The withering of Europe’s welfare states

Press, 26 October 1982, Page 24

The withering of Europe’s welfare states

From “The Economist,” London

The welfare state in northern Europe is now facing its most serious challenge. This is partly because of a political swing to the Right in the region: since 1977, socialists have been thrown out of power (or coalitions) in Britain, West ■Germany, Belgium, the Netherlands. Norway. Luxemburg and Denmark. Sweden, which bucked that trend last month by electing a Social Democratic Government. is the one country in the region which is planning to increase the share of resources devoted to welfare. The main threat to the welfare state is posed not by mean-minded conservatives, some of whom have a tenuous hold on power, but by the sheer cost of maintaining welfare programmes at a time of little or no economic growth. The chart shows just how crushing a burden public spending has become on all European Governments. Rising unemployment has more than doubled the cost of unemployment benefits in many countries. The fast-grow-ing number of old people — who cost far more than younger people to keep healthy — has sent the health spending soaring. In Britain, Mrs Thatcher has now rejected radical suggestions for welfare cuts proposed by the secret think-tank report, such as de-indexing old-age pensions and replacing the national health service with private health insurance. But neither she, nor any subsequent British Prime Minister, will be able to ignore the report's forecast that, if no welfare changes are made, and economic growth is sluggish, the share of gross domestic product devoted to state spending could shoot up from the present 45 per cent to 60 per cent by 1990. The Thatcher Government has already had to make some cuts in welfare spending: earn-ings-related unemployment benefits have been abolished and all unemployment benefits have been cut by 5 per cent in real terms. Welfare benefits and the health service together now cost $l2O billion a year and account for 40 per cent of the

British Government's spending, against only a third in the late 19705. Oddly, across the Channel, many other European Governments are introducing welfare cuts with a gusto that would set Britain's think-tank bubbling. ' The Socialist Government in France has agreed to a surprisingly severe programme of cuts. On September 29, Mr Pierre Beregovoy, . the new Social Affairs Minister, submitted his plan to the Cabinet. It met strong opposition, especially from Communist Ministers. but was approved after a prolonged debate. From 1983. French welfare payments will be linked to the current inflation rate, not to that of the year before. The Government hopes that this change will save $2.9 billion next year. Hospital patients will from now on have to pay for food and other non-medical services. Frenchmen who retire early will have to pay the standard level of social-secur-ity contributions instead of the reduced rate which they have had to pay in the past. The Socialists have been obliged to embark on this rather unsocialist change because the annual deficit on social security is running at $5.7 billion a year. Since the French Govern-

ment is trying to slow down the growth of public spending (to curb inflation and protect the sickly franc), it has been obliged to turn a stern face towards social-security claimants. Mr Mitterrand's Ministers hope that these changes, together with extra revenue from a new levy on drink and tobacco, will balance the social-security books within a year. Last week. Mr Beregovoy started to tackle an even trickier problem: the growing deficit of the (separate) French unemployment fund, Unidec. which was set up in the late 19505. An extra $4.7 billion will be needed to finance the fund next year, but the employers, the unions and the Government (which jointly finance the fund) are all equally unwilling to pay more. Talks between the employers and the unions on this issue broke down. Mr Beregovoy will either have to twist somebody’s arm or freeze the level of benefits paid to France's 2 million jobless. That would be a coldhearted decision for a Socialist Government to take. In West Germany the new Christian Democratic Government, led by Mr Helmut Kohl, has also announced its plans for cutting public spending. These are not as drastic as the ideas put forward by the Free Democratic Economics Minister, Count Otto Lambsdorff, which helped to break up the Schmidt coalition. Mr Lambsdorff suggested that unemployment benefit should be cut, that pensioners should pay more for their medicines and that the sick should shoulder a bigger share of the cost of their treatment. The new Labour Minister, Mr Norbert Blum (who comes from the trade-union wing of the Christian Democratic Party), has firmly rejected proposals from his own party to cut unemployment pay and maternity benefit. However, he has agreed to delay rises in pensions, due at the start of 1983. until next July; and from July on pensioners will have to pay sickness insurance contributions. From the beginning of the next academic year, all students' grants will be repayable in full once

the student starts to earn his living. Mr Blum sums up his approach to the welfare state thus: "We are faced with only one choice — caution or demolition. And as I am against the demolition of the social welfare system, I regard a breathing space as absolutely necessary." The Netherlands, which has long prided itself on one of the most generous welfare states in Europe, is embarking on a savage cutback. When Queen Beatrix read her speech on the caretaker Government’s programme three weeks ago in the Hague, she said: "Unless the social-security system is thoroughly revised, it will become impossible to finance, thus endangering even the essential achievements which it embodies . . . Structural changes will be needed to reduce the cost of health care." The next Dutch Government, which is expected to be a Liberal-Christian Democratic coalition, is likely to be far tougher than its predecessor. The Christian Democrats are prepared to freeze all socialsecurity benefits in 1983 the Dutch treasury $1230 million (saving) and to make further specific cuts in selected socialsecurity benefits and healthcare services, to save another $836 million. These changes are expected to shut down some hospitals in big cities. The Liberals are even more vigorous in their demands for welfare cuts than the Christian Democrats. South of the dikes, in Belgium. the story is much the same. The right-of-centre coalition led by Mr Wilfried Martens has embarked on a drastic pruning of the welfare system. It is now planning io cut the number of hospital beds by 25 per cent arguing that there is over-capacity in Belgian hospitals. Family allowances have been reduced “temporarily,” payments to doctors and health workers under state-backed insurance schemes have been frozen for two years: and a proposal is being discussed to phase out family allowances for the first child in a family. In Scandinavia, Denmark has embarked on equally radical changes. The new right-of-centre coalition, led by the Danes’ first Conservative

Prime Minister in this century, Mr Poul Schlutter. has submitted a plan to abolish the indexation of all wages, salaries, and transfer incomes. The Government hopes to cut public spending by about 7 per cent next year, almost entirely at the expense of social welfare programmes. Unemployment benefits are to be reduced from 90 per cent of wages to 80 per cent; parents' payments for day nurseries and kindergartens will go up sharply; and sickness benefit is to be abolished for the first day off work. The Conservative Government in oil-rich Norway is under less pressure. Public spending there is already comparatively low by Scandinavian standards, and the Conservatives have not got an over-all majority in Parliament. But

they may yet be tempted to trim welfare spending to finance the large income-tax cuts they promised in last year's election. Sweden is the exception that proves the rule. The new Social Democratic Government, led by Mr Olof Palme, has dropped the plans prepared by the previous right-of-centre' government to trim welfare spending. The outgoing administration had proposed that sickness benefit should not be paid until a person had been off work for three days, and that sick pay should be only 87 per cent of wages instead’ of 90 per cent. This change would have saved only a modest $3lO million but it created political uproar in the one country where the welfare state is clearly sacrosanct.