The relentless rise in the cost of social welfare

WITH less than two months before Budget 2017 we have once again arrived at the time of year when tax and spend issues come to the fore.

This week these pages consider the largest single public spending item: social spending — benefit payments and the range of services the State provides to citizens.

Before looking at Irish trends, let’s consider the broader international picture on how the welfare state is evolving.

Contrary to what is often stated, social spending has been expanding almost continuously across the world over many decades. When the effects of inflation are stripped out, public social expenditure per person in the OECD countries has almost doubled over 30 years, as the first chart illustrates.

Every OECD country has spent significantly more on social spending in real terms since the 1980s. All but one OECD country has increased social spending as a share of GDP. The Netherlands is the exception, where it has been high (at 25pc of GDP) and stable.

This is powerful evidence that there has been no ‘race to the bottom’ in social transfers as a result of competition in a more globalised world. This evidence suggests that whatever downward pressure competition and globalisation put on spending, they are more than offset by domestic political demands for an expanded social safety net and ever more publicly provided services.

Even more powerful evidence against the race to the bottom thesis comes from poorer countries that have been growing fast or have achieved high income status in recent decades. Mexico and Turkey fall into the former category; South Korea into the latter.

All three countries have seen very rapid increases in social spending over the past quarter of a century and more, both in real cash terms and as a percentage of their (fast-growing) GDP. This suggests that when countries develop, they expand welfare provision towards the levels of their richer peers. They don’t drag the more developed countries down to an imaginary bottom.

If globalisation has not caused the pruning back of entitlements and free services, neither has the efforts of those who believe that welfarism has gone too far. Back in the 1980s Ronald Reagan claimed that America’s greatest problem was an overweening state. Along with Margaret Thatcher, he believed that the unprecedented increase in the size of the state in the years after the Second World War had been counterproductive in its outcomes and damaging to individual liberty. Reagan and Thatcher wanted to reverse the trends of the previous three decades and roll back the state. They failed. Nowhere did they fail more obviously than in containing the size of the welfare state.

In the current decade, social spending in the US has averaged around 19pc of GDP. That is half as much again as it was in the 1980s. In Britain the figure has been 23pc of GDP in the current decade. While it has not grown by as much as in the US it is also well up on the 1980s.

In both countries, as is the case in many other developed countries, there is a ratchet effect in social spending: it rises considerably with each recession, but does not fall back to pre-recessionary levels once growth has resumed.

Turning more specifically to Ireland, over the past few decades trends have been a little different, reflecting in large part the rollercoaster ride the economy has been on.

In the years of the real Celtic Tiger — approximately 1995-2001 — social spending rose only moderately. That reflected a much better economic environment in which fewer people needed to fall back on state support. But as the second chart shows, it was also related to a general moderation in all forms of government spending. That, in turn, reflected the lingering caution in the political system after an extended brush with national bankruptcy only a few years earlier.

But things changed from the turn of the century. The political class appeared to conclude that rapid growth in tax receipts was here to stay. As is so often the case with politicians, the opportunity to buy favour with taxpayers’ own money was too difficult to resist — and spending took off.

The second chart shows the main areas of public expenditure (social transfers, public pay, capital spending and debt servicing), which together account for 90pc of all government spending. As is clear from the chart, social spending was prioritised above all other areas.

Then came the crash. As the same chart also illustrates, increases in public expenditure hit a brick wall. Capital spending was slashed and public pay trimmed back. Social protection, despite what is often said, recorded the smallest cut.

The growth in the welfare state relative to the rest of the state is illustrated in the third chart. Social transfers accounted for just over 30pc of all public spending in 1995. By last year they had exceeded 40pc.

How does this compare to our 14 longstanding and rich peers in the EU? Given that measuring anything against Irish GDP has become utterly unreliable, a better measure is per capita spending.

In 2012, the last year a full set of figures is available from Eurostat, Irish social spending per person annually stood €200 higher than the average across the EU-15 — and that is despite having considerably lower pension spending (as a result of fewer older people in the population relative to other countries and smaller pension payments).

When core welfare benefits for working age people are considered, as the final chart illustrates, Ireland was spending considerably more than the average as of 2012. As is clear from the graphic, most of the differential came from much higher spending on jobless benefits.

That, in turn, reflects an unemployment rate at the time that was well above the EU15 average.

Over the longer term, Irish transfers to families and children have been a lot higher than the EU average. Before the crash in 2007, for instance, supports of this kind came to over €1,000 per capita, which was 70pc higher than the EU-15 average. That is closely tied to Ireland’s high long-term rate of jobless households which persisted during the boom years despite extraordinarily high job creation.

This is Ireland’s most serious socioeconomic injustice and one that the welfare state continues to fail to remedy.

‘Social transfers accounted for just over 30pc of all public spending in 1995. By last year they had exceeded 40pc...’