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Budget Discipline and Welfare Services

Targeting Welfare Services1

A first glance at levels of deficit and deficit reduction (see Table 6.1) shows an interesting picture of differentiated situations across the EU. In a first group, we find countries which strongly reduced their deficit from four to eight points between 2009 and 2013,[1] [2] either because they were under the constraint of financial assistance programmes of the EU and the IMF (Latvia, Ireland, Romania, Portugal, Spain), or out of self-motivated policy programmes (Lithuania, Slovakia, the UK, the Czech Republic, Austria). Ireland, for example, which received a bail out of €85 billion from 2001 to 2013, experienced a succession of eight austerity budgets between 2009 and 2014 which have amounted to €28 billion (i.e. 17 % of GDP) in spending cuts and tax rises.[3] As early as 2009, the UK, which has been fully independent from financial support and is not a member of the Eurozone, set the target of saving ?9 billion a year for a total of ?35

Table 6.1 Deficit reduction (in the unit of measure is % of GDP) between 2009 and 2013

Deficit in 2009

Deficit in 2013

Deficit reduction

Latvia

90

07

83

Ireland

139

58

81

Romania

89

22

67

Lithuania

91

26

65

Slovakia

79

26

53

United Kingdom

108

57

51

Portugal

98

48

50

Czech Republic

55

12

43

Spain

110

68

42

Austria

53

13

40

Bulgaria

42

09

33

Poland

73

40

33

Netherlands

55

23

32

France

72

41

31

Germany

30

-01

31

Belgium

55

29

26

Italy

53

29

24

Hungary

46

25

21

Estonia

22

02

20

Denmark

28

11

17

Luxembourg

05

-09

14

Malta

33

26

07

Cyprus

55

49

06

Croatia

58

54

04

Finland

25

25

00

Sweden

07

14

-07

Slovenia

59

1 49

-90

EU 28

NL

32

Greece

NL

123

Source: Eurostat

billion by 2014 through wide-reaching measures. These included: selling government buildings and the privatization of state-owned enterprises such as the Royal Mail; contracting out some welfare services; taking ‘efficiency measures’ in health, education, transportation, local government; privatizing jails and restraining salary increases to public sector workers; cutting 10,000 jobs in local authorities in 2010; cutting 350,000 jobs in the central public sector between 2010 and 2014 (Baskoy, p. 15).

Starting with a very low level of deficit, Germany belongs to a middle group of countries which have followed, although less drastically, the same policy direction by reducing their deficit between 2 and 3.5 points. In June 2010, the German government adopted the largest austerity plan of the post-war period. The so-called package for the future (Zukunftspaket) foresaw cuts amounting to €80 billion—that is, 0.8 % of GDP—by 2014. The plan included job cuts in the public sector, and the controversial suppression of some long-term unemployment benefits and subsidies to families. In contrast, France delayed action until the November 2011 where the government under Nicolas Sarkozy adopted the first austerity plan aimed at saving €65 billion by 2016. The plan mainly foresaw a tax increase, but also attempted to contain healthcare and pension- related costs, and implement cuts in aid to families. Meanwhile, France has adopted two further austerity plans since the election of the socialist Francois Hollande in 2012. In April 2014, the austerity plan put forward by Prime Minister Valls foresaw cuts amounting to €50 billion: €18 and 11 billion will be respectively cut from the central government’s and local authorities’ expenses, €10 billion from the budget of national healthcare insurance, and €10 billion from further social expenses.[4] Finally, a last group of EU Member States displays very low deficit reduction, either because their deficit was already very low in 2009 or because effort was limited, with Sweden and Slovenia even increasing their deficit over the period.

Figure 6.1 below shows the extent to which EU countries have reduced their expenditure for welfare services between 2009 and 2014. Whereas a first group of East European and Baltic countries (plus Ireland) implemented drastic cuts, Scandinavia and continental Europe still spend the most on welfare services. While having reduced their expenses to a relatively significant extent, Poland, Germany and the UK remain at a middle level of expenditure in the EU landscape.

Reviewing fiscal consolidation measures in 13 EU Member States[5] between 2008 and 2012, researchers found that the overwhelming majority of them had implemented measures such as freezing hiring and pay, reducing wage and staff in the public sector, as well as proceeding to

Spending on public services (in % of GDP) in the EU [The following categories have been included

Figure 6.1 Spending on public services (in % of GDP) in the EU [The following categories have been included: communication, waste management, waste water management, housing and community amenities, housing development, water supply, health, medical equipment, outpatient services, hospital services, health services, recreation, culture and religion, cultural services, broadcasting and publishing services, education, secondary education, post-secondary non-tertiary education, tertiary education, education not definable by level, social protection, old age, family and children, housing, unemployment, social exclusion. The data includes social benefits (but excludes pensions) because it is very difficult to disentangle benefits in cash transfers from benefits in the form of services. Moreover, no data is available on the expenditure on social benefits for 2013. Yet, we know that, due to rising numbers within the population, transfers related to unemployment or healthcare have been difficult to contain. The data for 2012 shows that their share of GDP has indeed continued to grow in most countries (except in the Baltic and some Central or Eastern European states). We can, therefore, assume that public services as such have been strongly hit when total expenditure has decreased.].

Source: Eurostat

make cuts in health, education, social and welfare services and infrastructure (Kickert et al. 2013, p. 19). Different governments have targeted different sectors. While, for example, cuts in the public administration have been particularly important in Lithuania and Estonia, cuts in healthcare have the focus in Belgium and Spain. In Ireland ‘the total volume of cuts in health services outweighs all other spending cuts (...) and the largest proportion of cuts affected cultural and arts policies, which were cut by 65%’ (ibid., p. 22). In 2012, Lehndorff and his colleagues describe cuts in Italy, Spain and Hungary, Austria and Germany as ‘severe’, and speak of a ‘great shock’ in the UK and a full-scale ‘recommodification’ of welfare services in Ireland. They note:

In Germany, to select the alleged role model, the deficiencies of public investment in education and other crucial social services are striking, given that this country has no other ‘raw materials’ than the skills of the people living in it. (Lehndorff 2012, p. 21)

By combining data from Table 6.1 and Fig. 6.1, it is possible to compare the extent of cuts in welfare services and that of deficit reduction as accounted for by Fig. 6.2. This gives an idea of the politics of austerity, that is to how different governments have prioritized the sustainability of quality welfare services or, on the contrary, targeted them compared to cuts in other sectors of public expenditure (e.g. defence) or increase of state revenue through tax.

Germany has, for example, cut its deficit and spending in public services in relatively balanced proportion, while Belgium, Croatia, Cyprus, France, Portugal and Slovenia have reduced their deficit but not their level of spending for public services. At the other end of the spectrum, the decrease in spending for public services has been ove proportionate in relation with deficit reduction in Estonia, Lithuania, Luxembourg and the UK. Bulgaria and Finland have known an increase of both their deficit and spending for public services. Comparing, for example, policy responses to the crisis in Belgium and the UK, it seems that traditional policy trajectories (or varieties of capitalism) adopted in different countries matter more than institutional constraints stemming from the EU (or Eurozone) governance. On the side of the most

Reduction of public deficit and reduction of spending in public services (in % of GDP) from 2009 to 2014

Figure 6.2 Reduction of public deficit and reduction of spending in public services (in % of GDP) from 2009 to 2014.

Source: Eurostat

affected countries, this argument is supported by a comparison between the Baltic countries and Ireland, where welfare services have been very much affected, on the one hand, and Portugal, Italy or Spain, where they have been to a much lesser extent affected, on the other. Hence, even in a context of strong pressure to abide by fiscal discipline, governments retain a room for manoeuvre which they have, de facto, used in order to undermine or safeguard the level of financial and human resources dedicated to welfare services.

  • [1] Surprisingly, it is not easy to find systematic comparative analyses on the impact of fiscal disciplineon welfare services. A main reason is that welfare services do not constitute a category as such.When looking at raw data on public expenditure and government deficit, it is very difficult to disentangle social policy in the form of services from benefits in the form of transfers (social security,unemployment benefits, help to families, housing, etc.). Most scholars who have assessed the impactof the crisis on welfare states have focused on what is more traditionally understood as ‘structuralreform’ standing for a significant share of government expenditure, namely labour market reformsand pension reform. For example, looking at 11 EU countries, Hermann (2014) finds that allof them have, in one way or another, cut the level, duration or access of unemployment benefits,decreased pensions, liberalized labour markets and changed the rules of collective bargaining.Finally, it should be underlined that Eurostat data is systematically expressed in percentageof GDP. Therefore, in some countries, data does not show a significant decrease in public spendingin welfare services sectors (except in the most indebted countries such as Greece or Ireland), but onemust keep in mind that in most countries, the GDP dropped strongly in 2009—2010, and after thatit has stagnated in most countries. This means that, even if in terms of GDP, financial supportfor welfare services did not decrease significantly, it has actually decreased or stagnated in real termsin a period where needs among the population have increased, thus bringing about a deteriorationof the situation on the ground. In addition to raw data, this section uses more focused analysesof the data provided in reports elaborated by political institutions such as EU Commissionand the OECD, or assessments by specialists of social policy.
  • [2] 2009 was taken as a reference for the first year following the financial crisis of 2008. Yet, mostausterity measures and their impact have only been visible later in the following years. 2013 is thelast year for which Eurostat data is available for all EU Member States.
  • [3] ‘The eighth austerity budget’, The Economist., 13 October 2013.
  • [4] ‘Valls : l’effort de 50 milliards n’est ‘pas un plan d’austerite’, Liberation, 16 April 2014.
  • [5] Belgium, Estonia, France, Germany, Hungary, Ireland, Italy, Lithuania, the Netherlands, Slovenia,Spain and the UK.
 
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