As we head into 2016, the consequences of the financial and economic crisis are still being felt. While labour markets are recovering in some countries, others are still suffering from steep declines of employment and seriously weakened public finances.
The numbers of people living in households without any income from work, for example, have risen dramatically in Greece, Ireland and Spain. The situation has become particularly difficult for households on low incomes, for young people and for families with children. At the same time, longer-term structural challenges, such as population ageing and new needs, including those related to welcoming and integrating refugees, are putting stress on social policies and public finances.
Social spending: a large part of public budgets
In 2014, OECD countries spent on average more than one-fifth of their economic resources on social protection. European countries come on top, with the highest public social spending-to-GDP ratios. France is the top spender, at almost 32% of GDP, followed by Denmark, Belgium and Finland. Italy, Austria, Sweden, Spain and Germany also devote more than a quarter of their GDP to social spending.
Given these large shares in public budgets, it is hard to see how social spending could be ring-fenced and excluded from fiscal consolidation efforts. As in many other areas, doing more with less has become the motto in social policy too.
Doing more with less
But how and when to cut social spending needs to be weighed carefully. Reducing social spending will generate short-term savings but may translate into much higher costs in the future.
Where and as long as job markets are weak, not much can be saved on unemployment benefits, social assistance and active labour market programmes. The risk of increasing poverty and social exclusion of families affected by long-term unemployment is high in some countries. Problems rooted in the structure of social spending make cuts even more difficult. In Greece and Italy, for example, there is no safety-net for people who have exhausted their rights to contribution-based unemployment insurance. As a consequence, pensions end up serving as a last-resort benefit for whole families where unemployed working-age people are living with their elderly relatives. This is not only inadequate in terms of protection, but also inefficient and an obstacle to pension reforms needed in light of population ageing.
Cash-strapped finance ministries might be tempted to reduce expenditures on children and families. But across-the-board cuts in social transfers, such as those destined to housing and child and family benefits, carry substantial risks. These transfers frequently provide vital support to poor working families and lone parents. Being able to combine work and family responsibilities is especially important for those who have lost their jobs and need to focus on training and job-search. Spending on children also has long-term benefits for physical development and lays the foundations for young adults’ cognitive, emotional and social skills, skills that we know are essential in the new world of work.
Some of the social consequences, for example on family formation, fertility and health, will be felt only in the long term. Fertility rates have dropped further in many countries since the start of the crisis, deepening the demographic and fiscal challenges of ageing. Often, families have also cut back on essential spending, including on food. It is still too early to quantify the longer-term effects of this situation on people’s health, but unemployment and economic difficulties are known to contribute to a range of health problems, including mental illness.
In several European countries, healthcare expenditure has fallen drastically since 2008, with Greece and Ireland cutting the most at 11% and 7%, respectively. Other hard-hit countries, such as Iceland, Portugal and Spain, also reduced health spending.
Again, poorly designed reductions can trigger rising healthcare needs – and in turn higher spending – tomorrow. Often, money for healthcare can be spent more efficiently: by reducing unnecessary treatments, reducing medical errors, cutting inappropriate care, improving care coordination, and removing administrative inefficiencies. But cuts unfortunately tend to happen where it is easy to cut, not where there is a need or opportunity to improve health. The best example here is prevention, where spending has been reduced since 2009 despite its proven cost-effectiveness in improving health outcomes.
A safety net that works for all
In the future, both social and fiscal policy-makers should take on board the lessons from the most recent crisis. While we of course all hope that 2016 will bring further recovery, higher employment and prosperity, structural challenges remain. Experience tells us that there will unfortunately be more crises down the road. The good news is that there are useful policy conclusions and positive examples from which to draw inspiration. Here are five suggestions to combine the needs of social protection and public finance:
1. There is a strong case for designing government support in ways that harness and complement – rather than replace – households’ own capacities to cope with adversity. This means maintaining labour market activation programmes and providing in-work support as far as possible. Australia, Denmark and Switzerland provide good examples for this approach, as they automatically adjust budgets for active labour market policies to the conditions of their labour markets.
2. Once labour market conditions improve, policy efforts need to focus on ensuring that workless households in particular benefit quickly from employment opportunities. For instance, work-related support and incentives should not be restricted to individual job-seekers but should be made available to non-working partners as well.
3. Governments should make funding of investment-type programmes a priority. Countries should ensure access to quality services for children and prevent labour market exclusion of school leavers. To be effective, however, social investments need to be embedded into an overall strategy that provides adequate support for the poorest. In health policy, cost-effective areas such as prevention need to receive continued funding.
4. More effective targeting can generate substantial savings and leave more space to protect vulnerable groups. Targeted safety-net benefits should be introduced and boosted where such programmes do not exist, where they are difficult to access, or where large numbers of long-term unemployed are running out of unemployment support. Any savings on this type of social programmes should only be undertaken in line with the pace of recovery. Fine-tuning will be necessary, however, to avoid creating perverse incentives that deter people from finding work.
5. Effective social protection requires a strong and sustainable resource base. To “crisis-proof” social policies and maintain effective support throughout the economic cycle, governments must look beyond the recent downturn. Economic recovery alone is in most cases unlikely to undo the damage inflicted by recessions, as income losses have often become entrenched. Some countries, such as France, Portugal and the United States, therefore extended the payment duration of out-of-work benefits when the crisis struck. In order to do so, savings need to be built up during upswings to cover rising costs during downturns.
Author: Monika Queisser is Head of Social Policy at the OECD; she is also a Member of the Global Agenda Council on Public Finance and Social Protection Systems.
Image: An elderly man hugs a boy in the Andalusian capital of Seville January 18, 2012. REUTERS/Marcelo del Pozo