The welfare state essentially comprises such provisions as pensions, unemployment benefit and services including healthcare, education, care for dependent people and other social services. There is a broad consensus that a well-established welfare state helps to reduce imbalances and foster equal opportunities.
A number of considerations may be applied to an evaluation of the sustainability of today’s welfare state. To begin with, over the years the demand for the resources required to finance the welfare state has increased. There are various reasons for this, including above all the rise in unemployment and poverty, along with medical advances which increase the costs of the health system and lengthen the life expectancy of the population, thereby increasing the number of pensioners. In Spain, for example, there are fewer than 17 million workers for a population 47 million.
Secondly, the economic crisis has reduced the tax take, and consequently increased public debt and deficit. In order to improve public finances, substantial cuts have been made, and these are affecting all public services. In the Netherlands, the government has declared that the welfare state as we have known it to date is over. Nor can Europe easily compete on cost with the rest of the world, when it accounts for 70% of global welfare state expenditure.
A third point is the high level of fraud. Spain has posted record figures for the shadow economy, which accounts for some 25% of GDP, leading to the loss of 80 billion euros of tax revenue every year. There is also, though, fraud on the expenditure side. The Employment Inspectorate, for example, finds that a third of those claiming unemployment benefit are working illegally. If these forms of fraud were effectively eliminated, there would be no need for cutbacks.
A fourth aspect is that social expenditure generates a highly positive impact on the economy. For example, according to KPMG 1 euro invested in special employment creation centres generates a return for society of 1.44 euros.
A fifth consideration is the need to improve efficiency in public management. There have recently been cuts in the public sector, but there has been no major reform with a view to achieving more with less. A new form of public management based on efficacy, efficiency and transparency is vital in this regard. Public-private partnership could assist greatly in achieving these objectives.
In conclusion, the welfare state with which we have been familiar is in jeopardy, and can be maintained only with an improvement in revenue, a reduction in fraud and increased efficiency in expenditure.
Professor of Economy and Financial Programmes, Barcelona School of Management