benefit from living in a society where every individual enjoys a basic security and opportunity to live a full life.

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