THE WELFARE STATE: NEED FOR A KISS OF CHANGE (PART VIII) : Is the Welfare State Sustainable?

Whenever the economy grows, the size of the welfare state grows. And whenever the economy takes a hit, demand for welfare services grows stronger. Head or tail, the size of the Welfare State keeps growing irrespective of the state of the economy. Every time the Government subsidizes any service or fully funds any welfare service the size of the public sector grows. Often, it’s just another bureaucracy headed for disaster, dissipating wealth as it goes. It’s like aid provided to poverty-stricken countries by international organisations. By the time the aid reaches the targeted recipients, the initial size of the aid has thinned out to a mere pittance. Bulk of the aid is eaten away by administrators and other intermediaries. The world had never seen a shrinking Welfare State until the start of the 1990s when Sweden, a State with a very strong socialist bias, was per force required to make sweeping welfare reforms due to budgetary pressures.
The Welfare State, as it evolved over the years since the 1970s, has led to a rise in Government’s share of the national economy. This is not only due to the fact that most Welfare State services are characteristically labour-intensive activities but also due to a broadening of the scope of welfare spending. Is our expansive Welfare State fiscally sustainable? As long as the Government is willing to raise enough revenue for the financing of welfare spending the Welfare State is believed to be sustainable. It’s an armchair view shared by many people. The will to impose higher and higher taxes is one thing; the State’s capacity to raise revenue by means of taxation is another. The latter is principally a function of the size of the economy. The willingness of the people to pay taxes is another significant variable in the equation. Should the size of the economy contract or grow sluggishly and the willingness of the people to pay taxes falter because of, say, rampant corruption, wasteful government expenditures or a perception that what are being offered as welfare services by the Government is not value for money paid in terms of taxes, the Welfare State would become unsustainable over time.
Surprisingly, no one seems to have an idea of the actual overall cost of the welfare budget and how the overall cost has evolved over the years. The statistics are scattered and latent over a broad and complex system of welfare spending and accounting. A very crude estimate of total welfare spending by the Government gives a figure of around 27 per cent of GDP compared to around 25 per cent for most Welfare States. Expenditure on the three largest items of welfare spending, Social security, education and health grew by an average of just over 10 per cent during the period 1999-2000 to 2013. This growth rate was higher than the average nominal growth rate of 8 per cent of the economy; it also exceeded the average inflation rate of about 5 per cent for the same period. If the costs of several new items of welfare services are added the overall growth rate of welfare spending by the Government would be far higher. This trend may not seem alarming but it does point to the fact that the current level of welfare spending is unsustainable, more so when prospects for a 5-6 per cent of economic growth are clouded. It goes to say that the tax base will not expand by as much as the financing needs of welfare spending and, more importantly, of facilitating taxable output growth in the economy. Budgetary pressures are expected to intensify. In the past several years, external borrowings and other forms of capital flows have made welfare spending painless, that is, without Government having recourse to additional taxes. Before the welfare state agenda turns into an albatross that stranglehold the fiscal neck of the people, a number of bold initiatives, however unpopular, needs to be taken.
In an ideally managed fiscal system, there is a perfect or near-perfect balance between what people expect the Government to deliver and the amount of resources at its command. We know for sure that in the real world this does not happen. But responsible governments constantly seek to achieve the balance – an objective reflective of an effective and sound economic management. The doctrine of balanced budget is hitherto the best available standard for evaluating the relationship between the Government and the citizens with regard to what is paid as taxes and what is expected in return. But budget deficits have so far been a near-permanent reality because welfare spending has been growing at a faster rate that the economy over the last thirteen years. This trend does definitely not augur well for the economy. An in-depth study of Welfare spending by the Government could throw more light and answer the following key questions, amongst many others:-
(i)    What is the exact size of the government welfare spending in the Mauritian economy and how it has evolved over the years?
(ii)    The Welfare State was supposed to redistribute income from the rich to the poor. Keeping in mind that income tax is paid by a specific income group and indirect taxes, including VAT, are paid by rich and poor alike, is redistribution being effected in line with the underlying principles of the Welfare State and on a meaningful scale?
(iii)    Have the Welfare interventions succeeded in achieving its core objective of reducing income equality and eradicating or alleviating poverty?
(iv)    To what extent resources have been moved from the productive to the unproductive sector, that is, from the part of the economy producing taxable output to the tax-financed public services attributable to welfare. If the diversion of the resources is substantial, has it left too few creators of wealth in the country?
(v)    What kind of a growth rate of taxable output (as opposed to simply relying on GDP) is needed for the Government to sustain the current level of welfare spending? What have been the trends in the tax base of the economy and, objectively, what does the future of the Welfare State looks like?
An evaluation of Welfare State spending is warranted. Suffice it to say that the trends in welfare spending in the first thirteen years of the 21st century, bulky debt-servicing by the Government and the growth prospects of the economy do not support the view that the financing of welfare spending on the present scale is sustainable.