by Piet Coetzer

Social spending

Economic crisis puts state resources under pressure

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The global economic crisis has had a big impact on the share of economic resources, pushing up public social spending to GDP ratios of economic powerhouses between 2009 and 2011. Due to enforced austerity measures, Greece, has experienced serious social upheaval. Since then, social unrest has spread and with a double dip recession setting in for most of the developed world, more of the same can be expected.

A just-released report, “Social Spending after the Crisis”, by the Organisation for Economic Coordination and Development (OECD) shows  that social expenditure, on average across EU-member countries, increased from around 19% of GDP in 2007 to 22% in 2009/11.

In only two countries has social spending fallen: by 14% in Greece and 13% in Hungary. Greece, however, has been subjected to severe austerity measures enforced under a sovereign debt bailout plan.

OECD estimates for 2012 indicate that pressure for increased social spending in relation to GDP will remain high. However, more countries – especially in Southern Europe – also had to introduce austerity measures. Subsequently countries, including Spain, Portugal and Italy, became subject to violent protests and social upheaval.

And the latest indications are that most of Europe and the wider developed world, is slipping into another recessionary cycle. This is likely to aggravate the two factors that report identifies as forcing public spending to increase against GDP in times of economic downturn: public spending (which goes up to address the greater need for social support such as unemployment or housing benefit) and/or the GDP grows slowly or starts to decline.

Already public social spending has increased to 22% of GDP on average across the OECD countries in 2012, up from 19% in 2007.

Public spending on unemployment benefits had increased from an average of 0.7% of GDP in 2007 to 1.1% in 2009 and has stayed at that level since.

Spending on family benefits, such as childcare allowances and tax credits, has also increased slightly to 2.7% of GDP. Ireland and the United Kingdom, which have income-tested family benefits, now spend the most on family benefits, at around 4.2% of GDP each.

One explanation for the rapid rise in family spending trends in Ireland and the United Kingdom is that it has become more difficult for single parents to find a job in recent years. This will sustain public spending on specific income support programmes to help them in both these countries.

Population ageing

Population ageing will also drive up pension and health spending in the years ahead. The challenge now, the OECD says, is to safeguard social support for future generations. Public social spending on the elderly amounted to 11% of GDP in 2009.

The population proportion of the elderly is around 15% across the OECD and on average they receive 40% of all public social spending. In Japan and Italy, where senior citizens make up about 20% of the population, public social spending on the elderly is about 60% of the total.

Countries with a young population are much less likely to have higher increased social spending to GDP ratios than countries with older populations. However, countries with younger populations have a greater share of education spending.

For example, in a country such as Mexico, where only about 6% of the population is older than 65, public spending on education (4.8% of GDP in 2009) is much higher than public spending on the elderly (including pensions, long-term care and health) at 2.8% of GDP.

The rules and structures of benefit systems must also be taken into account. Thus, despite a similar age profile of the population, public spending in Italy on the elderly is about 3.5 % of GDP higher that in Japan. This reflects Italy’s higher spend on pensions.

In addition to the crisis and fiscal consolidation efforts which have put pressure on social protection systems, population ageing will be a key driver of future increases in social spending. OECD projections suggest that public spending on health and long-term care services might almost double from 7% in 2009 to 13% in 2050 on average across the OECD.

Another OECD report, however, shows that in many countries pension reforms have improved the financial sustainability of pensions systems through, for example, less generous procedures for benefit payments; a greater reliance on private and/or defined contribution schemes; and higher retirement ages. These changes may not immediately affect the level of current spending but they will reduce the growth of public pension spending in future.

There is considerable cross-national variation in trends. However, in general it seems that public social spending increases against the GDP in an economic crisis but only declines slowly afterwards, if at all. On average across the OECD, this increase was about 2.5% after the economic shocks in the early 1980s and 1990s, without any significant decline after the economies had emerged from these crises.

So far, the report states that there is little evidence that this trend will be different following the increase in public spending to GDP ratio in 2008/09.

Another sharp downturn in the global economy, might, however, put the sustainability of the so-called welfare states under serious pressure. This could bring more austerity with accompanying pressure on the social fabric of those major economies.

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