Rejecting welfare state pessimism

Many on the left would say that the greatest threat facing Britain’s welfare state is the present government’s reckless upheavals and swingeing spending cuts. Not Patrick Diamond and Guy Lodge, the authors of Policy Network’s new report European welfare states after the crisis. They argue that inertia not radicalism is the problem: ‘the biggest threat to social justice in Europe is not radical institutional change, but the ‘frozen’ welfare state landscapes where resistance to change is institutionalised’. It’s a thoughtful, well-argued report but, with respect to the UK, I think they overstate their case.

Diamond and Lodge’s main exhibit is a new You Gov survey looking at public attitudes in France, Denmark and the UK. This shows that citizens in each nation, despite their different welfare traditions, prioritise ‘social insurance’ over ‘social investment’.  The former are the activities of the state which act as insurance to protect us when times are tough and smooth risks and costs over the lifecycle (in Britain the main examples are healthcare, pensions and some other benefits). The Policy Network survey shows the public is much less wedded to future-orientated ‘investment’ spending which might increase our personal and national prosperity, including childcare, maternity support and universities.  These findings tally with a similar study the Fabians conducted in 2012. We found high public support for entrenched aspects of the welfare state – health, education and policing – but little public appetite for spending on early years, universities, housing or employment programmes.

There are several things going on here and they need unpacking. First, entitlements which we all use or can expect to use are the most popular. This enduring support for universalism is good news for social democrats since there is extensive evidence that universal entitlements both sustain public consent for welfare states and efficiently distribute both ‘hortizontally’ across the lifecycle and ‘vertically’ to low-income groups. Indeed Diamond and Lodge make a good case for the progressivity of universal investment-type services, based on the varying returns they afford to people from different backgrounds.

The darker side of the public’s universal instinct is widespread concern with pro-poor provisions and the presumed irresponsibility and dependency of many of those who rely on them. In 2012 the Fabian report No Right Turn found that ‘dependency’ was the only argument against the welfare state which attracted widespread support. This shows why arrangements which people feel are founded on contribution and reciprocity are so important, a message reinforced by Policy Network’s findings with respect to the UK and France. Diamond and Lodge also show how the public can hold two views at once. While the Policy Network survey confirms previous evidence of hostility to targeted pro-poor spending it also finds that, in the context of austerity, people accept the case for means-testing as a way to save money. So measures which have short-term public endorsement as the ‘least bad’ option risk undermining long-term support for welfare provision.

This point goes to the heart of the ‘trilemma’ posited by Diamond and Lodge: that you can’t simultaneously achieve sustainable public finances; safeguard universalism and the public support that goes with it; and increase ‘social investment’ spending. It’s a good challenge that reflects the agenda of the Fabian Society’s Commission on Future Spending Choices which will report in the Autumn. However I think the left can find ways to blend all three goals rather than simply make forced trade-offs.

Turning to the public’s muted support for investment-style spending, many people probably instinctively prioritise immediate security over spending that builds prosperity for the long-term.  But the real issue is not ‘investment’ verses ‘insurance’ but ‘new’ versus ‘old’. People place a much higher premium on preserving the status quo than building institutions. New services also take time to bed in to the public consciousness, which I suspect goes some way to explain the public’s limited support for childcare spending.

Diamond and Lodge discuss this small-c conservatism at length, portraying it mainly as a negative phenomenon. I would be more even-handed: the public’s instincts for preservation and stewardship have helped Britain and other European nations preserve strong welfare states in spite of thirty years of headwinds from neoliberal ideology and the competitive forces of globalisation. No Right Turn illustrates this enduring public commitment and shows the public has little truck with most of the small-state propositions of the right. This is not to say our welfare state does not need to change, but we should recognise that the public’s instincts have helped anchor the UK’s levels of public spending at around 40 per cent of GDP for sixty years, even with the Thatcherite revolution.

Diamond and Lodge’s concern is that the public will not tolerate changing priorities to reflect new social needs and risks, or rather they only will when the overall pie is growing. By contrast, the Fabian research on spending priorities found that the public’s top priority for spending was for older people’s social care, which has traditionally been a Cinderella of the UK welfare state. This shows that if politicians and campaigners do enough to ‘roll the pitch’ the public can be persuaded to priortise innovations in response to changing social needs. Admittedly, this example fits firmly into the ‘insurance’ side of the equation but it does suggest that if a case is presented well, the public can be won round to spending money differently.

It is also important not to be too down on Labour’s record in government. During the new Labour years, important strides were made in transforming the UK welfare state towards the ‘nordic’ social investment model Diamond and Lodge describe.  Good progress was made in the provision of childcare even though there is rightly appetite to do more. The expansion of university places will change the country’s long-term prospects. And Labour’s welfare-to-work reforms were successful in supporting more people into work. Indeed, I’ve argued before that Labour has not done enough to explain how its labour market reforms have contributed to today’s remarkably robust employment figures (this week’s IFS Green Budget looks into this point in detail). There were failures of course – I’d single out adult and vocational skills – but with our welfare system so focused on labour activation and work incentives, much spending on working-age adults can now be considered ‘investment’ as much as ‘insurance’.

Nor should we be too despondent about the ‘insurance state’. There are many reasons, apart from the public’s small-c conservatism, to want to preserve its key building blocks. In the UK the bulk of ‘social insurance’ goes to health and pensions and both were transformed under Labour. They will cost more in the future than the past, but neither is on an unsustainable spending trajectory. And importantly, it’s hard to contemplate how a centre left government would want to trim either budget, except at the margins.

Our state pension system has been quietly reformed and now stands on a firm footing for the long-term. The Labour party inherited a system characterised by inadequacy, complexity, savings disincentives and bias in favour of men and high earners; it bequeathed the coalition plans for a simple flat-rate pension which would no longer lose value against earnings. These changes included increases to the pension age which, while not free from controversy, did not create the small-c conservative backlash seen in France.

Turning to health, Labour raised spending a lot to catch up with levels typical in other EU and OECD nations. This has to be seen as a one-off, and for the time being we should expect health spending to rise by no more than GDP. It’s true there are always upward pressures on health spending (from innovation and labour costs, as much as demography). However the NHS is an efficient, cheap health system compared to many around the world and crucially its budget is controlled annually from the Treasury, rather than being a demand-led insurance system.

So with careful management, ‘insurance’ costs can be contained over the long-term, as I’ve set outelsewhere. For example older people’s social security, health and care are only projected to rise from 15 per cent of GDP in 2015 to around 18 per cent by 2040, on the OBR’s numbers. Sure this is an increase, but there’s still a lot of headroom for investment style spending as long as the economy returns to trend growth. Over the long-term the challenge of balancing universally-based ‘insurance’ against ‘investment’ is do-able.

The trouble comes with the short-term because of austerity and real spending cuts. The government has made some nasty cuts to certain social insurance provisions (both universal and targeted) but it has chosen to safeguard the main universal entitlements: healthcare and pensions.  It’s easy to say that the coalition is just pandering to institutionally conservative political interests but it’s hard to see what Labour would have done differently, apart from perhaps cutting a few of the peripheral pensioner entitlements.

In the UK context, with our lean health and pension systems, the choice is not really between ‘investment’ or ‘insurance’. Instead insurance at current levels should be preserved and the choice becomes ‘investment’ or ‘austerity’?  The squeeze to social investment is a consequence of the government’s cuts and the scale of those cuts was a political choice. George Osborne decided that 85 per cent of deficit reduction should be through spending cuts not tax rises; and he prioritised immediate action over boosting growth and tax revenues. A credible, but less eye-watering approach to deficit reduction would allow the government to maintain its insurance commitments and create some space for more investment-style welfare services as well as other pro-growth spending. Diamond and Lodge lay down a good challenge, but in the case of the UK it is one that can be approached with pragmatic optimism not a sense of inevitable decline and despair.