The wrong conclusion on welfare reform

In his speech on Europe yesterday, David Cameron observed that Europe, with seven per cent of the world’s population and 25 per cent of world GDP, accounts for 50 per cent of world welfare spending.  This is a striking statistic but is it actually something to criticise the EU for? Is it even such a surprise?

Let me make a rough guess that towards 100 per cent of the spending on Maseratis is made by the nation’s millionaires.

That is not to say that welfare spending is a luxury like a sports car but that it is something that inevitably is going disproportionately to be incurred by the richer parts of the world.  And that includes Europe.

These days though we can also think of it as an essential part of a modern economy. It gives people the confidence to take risks in setting up new businesses. It gives workers the willingness to accept redundancy from a declining industry in order to learn new skills and search for a new job. It is actually the means by which the disabled or the retired are offered the chance of a decent, dignified life, and it is good for economic growth in that it can route income and wealth from economically unproductive uses, such as inflating the prices of property and fine art bought by the rich, to economically more productive uses, such as buying food and clothes and providing heating for the poor.

In that other major speech this week – Barack Obama’s inauguration speech – he put it thus:

The commitments we make to each other – through Medicare, and Medicaid, and Social Security – these things do not sap our initiative; they strengthen us. They do not make us a nation of takers; they free us to take the risks that make this country great.

Too much welfare spending is undoubtedly a bad thing, but I think we can say also that so is too little.

Why has welfare spending grown? This website has observed before that an ageing population and declining birth rate will lead to growing dependency ratios (each person in work is going to have to support more non-working people) which in turn will pose a new challenge to existing welfare strategies. Governments were warned about this over the past decade but did not deal with it at the time. This is one of the reasons why national public finances are now in trouble.

But an important word in that last sentence is “national”. The task of reorganising welfare systems is a national one, not a European one. The EU does not set benefit rates nor the conditions for eligibility. Those are decisions for national governments. The EU has an influence at the margins in its insistence on the free movement of workers and their corresponding eligibility for benefits in member states to which they might move for work. But using the need for welfare reform as a stick to beat the EU with is quite wrong.

In fact, looking at the need for welfare reform, the EU is an asset not a liability. What will bring welfare bills under control is a more productive labour force, meaning both that more people are in work and that they work better in the jobs they are doing. EU investment in technology and trans-European networks and further moves to eliminate non-tariff barriers in the single market are the keys to a more productive European economy and a more productive labour force.

That welfare spending statistic is a reason for more action by the EU and not less. David Cameron makes a good point but draws the wrong conclusion.

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