OECD finds the welfare state isn't doing so badly after all

The welfare state isn't in such bad shape after all. This is the conclusion of the Organization for Economic Cooperation and Development in its recent second look at ``Social Expenditure 1960-1990.''

The Paris-based OECD's first post-oil-crisis evaluation four years ago took a much gloomier view, as its title implied: ``The Welfare State in Crisis.''

The concern then was that social and economic needs were in conflict -- that while welfare payments had increased handily during the boom years of the 1950s and '60s, they were braking economic growth in the stagflation of the '70s. Commitments to health, education, pensions, and unemployment benefits, it was feared, could be met only by taking money away from the investment needed to generate new growth and thus the wherewithal to pay for social welfare.

In the late 1970s the results of this clash included `` `tax revolts' and anti-bureaucratic movements of both the right and the left,'' the 1981 report said.

This year's study, by contrast, finds that ``overall spending can at least grow in pace with real economic growth'' and that reform and better management can even ``provide room . . . for financing new developments.'' Thus, OECD members should have ``breathing space'' to adjust to the demands looming in the 21st century.

What has made the OECD more optimistic is that economic recovery has begun, and some ceilings have been put on rising expectations in social welfare in the past few years. Unemployment thus looks more manageable, and the OECD's 24 Western industrial societies are showing enough flexibility to hope they can adapt to the pension payments coming due in 2010 as the generation of the post-World War II baby boom retires.

Some rigidities remain. The OECD study warns, ``Only a few countries have been able to stabilize the share of social expenditure in GDP [gross domestic product] in recent years.'' Denmark is currently experiencing some of its worst labor violence in four decades after the government ended the index linking of wages to inflation; capped public spending; and then passed legislation stopping this spring's strike.

In addition, an independent team of OECD economists, assessing the national economy of the Netherlands, has just cautiously warned that the country must free up its labor market if it is not to price young people out of jobs. The Dutch government, in fact, has already reduced the minimum wage for young people to help combat high unemployment among school leavers.

The Netherlands and Belgium are the extremes among OECD members, spending 36.1 and 37.6 percent of gross domestic product, respectively, on public health, education, pensions, and unemployment compensation. The OECD average is 25.6 percent, with roughly half of the Western European countries falling within a 3.5 percentage band in either direction.

Over the past two decades social expenditure has risen rapidly in all OECD countries. And (if the anomalies of Greece and Switzerland are excluded) the relative gap has narrowed from a 1960 spread of 8 percent for Japan to 20.5 percent for West Germany, to the present spread.

The OECD study concludes that ``it should be possible for average real benefits to increase slightly between 1981 and 1990, although not as fast as real GDP per capita.'' This assumes policy decisions to keep the share of social expenditure at the 1981 level relative to GDP -- and an increase in the cost of education and health services consistent with the past. This means, the study says, that ``the essential features of the welfare state can be preserved through to 1990.''

Additional demand in the 1980s is to be expected from existing commitments, the study points out. In education and health ``rights of access have been universalized,'' but utilization has stayed below potential.

In addition, ``the high incidence of unemployment among the young and the growing number of long-term unemployed'' will require more compensation payments while economies seek to adjust to shifts to high-tech industries.

The OECD study notes that whatever the overall levels of social spending, education, health, and pensions have always taken the lion's share -- some 80 percent in 1981 on average, 82.2 percent in the United States. Unemployment compensation has accounted for a much smaller share -- the OECD average in 1981 was 4 percent.

In the late 1970s, pensions were the fastest-growing expenditures in social welfare. Since the second oil shock in 1979, unemployment compensation has been the fastest-growing segment (though still constituting less than 5 percent of all social expenditures).

In evaluating the effectiveness of social expenditures, the OECD report concludes they have reduced ``the number of people in poverty and the degree of hardship suffered by the poor.'' It notes that the middle class is the chief beneficiary of the education and health payments that comprise nearly half of social expenditures in OECD nations. Pensions make the most difference to those with low incomes but also help the middle class and ``even the fairly well-off.''

This being the case, the ``gross flows of resources . . . far exceed the net flows which ultimately result. In principle, the same amount of redistribution [of incomes] could be achieved with vastly reduced gross flows; indeed, postwar increases in social expenditure have been accompanied by little discernible reduction in social and economic inequality.''

This implies the same results could be achieved by greatly reduced social expenditures -- and that by so doing societies might spare themselves such side effects as ``reduced incentives to work, save, and take risks.'' But the study is skeptical that a wholesale dismantling of present social programs would achieve the same breadth of access to education and health care. It notes that the entire society benefits from this access. Chart: What OECD nations spend on social welfare,* as percentage of gross national product. (OECD average is 25.6%) The Netherlands 36.1% Belgium 37.6 Sweden 33.4 Denmark 33.3 West Germany 31.5 France 29.5 Greece 13.4 Switzerland 14.9 Australia 18.8 New Zealand 19.6 United States 20.8 Canada 21.5 * Includes spending on public health, education, pensions, and unemployment compensation. Figures for 1981 or latest available year. Source: Organization for Economic Cooperation and Development. -- 30 --

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