"In no field of public spending is the pressure for reductions greater than that of the welfare state," Tony Atkinson, warden of Nuffield College, Oxford, says in an LSE booklet, The Welfare State and Economic Performance. "It is argued that the size of social transfers [social security and welfare payments] is responsible for a decline in economic performance, and that cuts in spending are a prerequisite for a return to a golden age of full employment and economic growth."
The evidence for that is mixed, he says, after a review of nine European studies of the issue, and provides "no overwhelming evidence that high spending leads to lower growth rates".
Indeed, he argues, studies which simply look at the amounts spent may not be capable of answering the question of whether high spending leads to poorer economic performance. The way the money is spent may be as important as how much.
For example, unemployment and other insurance-based benefits allow partners to carry on working. Under means-tested assistance, however, a partner's earnings are taken into account in deciding benefit. That can produce incentives to give up work and claim, rather than work for marginal financial advantage. "The form of benefits, and the conditions under which they may be claimed, can change their impact."
Equally, providing incentives for people to switch to personal pensions in place of state provision can affect capital markets, changing the nature of investment decisions. Until such issues are taken into account, studies aimed at proving whether or not high welfare spending harms growth are unlikely to be conclusive, Professor Atkinson says.
tThe Welfare State and Economic Performance; WSP/109; LSE Welfare State programme.Reuse content