Principal Ways of Financing the Welfare State Synthesis Essay

Introduction

In a century faced with significant global financial crises, discussing financing welfare state as an issue of urgency has become inevitable. Obscurity in the way in which welfare states are financed has significantly contributed to uncertainty about which policy alternatives are available. Scholars have expressed diverse opinions about the financing mechanisms of the welfare state.

Some says that the welfare state is the sole source of the two ongoing major crises in developed countries; that is, financial and debt crises. Conversely, proponents view the welfare state as a sacrosanct, beyond query, and innately good.

The analysis shows that various innovations, such as creating a direct link between contributions and returns, are necessary to resolve the austerity that exists in ways of the welfare state. According to Page (2011: 63), a welfare state ‘refers to a model whereby the government plays a significant role in the provision of essential economic as well as social needs of the subjects’.

For instance, the government may offer to provide education, housing sustenance, unemployment, and health insurance to its citizens. Cook (2007b) notes that the aim of the concept of the welfare state is to promote equality and a given minimum quality of life for every citizen.

The purpose of this essay is to analyse the principal ways of financing the welfare state. Thus, it will explore the effects of tax-financed and contribution-financed systems, as well as emerging trends in the mature states.

This essay is divided into three sections. First is the historical background of economical angle welfare state, which briefly discusses the welfare history in UK. The principal ways of the welfare state will be presented, followed by financing trends in mature welfare states. Through these sections, a clear idea emerges on the modifications that should be made on ways of financing the welfare state.

Historical Background

Historians believe that Conservatives introduced the welfare state, but the introduction of a welfare state did not sit well with socialists and labour unions. Sefton (2012: 8) notes that although the infancy of the welfare state in the United Kingdom (UK) dates back to as early as the age of Liberal Welfare Reform from 1906- 1914, it started being considered seriously after the Second World War.

In 1942, William Beveridge discovered five problems that needed to be resolved for the UK to become a better nation. The Beveridge Committee report has been quoted as a legendary report that established the foundations for most social reforms that have been achieved in the country (Sefton 2012: 11). The five problems identified in the report were poverty, disease, ignorance, squalor, and idleness.

Page (2011: 20) notes that in order to eliminate these “greatest evils of the contemporary age”, the committee recommended the creation of a welfare state composed of social security, a national health service, free education, council housing, and full employment. During the parliamentary elections held in the summer of 1945, after the termination of the Second World War, the Labour Party received a convincing win thus enabling the leader of the party, Clement Attlee, to appoint his cabinet without including the opposition (Page, 2011: 26).

Having the majority in the House of Commons was of great significance as it enabled the government to work towards achieving its promises, in particular the establishment of a welfare state. The Labour Party assumed power with a lot of passion for governance.

However, the economic situation in the country was complicated. According to Page (2011: 29), the government had to make tricky negotiations with Washington over essential funds as well as other harsh measures enforced by the United States, such as the termination of the British imperial tariff system.

Following the deal with Washington, the Labour party began the social transformation by nationalising the main sectors of various industries, such as the banking and railway industries. Brooks and Manza (2006: 820) note that the course of establishing the reformations commenced almost straight after the enactment of certain laws: the National Insurance Act (NIA), the Industrial Injuries Act (IIA) and the National Health Act (NHA).

Nevertheless, the establishment of a welfare state still faced challenges. These were largely related to the constitutional reforms that the Labour Party introduced during the post-war era. The introduction of the Representation of the People Act of 1948 and the amendment of the Trades Dispute Act of 1927 restricted the power of the House of Lords (Brooks & Manza, 2006).

The attitude of the Conservatives towards the welfare state was also part of the problem, as was evident in the publication of the Industrial Charter. Furthermore, the actual cost of running the National Health Service (NHS) was enormous as it was growing at a rate contrary to the planned cost (Kangas & Palme 2007: 61).

In an attempt to overcome this gap in funding, there were efforts to introduce new medical prescription fees. However, these efforts were unsuccessful following a mounting ideological and political difference between the leaders of the Labour Party (Sefton 2012: 38). Later on, in 1950, the Korean War broke out, forcing Britain to give military assistance to the U.S. Consequently, there was a dire reduction in the health service budget.

Principal Ways of Financing the Welfare State

From an economic point of view, the way in which welfare states are financed is crucial. Genschel (2002: 261) holds that taxes and National Insurance payments may instigate numerous behavioural reactions. For example, workers and companies may attempt to transfer the burden of the cost to others through wages as well as prices.

For instance, Brady, Seelelb-Kalser, and Beckfield (2005) posit that there may be a disparity if a social security is funded through levies that are not analogous to entitlements, unlike when they adhere to actuarial doctrines. According to Kirkup (2013: 45), the cost of welfare is one of the things that make public finances unsustainable, which suggests that the issue is not only a short-term crisis, but also a long-term problem.

The rise of an ageing population and reduced birth rate means that the number of people dependant population on the working population is increasing. With no mitigation, it is anticipated that public expenditure will be drastically affected in the decade to come (Needham, 2011, 104).

Moreover, the informed public is continuously demanding better services. The high staffing costs of social services makes productivity more complicated to accomplish. Khoman, Mitchell, and Weale (2008: 214) hold that, with time, the cost of settling the debts of the recent past will surpass the rising cost of maintaining the status of the welfare state. Critics fault Britain for trying to create social welfare to European levels whilst Britons are only willing to pay taxes at the same level as the Americans.

By providing this high level welfare state without servicing its debts makes it difficult to evade this long-term issue. The demand for welfare financing has also been inevitable, as the social welfare spending among members of the Organisation for Economic Cooperation and Development (OECD) has risen from 7% to 19% over 50 years. In Britain, the rise in social policy expenditure over three decades is comparable to 5% of GDP.

Glennerster (2010: 82) argues that the national revenue has dropped from 41.6% to 37.1% of GDP. The ongoing scenario of high social policy expenditure accompanied by lower taxes has been achieved by minimising GDP expenditures on services such as defence as well as financing the costs through borrowed loans (Needham, 2011: 109).

Reports show that Britain will be in a position to service prospective social expenditure, as the working population is expected to rise. Moreover, the International Monetary Fund (IMF) has indicated that the demographics population of developed countries will have more influence on social expenditure than the consequences of banking predicaments.

According to Glennerster (2010: 91), once the UK has tackled the issue of banking, it will have to solve more ominous ones: statistics show that citizens are equally divided on the issue of paying more taxes to sustain the level of public services to solve the current crisis.

In the recent past, critics have said it is not possible for the welfare state to succeed in Britain. In the 1970s, scholars accused states of being inept at overcoming the pressure caused by a financial crisis. Indeed, these accusations were never confirmed, as none of the governments collapsed.

Palier (2010: 36) argues that most governments continued to raise taxes and reduce expenses on certain pension promises whilst increasing social expenditure. Several previous analysts failed to understand that the problems that made financing welfare state complicated caused were even worse for the private market. Genschel (2004: 623) warns that the increase in life has expectancy escalated the expenditure on salaries as well as private pension plans.

Unfortunately, the effects of this increase were ignored by the private sector. Most employers have minimised their pension contributions and have transferred the burden to their employees. In turn, employees have adopted poor saving habits and, according to Pierson (2001:45), this explains the current economic trends. In line with the aforementioned argument, the state has been compelled to join the market to fortify it.

The economic uncertainty has made it difficult for companies to envisage long-term care expenditure and it has resulted in a reluctance to give private insurance for ongoing care. Clarke (2010) laments that most individuals are also hesitant to consider paying for insurance in care homes for elderly people as they often opt for pension schemes.

Moreover, the mounting labour expenditure has affected private as well as public services. If the government provided vouchers for people to buy private education, it would lead to a sudden increase in the education budget. An extra amount would be needed to cater approximately 7% of the population who take their children to private schools.

After noting some of the challenges that the welfare state in the UK is going through, the following discussion will focus on some of the approaches that most countries (UK included) use in financing their welfare states. The first is social insurance, which is one of the key ingredients and pillars of the social welfare structure. Daly (2012: 276) notes that social insurance evolved from voluntary insurance programmes that existed during the medieval age in Europe.

It developed from the craft guilds in Europe and eventually spread to other parts of the world like the U.S. Though social insurance might have disparate features in different countries, some are outstanding. Social insurance often entails compulsory contribution; most individuals join social insurance schemes because they have to do so by law. The state often sponsors and monitors the programmes, although they are not always monitored by the government.

For instance, Cook (2007a: 51) notes that German health care systems are run under the watch of private bodies, whilst in the US, Medicare is administered by a combination of public and private institutions. In most cases, the funds required to operate social insurance are overtly amassed from companies or employees, or both.

Employees pay a predetermined portion of their earnings towards the insurance. There are legal systems proceedings set up to define how contributors are to earn their benefits. The Managers have little power to decide the amount an individual can get. Moreover, the benefits earned are not akin to the contributions accrued by the members.

Needham (2011: 113) argues that social-insurance programmes reallocate the funds to low-income earners and those doing socially attractive activities. For instance, with regard to health insurance, people contribute different amount relative to their earnings, but when it comes to benefits, they are distributed equally. Some countries also increase the benefits for unemployed family members of the contributors, military officers, and citizens who engage in activities considered useful to society (Kangas & Palme, 2007: 66).

The programme also has distinct accounting and overt long-term financial arrangements. The state has a specific account for comparing contributions and gains as well as indicating that the anticipated revenues are able to support the planned spending in the forthcoming years. Notably, the features of social insurance are often intertwined.

For instance, Kangas and Palme (2007: 35) insist that a programme meant to grant ample assistance to low-income earners should be structured in a way that reallocates funds from high-income earners to those who get low wages. In addition, if a programme is compulsory, then it has to be driven by the state.

Proponents of social insurance assert that it creates a financial order in the political arena. Recipients of the welfare state programmes often prefer to increase the benefits received from the programme. However, due to the nature of collecting funds and having distinct accounting for collections and revenues, the growth of social insurance needs a rise in the percentage contributed.

Hence, workers who contribute a higher percentage of their earnings to fund the programme have a reason to support a limit the on the upsurge of gains (Genschel 2004: 617). The government can also increase social welfare benefits through directing firms to grant certain social welfare offers to their employees. This option has many similar features that of social insurance.

In the case of employee mandates, this has existed in conjunction with health-care insurance programmes for years in many countries. The main difference between the employee and employer’s mandate is that in the latter, pensions are usually financed in advance, which is not the case in the former. Greve (2011: 75) notes that a significant amount of reallocation of benefits could be implemented in the employee mandate through state support.

Mean-tested programmes helps in supporting those who initially express their lack of economic resources. A citizen does not benefit in line with his or her economic history of behaviour. According to Glennerster (2009: 97), benefits are awarded to those who need them most in the present circumstances. The programme is financed through the normal revenues earned by the government from other channels; hence, programme expenditure is not distinctly identified.

The government also has a programme known as tax expenditures to encourage companies to offer private arrangements through a plan whereby those who engage in private arrangements pay lower taxes. These private arrangements are mostly used in retirement benefit schemes and, more recently, in the health sector.

Though not obligatory, they are usually monitored by the government, which provides the legal procedure for enjoying the special tax treatment. Tax expenditure programme does not necessarily need to have a reallocation because it is aimed at citizens who are not subscribed to any employment model. However, Andersen (2003: 17) notes that it is often considered cost-effective if the individuals who enjoy the special tax treatment have reasonable earnings.

Financing Trends in Mature Welfare States

The changes in ways of financing welfare states can be comprehended through the merits and demerits of the disparate techniques of financing and the varying demographic and fiscal perspectives that most welfare states are undergoing. The main issues with countries relying on taxation as their sole source of a welfare state include financial and budgetary restraints.

Disney (2004: 269) holds that the constraints caused by rising rates of unemployment, economic globalisation, and an ageing population trigger the U.S. government to reduce social policy spending. The process of comparing the amount of expenditure needed in social policy in relation to other sectors such as defence becomes delicate and critical.

Consequently, Greve (2011: 46) points that welfare state benefits become more dependent on annual budget resolutions than on contribution-based systems. The pressure from citizens, who often dislike the idea of tax upsurge, stirs up politics, which exacerbates difficulties in the process of financing the welfare state.

Conversely, welfare states financed through contributory-financed systems are often less vulnerable to cutbacks than tax-financed systems. The contributory-funded systems are managed by tripartite bodies, which do not rely heavily on government monetary plans because the contributions are distributed for particular benefits.

According to Ooghe, Schokkaert, and Fléchet (2003: 97), there is goodwill from citizens to raise funds because their use is definite; hence, political approval for increasing taxes in UK is anticipated particularly if there are sufficient interests and earnings. In fact, citizens succumb to the idea that they have a share in the scheme and their payments will accrue to large returns.

Maintaining a welfare state funded through contributory systems relies on the level of dependence between the contributors and the beneficiaries. Considering this argument, policy-makers recommend the use of financed pension schemes (Genschel 2004: 628). However, this move does little to change the situation unless governments intend to globalise it, which essentially introduces new risks.

For instance, short-term contribution plans such as maternity pay can be easily altered to fit the current fiscal and demographic context, but pensions need a long-term arrangement. Most developed countries that have utilised contribution-funded pension systems have suffered massive deficits.

Morel, Palier, and Palme (2012: 631) argue that this scenario has not played out in Britain, which is principally a tax-financed welfare state. Nevertheless, contribution-financed systems have not been immune to budget shortages, particularly in the health-care systems, where there is a difference between contributors and providers. This assertion holds, as the financers have limited influence on the burden that health-care providers suffer.

Conclusion

The development of various challenges has stirred debate on current financing plans as well as prospective ways of maintaining welfare states. Economic globalisation reportedly introduces restraints on national tax strategies; and thus, it can induce tax competition.

Modification in the systems for managing capital markets has increased freedom in terms of how tax bases are transferred, and, consequently, capital markets have influenced the financing mechanism.

Moreover, corporate taxes are indicating a tumbling trend, especially in Europe. Although labour is still the main tax base for financing welfare states, the dilapidation of other means is highly influencing welfare state funding.

The impact of contributing from employment more flexible in terms of the amount taxed is unclear, as citizens want low taxes and increased benefits. Essentially, the future financing of welfare states is coupled with a surge in demand as well as limitations; thus, it entails raising the tax base, re-examining policies, and modernisation.

Indeed, streamlining the monetary structure should be part of the process of welfare state reforms. The UK and other developed countries will benefit from establishing proper future tax bases through relevant social-investment plans that enlarge revenue collection, advance possible working skills, and promote gender equality in the labour market.

However, people should not be loathed when it comes to intertwining funding methods with innovation. Indeed, states should focus their innovation on how to create a clear link between contributions and benefits. Fortifying the fundamental build-ups as well as saving mechanisms would enhance the aforementioned proposals.

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