VIEWPOINT: AUSTERITY THREATENS THE FINANCIAL SUSTAINABILITY OF EUROPEAN WELFARE REGIMES

VIEWPOINT: AUSTERITY THREATENS THE FINANCIAL SUSTAINABILITY OF EUROPEAN WELFARE REGIMES

Daniel Edmiston (University of Leeds)

 

Austerity has captured the political imagination of Europe and is being used to challenge the capacity and function of the Welfare State. In response to the financial crisis of 2007-2008, European governments have drawn upon notions of ‘fairness’, ‘need’ and ‘sustainability’ to justify austerity measures. Contrary to dominant political and policy rationales, welfare reforms across Europe have failed to meet policy objectives and principles. Austerity has resulted in a neo-liberal paradigm that has embedded libertarian concerns for social justice in welfare governance and financing. However, austerity measures taken since the ‘Great Recession’ have not only compromised the ethical coherence and function of European welfare regimes – perversely, they have also jeopardised their financial sustainability.

In this post, I consider three supposedly divergent welfare regimes: Italy, Sweden and the UK. Not only do these countries differ in terms of their social spending and fiscal balance, they also typify radically different welfare typologies: Familial, Social Democratic and Liberal, respectively. In spite of this, an ‘austerity consensus’ (1) has emerged across them with political administrations citing welfare profligacy as a key cause of public debt.

Analysis suggests that a collapse in tax revenues and increased financial sector support have driven up the debt-to-GDP ratio across OECD countries. Nevertheless, all three countries have implemented a series of fiscal consolidation measures. Between 2007 and 2012, government net debt as a proportion of GDP increased substantially in Italy and more than doubled in the UK. During the same period, the budget surplus of Sweden actually increased but is set to decline over the coming years.

Whilst there have been some attempts to generate tax revenue, political administrations have tended to focus on cuts to public social expenditure and, at times, tax cuts to ‘kick start’ the economy. A recent study found that austerity has stifled the European economic recovery; limiting tax revenues and compromising the desired restoration of fiscal balance. Indeed, the UK Office for Budget Responsibility has said that: ‘on current policy we would expect the budget deficit to widen sufficiently over the long term to put public sector net debt on a continuously rising trajectory as a share of national income’.

How, then, can this paradox be squared? Political administrations have affirmed their desire to reduce public expenditure but have hindered the economic recovery and failed to sustainably reduce public expenditure over the long term. Political leaders across all three countries have justified tax-benefit austerity with assurances that constrained resources will be prioritised so that ‘money goes to the people that need it most’. However, all three countries have failed to implement such a policy.

In the early 1990s, Sweden managed to protect the incomes of those at the bottom of the income distribution during their economic crisis. However with the more recent economic downturn, tax-benefit austerity measures have seen the poor get poorer and the rich get richer. After taxes and transfers, the poverty rate has increased substantially following the financial crisis. Despite proclamations of ‘supporting the needy’, policy responses have not followed through on political rhetoric.

A recent study suggests that fiscal consolidation measures have been more progressive in Italy and the UK. However, this study only models policy instruments implemented between 2009 and 2012. A reduced top rate of income tax is likely to have reversed the progressive effects witnessed in the UK and measures inclusive of those proposed up until 2015 show fiscal consolidation measures to be highly regressive. According to analysis released from the UK Treasury, those in the middle of the income distribution will be net beneficiaries of direct taxation measures in the UK. In addition, those at the top of the income distribution are set to lose little more than those at the bottom. Similarly, current and forthcoming cuts to public social expenditure in Italy are likely to counter the progressive effects witnessed up until 2012. In Italy, the real-term incomes of those at the bottom of the income distribution are to be reduced rather than protected and the cuts are understood to be discernibly regressive.

These findings are well-reported and as a result, many have contested the idea that ‘we are all it together’. However, the most troubling development is that austerity has not only failed to protect those most vulnerable to poverty and social exclusion, but that it has concomitantly failed to follow through with the idea that ‘those with the broadest shoulders should bear the greatest load’. Those most able to weather a real reduction in income have been sheltered from cost-saving and fiscal accumulation measures. Not only then are European governments failing to distribute finite resources according to a logic of need, they are also failing to implement austerity in the interests of fiscal balance.

These tax-benefit austerity measures are partly explained by a reluctance to intervene in market processes. Reduced corporations tax and poor tax regulations are narrowing tax bases across all three countries. Concomitantly, reduced collective bargaining power and an increasing dependence on tax credits have weakened pre-distribution mechanisms. As a result, many European states are faced with an ever growing financial commitment to the working poor by subsidising low-paying larger employers that can afford to pay a Living Wage. Meanwhile, the State forgoes tax revenue to attract and ensure a competitive market-based economy.

There are of course limitations to domestic strategies in combatting the downward pressure on wages and corporation tax in the global economic order, but global governance responses to such challenges have been largely slow and ineffectual. However, it is wrong to attribute this either to the impact of globalisation… or to the wage premium supposedly available to skilled workers. In other words, there is ample scope for domestic policy choice and good grounds for optimism that progress can be made.

European states appear to have intervened in market processes in a way that places an increased financial burden on public resources. Without effective pre-distribution and fiscal accumulation measures, the State is compelled to compensate for rising inequality and wage stagnation with fewer resources at its disposal. Tax-benefit austerity measures are demonstrative of the political pragmatism embraced by European leaders. By obscuring the structural determinants of public debt and targeting resources where they are most politically effectual, European states have been able to mask the economic grievances of median voters. The regressive distribution of scarce resources mollifies those most able to affect political change and protects the austerity mandate.

Austerity has stimulated both interest and concern in the sustainability of welfare states and this opens up the opportunity to re-imagine the purpose and potential of welfare on terms compelling to both libertarian and egalitarian thinking. Thus far, across many welfare regimes, policy responses have failed to do so. With this in mind, it is important to recognise that there is a crucial difference between the political and economic scarcity of resources for welfare. Without political recognition of the structural determinants of inequality, poverty and public debt, austerity is likely to jeopardise rather than protect the financial sustainability of European welfare regimes.

Note:
(1) Farnsworth, K. & Irving, Z. (2012) Varieties of crisis, varieties of austerity: social policy in challenging times, Journal of Poverty and Social Justice, 20(2), pp. 133-147.

 

Daniel Edmiston is a doctoral researcher in the School of Sociology and Social Policy at the University of Leeds. This article summarises findings from research accessible here.

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