Welfare State Reaches Turning Point

By Juhani Artto, Trade Union News from Finland, 26 March 1998

Helsinki (26.03.1998—Rauno Pentti) Intense debate about the welfare state's future is now under way in Finland. Differing opinions have been expressed as to the role of social policy. Calculations and examples of many different kinds have been presented, but they don't seem to be culminating in a common vision.

Professor Jukka Pekkarinen, Director of the Labour Institute for Economic Research, thinks this stems more than anything else from the difficulties encountered in grasping the overall effects of the various partial segments. Modern society is a system where every aspect affects all other aspects, and where even slight shifts can result in major changes, he says.

Let's take taxation as an example. Finland and all the Nordic countries are criticised for their high taxes. This is the case if taxation as such is compared with the tax rates levied in other countries. But if everything obtained through tax funds and citizens' total cost burdens are also included in the comparison, the results often look quite different.

In Pekkarinen's opinion, Nordic social policy is an example of the good that can be accomplished with high tax rates. The Nordic model starts from universality and provision of services by the public sector. In international comparisons, these factors have proved to be the most effective in eliminating inequality. To me, that's one example of an achievement worth paying for, he continues.

Pekkarinen is convinced that the present welfare model enjoys wide support among citizens. He therefore finds it odd that many economists, bureaucrats and politicians have recently had so much enthusiasm for measures aiming at lower taxation. I don't believe that social reform can be carried out simply by cutting taxes. In my view, it would also be important to inspect the overall effects of the desired tax cuts, Pekkarinen states.

This is not to say that he considers it unnecessary to talk about cutting tax rates. Quite the contrary. I think it's important that we discuss together, for instance, the best way of guaranteeing the future availability of services falling within the sphere of social security, so long as the discussion is diverse enough. The advantages and weaknesses of the current scheme, as well as the improvements called for, should be presented openly. Now the discussion easily polarises round the issue of whether or not taxation should be reduced, Pekkarinen continues.

Typical of the situation, in Pekkarinen's opinion, is that bureaucrats, in particular, display monetary calculations illustrating the amounts accrued to the State through taxation and the money spent to manage the public debt and how much is then left for other uses, such as social income transfers. In the final analysis, social policy is always a matter of will. Expenditure for social welfare cannot be derived on mathematical grounds, Pekkarinen explains.

Pekkarinen suspects that the recent debate has fuelled the concept that social policy has become some sort of burden to the national economy; that money spent for social policy goes down the drain. To me, that line of thinking is an antiquated relic from the time when social security was considered a luxury, something to be provided only if it can be afforded. And the national economy was seen as some sort of pie that could be cut into suitably sized slices according to what was considered necessary at the moment. A more relevant concept arouse already in the 1960s, when Pekka Kuusi wrote his internationally acclaimed work on the grounds of Finnish social policy. Kuusi's departure point was the theory that social income transfers are a factor stabilising the national economy. They reduce differences in incomes and increase citizens' purchase power, thereby vitalising the economy. I believe this theory is still valid today, Pekkarinen claims.

Pekkarinen guesses that opinions critical of the current welfare model in the end are motivated by concern; concern about the impacts of changes in the social environment and concern about controlling these changes. The demands of the global economy and of market forces have given rise to new uncertainty factors. Growth of productivity and improved living standards have become increasingly more dependent on efficiency. In consequence, we may need to choose from difficult alternatives affecting the economy and social policy. For example, decisions pertaining to taxation may have detrimental effects on incentives affecting individual households, Pekkarinen explains.

He points out that, in weighing potential effects, careful consideration must be given to the advantages and disadvantages on a wider scale. As I already said, not everything can be measured directly in terms of money. One less tangible determinant is a peaceful and orderly society. That, too, may be convertible into money in the future, for instance when international enterprises seek sites for their investments, Pekkarinen continues, adding that market forces and their influence are part of our real world.

The swiftness of market forces challenge society to undergo reform at an ever-quickening pace. Market forces and their actions, however, involve risks that call for protection provided by society. Unemployment insurance, for example, requires public control, because the need for unemployment insurance may arise from disturbances having widespread impacts.

According to Pekkarinen, the current high unemployment rate is an issue that typically divides experts into two camps. Some think that high unemployment is here to stay. The idea of citizens' pay, for instance has developed on the basis of this view. If the idea of citizens' pay were adopted, the fruits of economic productivity would be distributed to people irrespective of whether or not they happened to be gainfully employed. I see this line of thinking as faulty. It would be a very expensive idea if implemented in practice; firstly, because it would increase the tax burden of those gainfully employed and secondly, because it could lead to abuse. Many might begin to ask why they should work and pay taxes if they could merely collect citizens' pay and work under the table, he says.

Pekkarinen agrees that he is a proponent of the old-fashioned school that strives for high employment. Of course, the starting point for high employment is a healthy and smoothly functioning economy. In addition, people need to be encouraged to remain active in working life as long as possible. This calls for measures to ensure that their motivation, know-how and skills are maintained, he continues.

In discussions of employment policy, Pekkarinen says we must also take a serious view of poverty traps. Great Britain is now considered the model of a new social policy. It has been found, however, that British social security has gaps, say, with respect to single parents. In practice this means that single parents cannot go to work, even if they wish to, because society does not provide a sufficient amount of children's daycare services. People thus are forced to subsist on a weak level of basic income support; the outcome may be impoverishment and exclusion.

In this regards, matters are in better shape in Finland. Even so, Pekkarinen reminds us that our social security also has incentive traps which, for instance, encourage mothers of small children to stay at home rather than return to work. The economic gain obtained through various social supports may exceed the income earned by working if low-paying part-time jobs or short, fixed-term contracts are the only employment available.

Nevertheless, ever stronger demands calling for tax cuts are being presented; by bureaucrats, so-called experts and even by many politicians. The limits to radical cuts, however, are generally acknowledged. The huge public debt is a menace, and its existence cannot be ignored. That's why people calling for tax cuts talk about reductions in public expenditure at the same time, presenting them as the means to implementing tax cuts. But in practice, reductions in public expenditure would lead, for instance, to further savings in expenditure for social welfare and health care.

In my opinion, these issues should be weighed very carefully, paying particular attention to the impacts such measures might have. I consider our present social policy system to be such a great achievement that we shouldn't jeopardise it by acting rashly. The system guarantees equality fairly well. We don't have any real division between an upper and a lower class, and no one needs to experience economic insecurity. People also, more or less, have equal opportunity for education and development. If we start to dismantle this system, we might launch a process having unpredictable effects, Pekkarinen cautions, pointing out that the public sector is also a notable employer.

Appreciable tax cuts would inevitably weaken the service-readiness of the public sector. The sharpest effects would be felt in women's employment situation, since the public sector—municipalities and the State—is a major source of employment. Privatisation of services would hardly replace all the government jobs lost, he continues.

It riles Pekkarinen that in discussing these issues, even people of high standing in society present opinions based on flimsy premises. It would appear that many calls for reform are merely test balls thrown into the fray. But I don't think they help clarify the total picture. Nor is the situation improved by the fact that economists and social policy experts often speak a totally different language, he says.

Pekkarinen suspects that bureaucrats aren't always presenting ideas that they themselves have come up with. It's easy for civil servants to present ideas and opinions because they aren't saddled with political responsibility for them. But they know that they are stepping up the pressure centring on issues that political decision-makers must take a stand on. For this reason, I think it would be important for bureaucrats to inspect these issues from a wider perspective, assessing their overall effects as well.

In Pekkarinen's opinion, the current debate has polarised into two camps; neither of the opposing sides listens to the other's reasoning with an open mind. I think it would be important to remember that no single social policy system is necessarily the best alternative in changing conditions. New challenges require reform. The system should be inspected critically, but with sufficiently diverse values. That's why I'd prefer a low-key approach to the current debate; no unnecessary exaggerations or half-baked notions.

Pekkarinen concludes by reminding us that a well functioning social security system is an important component of any active, evolving society. It increases citizens' basic sense of confidence, the feeling that the material side of life is under control, and provides a good foundation for constant self-development. The opposite situation causes insecurity and resistance to change; people then cling tightly to what they already have and avoid new things. Such a situation stiffens society and also weakens economic activity.