At first glance, the absolute level of social protection in Europe varies considerably, from more than 30 percent of GDP in Sweden, France and Belgium, to less than 15 percent of GDP in Estonia, Latvia, Lithuania and Romania. This disparity, though, is less than that perceived. A new exercise being conducted by Eurostat on net ESSPROS (ESSPROS is the EU’s harmonised measure of the welfare state), rather than the usual gross concept, reveals that the 15 percentage points difference is reduced by more than 33 percent when allowing for taxes paid on social benefits.
Notwithstanding the difference in the level of expenditure, as noted in the 1990s by Esping-Andersen and a decade later by Tito Boeri and Andre Sapir, the European Social Model is composed of numerous regimes. Diverse European cultures have produced different ‘tastes’ for social welfare functions. Empirical research suggests there are six such models: the Nordic (Sweden, Finland, Denmark, Netherlands), Continental (Germany, France, Austria, Belgium, Luxembourg), Liberal (United Kingdom, Ireland), Mediterranean (Italy, Spain, Portugal, Greece, Malta, Cyprus), Reformed Post-Communist (Czech Republic, Slovenia, Estonia, Hungary, Slovakia) and the Conservative Post-Communist (Lithuania, Bulgaria, Romania, Latvia, Poland).
Most contemporary studies on welfare focus only on particular aspects at a time, and limit comparisons to a few countries rather than to all the social models mentioned above. The available literature tends to group welfare state impacts into three main areas: i) poverty and inequality –two distinctive areas on their own despite being similar at face value, ii) labour market rigidness – lax market rules are deemed to promote high employment ratios whereas stringent or protectionist markets contribute to longer doles, and iii) growth rates – the more a welfare state grows in size, the more taxes are needed for its finance, thus the less resources are available to be privately spent.
Poverty and income disparities are static aspects of the welfare state, while the dynamism of welfare is more concentrated on employment and growth. The handling of poverty and inequality is fundamental such that their consequences impact the long-term economic trajectory. In a nutshell, it is the whole welfare mechanism which affects the economy in one way or another; hence any analysis must be carried out holistically.
The EU27 shows disparities in the area reflecting the heterogeneity between Member States. Government expenditure as a percentage of GDP in 2007 for the EU27 average (arithmetic) totalled 44 per cent. Sweden had the highest government spending with 53 per cent of GDP, down from 56 per cent in 2000. On the other end, the Lithuanian government had an expenditure of only 35 per cent of GDP, down by four percentage points from 2000. During the 2000-2007 period, the EU27 average government expenditure as a percentage of GDP remained stable, with eleven Member States experiencing an average rise of 2.1 percentage points, while the rest experienced an average decline of 3.2 percentage points.
Social protection expenditure as a percentage of government expenditure (2007) varies from a low 30 per cent in Latvia to a high 59 per cent in the Netherlands, with an EU27 average of 48 per cent (less than a percentage point rise from 2000). In short, despite the evidence that on average European governments stalled in size (until the beginning of the financial and economic crises), social protection continues to absorb more resources two-thirds of EU Member States.
In my next contribution, emphasis will be drawn on how welfare state expenditure affects economic growth, both in efficiency terms and between welfare regimes, and on the causality between welfare state growth and economic growth.
Clyde Caruana is a statistician at the National Statistics Office
