Four Challenges - Can the Welfare State Survive? - Andrew Gamble

Can the Welfare State Survive? - Andrew Gamble (2016)

Chapter 3. Four Challenges

The market libertarian tide has advanced and scored some successes, particularly in Anglo-America, but the political and social consensus in favour of sustaining a welfare state even in these countries has so far held. The social democratic welfare states in the Nordic countries and the conservative corporatist welfare state regimes in Western Europe have been most successful in resisting any trend towards ‘decommodification’. But even if this remains the case and majorities in all the Western democracies continue to want the welfare state to survive, there is no guarantee that it will. The new hard times ushered in by the financial crash have once again put the future of the welfare state in question. Will it pass the test again and find fresh ways to renew itself, or this time will it fall apart because the stresses placed upon it cause sufficient voters to withdraw support? The welfare state faces many challenges, but four are picked out here for closer analysis. They are interlocking, and to some extent have existed as long as welfare states have existed. But in their present form they are the products of the neo-liberal era, and reflect some of the key trends in the political economy of the last thirty-five years.


This challenge is the one perhaps most often picked out as threatening the future of the welfare state. At its core is how to persuade people to pay higher taxes for the public services they say they want. Right from the beginning of the welfare state, there have always been fears that governments would promise too much or would make commitments they could not fulfil. The pressures on governments to spend more are intense, and in good times governments bend to those pressures and allow spending to rise. But this can mean that the amount governments are able to raise in taxes fails to keep pace with the amount they need to spend to cope with rising costs. This problem is particularly acute during recessions, but it exists at all times. Governments can deal with it by cutting back services, but this is unpopular. Or they can look for efficiency savings, constantly reforming services in order to cut costs, but this can be slow. Or they can increase taxes or charges, but this too is unpopular. Or they can increase borrowing, but this encounters limits.

The problem is not really one of money. Western societies are much richer than when welfare states were first introduced. They could choose to spend more on welfare. Already there is a wide variation between what different states are willing to spend, with the Scandinavian social democracies tending to have the most generous welfare states and the highest taxes, and the Anglo-liberal states the least generous welfare states and the lowest taxes, with the conservative ordo-liberal states of the eurozone somewhere in the middle. The problem is one of political will. Voters in Western democracies vote for parties that promise them more spending on public services and lower taxes. They want Swedish-style public services and American-style taxes. Political parties pretend, with varying degrees of plausibility, to offer both. The acceptability of very high taxation has declined in many countries, as opportunities for personal consumption have mushroomed. As a result, politicians have become very wary of proposing new taxes, which always tend to be unpopular.

If new taxes are hard to introduce, governments also find it increasingly difficult to increase existing taxes. In the neo-liberal era, parties increasingly compete with one another to promise not to raise the main forms of direct and indirect taxes - typically income taxes often deducted by employers on behalf of the state and sales taxes such as VAT. In recent years, governments across Europe and regardless of welfare regime have become interested in adopting fiscal rules which constrain their freedom of manoeuvre and commit them to strict targets on spending and borrowing to achieve fiscal surpluses.1 In some instances, this also involves laws to prevent governments increasing certain taxes. The resilience of such rules has yet to be properly tested. Many observers assume that if a financial emergency was grave enough, any government would suspend such rules to raise taxes and would have no compunction in doing so. After the 2008 financial crash, all Western governments were willing to adopt extraordinary measures to prevent the economy going into freefall.

The political enthusiasm in the neo-liberal era for much stricter fiscal rules and fiscal surpluses reflects an expectation fostered by politicians of all parties that tax rates should never rise but only come down. When tax rates are increased, it is understood that this is temporary and will be reversed as soon as possible. This is very different from tax regimes in the past, when it was accepted that in periods of financial emergency tax rates needed to be increased to restore fiscal balance. In the neo-liberal era, at least as far as the Anglo-liberal states are concerned (the ordo-liberal states of the eurozone are a different matter), there are really no fiscal conservatives left in the traditional sense. In denying themselves the ability to raise taxes, they have to put all the emphasis on reductions in spending, often politically a much harder task. To get round this difficulty, governments have become adept at promoting stealth taxes. These are taxes which have a low public profile. The most useful stealth tax of all in the past was fiscal drag, the process by which inflation pushed taxpayers into higher tax brackets without any political decision from governments. One of the problems of the neo-liberal era is that inflation has declined to very low levels, and in many countries there is now greater pressure towards deflation rather than inflation.2 The benefits of fiscal drag are as a result much reduced, and governments in many countries, such as Japan, are seeking to raise the rate of inflation not lower it.

This downward pressure on tax rates extends to pressure for removing certain kinds of taxation altogether. This is most evident in the fiscal competition which sees states compete with one another to lower taxes on capital, and also to tolerate tax arrangements for the rich which allow them to avoid high tax burdens. In the United States there is pressure to abolish inheritance tax permanently, and there has also been interest in the US and in some Eastern European countries in the idea of flat taxes: abolishing all forms of progressivity in the tax system, and requiring instead individuals to pay a fixed proportion of their income, say 20 per cent, or even a fixed amount. Both would be highly regressive, and would be designed to entrench a permanently lower level of tax revenue from which government would have to fund its spending, including spending on the welfare state.

Market libertarians have long been fascinated with curves which purport to show a relationship between tax rates and tax yields and also between tax rates and economic growth. The Laffer curve in the 1980s was invoked to provide substance to the trickle-down thesis: the claim that reducing tax rates on the rich would actually increase tax revenues because the rich would stop finding ways to shield so much of their income from the tax authorities. The evidence for this was always highly dubious. The main effect of lowering tax rates on the rich and reducing the progressivity of the tax system was dramatically to increase inequality. More recently, the Cato Institute has championed the Rahn curve, which attempts to show that there is an optimum level for government spending if the aim is to maximize economic growth.3 This is calculated to be between 15 and 20 per cent of national income. If it goes above this (and among advanced economies only a few special cases such as Hong Kong are below), then economic growth will be much lower. Among the Western economies, public spending (a large part of which is spending on the welfare state in one form or another) varies from 35 per cent to 50 per cent. But there is no obvious correlation with economic growth. Some of the highest spenders, such as the Scandinavian economies, have had persistently high growth rates. There is considerable evidence that strong welfare states boost economic growth rather than hold it back.4

But although the economic argument fails, the political argument is still potent, because lower taxes is what many voters want, so long as it is other people’s services which are cut. This race to the bottom in the Western tax states means that they come to suffer from a chronic shortage of revenue to fund public services. This makes the welfare state always look unaffordable, always on the edge of a new financial crisis. In the United States, the Republicans in Congress in recent years have been firmly opposed to any new taxes on the wealthy and advocate only spending reductions to deal with the ballooning US national debt. (It had reached $18 trillion in 2015 - six times the debt Ross Perot was so worried about in 1992.) Paul Ryan, who, as noted in chapter 1, became the Republican nominee for Vice President in the 2012 US presidential election, put forward the Ryan Plan for achieving budget balance. It proposed reducing the federal budget to around 15 per cent of US national income by 2050. The Congressional Budget Office calculated that the effect of the plan would be massive cuts in federal spending programmes.

Barack Obama’s re-election in 2012 means that there has been no attempt as yet to implement anything approaching the Ryan Plan in the United States. But it forms part of a pattern of persistent agitation by market libertarians in the US for amendments to the Constitution to entrench a fiscal regime of permanently balanced budgets and low taxation. Such a regime, if ever achieved, would make the preservation of even a residual welfare state very difficult. Nor is this debate limited to the United States. Canada has already introduced a Federal Balanced Budget Act, and the United Kingdom’s Charter for Budget Responsibility commits governments to budget surpluses when the economy is growing. The battles over levels of taxation are crucial for the survival of the welfare state. Any state which cannot collect taxes is close to collapse, unable to function. The same is true of welfare states. If tax resistance and tax evasion reach certain levels so that either taxes cannot be collected in sufficient amounts (as in Greece) or taxes cannot be increased above a certain level, this severely limits what kind of welfare state, if any, is possible. Research on willingness to pay shows that the sustaining of broad political coalitions is essential. If all citizens benefit from welfare programmes at some point in their lives, they are more likely to support the taxation necessary to fund the welfare state.5

The other side of affordability is spending. One of the reasons why the right libertarian agenda has not advanced as far as its protagonists hoped is that although many voters are increasingly keen on seeing taxes reduced, they also do not want spending on services to be reduced. On the contrary, they want it to rise, or at the very least they want the quality of services to be maintained. With declining tax revenues, this is an impossible circle to square. Governments try to do so by offering to protect and ringfence the services which are valued most, or at least which are valued by a majority of voters, or by voters who actually vote. This means that it is the universal programmes on health, education, and pensions which tend to get protected. In the austerity programmes of Europe, the interests of pensioners have been safeguarded in almost all states, which reflects the fact that they are much more likely to vote than younger citizens. Similarly, health and education are services which the vast majority rely on and which still have high levels of approval. The areas of spending which are targeted are those which benefit minorities: the disabled, the unemployed, and low-income working families. As noted in the previous chapter, these benefit recipients can much more easily be stigmatized than can pensioners, or than those who use the schools and hospitals. It is here generally where the axe falls. Sympathy for welfare spending which supports the poor has declined. Popular attitudes support welfare spending where there is a contributory principle; but there is much less support for those programmes where no contribution is made.

When austerity really bites, however, as it has in Greece, some of these rules get broken, but that is because the government loses its sovereignty. The Syriza government in Greece insisted that protecting pensioners was one of its red lines, a pattern seen across Europe. Funding pensioners actually protects many other groups, including the unemployed young, because resources get redistributed through households. But in the last-ditch renegotations over a new bailout in June 2015 Greece’s creditors, the Troika of the European Central Bank, the European Union, and the International Monetary Fund refused to accept the government’s proposals for increases in corporate taxation and taxation on the rich, believing that these taxes could not be collected, and instead proposed further cuts to pensions, including the poorest pensioners, whom Syriza had vowed to protect. In fiscal squeezes in the neo-liberal era, the default position both in Anglo-liberal capitalism and in ordo-liberal capitalism has been to cut spending and not taxes, and in Greece and several other ordo-liberal countries this has meant cuts in core programmes. In Anglo-liberal countries, the cuts have been severe but so far have been concentrated in programmes that do not directly affect the majority.

The other way of avoiding deep spending cuts but also to avoid large tax increases is to deliver efficiencies. Public service reform is not new. It has always been part of the welfare state, but since the crisis of the 1970s it has acquired a new urgency.6 The recognition that mature welfare states exhibited a constant tendency for spending to increase faster than the resources available to sustain them inspired constant efforts to restructure the welfare state, reforming its operations and subjecting it to new disciplines and targets, in a bid to enhance efficiency, raise productivity, and slow the inexorable rise in costs. Any mature welfare state that was not being constantly reformed would probably not survive very long. The problem is not whether efficiency savings are possible but whether they are ever enough to contain rising costs and meet rising expectations.

The neo-liberal era gave an extra twist to this debate through the development of what became known as the new public management, with its emphasis on targets, audits, quasi-markets, the split between purchasers and providers, and experiments with contracting out and novel forms of financing, such as the public finance initiative. What the new public management sought to do was to allow managers to measure output and performance more precisely, and to use these measures to improve productivity and efficiency.7 Controversy abounds as to how far these methods were successful, or whether they mainly added another level of bureaucracy, which then in its turn became a target for culling. The professionals who used to run services were pushed aside and subordinated to the new public service managers, who now became a recognized stratum in every advanced welfare state. Their function was to be engaged in continual reform of the services they were managing and regulating.

The affordability dilemma in the neo-liberal era has arisen from both the desire of voters to have lower taxes, or at least not higher taxes, and at the same time the desire of the same voters to have better and more services. This is one of the reasons why governments of all political persuasions embraced the language of perpetual reform which the new public management offered them. Another reason was that welfare states did not just satisfy demands from voters, they are also integral to modern political economies, their reproduction and sustainability. It helps explain why even radical governments influenced by market libertarians have made relatively little progress in dismantling the welfare state either in the good times or now in the bad times of the neo-liberal era. There has not yet been the kind of step-change to a much reduced size of state which would be needed to realize the market libertarian agenda.

One of the reasons for this is the rising tide of expectations and the entitlements which go with them. Welfare states can seem quite affordable if entitlements are kept limited. At the beginning of welfare states, the goals were extremely modest: the provision of a basic pension for old age, and social security to cover risks arising from unemployment and ill health. But the needs of the economy and the pressures of competitive democratic politics have transformed that. Modern citizenship has been built on making civil, political, and social rights truly universal,8 and that has meant uncovering the multiple sources of inequality and discrimination against particular groups. Since the ideal of the welfare state is to achieve full self-realization for all its citizens, the best way to ensure this is by recognizing that every individual citizen should be entitled to enjoy certain goods, have access to certain opportunities, and be protected against certain harms. As societies get richer, so the quality threshold in providing entitlements rises. Should welfare states provide only the basics, or should they strive to make available the best that there is? Here is the dilemma. If they do the former, then they provide little more than a basic safety net, and inequality will persist, because families which can afford to will purchase the highest-quality education and health care. If they do the latter, they open Pandora’s box, because the quality of what can be provided is always rising and so is the expense. To provide the best health service possible, there need to be constant increases in the resources made available to it, and that means either charges for specific services or higher taxes.

The problem lies in universal benefits, since by their nature they tend to be potentially open-ended. There has long been a debate in welfare states about the merits of universalism over selectivity, a distinction highlighted by Richard Titmuss.9 If benefits or services are made selective, they can be directed to those who need them the most, while withheld from those who can afford to do without them. Selectivity certainly reduces the costs of welfare programmes if eligibility rules are tight enough and enforced. But there are disadvantages too. They involve some kind of means test, which imposes costs of its own and is often very bureaucratic. Means tests attract a stigma, and many people who ought to claim prefer not to, both because of the stigma and because of the hassle. Universal benefits have the great merit that since they are available to all citizens, there is no stigma in accepting them. They are an entitlement. They are also essential if there is to be broad-based political support for an extended welfare state.

Conservatives and market libertarians have always worried about an entitlement culture because it tends to set expectations of what the state should deliver on a rising curve, severing the link between outputs and costs. In earlier periods, governments dealt with this problem by asserting the primacy of fiscal balance, and imposing financial caps on the money available for any particular benefit. Either that benefit then has to be rationed or its value has to be reduced. This can lead to harsh politics. In fiscal squeezes in the early decades of the welfare state, orthodox financial doctrine decreed that budgets must be balanced by raising taxes, reducing expenditure, or increasing borrowing.10 The second was always the favoured route, and finance ministries were quite ready to cap spending even on open-ended benefits such as unemployment benefit. Balancing the budget took precedence over any item of current expenditure. That included citizens’ entitlements.

Those fiscal doctrines were largely abandoned in the post-war Keynesian era. When they resurface, as they have done during the Greek crisis, it comes as a shock. The Greeks were asked by their creditors to cut entitlements, including pensions, in order to restore fiscal balance. In most other countries where governments are under such duress, there are strong incentives to avoid any such direct confrontation on universal entitlements. They may be weakened, for example by raising the age at which pensions are paid, but such changes are generally phased in over long periods, and care is taken not to affect the interests of current pensioners. In several countries, even during the implementation of austerity, certain universal benefits and programmes have been specifically protected, and in some cases their position has even been enhanced.

When the numbers are rolled forward, the financial commitments of some of the big universal entitlements which have come to characterize the welfare state can seem alarming. The United States is reckoned to have amassed unfunded entitlements amounting to $61 trillion in pensions and Medicare. Given the deadlock in Congress between Republicans and Democrats over raising taxes, the country faces a debt burden that will continue to grow. The United States is very wealthy and could eliminate its debts by choosing to raise taxes. But as long as that political option is blocked, the US budget continues to be adrift. The problem is passed on to the next generation to solve, along with climate change and much else. The United States is not known for the generosity of its welfare state, but its commitment to some core entitlements, such as Medicare and pensions, which are extremely popular, even among Tea Party supporters, makes it an exemplar of what can go wrong with welfare states when entitlements and expectations exceed the political capacity to fund them.

The revolution of entitlements has been one of the great changes of the last hundred years, associated with the rise of democratic citizenship and the expanding horizons which this has encouraged. One of the key areas where this has manifested itself is in the household, the sphere of gendered division of labour and social reproduction. The household has always played a vital role in the provision of welfare. It is a collective institution and acts to absorb many of the problems and deal with many of the risks created by market economies. When welfare states contract, it is generally families which must step in to fill the gap, and within families it is most often women who perform that role, in terms of care of children, the elderly, the disabled, and the sick. Capitalism has always depended on non-market institutions to be viable; households were for a long time the crucial support, and in many countries still are. Gradually that role was taken over by welfare states, and women were emancipated to pursue lives on a more equal basis with men. But whenever there is a fiscal crisis and a new bout of austerity, the state suddenly starts shovelling responsibilities back on to families.

The entry of many more women into the labour force has had major economic as well as social benefits, but the battle to ensure that there is equal and fair treatment between men and women is far from won, in part because of the hidden support which is still required from families and the voluntary sector, which is again disproportionately staffed by women. The gradual extension of child care and nursery provision, specific income support through child benefits, carers’ allowances, and improvements generally to social care and provision for the disabled - all this is essential if the unequal nature of domestic labour is not to reassert itself whenever a new financial crisis hits. There has been some progress, but there is still a long way to go. In this area of the welfare state, as in so many others, the appetite for more state provision, once aroused, becomes hard to satisfy within existing financial constraints. But it creates a body of support for extending the coverage of the welfare state and the quality of the services it can deliver. Welfare states are often depicted by their critics as forever spiralling into black holes of debt and waste, and this is given as the reason why they will not survive. They cannot control their costs. But welfare states which do best, such as those in Scandinavia, manage to achieve both increasing quality of services and deeper engagement with citizens’ needs, while at the same time generating the political consent for the gathering of the resources which keep them solvent. It can be done.

International competitiveness

The second key challenge facing contemporary welfare states and governments seeking to manage them is how to maintain a welfare state in an open economy. After several decades in the twentieth century when international monetary cooperation collapsed, trade stagnated or shrunk, and protectionism in all its forms advanced, the period since 1945 saw a gradual opening of the international economy once again, with the establishment of a new international monetary order, and steady efforts to liberalize the movement of goods, capital, and even people. After the 1970s and the neo-liberal turn executed by the United States and the United Kingdom, the pace of opening quickened. The new monetary and fiscal rules developed to counter inflation were accompanied by the steady abandonment of capital controls, the floating of currencies, the opening of borders, and the freeing of trade. These trends were enhanced by the end of the Cold War and the division of the world into two separate economic and military blocs.

The new opening acquired a new name, globalization, and although the claims for it were often exaggerated, it did represent a marked shift from the earlier post-war period, and still more from the inter-war period and the world wars themselves. This was much more like a return to the liberal international order over which Britain had presided in the nineteenth century. One important difference was that there were no colonial empires left. The new phenomenon since the 1990s has been the emergence of a group of rising powers, among them China, India, and Brazil. These powers with their vast populations began to grow rapidly, transforming the nature of the international economy, its division of labour, and the prospects for its future governance. These developments suggested that during the twenty-first century there would be a significant change in the balance of the international economy, with much greater weight and political power accruing to the rising powers.

The remarkable progress of the rising powers was a key factor in the long economic upswing which began in the 1990s and lasted, with some interruptions, until the financial crash of 2008. The rising powers contributed low-cost manufactures which now flooded the markets of the Western economies, lowering inflation and boosting living standards. But what they also did was raise anxieties about where the process would stop. In the new division of labour of the international economy, how would the Western economies readjust to survive? As more and more manufacturing and service jobs were outsourced to the rising powers, many worried that it would be hard to find replacement jobs for the workers who were displaced. If jobs could not be found for them, many might become dependent on welfare benefits, requiring an increase in spending and therefore a further shortfall in resources to pay for it.

The Western economies seemed to be caught in a bind. It was difficult to reverse globalization and the liberalization of the international economy with which it was associated. But if the wages and labour standards in the rising powers were so much lower than in Europe and the United States, there was little that could be done to prevent the loss of jobs. The only remedy might be to lower wages and labour standards in the advanced economies so as to be able to compete. Such moves would be very difficult politically, not least because it would require not just action on wages, but also action on the social wage. One of the reasons why Western workers were no longer competitive with workers from poor countries was because they were supported by a dense network of welfare benefits and entitlements. Strip all that away, some market libertarians argue, and Western workers could price themselves back into jobs.

The core of this argument is that much of the wealth and the enhancement of that wealth through the social wage in the Western economies has been in part due to the way these economies have been protected in the last hundred years, but particularly in the forty years after 1945 when a liberal international market order was being re-established. Western economies had a privileged structural position in the international economy which they used to build their wealth and entrench it. Enhancing the social wage through an expanded welfare state which brought domestic peace and a large internal market was one of the main fruits of this.

With the advent of the era of globalization, however, this post-war settlement came under attack. Many of the jobs are no longer competitive internationally and disappear, while there is growing pressure from economic migrants to enter the wealthy countries. The twentieth-century welfare states were always projects of nation-states. The community in which resources were to be shared and redistributed was always a national one. Many programmes were universal, but they were universal within national spaces. There were a few eccentrics who thought about world government and world distribution, but this was never likely to be practical politics. The discrepancy can be seen in the amounts states typically spend on their welfare budgets and the amount they dispense in foreign aid. The UN development target for foreign aid is 0.7 per cent of national income. Few states achieve this. But they will spend 20 per cent or more on welfare programmes for their own citizens.

This is another paradox at the heart of modern welfare states. They were developed to mitigate the extreme inequality and insecurity which laissez-faire capitalism generated. They succeeded in taming capitalism and creating social democracies in which the majority came to enjoy not just civil and political but also social rights. In the second half of the twentieth century, this made these economies rich and stable. In the era of globalization, however, they have become not only a magnet for the poor of the world, who try to enter them to find work, but also at the same time uncompetitive with the new forms of laissez-faire capitalism arising in Asia, which are unencumbered by employment rights or the cost of state-provided welfare. The Western welfare states become little oases of prosperity and harmony, and to preserve their privileges populist movements increasingly demand restrictions on immigration and restrictions on trade.

Global competition threatens the survival of the welfare state if welfare comes to be seen as a luxury which can no longer be afforded. This is a refrain often heard from market libertarians, but sometimes on the social democratic left as well. There are often calls for costs to be reduced to make Western workers competitive again, and warnings about ‘the global race’ and how the wealth and employment of the Western economies are not guaranteed. However, even if all welfare costs funded through the state were stripped out, Western workers would still not be competitive with workers in China, Vietnam, and Indonesia. To be competitive, Western economies have to move up the value chain, using skills, networks, and accumulated capital to develop new products and services which cannot be replicated by cheap labour in other parts of the world. But that would require increasing investment in education and training, which, since they are unlikely to be financed by private corporations, must be financed by the state. To keep the economy competitive and citizens in employment requires major long-term investment by the state in human capital. This enlarges the welfare state rather than contracts it, with all the implications for funding which then arise. Stripping out the welfare state would damage employment and prosperity in the Western economies.

This is a familiar pattern in the history of welfare states. If the welfare state was just about relief of poverty and suffering, welfare spending might be sacrificed were this the only way to price workers into jobs. But if the only way to price workers into jobs is to invest in them, to give them the skills to perform different kinds of jobs, then cutting back the welfare state will only create bigger problems for state budgets further down the line. At the same time, most Western economies have found it very hard to make the social investment strategies work for all their people. Too many remain long-term unemployed, with low skills and employability and therefore dependent on benefits. Employers are naturally attracted to the large numbers of young, highly motivated, highly skilled immigrants who are willing to come and do a wide range of jobs in the economy. But this then creates social and political tensions in many communities, over jobs, housing, schools, and the cultural integration of the newcomers.

These are intractable problems, but welfare states are learning to survive them. What is important is not to retreat into narrow forms of protectionism.11 There are limits to the amount of immigrants any community can absorb if the flow is too high, but provided the flow can be controlled, welfare states have shown themselves capable of helping to build diversified but also integrated communities. Austerity programmes can, however, put all this progress at risk if they destroy trust and increase insecurity, and also threaten the future affordability of welfare states if they lead to cutbacks in social investment which is so important in creating the high-skilled, high-paid jobs and individuals the future economy will need, at the same time placing arbitrary restrictions on the flow of migrants. Getting the balance right is enormously complex, and given the crude way in which issues such as welfare benefits and immigration are discussed in the media, politicians continually appear on the defensive. But there is no real alternative. The gains which welfare states represent should not be thrown away. At the same time, they cannot be protected by turning Europe into a fortress against the rest of the world. Efforts to increase aid and the pace of development around the world are the only sure long-term remedies.

New social risks

The third key challenge is the emergence of a set of new social risks, alongside those which the welfare state was originally introduced to tackle. These new social risks are associated with the transition from a manufacturing economy to a service economy, and the emergence of a more individualist society and political culture, of which neo-liberalism is one manifestation. The political challenge for defenders of the welfare state is how to make the case for solidarity in such a climate. Many of the institutions which spontaneously supported collectivism and collectivist attitudes in the past have been weakened or destroyed. They include trade unions, mass-production factories, close-knit working-class communities, churches, and extended families. This is not a new trend. It is inscribed in the logic of the development of capitalism as an economic and social order. Individuals have been set free from the collective bonds of nation, community, and family. This has given individuals much greater personal liberty and private space, much more room for experiment and projects of self-creation; it has made them more independent and self-reliant, and less keen to accept dictates of authority, whatever their source.

The new social risks are centred on new emerging patterns of work, households, and dependency.12 Key developments have been: the much higher levels of participation of women in the workforce; the creation of a far larger group of citizens permanently dependent on benefits; the growth of single-parent families; the increase in job insecurity with the shrinking of permanent well-paid jobs and the growth of part-time, temporary, minimum-wage jobs; the growing importance of social care in an ageing population; the trend for increasing numbers of workers to be trapped by only possessing low skills or skills which have become obsolete; and the inadequacy of social provision against many of these risks. Some of these risks would previously have been handled by extended families, but changes in family structure make this less likely. Many of the groups affected by the new social risks are marginalized and lack the kind of networks and capacities to mobilize in support of new rights. Social democratic parties are most sensitive to the needs of these groups, but other groups are much better organized politically. Those most affected by the new social risks tend to be more isolated and fragmented and less able to make their needs count. Many of them do not vote.

These trends have created both obstacles and opportunities for welfare states. They have made spontaneous, unreflective solidarity less common. There has been increased pressure for individuals to become autonomous financial agents, taking responsibility for choices and decisions at every stage of the life-cycle once they become adult. This involves taking on increasingly large debts to navigate the life-cycle, such as student loans, mortgages, and pensions, as well as many different kinds of insurance. In addition, individuals increasingly borrow in order to buy immediately the goods and services they want. Financial services have expanded to fill the demand that these needs create. The mushrooming of credit cards, personal loans, long-term finance, online banking, and financial products for every possible life-choice and life-risk has become an everyday reality for most citizens.

The way in which welfare states are funded and organized runs counter to most of these trends. Citizens pay a significant proportion of their incomes in taxes, either directly or indirectly, and services are provided often in a top-down way, with limited possibility of citizen involvement, participation, or choice. The old command economy model of the welfare state drew on military modes of organization, and tended to concentrate power and decision-making in the hands of experts, managers, and professionals. There was an emphasis on hierarchy, discipline, and efficiency. At their best when directed to the achievement of a single goal, command models of organization can be highly effective, but they increasingly clashed with the desire of citizens to exercise more choice and control over the decisions which affected them. The challenge for welfare states has been whether they are able to introduce some of the flexibility and responsiveness to their customers that is characteristic of supermarkets.

The defenders of traditional models of the welfare state argue that the services and products which welfare states provide are quite unlike those provided by supermarkets. Good health and education are too important to be subject to market exchange as though they were just commodities which can be bought and sold like soap. One of the distinctive arguments for the welfare state has been that it is a sphere which recognizes that there are some goods which should not be commodities, and which should be provided in a way that is different from markets. This gives a large role to professionals, those with expert knowledge, to determine what a particular welfare good consists in and how it should be provided, and to whom. If citizens have trust in professionals to make the right decisions in the light of the best evidence, then this is a system which works well. But one of the consequences of the rise of a more individualist exchange and contract-oriented culture is that the market invades more and more spheres of social life, and individuals want more control over the decisions and choices which affect them. They lose trust in professionals to make the decisions for them. Various scandals in welfare states around the world, particularly in the medical sphere, but also in child protection and education, have caused trust in professionals to weaken, and have made citizens much more assertive.

As a result, there have been increasing experiments with new models of organization for welfare states. Some of these involve the direct participation of citizens in the governance of the services they use. But there are always problems of ensuring representativeness and efficient decision-making. The more common reforms have been to introduce markets or quasi-markets into welfare services, treating citizens as though they were consumers. Real markets involve lowering barriers to entry and allowing many different producers to compete for customers. But the prospect of unlicensed deregulated markets operating in health or education has generally been a step too far for most governments. Besides, they would only work if governments were prepared to take the further step of no longer letting the state provide or purchase services on citizens’ behalf, but radically reducing taxation and leaving it up to individuals how they choose to spend their money.

The logic of a more individualist society, where everyone has become a financial agent and learnt to manage their assets and debts, and to calculate risks and returns, is clearly against the ethos and purpose of collectivist institutions like the welfare state. Advocates of public service reform argue that citizens will not be satisfied if public services do not offer them the kind of choice and flexibility which they have become used to in so many other markets. If individuals have increasing control in other parts of their economic affairs, why should they not be given the same freedom within the welfare state? Opponents say that this is an agenda for full privatization. Once there is a split between purchasers and providers of services, with providers becoming mostly private for-profit companies, the next logical step is to remove the state as a purchaser, transferring that role to individual citizens.

No government has actually gone this far yet. There remain strong reasons for not doing so. Whether or not to remove the state from the provider role has often been controversial, but it does not in principle breach the idea of services provided through the taxpayer and free at the point of use. Many countries allow a range of organizations - both not-for-profit and for-profit - to provide services. There are serious issues about whether the taxpayer gets a good deal, and the extent to which public resources are siphoned off into private profits without any real gain in service quality. But the basic principle of collective provision remains. Transferring the purchasing role to individuals would entail full privatization, and a major shake-up of taxation and spending. Some regulation would probably be imposed to prevent major scandals, although market libertarians such as Milton Friedman have long argued that the best form of regulation is competition.13 Bad and fraudulent producers will not survive because consumers will vote with their feet and boycott them. The main practical objection to this policy is that the market would make a correction only after quite a lot of people had suffered serious harm.

How big a challenge is the spread of greater individualism to the welfare state? If all citizens were to embrace a market libertarian ethic, accepting in full the risks of living in a commercial society, then the appetite for either paying the existing level of taxes to support welfare provision or allowing choices and decisions to be made for them would quickly become intolerable and political parties would start to campaign on programmes to dismantle the welfare state. The rise of individualism certainly has influenced the growth of resistance to increased taxes, and has helped undermine the legitimacy of welfare states, and the instinctive support for them. There has been a weakening of political support for collective solutions to social problems, with some key groups in democratic electorates now opposed to increases in taxes to fund collective services. It is particularly noticeable how a division has opened up in many Western societies between private sector and public sector workers, with the latter being much more ready to support continuing high levels of public spending, not simply because they benefit from it but also because they believe in the public ethos and a strong public realm, as a counter to the individualist ethos of the market.

But the agenda of market libertarians has not made greater progress because the desire of citizens for greater personal freedom and independence is balanced by their desire for greater security. Most citizens remain risk averse, which is reflected in many of the products the financial services offer. There is also an increasing desire for greater government regulation of all kinds of matters throughout society, including the family. The reach of government in the neo-liberal era has been advancing not retreating when the number of areas in which government is expected to intervene is taken into account, from food labelling to smoking to transport. Fundamental areas like health, education, housing, and pensions show the same desire. Citizens want to know that they are safe, and when things go wrong they blame the government for not regulating the offending sector toughly enough. This was true even of the financial crash itself. The banks were blamed for their behaviour, but so too were governments for not regulating the banking sector in such a way that the excesses which led to the crash were prevented.

The modern individual is a curious amalgam of qualities in which different principles contend for mastery. More individuals have been obliged to become financial agents to a greater extent than ever before in the history of our modern commercial societies. In such societies, everyone is a merchant, as Adam Smith observed, but relatively few enjoy exposure to risk and many seek protection from it. If that is so in relatively unimportant areas of life, it is even more so in those areas which are central to any notion of human flourishing and well-being. These are the areas typically covered by welfare states. So long as they still discharge that function, most citizens are unlikely to vote for the dismantling of the protection it offers them. The problem is perhaps a more insidious one. It is the way greater individualism can make citizens less attentive to the needs of others, less convinced of the need for solidarity with those who are not as well off as they are, less willing to pay the taxes needed to keep universal protection in place. There is evidence particularly in the recent recessions in the Western economies of some hardening of attitudes towards the poor, with those claiming benefits viewed unsympathetically. Does this mean that the acceptance of the need for redistribution is declining? Or that there is now a much greater tolerance of inequality in Western societies? Rising inequality is a fact which will be discussed in the final chapter, but the evidence as to whether there is greater tolerance of it is mixed, in part because there is only limited understanding of the extent of the inequality which is once more emerging.

Welfare states can survive some erosion of the support for redistribution and for collective solutions, but it weakens them, and makes them appear ponderous and persistently ailing. This is why reforming public services remains important. Reconciling a more individualist culture and the concomitant expectations of service standards and product standards is as important for the welfare state as for any other organization. But what has to be avoided is following managerial agendas which talk the language of customer care and customer satisfaction but in practice are insulated from the actual concerns of those using public services. Getting that relationship right is vital to ensure the long-term survival of welfare states. But it is a complex matter. After several decades of reform, many familiar complaints are still heard, and shortcomings are still exposed. There is probably no escape from this.


A fourth challenge is demographic: the problems of ageing and fertility and how they can affect the sustainability and legitimacy of welfare states. One of the most important aspects of welfare states is the way in which they redistribute resources between the generations, guaranteeing to everyone in old age sufficient income to live on, and appropriate health care and social care. Dignity in retirement has long been an aim of welfare states, and pensions were one of the first programmes to be developed. The need to support people when they were no longer able to work or were ready to retire from work was obvious and widely accepted. Redistribution of resources from young people to old people became part of a social contract in which individuals understood that they would contribute now, and their contributions would fund retired citizens, and that in return they would receive support from younger citizens when it was their turn to retire.

Such a model worked well, but it did depend on there being a steady supply of young workers to take the places of the ones who reached the age of retirement. It also assumed that the usual pattern would be for the flow of those entering the workforce to be greater than the flow of those retiring. Otherwise there might not be enough younger workers to support the aged population. Another assumption was expectations of mortality. In the Beveridge Report, published in 1942, which provided a road map for the much-expanded welfare state constructed in Britain after 1945, the pension age was fixed at 65 for men and 60 for women, reflecting the relatively small number of citizens expected to live much beyond that age. Many of these assumptions have been confounded by later developments. In most Western societies, there has been a pronounced deceleration of the rate of population growth. There has also been a significant increase in life expectancy, a striking success of the welfare state and its social investment in people. The result has been that many Western societies have experienced an ageing population, with the proportion of elderly people steadily increasing. In some countries, such as Italy and Japan, demographic trends point to the population shrinking.

Such trends are a problem for welfare states because they imply that extra resources must be extracted from a relatively declining pool of younger workers in order to maintain the value of pensioner benefits. There are many ways of alleviating the problem, which is also one of intergenerational fairness, but none of them are very popular. The easiest, on which most countries have made a start, is to restrict eligibility for pensions by raising the state pension age, not just once but progressively in line with the rise in life expectancy. A second option is to reduce the generosity of state pension benefits, but this is difficult because of the power of the pensioner lobby and still more of the pensioner vote. In all the democracies, pensioners wield considerable political influence because, as noted above, they are more likely to vote than younger citizens. In all the established democracies during the austerity programmes of recent years, it is noticeable how pensioner rights have tended to be protected. Sometimes pensions and pensioner benefits have been explicitly ringfenced, and pensioners given guarantee of a real-terms increase much more generous than anything being offered to younger workers. Such crude tactics have often paid off. In the United Kingdom, where pensions and pensioner benefits had been one of the areas ringfenced from austerity, the grey vote swung decisively to the Conservatives in the 2015 general election.

A third alternative is to stimulate the birth rate. In the 1950s, the French went to great lengths to increase the birth rate by offering a range of financial incentives to anyone who conceived. The programme had some success but only for a time. There would be much more difficulty in imposing these incentives in today’s more liberal and individualist societies, where the question of women’s rights is so prominent. The burden of child care in large families tends to fall disproportionately on the mother, as with so many other aspects of the household economy. The emancipation of women, and the opportunity for many more to work full-time and to pursue careers, have meant both that the age at which couples have children has gradually increased, and that the number of children per family has tended to fall.

If the birth rate of a particular nation cannot be stimulated, the obvious solution is immigration. Given the inequalities in the international economy, there are many citizens of poor countries willing to emigrate to work in rich countries. Such migrants are young, highly motivated, and prepared to work hard and for low wages. They pay taxes, and therefore make a major contribution to the resources available to the welfare state. Many additionally work directly for the welfare state, for example in hospitals and in social care. Contrary to tabloid myths, they tend to take very little out of the welfare state, unless they suffer an accident or illness, because many of them are working to earn money they send back to support their families in their home country. Immigration rejuvenates a nation’s age profile, and if immigrants are allowed to settle and bring their families, then this, too, encourages a better demographic composition.

Immigration is the perfect solution for a country with an ageing population, but it has become one of the most toxic of political issues, with huge resistance from local communities to the impact that immigration is believed to have on housing, jobs, and schools. As so often before, migrants are made the scapegoat for shortcomings in other areas of policy, and myths quickly grow about the preferential treatment that migrants receive, and how their needs are given priority by the welfare state, ignor-ing the claims of other citizens. Some of the hostility to immigrants arises from the desire to defend the welfare state as an exclusive benefit for the national community. Some of it arises from fear of their competition for jobs and the impact on wages. The rise of anti-immigrant parties across Europe has changed the discourse about immigration, and more and more obstacles are being erected to stem the flow. But the problem seems unmanageable. Countries are not proving very effective in policing their borders or reducing the flow of migrants. They need them too much.

A policy of open borders will not fly politically, but equally a policy of closed borders would be unworkable, wrong, and counterproductive. As discussed earlier, some kind of managed immigration is the only way forward, and potentially it has an important part to play in relieving some of the pressures on the welfare state, particularly in relation to ageing populations. A market libertarian agenda would support open borders as a way of cutting costs and undermining support for collective welfare. If migrant workers do not expect welfare benefits, they can be deprived of them, which helps cuts employers’ costs. They would not have to pay into pensions, for example. Indigenous workers then argue they are being undercut, but the market libertarian answer is that the way to stop being undercut is to give up the benefits too. In this way, the welfare state would start to unravel, fuelled by the social conflicts which high levels of immigration create.

The four challenges discussed in this chapter are all deep-rooted and together pose a number of intractable dilemmas for policy. Finding ways to manage them is essential to rekindle broad-based support for the principles of a universal welfare state. But what is also needed is a vision which can once again inspire hope and trust.


1. Paul Posner and Jon Blöndal, ‘Democracies and deficits: prospects for fiscal responsibility in democratic nations’, Governance 25:1 (2012), 11-34.2. Larry Summers, ‘US economic prospects: secular stagnation, hysteresis, and the zero lower bound’, Business Economics 49 (2014), 65-73.3. On the Laffer and Rahn curves, see Daniel J. Mitchell, ‘Question of the week: what’s the right point on the Laffer curve?’, Duane Swank, Global Capital, Political Institutions, and Policy Change in Developed Welfare States (Cambridge: Cambridge University Press, 2002); Dani Rodrik, The Globalization Paradox: Why Global Markets, States and Democracy Can’t Coexist (Oxford: Oxford University Press, 2011).5. See especially Peter Taylor-Gooby, The Double Crisis of the Welfare State and What We Can Do About It (London: Palgrave-Macmillan, 2013); Hills, Good Times, Bad Times.6. Kees van Kersbergen and Barbara Vis, Comparative Welfare State Policies (Cambridge: Cambridge University Press, 2014).7. Mike Power, The Audit Society (Oxford: Oxford University Press, 1997).8. T.H. Marshall, Citizenship and Social Class (Cambridge: Cambridge University Press, 1950).9. Richard Titmuss, Commitment to Welfare (London: Allen & Unwin, 1968).10. Christopher Hood, David Heald, and Rozana Himaz (eds), When the Party’s Over: The Politics of Fiscal Squeeze in Perspective (Oxford: Oxford University Press, 2014).11. Andrew Geddes, Immigration and the European Integration: Towards Fortress Europe (Manchester: Manchester University Press, 2008).12. Giuliani Bonoli, ‘The politics of the new social policies’, Policy and Politics 33:3 (2005), 431-49.13. Milton Friedman, Capitalism and Freedom (Chicago: University of Chicago Press, 1962).