Irita Kise

Movement towards an affordable welfare state?

“...The postwar welfare state carnival is over.”

“...Frontal assaults on the welfare

state carry tremendous electoral risks.”

These two statements try to characterise the developments of welfare state in last twenty years. In most developed capitalist countries which also are rather developed welfare states, governments have been forced to consider some change of their public policies due to economic recession. At the same time they have not been able to make radical steps in dismantling existing welfare system because of fear to face discontent of people. The long history of in some countries very generous welfare benefits has created a generation of people who gave been dependent on those benefits and would consider the shift towards state non-intervention in economics as threatening to their living standard. It gas been argued that “welfare state interventionism has created an irresponsible society by removing choices from individuals and by doing for citizens what they could and should do for themselves”(Boyson, quoted by Sullivan, 1992:146). Undeniably, people can become accustomed to rely on state help. In case of decrease in state provided welfare people may feel insecure. As security is one of the primary needs of human beings, clear opposition to attempts of welfare state dismantling can be expected. Not all governments are ready to risk their popularity in order to improve economy. As Paul Pierson puts it:

“Politicians in democratic systems generally worry first and foremost about getting elected. Helping improve the economy may make that easier, but not if it requires hugely unpopular policies, and not if the economic benefits are likely to appear at some point in the distant (that is, postelection) future.” (Pierson, 1996)

In many cases governments face very serious crises in economy, it was most evident at the end of 1970s and now in 1990s. That gave rise to the statements about welfare state crisis. Economic growth was in some countries negative. As result of interdependence, national economies have become increasingly vulnerable in cases of international economic crises. The faltering of economic growth, coupled with a rise in unemployment, consumer prices and inflation, led to concern about the availability of resources for future social policy and questioning the viability of Keynesian economics. In Sweden in that period public income was insufficient to meet public spending. Tremendous problems occurred also in the private sector: basic industries had to be heavily subsidised by central government in an effort to rescue employment. Inflation became worse each year, and finally went above the OECD-average. The state budget deficit became a major political issue: it had grown from 1 to over 10 per cent of GDP. (Olsson, 1993:222-23) In Britain the impact of the crisis was also sever. Inflation in 1975 was 26 per cent, negative growth in the mid-1970s was repeated in the early 1980s and at the beginning of the 1990s unemployment rates remained at nearly twice the average for the seven major capitalist countries. (Taylor-Gooby, 1991:3)

Poor economic performance resulted in various measures but in most countries public sector was the area which experienced largest cutbacks. The growth of public expenditure was halted. All capitalist countries can be divided into two groups - those who responded to the recession by retrenchment in state spending, and those who strove to maintain the level of provision. The United States and Britain typify the policy of cutting back, whereas Sweden and Austria were able to sustain provision under difficult circumstances because “they had institutional arrangements which incorporated the labour movement into the process of economic decision making.”(Taylor-Gooby, 1991:64) This cutting back the rate of increase in social spending to an annual average of 0.1%, whereas the USA at 2.7% exceeded the OECD average of 2.6% (Taylor-Gooby, 1991:64). Different responses were mainly in general line of welfare development: more market orientation, shift in target groups, etc. Esping-Andersen’s three basic welfare state regimes can serve for identification of these different responses. In the “social democratic” regimes the alliance of left-wing workers’ parties with small farmers dependent on state subsidy generated pressure for state commitment to a full-employment welfare state providing universalistic services. In corporatist regimes conservative forces in central government developed a system of occupationally segregated social insurance welfare to ensure both middle and working class loyalty. In liberal welfare states a basic class alliance was never achieved, with the result that highly selective state welfare is directed at the poor and a dual system of private and occupational services caters for the needs of middle class. (Taylor-Gooby, 1991:4) The fact that governments tried to reform public sector in order to improve economy, indicates that they were blaming high public expenditure and government overload for existing economic problems. This was often quoted sentence in United Kingdom: “Public expenditure is at the heart of Britain’s economic difficulties”. Since social spending constitutes the lion’s share of government expenditure, this approach has stringent implications for the future of the welfare state. It was argued that the provision of high quality public services costed more than the economy could afford. Even an official conference on “the crisis of welfare” in 1980 concluded that: “the first priority seems to be to make clear ... that social policy in many countries creates obstacles to economic growth”. (Quoted by Taylor-Gooby,1991:1)

Jan-Erik Lane also regards the expansion of public sector as the most plausible explanation for “growth problem” in Sweden, although he does not reject the impact other factors like too much investment in the housing sector and too little in growth-generating infrastructure, weak entrepreneurship, too small wage differentials, too little investment in human capital. (Lane, 1995:581) Other authors do not think that large public sector was the reason why economy declined. They put forward such factors as globalization of economics and think that it is impossible to demonstrate that low growth is the result of social policy. However, the question of limits has accompanied the welfare state ever since its beginnings. Authors close to mainstream economic theory, have often argued that there exists a critical threshold, beyond which lies dangerous territory: increased state regulation threatens to destroy the very foundations of the well-being of the welfare state, the efficiency of the economic system, i.e. economic growth potential. The high level of taxation that is necessary to finance public sector is a threat to the smooth functioning of the market mechanisms. Organized interest groups like unions interfere in the free play of the market forces to such an extent that economic efficiency is retarded. This power of special-interest groups hinders overall growth, making the economy unproductive. (Olsson, 1993:247) That is much the case in Sweden where interest group access to decision-making is rather significant. Authors in this tradition have argued that increased incentives for private initiatives and a limitation of state activities would be a solution to the crisis of welfare state.

Paul Pierson argues that retrenchment follows different rules than welfare expansion, because the political goals of policymakers are different and the political context has changed. (Pierson, 1996:144) He claims that no inversion of existing theories of expansion can explain retrenchment. Most popular theories of welfare state growth are those which focus on economic and ideological factors. The first stresses the relationship of welfare state expansion to processes of economic growth. It relies on “logic of industrialism” that national economic and social systems converge. Now, when economic growth is very slow, public sector cannot grow. But here are two problems which do not allow to synchronise those both developments. First, if program is launched it has a tendency to expand. Budgetary process is so complex that there is no possibility to examine each program’s efficiency and control the results. Usually all programs get as much money as last year plus annual growth. Other factors are also expanding social programs and one of the most important is demographic change. Ageing of population expands the number of people who must rely on state welfare provisions. Secondly, welfare benefits create their own interest groups that react strongly if these provisions are limited. It imposes losses on concentrated groups of voters. It is standard proposition that concentrated interests are in stronger political position than diffuse ones. As interests become more concentrated, the prospect that individuals will find it worth their wile to engage in collective action improves. Besides, voters tend to be negatively biased. Their voting behaviour is more strongly linked to negative attitudes. They may have forgotten the good things this government has done for them but if their current position has become worse they will more likely vote for some other party. In many countries almost one half of the electorate receives transfer or work income from the welfare state. The only possibility to avoid loss defeat in elections is to “lower the visibility of reforms, either by making the effects of policies more difficult to detect or by making it hard for voters to trace responsibility for these effects back to particular policymakers.” (Pierson, 1996:147) That was the case of Sweden where government introduced new indirect taxes. It also gradually transferred all responsibility for social services to local authorities. The same constraints to policy of welfare cutbacks work in case of ideological factor. Strong unions and left parties contribute to the growth of welfare programs. The power of left parties really has diminished in last years but it has not had crucial effect on social programs. Moderate cutbacks due to many constraints could not be associated with party in power, both left and right parties had to follow the same development of policy. However, two examples have been provided for two different causes of retrenchment policy - Great Britain and Sweden. If in Britain the party in power was right-oriented, in Sweden the cutbacks in social programs were made under social democratic government. Many authors emphasize that if in Sweden it can be explained by solely economic reasons, in Great Britain also ideological factor plays great role. (Pierson, 1996; Senker,1989; Marsh, 1995)

The period when changes were made in British public sector is associated with new conservatives and Mrs Thatcher as Prime Minister. It is quite understandable that conservatives were worried about the kind of society which was now forming - with changed values. In these changes conservatives blamed welfare state. This is how conservatives characterized impact of welfare state on society:

“The provision of health care, free at the point of use, encouraged demand that outstripped supply and caused a decline in medical standards; unemployment insurance schemes had encouraged absenteeism and work-shy behaviour; unified secondary education had led to a decline in standards by providing academic education for more children than can reasonably benefit from it; and all, by virtue of their financing out of taxation, had led to an unwarranted curtailment of individuals freedom to make decisions about their own lives and financial resources.” (Sullivan, 1992:146) This new conservative movement became known as the New Right.

Privatization is well-known theme of the New Right. The public sector is indicated as the root of most social evils in affluent but crisis ridden societies. It is too big and ungovernable, overburdened with obligations, responsibilities and expectations. Supposedly a problem solver, it is now creating more problems than it solves. The strategy of privatization implies the deregulation and commercialization of previously publicly provided goods, services and transfers, all of which should be switched from bureaucratic agencies to competitive private enterprises. According to this view, such a turn will promote a revival of work ethic and a resurgence of traditional values. Such prescriptions to roll back public expenditure were not made simply on economic grounds. Peter Senker argues that government policy was directed more by ideology and political expediency than by considerations of economic efficiency, and policies lacked coherence.(Senker, 1989:180) Certainly, selling public assets was politically much easier, and more popular, than cutting public expenditure. Two-party system enabled Conservative party to win four consecutive elections and carry out some reforms, of which the most successful was the privatization of public council housing. The sale of circa 1.5 million homes to tenants laid the foundation for major expansion of home ownership and sharp cutbacks in subsidies for those who remained in the public sector. (Pierson, 1996:161) The governments pension reforms were also relatively successful. Private pensions were gradually expanded but public sector benefits reduced. Government’s use of incremental and seemingly technical reforms limited the emergence of opposition. Opposition could be rather strong because tests of opinion while showing support for cuts in income maintenance benefits, showed little support for tearing at the fabric of the welfare state. The fact that Conservatives avoided mentioning the radical reforms in their manifesto shows that the party was aware of unpopularity of such reforms. It also questions the right of Thatcher government to initiate the reforms if it did not possess any mandate for the dismantling of the welfare state. Only in area of housing in the manifesto appeared evidence of an anti-welfarist ideology. The electoral success in four succeeding elections, however, showed that Conservative government was successful in presenting and implementing radical reforms, transforming in many cases blame avoidance in clear credit claiming. Quite different course of welfare politics was followed in Sweden.

Between 1976 and 1982 and between 1991 and 1994 Sweden was governed by a bourgeois coalition. Conditions thus might have seemed uniquely favourable to a complete overhaul of social policy. What is striking is that even under these extraordinary circumstances there was no sign that the welfare state would be radically restructured. Instead, governments operated within the structure of existing programs and made relatively small adjustments, for example, an expansion of waiting days for unemployment and sickness benefits, a lowering of replacement rates for unemployment benefits (from 90% to 80%), a freeze on adjustments in child allowances, and a raise in the retirement age. (Pierson, 1996:172) Although bourgeois governments had to coupe with economic crisis and budget deficit 10%, they refused to increase taxes. Instead, from mid-1980, all major state agencies were subject to an annual 2% cut in outlays after compensation for inflation. Towards the end of 1980, the government presented its first clear-cut austerity bill: Savings in state activities. Out of central government budget of 200 billion SEK, 6 should be cut. These arrangements, affecting the general income earner, were “compensated” for by efforts to limit the upper echelons’ possibilities of tax evasion and speculative housing profits. The government announced its adherence to the traditional redistributive policy, but saw the public sector as being too big and an obstacle to industrial growth. Changes in sickness benefits approved by Parliament in 1982 brought back Social Democrats in power. The withdrawal of the new law became one of the specific election promises by the Social democrats in addition to increased unemployment benefits, continued central transfers to municipalities engaged in building child day-care centres, and, full value guarantee of pensions. (Olsson, 1993:224) Social democrats went in elections under slogan of consolidation of welfare state achievements. Conservative party with neo-liberal proposals of reducement of income tax, cuts in sickness insurance, etc., could not win majority in 1985 election. Its anti-tax campaign did not attract much attention as it was in Norway and Denmark in 1973 where anti-tax , anti-system parties got popularity in very short time. However, the Swedish economy seemed to be in deep crisis. Unemployment rose from 3% in 1989 to over 12% in 1993. Sweden’s generous and expensive social benefits led to immediate fiscal trouble when rising unemployment produced falling revenues and higher outlays. Government outlays reached the extraordinary level of 73% of GDP in 1993. Social democrats had to take also extraordinary measures to improve situation. Tax reform of 1988-89 was jointly worked out with the Liberal party. Indirect taxes were introduced. Trade Union confederation maintained that 2 million low-income employees would be losers when value-added tax was extended and taxes were increased on housing and petrol. Increased selective, income-tested housing allowances for pensioners failed to quieten the trade union protest, mainly because such measures were regarded as a threat to the universal welfare model. (Olsson, 1993:355) Sweden also declared that it would apply for EC membership. Social democratic party emphasized European integration as a solution to the financial problems of the welfare state. Experts have proved quite the opposite.

In 1991 new center-right coalition government was formed. However, the main decisions about welfare state were made in consultations with Social democrats. Public opinion was in support of social spending. In 1994 election Social democratic party won on a platform that stressed its intention to reduce the deficit largely through tax increases rather than budget cuts. Nevertheless, the economic situation did not improve. Now Social Democratic government plans cuts in welfare level to help to balance the budget. This year’s 1 May slogan for opposition parties was “Employment instead of welfare payments”.

In whole Europe there can be observed a decline of social democratic parties, but it does not mean that also the voice which advocates welfare state has become weaker. Interest groups which benefit from the welfare state become more organized. One example is the Netherlands where the General Association of Elderly People got 3.6% of the votes in general election in 1994. The party was formed as a reaction to cuts in social spending (a shared responsibility of Christian Democrats and Labour party). Christian democrats made things worse by discussing another reduction of social security not long before election. As a result it lost many votes in election. (EJPR, 1995)

It is clear that no reform can be successful without support of population. Limiting public spending seems to be very sensitive issue because so many people become affected. No government would risk its position unless it can guarantee that reforms will be supported or at least their results will not be visible. Only very bad economic situation makes reforms inevitable and more attractive in eyes of electorate.

Literature:

European Journal of Political Research (1995) Annual report, vol.28, Nos.3/4

Lane, Jan-Erik (1995) “The Decline of Swedish Model” from Governance, vol.8, No.4, pp. 579-90

Olsson, Sven (1993) “Social Policy and Welfare State in Sweden”, Lund Arkiv

Pierson, Paul (1996) “The New Politics of the Welfare State” from World Politics vol.48, pp.143-79

Senker, Peter (1989) “The Years of Thatcherism: Triumph of Ideology Over Economics”, The Political Quarterly, vol.60

Sullivan, Michael (1992) “The Politics of Social Policy”, Harvester Wheatsheaf

Taylor-Gooby, Peter (1991) “Social Change, Social Welfare, Social Science”, Harvester Wheatsheaf