Social Policy & Administration issn 0144–5596 DOI: 10.1111/j.1467-9515.2011.00777.x Vol. 45, No. 4, August 2011, pp. 333–337
Editorial Introduction: Overview and Conclusion
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Bent Greve Introduction It is said that welfare states have been in crisis since, at least, the first and second oil-price shock in the seventies. Many and varied words have been used to analyze and to describe the situation of the welfare states – recalibration, recast, dismantled, restructured – to mention just a few. Still, until now at least the welfare states of many countries have been stable or even witnessing expansion. The expansion has especially been into new areas in order also to be able to cover new social risk. Thereby welfare states have often been increasing the level of public sector spending, either directly or through the labour market or as tax-expenditures. It has seemingly been possible to continue to increase new initiatives and coverage, and also new risks. Improvement and expansion have been witnessed despite some cutbacks. Naturally, we do not know if the recent change is only a short-term change, but as is argued later this, presumably, is not the case, and by this a new era of welfare states emerges where targeting and emphasis on work are more substantial than earlier. The autumn of 2010 and spring of 2011 witnessed profound changes in several European countries in order to cope with public sector deficit in the wake of the financial crisis and to set up packages to help the financial sector. International economic support was given to countries like Greece and Ireland, but also strong austerity measures were taken in countries like France, Spain, Portugal and the UK. Many countries introduced reductions in welfare spending and tax increases to reduce public sector deficit. Sometimes this also meant a direct reduction in public sector employee wages. In this sense the recent economic crisis has to larger degree than previously seemingly put cuts in welfare spending on the agenda. This has implied reductions in the level of benefits for pensioners and unemployed, later retirement age and decrease in services, presumably in most countries with spending on health care being an exception. A window of opportunity has seemingly been opened. Reductions in spending have often implied a more targeted and narrower welfare state. This has changed the focus from how to improve service and transfers in welfare states towards how to reduce spending or increase public spol_777
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Address for correspondence: Bent Greve, Department of Society and Globalisation, Roskilde University, 4000 Roskilde, Denmark. Email:
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sector income. Two elements have been central to the arguments. First, as mentioned above, the high level of public sector deficit implying that the sustainability of public financing was in danger in many countries. Second, at the front line of the argument have been the expected demographic changes, especially in Europe, with a greying society and fewer people in the labour market, increasing pension expenditures and possible reduced ability to finance welfare state expenditures in the future. This has seemingly been an explosive cocktail for the welfare state and has paved the way for acceptance, although naturally not by all, of reductions in spending and changes in the balance between state, market and civil society. A question naturally is whether the changes would have come anyhow and the financial crisis thus only the excuse for doing what would have been done in any case. Up to the G-20 summit in November 2010 it was clear that austerity measures were taken more or less all across Europe, given that most countries had large public sector deficits. This despite the fact that part of the deficit was due to cyclical movement, but at the same time it showed that there was an insufficient level of savings in European economies in good times, as witnessed by the fact that the national debt as a percentage of GDP in many countries had passed the Eurozone agreed level of 60 per cent of GDP. The implication here is that in future a stricter budget policy will be pursued in order to save for a rainy day in good times. The Europact is a further indication hereof. Even in the Nordic countries, cutbacks are evidenced, as shown in the regional issue dealing with the Nordic welfare states (Greve 2011; Kvist and Greve 2011). Despite these changes, Nordic countries seem to continue to form a distinct cluster, at least in relation to income for older people (Haynes 2011), albeit convergences towards a European type of welfare state can be witnessed.
Overview of the Articles The series of articles opens with a comparative analysis by Vis, van Kersbergen and Hylands, which shows that when analyzing the USA, the UK, Germany, The Netherlands, Denmark and Sweden, Germany especially has chosen a different path to the other countries, one that can even be considered different from what one could expect, given that it can be seen as a Keynesianinspired type of response. Furthermore, that the retrenchment, at least so far, has been less than what could have been expected. Finally, that welfare regimes still seem to be rather different. Crisis or no crisis, this analysis does not point to the fact of a chosen path being changed. Further, also, that welfare states are still popular. The historical path taken is also at the core of the conclusion to the contribution by Chung and Thewissen who, in an analysis of Germany, the UK and Sweden, e.g. three distinct welfare state countries, state that there has been as a reaction to the crisis a focus on the historical roots and traditions of these welfare states. Germany followed its historical roots of support, especially to the insider, by making extensive use of short-term work as part of the active labour market policy (see also later); the UK choose a laissez-faire approach; and Sweden a more active stance, with the ambition of stimulating 334
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employment. However, one can question whether there is convergence, as the approach in Sweden by now has shifted even more towards a work-first approach. Australia has, as Saunders and Deeming show, due to fiscal stimulus packages, avoided the fate of most other western countries of ending up in recession, and has also had only a modest increase in the level of unemployment to around 6 per cent in 2010. Furthermore, despite what is often claimed, Australian governments seem not have used the economic crisis, neither historically nor now, to make dramatic changes to the welfare state. It is argued, however, that this is because the crisis emerged at a time when the Australian political system was in political turmoil, and also that there was a locked-in effect to continue welfare policy unchanged. Further, even more surprisingly, that the crisis has made it possible to establish an agenda for social inclusion. In the USA there is, as shown in the article by Anne Daguerre, despite the crisis, seemingly strong institutional constraints that hinder systematic social reforms, cf. the debate over health care reform. Lack of coverage in relation to health care of those outside the labour market has had the impact of, in order to have more people covered, unemployment insurance time being longer than the statutory 26 weeks. This is despite a system that is built upon the labour market and wage income being the central income resource. Furthermore, this is in spite of the fact that there has been over the last 20 years growing economic insecurity in the USA, so not only an economic societal fiscal crisis, but also clearly one at the individual level. From one liberal welfare state the focus moves to another liberal welfare state, although in Europe. Ireland once labeled the Celtic Tiger has been hard hit by the financial crisis, and here the relation between economic change and retrenchment of the welfare state is clearly witnessed, as Dukelow shows, and the contrast between the period of expanding welfare when the Irish economy flourished and recent changes is profound. However, the response in this crisis has been different from the one in the eighties making it difficult to estimate how different periods of economic downturns will have an impact on social policy; however, Ireland seems now even more than in recent years to belong to a clearly liberal idea of a welfare state. A welfare state once close to the universal Nordic welfare state, e.g. the Netherlands, has been witnessing dramatic changes over the last 30 years, including a stronger focus on market-driven reform, however, with clearly different patterns in the seventies and eighties and thereafter, as Yerkes and van der Veen describe. In particular, reforms related to the disability benefit system started early. The Dutch disability benefit system was peculiar in having a system with a clear incentive for both employer and employee to use it, which then in 1996 was changed in order to give higher responsibility to the employers. An increased focus on activation has also taken place. A specific trait has been the increasing role of private financing from 14 per cent in 1980 to 28 per cent in 2003. Finally, it is concluded that what has been witnessed is, perhaps, only the frontrunner in dramatic changes to social rights in a welfare state that can no longer, therefore, be argued as belonging to the Nordic © 2011 Blackwell Publishing Ltd.
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universal type of welfare state, but also that system change can be influenced both by internal barriers and bias in the political environment. In Southern Europe, welfare states have also been changed and there, clearly, also in times of crisis. In Italy, one of the European countries with a large budget deficit, due to the economic crisis reforms have been made, as Maino and Neri show, especially in the nineties, and particularly in the pension system with a movement towards a contributory pension system. The pressure from the EMU deadline seems to have been a core issue in the way to achieve the balance. Reforms have also been passed in the area of social assistance, whereas in health care with the exception of devolution the reform path is less clear, although managerialism and managed competition have been part of the reform process. The high level of public sector debt has had a clear impact on budget cuts in order to maintain or reduce public sector deficits. One way to cope with a specific problem in relation to the crisis and an increase in unemployment has been to share the available work. In the article by Sacchi, Pancaldi and Arisi, different approaches to the use of short-time work are compared for Italy, Germany and Austria. Despite, at the outset, there seems to be some convergence, this is less clear when taking a more systemic type of approach, where path-dependency seems to be integrated in the changes. Nevertheless, at the same time, there have been clearly marked changes to the systems in the wake of the financial crisis, and in using them actively as a way of coping with the rising level of unemployment. Finally, Doetter and Götze look specifically on the reforms in relation to the National Health Services in the UK and Italy. They argue that, despite the economic crisis opening a window of opportunity for making changes, this has not been the only reason for changes in recent years. Also specific aspects related to the system itself, e.g. endogenous factors, related to for example, the way incentives are working in the area of health care. Therefore, reforms also depend on ideas and how policy ideas can be diffused into societal decisionmaking. This might, perhaps, be a specific trait related to the way the health care system works and function (cf. also the other articles in this special issue), but might also be a more general understanding of changes that they are neither resistant to change, nor just changing when the opportunity is there.
Conclusion This special issue probes into how and whether the crisis has changed welfare states around the globe. The focus is on Europe, but also with an eye to Australia and the USA. The picture emerging from the articles is more diverse than one could have expected, still I would argue that we have seen a turning point in welfare states’ development with a move towards a more restrictive stance on public sector spending, at least in relation to societal total production, and a stronger emphasis on public sector deficit than we have witnessed earlier. In this way the financial crisis has had a profound effect on welfare states, or has at the least been used as a scapegoat in order to pursue dramatic changes in welfare systems in many countries. In particular, the development 336
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in Australia is different from the other countries analyzed, and in Europe Germany has seemingly chosen another path, albeit not that different. This does not imply that the time for welfare and welfare states has ended, although the balance between state, market and civil society seemingly is moving away from the state and more towards market, albeit also with a central role for the family in particular. Fiscal crisis thus opens a window for change that is used in some countries, whereas in others the development to a larger degree follows the path already chosen. However, at the same time, the opportunity provided by the crisis has not reduced the pressure for change.
References Greve, B. (2011), Editorial Introduction: The Nordic Welfare States – Revisited, Social Policy & Administration, 45, 2: 111–13. Haynes, P. (2011), Are Scandinavian Countries Different? A Comparison of Relative Income for Older People in OECD Nations, Social Policy & Administration, 45, 2: 114–30. Kvist, J. and Greve, B. (2011), Has the Nordic Welfare Model been Transformed? Social Policy & Administration, 45, 2: 146–60.
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Social Policy & Administration issn 0144–5596 DOI: 10.1111/j.1467-9515.2011.00778.x Vol. 45, No. 4, August 2011, pp. 338–353
To What Extent Did the Financial Crisis Intensify the Pressure to Reform the Welfare State? spol_778
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Barbara Vis, Kees van Kersbergen and Tom Hylands Abstract If ever there was momentum to roll back the welfare state, it is the (aftermath) of the financial crisis of 2008–09. All theoretical perspectives within comparative welfare state research predict radical reform in this circumstance, but does it also happen? Our data indicate that – at least so far – it does not. Focusing on a selection of advanced welfare states (the UK, the USA, Germany, the Netherlands, Denmark and Sweden), we find that these countries face similar problems and that their initial response to these problems is also similar. The latter is surprising because, theoretically, we would expect varying responses across welfare state regime types. Rather than retrenchment, we observe a first phase of emergency capital injections in the banking sector and a second of Keynesian demand management and labour market protection, including the (temporary) expansion of social programmes. Continuing public support for the welfare state was a main precondition for this lack of immediate radical retrenchment. However, the contours of a third phase have become apparent now that budgetary constraints are forcing political actors to make tough choices and introduce austerity policies. As a result, the question of who pays what, when, and how will likely give rise to increasingly sharp distributional conflicts.
Keywords Financial crisis; Welfare state reform; Retrenchment; Public opinion Introduction Are the financial crisis of 2008 and its economic aftershocks (Hemerijck et al. 2009) spurring major reform efforts in key social policy domains in Western welfare states? It is interesting to note that in all mainstream approaches to welfare state change, financial and economic crises play a theoretical role of instigators of structural and radical reform (see e.g. Kuipers 2006: chapter 2 for an overview). The general thrust of the argumentation is that although spol_778
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Address for correspondence: Dr Barbara Vis, Department of Political Science, VU University Amsterdam, De Boelelaan 1081, 1081 HV Amsterdam, the Netherlands. Email:
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tremendous pressures for reform have been accumulating in the past decades, these typically do not translate into drastic reform because of the various institutional and political forces that work against them. A crisis, in the sense of an indubitable threat of breakdown, is assumed to set these forces free and bring about, more or less instantaneously, radical reforms. The institutionalist approach, for one, has a good toolbox to explain, for ‘normal times’, social policy continuity and what has been termed ‘progressive change’, that is, the kind of change showing no brutal departure from a developmental path but with a specific direction nonetheless (Palier 2010a: 31). But an institutionalist analysis would also suggest that a crisis offers a critical juncture at which it is possible to divert from the original path of development and embark upon substantial reform, including harsh retrenchment and major restructuring (Palier 2010b). A socio-economic account would predict that socio-economic dire straits provide functional demands to the political system that are likely to translate into drastic reform at the moment they are perceived or felt as systemic or existential threats (see Schwartz 2001 and Starke 2006 for overviews). Given the pressures exerted by the financial crisis and its economic aftermath, such as rapidly rising levels of unemployment and increasing budget deficits, this perspective predicts radical retrenchment and recommodification almost as inescapable and immediate outcomes. An ideational account would point to the fact that ideas assume a transformative capacity under extreme conditions. A crisis causes urgent uncertainty and fosters the prompt take-up of groundbreaking and previously unacceptable ideas to transform the welfare state radically and rapidly (see e.g. Béland and Cox 2010; Stiller 2010). Finally, even Iversen and Wren’s (1998) service sector trilemma approach would predict a fast transformation of regime specific paths. Interestingly, and contrary to Iversen and Wren’s prediction, the conservative regime did not opt for a continuation of the welfare-without-work path, but has sacrificed, like the social democratic regime, budgetary restraint. The liberal regime also went in another direction than expected, by preventing income inequality from rising more sharply and protecting employment at the expense of budgetary restraint. The main theoretical perspectives converge around the anticipation that the financial crisis in the short run and its economic aftershocks in the somewhat longer run open up an opportunity if not necessity for radical welfare state reform. Can we (already) find empirical indications that support these theoretical predictions? Is the financial crisis setting in motion a (radical) restructuring of the welfare state and a programme of serious cutbacks in social expenditures? In the next section, we argue that, so far, it is not. After a first phase of supporting banks, a second one of mainly macroeconomic policies followed, which upheld and expanded rather than retrenched welfare programmes. We argue that the supportive public opinion on the core welfare state programmes is an important precondition in this regard. In the third, and ongoing, phase, cutbacks of social expenditures are entering the agenda, but it remains to be seen how this will play out. © 2011 Blackwell Publishing Ltd.
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Outline of the Argument and Structure of the Article The financial crisis and its economic aftershocks are a moving target, making studying their effects on social policy-making intricate. Still, we would like to present an indicative overview of the measures taken so far in countries selected from the different worlds of welfare: the UK, the USA, Germany, the Netherlands, Denmark and Sweden. We select the UK, Germany and Sweden because these countries are representative of the liberal, conservative and social democratic welfare state regimes respectively (Esping-Andersen 1990). The Netherlands, conversely, is a typical ‘hybrid’ welfare state regime (Vis et al. 2008), combining traits from both the social democratic and the conservative regimes. Moreover, we include the USA because of its major role in the financial crisis. Finally, we focus on Denmark because, arguably, welfare state reform in this country has been groundbreaking in its solution to the notorious efficiency–equality trade-off in the 1990s and 2000s, combining active labour market policies with a high level of generosity in benefit levels (Albæk et al. 2008). Below we report that the theoretical predictions presented in the first section cannot be supported, or at least not yet. Despite substantial crossnational differences, the early responses to the crisis are by and large similar everywhere. Governments did not immediately respond with cutbacks or radical restructuring. On the contrary, the initial response of all governments was to reserve or invest resources to support or bail out banks and, somewhat later, industrial sectors. With a seemingly unprecedented level of international coordination, all countries embarked upon a fairly classical Keynesian intervention, first, to prevent the collapse of the banking sector and, second, to prevent a massive drop in demand. In this first phase, the similarity in response is what is most striking. In the second phase, it became rapidly clear that in spite of the intervention the financial crisis was causing an economic downturn that threatened to turn into a recession, with severe consequences for labour market developments. Consequently, all countries expanded social programmes or adjusted them to cushion the shock of the crisis and the expected economic malaise. Again, there was much similarity in the responses and most countries made an effort to prevent mass unemployment and to ensure that redundant workers would retain their relation with the labour market (e.g. through ‘part-time unemployment’). The developments seem to be in line with the compensation hypothesis that (financial) globalization (economic openness) and welfare effort are mutually reinforcing (Glatzer and Rueschemeyer 2005). This conflicts with recent findings supporting the efficiency hypothesis of a negative relationship between globalization and social expenditures (Jahn 2006; Busemeyer 2009). Different from the latter’s predictions, and in line with the compensation hypothesis, we find that all countries initially chose to relax their budget restraint to finance the collapsing banking sector, then introduced macroeconomic support measures and finally also made an effort to defend social compensation and social investment strategies, albeit usually explicitly temporarily. We are also already picking up the signs of a third phase in the response to the financial crisis and its economic aftershocks. The Keynesian intervention 340
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and the following protective measures are a costly affair and they are causing budget deficits to increase rapidly. It might be that the theoretical perspectives will prove to be right in the end, that is if the crisis and the initial policy responses turn out to have revolutionized the social and political foundation of the welfare state consensus. Moreover, if the pessimistic (realistic?) economists are right (e.g. Stiglitz 2010) and the world economy is not likely to recover quickly, also precisely because governments discontinue demand management, the cumulative effects of lower tax income and social security contributions, continuing expensive financial support policies, and rising social expenditures are likely to deteriorate the already dire budgetary condition of the welfare states, adding to the pressure for drastic reform. Thus far, however, we observe that the crisis has not had the instant effect of triggering policies that harm core social programmes, but we do catch sight of the fact that the issue of radical retrenchment is capturing the political agenda in many a nation. As indicated, we argue that one important precondition for the initial similarity in policy responses is that the crisis did not undermine public support for the welfare state’s core institutions and the role the institutions play in mitigating the domestic impact of the whims of the global (financial) markets. To illustrate the relevance of public opinion in the wake of the crisis, on which ‘hard’ data that are comparable across countries are not available (yet), we conduct a qualitative content analysis of national public debates in print and online media.1 We discuss public support for the welfare state as an important precondition for the emergence of similar responses in the third section. The initial similarity in policy responses relates to the fact that countries are facing roughly similar problems. In the fourth section, we show that Denmark, Germany, the Netherlands, Sweden, the UK and the USA have, indeed, been facing comparable problems as a result of the financial crisis and its aftershocks. The aftershocks will likely be tangible for many years. During this time, large differences between countries – as well as across political parties within countries – are likely to re-emerge. Where, for example, to raise the money for the risen budget deficits? Will this be in the form of higher taxes, possibly for specific groups (à la Obama’s bank tax)? Or by cutting back on social expenditures? To answer these questions, our qualitative content analysis of national public debates in print and online media focuses also on how governments deal with the aftershocks. This analysis reveals a keen and nervous awareness of budgetary stress and commitment to cutbacks everywhere, but also (so far) a conspicuous lack of concrete plans on how to achieve a balanced budget in the (near) future (fifth section). The final section concludes.
Public Opinion and the Welfare State A supportive public opinion is one of the major defensive mechanisms of the welfare state against radical reforms and drastic cutbacks (e.g. Brooks and Manza 2006a). Generally, the core programmes of the welfare state are broadly cherished – except perhaps in the USA. More specifically, when the framing of certain core social programmes triggers the so-called © 2011 Blackwell Publishing Ltd.
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‘deservingness heuristic’ among the public, support for such programmes and policies is automatic and even overrules prevailing values (Petersen et al. 2010). The current crisis differs substantially from the crises of the 1970s and, especially, the 1980s. At those times, the ‘big’ (welfare) state was seen as one of the primary causes of the crisis, crowding out money for investments and thereby inhibiting economic and employment growth. In sharp contrast, public opinion data now show that the public by and large does not blame the welfare state for the current crisis. Instead it is viewed as a solution to (at least some of) the problems caused by the financial sector and the aftershocks. What is the relation between public opinion and the welfare state? The literature comprises two distinct theoretical and conflicting empirical findings. One is that public opinion in certain contexts affects policy decisions (e.g. Brooks and Manza 2006a, 2007; Burstein 1998, 2003; Christian 2008; Kenworthy 2009; Manza and Cook 2002; Svallfors 2003), while the other is that government policy and a welfare state’s institutional setup shape public opinion (e.g. Blekesaune and Quadagno 2003; Jaeger 2009; Jakobsen 2010; Larsen 2008; Matthews and Erickson 2008; Sihvo and Uusitalo 1995). Both mechanisms can bolster support for the welfare state in the wake of the financial crisis. If public opinion is supportive of the welfare state, this increases welfare-friendly policies through the first mechanism. Through the second mechanism, the policies in place increase their own support when needed most, such as in the current crisis. Together, these two mechanisms work against dramatic scaling back of the welfare state. An important issue is thus whether or not the current crisis is undermining public support for the welfare state. Obviously, it is difficult to obtain contemporary data. The data we could find through our content analysis (see note 1), however, reveal that there is continuing support for the welfare state in spite of the mounting financial constraints that limit the extent to which governments can meet such demands. In fact, we found indications that voters cherish the welfare state even more because of the crisis, because it does precisely what it was supposed to do: shields people from losing their jobs or protects their income in the case of unemployment. Between the liberal regime countries, the USA and the UK, there is some degree of divergence in public outlook. While a late 2009 Ipsos-MORI poll in the UK showed that voters there were not ready for spending cuts, Gallup polls indicate that a slight majority of Americans accept the need for temporary government expansion, but that a very large majority want it wound back either immediately or as soon as the crisis is resolved (Ipsos-MORI 2009; Gallup 2009a, 2009b). From the literature and our analysis, we can present some tentative conclusions. First, it seems that the crisis and its aftershocks are likely to increase rather than decrease public support for welfare provision (Blekesaune and Quadagno 2003), making radical welfare state reform even more difficult. Second, social policy remains a salient issue that the public will have relatively clear and coherent views on, as a result of which public opinion will continue to influence government policy-making and action (Burstein 1998). Third, governments are likely to respond with increased support for the welfare state where possible (Brooks and Manza 2006b). Quite clearly, a pro-welfare state 342
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rhetoric is dominating, in spite of frequently expressed worries about the need to balance the budget. We infer that in the near future many political systems are likely to experience an increased political tension between the popular demand to uphold welfare arrangements and the financial and economic demands to balance the budget. It is likely that activation and maximization of labour market participation (including, for instance, an extension of the pension age) are elements of the solution promoted in the wake of the crisis. Contrary to Brooks and Manza (2007), we expect domain-specific trade-offs to occur where specific domains receive extra support at the expense of less-salient domains, in spite of the fact that increases in aggregate welfare state effort or in welfare state generosity are limited because of budgetary constraints. If we look at the Ipsos-MORI polls, for instance, we observe that the UK public is willing to accept government spending cuts, but refuses to accept cuts on health care.2 A more recent Financial Times/Harris Poll (2010) supports this result. Only 8 per cent of Britons think that health care should bear the biggest part of the spending cuts burden.3 Interestingly, the same poll shows that a little over 50 per cent of Britons consider it acceptable that unemployment benefits get cut the most. In this respect, the UK differs radically from the USA, where only 22 per cent considers this the best policy to cut, which is about the same level as in Germany (and France, Italy and Spain). Another interesting finding is that around 70 per cent of the respondents in the USA, the UK, Germany (and France, Italy and Spain) agree with the statement that ‘the large budget deficits and the spending cuts that have happened or been proposed call for a re-examination of Europe’s welfare states’. Unfortunately, the poll does not provide any information about what this re-examination should look like. We conclude that the welfare state is still cherished as a major protection against the impact of financial and economic shocks. However, it may be that the public holds contradictory views that – from a public policy point of view – are hard to square: the expensive welfare state is heartily supported, but so are cuts in government spending.
Similar Problems? To what extent do Denmark, Germany, the Netherlands, Sweden, the UK, and the USA face similar problems as a result of the financial crises and its aftershocks? An important indicator for the state of the economy is the level and change in unemployment. Figure 1 displays the development of the harmonized unemployment rates in these six countries from the first quarter in 2008 to the second quarter of 2010. Whilst in Sweden, the UK and the USA, the unemployment level was on the rise for the entire period, the increase was particularly sharp from the third quarter of 2008 (Q308) onwards. This is also when unemployment starts to increase in Denmark, in fact almost doubling between Q308 and Q309 from 3.3 per cent to 6.2 per cent. In the Netherlands, unemployment levels had risen as of Q409, although less than in the other countries (except Germany). Germany is the outlier in terms of unemployment, because the level does not rise throughout the period. However, © 2011 Blackwell Publishing Ltd.
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Social Policy & Administration, Vol. 45, No. 4, August 2011 Figure 1 Development of harmonized unemployment rates
Source: OECD 2010. Note: Unemployment rates adjusted for seasonal variation; entries are the 1st quarter of 2008, the 2nd quarter of 2008, etc.
with 7.6 per cent unemployment, Germany had the poorest performance in terms of unemployment of these six countries anyway. By Q409 this was no longer the case: the USA (10 per cent) had taken over this position, trailed by Sweden (8.9 per cent). Despite the differences between the countries, these figures show that unemployment is clearly a problem in all of our countries. The surge in unemployment is a symptom of interlinked problems that all countries face. The banking sector in developed democracies has serious credibility and stability problems, with many banks requiring very large sums of capital injections. The Swedish government has spent the least of our six cases, namely €5 billion (about 1.5 per cent of GDP). Compared to those of the other countries, the Swedish banks have been less eager to take this money because of the greater conditionality attached. The latter is a result of the banking crisis that Sweden faced in the early 1990s (see e.g. Englund 1999). In terms of sheer numbers the Danish government is next in line, with two rounds of capital injections totaling around €18 billion (about 8 per cent of GDP). In addition, the government has come to the rescue of two of Denmark’s (albeit relatively small) banks. The situation is similar in the Netherlands, where the government has spent about €20 billion to take over a bank and another €20 billion on capital injections (about 7 per cent of GDP). The German figures are substantially higher: in December 2008, the German Parliament approved capital injections of €480 billion (about 20 per cent of GDP). The American response resembles that of Germany in terms of the absolute level of spending, with capital injections amounting to US$700 billion (€519 billion) (about 5 per cent of GDP). The UK, finally, tops this figure, with 344
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Social Policy & Administration, Vol. 45, No. 4, August 2011 Figure 2 Exports in goods (value), in 2005 billions of US dollars
Source: OECD 2010.
£850 billion (€960 billion) of expenditure (about 60 per cent of GDP). Although the exact figures vary across the six cases, the trend indicates that the banking sector in each country required massive government assistance to survive the crisis. Unemployment has been rising also because of falling exports, among other things caused by lower consumer confidence. Figure 2 displays the development of exports in goods (value) in billions of US dollars in our six countries from the final quarter of 2008 to January 2010. Exports fell everywhere between Q408 and Q109. The highest reduction took place in Sweden (minus 15.9 per cent), trailed by the UK (minus 15 per cent), the USA (minus 14.3 per cent) and, at some distance, the Netherlands (minus 12.9), Germany (minus 10.7 per cent), and Denmark (minus 8.7 per cent). In most countries, exports picked up after the first quarter of 2009, but not in Germany (another 2 per cent reduction) and the USA (minus 1.3 per cent). Between the second and fourth quarters of 2009, all countries saw their exports increase again – in most cases to levels higher than Q408 – yet in Denmark (minus 5.1 per cent), Germany (minus 4.5 per cent), and the UK (minus 6 per cent) exports fell again between the Q409 and January 2010. But we live in volatile times. The International Monetary Fund (2010: 75, see also Statistisches Bundesamst Deutschland 2010) has recently predicted that, after a decline of real GDP in 2009 of 4.7 per cent, the German economy is expected to grow by a high 3.3 per cent in 2010 (although unemployment is expected to remain around 7 per cent). Overall, however, the data on unemployment, the banking sector, and exports show that our six countries largely deal with similar problems. Did these similar problems evoke similar initial responses? © 2011 Blackwell Publishing Ltd.
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Similar (Initial) Responses? Which measures have the American, British, Danish, Dutch, German and Swedish governments taken to cope with the adverse effects of the crisis? Apart from the emergency support for the financial sector characterizing the first crisis response phase, it is difficult to get data on policy adjustments or new policy initiatives taken in the various countries, because many proposals are still being developed or are under debate. In order to get at least some idea of what has been going on, we have been collecting data from various sources (see note 1). Table 1 summarizes the measures taken in the first and second phases of the response to the financial crisis and its economic aftershocks, as we found them in our qualitative content analysis. We subsume the measures under four categories: (1) Keynesian measures (investing in jobs, investing in infrastructure, tax measures, and tax relief); (2) monetary policy (lowering interest rates, money creation, buying government bonds); (3) circumventing bankruptcy (creation of ‘bad’ banks, guarantees on problem assets, financial support to banks or companies, take-over of banks, liquidity fund for banks); and (4) re-establishing trust in the banking sector (guarantees on savings, guarantees of inter-bank lending, and increase of supervision). Table 1 Summary of crisis measures taken
Keynesian measures Investing in jobs Investing in infrastructure Tax measures Tax relief Monetary policy Lowering interest rate Money creation Buying government bonds Circumventing bankruptcy Bad bank (crisis bank) Guarantees on problem assets Financial support to banks or companies Take-over of banks Liquidity fund for banks Re-establishing trust in banking sector Guarantees on savings (or increases its level) Guarantees for interbank lending Increase of supervision
USA
NL
UK
DE
DK
SW
X
X
X
X X X X
X
X
X
X X
X X
X
X X X
X
X
X
X
X
X
X X
X
X
X X X
X
X
X
X
X X X
X
Note: An X in the table indicates that one or more measures were taken that fall under a specific category (such as investing in jobs). To assess whether a particular measure was taken, we conducted a qualitative content analysis of written and (online) media sources (see note 1).
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Social Policy & Administration, Vol. 45, No. 4, August 2011 Table 2 Labour market related measures USA NL UK DE DK SW Labour demand measures Job subsidies, recruitment incentives, public job creation Reductions in non-wage labour costs Short-time working schemes Measures to help the unemployed find work Activation requirements Job search assistance and matching Job finding and business startup incentives Work experience programmes Training programmes
X X
X
X
X X
X
X X X X X X
X X
X X
X
X X
X
X
X X
Sources: Clegg 2010: Table 1 (Compiled from Glassner and Galgóczi (2009); European Employment Observatory (2009); European Monitoring Centre on Change, http://www. eurofound.europa.eu/emcc/index.htm (accessed April 2010); Mandl and Salvatore 2009: 12–13; OECD 2009: 3, Table 1.
If we look at the indicators falling under the heading of ‘circumventing bankruptcy’ and ‘re-establishing trust’ in table 1, we observe similar responses. If our data are correct, Germany is a special case because in this country a Keynesian type of response seems to have been most systematically formulated. Our content analysis reveals that in the second response phase the labour market is the area to which most attention has been directed and where policy-making initiatives have been most frequent (and most frequently discussed). Still, the need for more general welfare state reform (and major restructuring) in the fields of health, education, housing and pensions, continues to be a hot issue too. Specifically, our analysis indicates that, next to the direct financial predicament, rising unemployment (or the expectation that jobs will be lost) is by far the greatest worry of all governments. If anywhere, we expect major adjustments in labour market related policies in the wake of the financial crisis. Table 2 summarizes the recent data on this. If we examine the details of the measures taken, the UK stands out. Although the UK had the lowest score on supportive policies of all EU 15 countries before the crisis, the government has been very reluctant to improve these policies, even temporarily (Clegg 2010). The main measures taken in the UK fall under the heading of active labour market policies. As of January 2009 there is extra support for jobseekers who have been unemployed for more than six months, additional funding for the public employment office ( Jobcentre Plus), a bonus of up to £2,500 (€3,000) for employers to hire and train an unemployed person, new training places, work-focused volunteering options, and help to establish a business. The total costs of these measures amount to approximately £0.5 billion (€553 million). Furthermore, the © 2011 Blackwell Publishing Ltd.
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government has committed to another £1.3 billion (€1.4 billion, about 0.1 per cent of GDP) so that those individuals who become unemployed can receive their benefit more quickly (EEO 2009: 15–16). In a comparative perspective, these measures are not that substantial. Overall, the UK’s approach to tackling the crisis has been characterized mostly by tax cuts in an attempt to boost economic activity (Clegg 2010). Conversely, nothing has been done to address those who are becoming unemployed – a feature in which the UK differs substantially from the rest of Western Europe. Partial unemployment is perhaps the most important of these. In Germany, there was already a partial unemployment scheme in place – in the form of structurally lower working time – which has been extended from 6 to 18 months (‘stimulus package 1’) and has been extended further after that. Also the contribution from the government has been increased (Clegg 2010). Table 2 indicates that most countries, although not in all specific fields and to the same extent, have formulated new or updated existing measures in the area of both active and passive labour market policies. Our data also indicate that in all countries cuts in core functions have not been made, at least not yet. However, we are picking up the contours of a third phase in the response to the financial crisis and its aftershocks. It seems that a general acceptance has emerged that cuts need to be made in the long term, but political actors have avoided discussing exactly how, where, and when such cuts will have to occur. During the 2010 election campaign the main political parties in the UK, for instance, were not very specific with numbers on planned cuts. The new coalition government (Conservatives and Liberal Democrats) adopted a plan for £30 billion spending cuts (about 1.8 per cent of GDP) in its June 2010 Budget. Proposed measures include an increase in the VAT tax by 2.5 per cent (to 20 per cent) and a spending reduction of 25 per cent over the next four years for all civil service departments, except health and overseas aid. Welfare spending will be cut by £11 billion (about €13 billion, 0.8 per cent of GDP) over the next five years. Child benefits will be frozen, family tax credit will be reduced, housing benefits will be capped, medicals for disability benefits will be stricter, and the increase of the state pension age from 65 to 66 will be accelerated (European Institute 2010). Total spending cuts by 2014–15 will amount to £81 billion (€90.7 billion, 5.6 per cent of GDP) (HM Treasury 2010). These proposed cuts will, among other things, further hit welfare and public service pensions (as well as environmental levies). Additionally, the government will ‘radically change the welfare system’ (HM Treasury 2010: 28) by replacing the current system of means tested working age benefits with a new Universal Credit that would enable work to always pay. Simultaneously, the government will reduce fraud and error through a new approach and implement a Work Programme for those with the largest distance to employment. The German government also appears to be committed to meeting tough deficit targets. In July 2010 the German government agreed on significant cutbacks in a savings plan (Sparprogramm), amounting to approximately €80 billion between 2011 and 2014 (about 3 per cent of GDP). The package is a mixture of cancellation of existing subsidies, higher taxation, a major reform of the army, public administration reforms, reform of the financial sector, and 348
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several – taken on their own – relatively minor benefit cuts and entitlement restrictions (Bundesregierung 2010). At the same time, the savings package reserves €12 billion to invest in education, research and development. In the Netherlands the exact cutbacks and their timing dominated the electoral campaign of Spring 2010, and they were a crucial part of the negotiations on the new coalition government. Cutbacks are projected to be around €18 billion (about 3 per cent of GDP). The aim of the new government is to restore a balanced budget in 2015. Proposed measures concern modest to considerable retrenchments across various sectors, including health, pensions (a gradual increase of the retirement age), child care, disability and social assistance. The Danes face spending cuts of a, for them, draconian size of €3.2 billion (almost 1.5 per cent of GDP). Proposed measures involve the (further) reduction of the unemployment benefit from four to two years, 20,000 less jobs in the public sector and a 5 per cent reduction of child benefits. Sweden is the only one of our six countries where severe cutbacks in public spending are not expected. This is because Sweden benefits from the strict fiscal rules implemented in the 1990s (European Institute 2010).
Conclusion We have highlighted the financial, economic and social policy responses to the financial crisis of 2008–09 in six key advanced welfare states. To answer our title’s question: the crisis intensified the pressure to reform the welfare state reform to some extent, but, to date, the various pressures have not translated into drastic welfare state reform. The responses hereby fail to confirm the expectations of any theory of welfare state change, in which political actors are expected to take up the opportunity to implement substantial reforms. Governments have first jumped to the rescue of the financial sector and then introduced measures to stimulate demand, at the cost of a balanced budget. The initial response has been compensation rather than efficiency and has occurred irrespective of the political leaning of the ruling parties. During the crisis and its aftershocks, the welfare state appeared a crucial institution protecting people from ill fortunes beyond their control. The welfare state’s core programmes therefore remain popular and – under the extreme conditions of the financial crisis – are still broadly supported. This continued public support for the welfare state is proving to be quite robust, especially now that the financial crisis is not in any fundamental sense blamed on, for instance, expensive social policy as the 1980s crisis was. The welfare state, then, is typically included in the political solutions to the crisis. The data on public opinion and on policy developments in the UK, the USA, Germany, the Netherlands, Denmark and Sweden also reveal the public’s continued support for and trust in the welfare state. In addition, the common problems faced – including rising unemployment, reduced credibility of the banking sector and falling exports – help to explain the common reactions across the board. However, the immediate response has been a costly affair and we find an indication that we have entered a third phase in the response to the crises. Labour market policy and banking reform have clearly received the most attention in the first phase, but measures have also © 2011 Blackwell Publishing Ltd.
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been taken or are being considered in other policy areas, such as pensions and housing, announcing the arrival of a more austere period to restore balanced budgets. The theme that runs throughout is that spending has been, albeit temporarily, increased in key areas, as governments try to support those who have been adversely affected by the crisis. However, a broadly shared political conviction is developing, that the costly initial response is not sustainable in the long run, because it is causing deficit spending to rise dramatically. The current, third, phase is characterized by an emerging political agreement that deficit spending is rapidly approaching its limits. Consequently, it is likely that the politics of reform will now quickly revolve around the question who pays what, when, and how, or in other words, who will have to carry the heavy burden of financial and economic recovery. The crucial political issues are if a swift return to a balanced budget is a conditio sine qua non for economic recovery and, if so, whether drastic retrenchment or a substantial increase in taxes is the key. Governments in some of our countries (especially the UK, Germany, Denmark and the Netherlands) have already agreed on significant public spending cuts that may or may not add up to drastic reforms and induce new distributional conflicts. Such decisions might spark public resistance like in Greece, because the crisis has also bolstered public support for the welfare state. Public opinion will remain an important factor in determining the timing, extent, and pace of social spending cuts. In addition, the well-known resilience mechanisms of long- and well-established social programmes will be automatically triggered by such measures, making outcomes uncertain. We conclude that there has not been a major onslaught against the welfare state in the immediate wake of the financial crisis. It seems, however, that more drastic spending cuts are envisaged, although for a variety of political and institutional reasons there will probably be a considerable gap between intentions and achievements. Pressures that impel radical reform have gained further strength, but the welfare state is simply not that easily toppled. This, however, does not imply that there has been no welfare state reform or change. On the contrary, during the last 20 years or so welfare states have been continually adjusted to new economic and social demands, and governments have pursued, albeit with considerable variation, well-adapted and innovative social investment policies. Whether such social investment strategies will become victims of the pending distributional battles or be part of a new positive-sum solution to the perpetual equality–efficiency trade-offs is a question that will dominate the political and research agendas alike in the next decade.
Acknowledgments Earlier versions of this article have been presented at the Dutch/Flemish Politicologen-etmaal in Leuven, Belgium (2009), the 17th International Research Seminar of the Foundation for International Studies on Social Security, Sigtuna, Sweden (2009), at a seminar of the research group Comparative Politics & Danish Politics of Aarhus University, at the workshop ‘Politics in Hard Times’, Mannheim, Germany (2010) and at the NIG Work conference (2010). Thanks to all participants for their helpful comments. In 350
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addition, thanks to Christoffer Green-Pedersen, Anton Hemerijck, Carsten Jensen and Matthias Stepan and the anonymous referees of Social Policy & Administration for useful comments. We would also like to thank Neda Delfani for her help with collecting the data. Tom Hylands’ research was supported by a Fulbright-Schuman grant from the US Department of State and the European Commission. Barbara Vis’ research is supported by a Veni grant from the Netherlands Organisation for Scientific Research (NWO, grant nr. 451-08-012).
Notes 1. We conducted the qualitative content analysis between October 2009 and August 2010, using search functions on the websites of: LexisNexis, the Economist, OECD, ICPSR and Google News. LexisNexis search sources included: Major U.S. and World Publications, News Wire Services, TV and Radio Broadcast Transcripts, and Web Publications. Search terms used: ‘public opinion’, ‘welfare state’, ‘social policy’, reform, change, amendment, initiative, development, economic, crisis, ‘credit crunch’, Germany, US, USA, ‘United States’, America, UK, ‘Great Britain’, ‘United Kingdom’, Sweden, Denmark, Italy, Netherlands. All results are limited to January 2008 and later. 2. The plans announced in the Spending Review 2010 of the UK HM Treasury in October 2010 indicates that the government is responsive to the British voters on this point; with all departments facing spending cuts of about 19 per cent, health is (with overseas aid) the only area that will not be facing such drastic cutbacks (HM Treasury 2010). 3. This analysis is indicative of the measures taken as well as of public opinion. Still, given that we are dealing with a moving target about which systematic data are unavailable (yet), this is the best we can do. See note 1 for information on the content analysis.
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Social Policy & Administration issn 0144–5596 DOI: 10.1111/j.1467-9515.2011.00779.x Vol. 45, No. 4, August 2011, pp. 354–370
Falling Back on Old Habits? A Comparison of the Social and Unemployment Crisis Reactive Policy Strategies in Germany, the UK and Sweden spol_779
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Heejung Chung and Stefan Thewissen Abstract Although long-term processes of welfare state development have been investigated frequently, there is a surprising gap in knowledge on short-term reactions of states to sudden events. This article aims to fill this gap by examining the reactive policies, i.e. immediate policy responses to urgent social matters, of governments to the current economic crisis. We focus on social and unemployment policies of the three welfare regime ideal types of Esping-Andersen’s typology, namely Germany, the UK and Sweden. We apply long-term policy development theories, most notably the convergence and path dependence theories, to understand the choices made in the different reactive policy strategies of these countries. In addition, we scrutinize whether we find similarities between the reactive policies and the converging structural welfare state developments. We use comparable data from various European and national data sources for the two years directly following the recent crisis, namely 2008 and 2009. Our analysis shows that, at least for the three countries under investigation, countries seem to have fallen back on ‘old habits’ by adopting social and unemployment reactive policies that can be identified based on their institutional legacies. This suggests that reactive policy strategies can be explained by different dynamics than the more structural long-term policy developments, and in our case we find evidence in support for the path dependence theory.
Keywords Reactive policy strategies; Economic crisis; Social and unemployment policies; Path dependence; Convergence; Regime typology Introduction The years 2008 and 2009 were characterized by worldwide financial and economic turmoil. The financial crisis quickly spread throughout the world and began to affect the real economies in the form of massive spol_779
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Address for correspondence: Heejung Chung, Tilburg University, Department of Sociology, PO Box 90153, 5000 LE Tilburg, the Netherlands. Email:
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redundancies and bankruptcies. This crisis caused a need for urgent state interventions. Many governments provided credit supplies and guarantees for financial institutions or even nationalized distressed banks. In addition, social and unemployment policies were adopted as an attempt to stimulate the economy and to respond to the sudden increase in redundancies. Germany for instance modified a tripartite agreement on short-term unemployment, whilst the UK implemented subsidies for employers to hire employees. An interesting question that stems from this is how to understand the reactive policies, i.e. the immediate responses of welfare states to urgent societal matters, of countries to sudden economic shocks. These policies differ in a number of aspects from structural policy-making processes such as grand welfare reforms. Reactive policies are meant to provide quick relief to an urgent crisis, the decision-making time is limited, and they only apply for a limited amount of time or are stopped when the urgent need is met. Although structural processes of welfare state development have been investigated frequently, there is a surprising gap in knowledge on reactive policies (Vis 2009; Castles 2010). This article aims to fill this gap by examining the reactive policies of three countries best representing the different welfare state regime typologies, namely Germany, the UK and Sweden. Our main question is how we can explain the strategies countries follow in their social and unemployment reactive policies. Due to the lack of theories that address the subject of short-term reactions of the welfare state, we turn to structural policy development theories, namely the convergence theories and path dependence theories. From a convergence perspective we would expect similar policy solutions to the crisis, due to similarities found in the nature of the problem and in the constraints of possible solutions. However, the rivalling path dependence theory entails that specific national institutional legacies are the most decisive cause in welfare state development. It could be expected that in times of abrupt turmoil and when there is little time to react, countries are more likely to fall back on their institutional legacies. By examining the reactive policies of the three countries, we can see if the choices made by governments can be understood with similar frameworks used for structural long-term policy developments. An emphasis is placed on social and unemployment policies, as the discussion of convergence versus path dependence notably took place in this policy field, and we focus on reactive policies that took place during 2008 and 2009. This article is structured as follows. The next section explains the theoretical framework of the crisis literature, and the convergence and path dependence theories. We derive general expectations from these theories as a framework to compare the reactive policy strategies. In the third section, the methodology of this article is explained. The fourth section consists of the empirical description of the implemented responses of Germany, the UK and Sweden. The fifth section compares and interprets the national strategies, after which we discuss our conclusions in the final section. © 2011 Blackwell Publishing Ltd.
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Theoretical Framework Reactive policy strategies of welfare states and the impact of crises Reactive policies are the immediate responses of welfare states to urgent societal matters. The comprehensive plan behind the implemented reactive policies can be referred to as the reactive policy strategy. Specific crisis situations, such as the current financial crisis, have been a topic of investigation. Yet, most studies focus on causes or consequences of the crisis (e.g. Datz 2009; Eichhorst et al. 2010; Castles 2010), providing short descriptions of what governments have done (e.g. Clegg 2010), or only focus on specific policy areas such as family policies (e.g. Richardson 2010). In the welfare state literature, there are yet studies that provide insights in understanding the reactive policy strategies countries take in times of crises. In agenda-setting theories the impact of crises on policy-making is examined more frequently. Here, crisis situations are understood as ‘windows of opportunities’ (Kingdon 1964) or ‘critical junctures’ (Capoccia and Kelemen 2007). For instance, Boin et al. (2009) stress that crises can be politically exploited by pushing forward certain policy answers by actors. Vis (2009) finds evidence for this stance in welfare state research, by claiming that deteriorating socio-economic situations are a necessary condition for unpopular welfare state reforms. As we can see, the key focus of these studies is in understanding the role of crises in changing the political dynamics of welfare reform. They teach us that crises can be used to implement radical changes. However, they do not provide us insight what kind of reactive policy strategies one can expect during crises in different countries. For this reason, we turn to theories on structural policy-making, namely the convergence and path dependence theories. Even though these theories refer to structural reforms and long-term policy-making, we use them as theoretical frameworks to reflect on when examining reactive policy strategies. In addition, applying long-term policy theories allows us to scrutinize whether we find similarities between the reactive policies and the structural welfare state developments in our country cases. Path dependence theory and reactive policy strategies In the path dependence theory, it is believed that the history or institutional legacy of a country strongly influences the policies it will adopt in the future (Pierson 2000). Changes happen, but they are bounded or incremental, rather than being institutional overhauls (Starke 2006: 105–6). A number of reasons are put forward to argue why welfare states developments are unequivocally path dependent. First, radical changes are difficult to accomplish and relatively expensive. Many institutions contain veto-points and have high set-up costs (Bonoli 2001: 238), and politicians have a short time horizon in which they need to show outcomes (Pierson 2000: 258–62). Second, existing institutional settings shape the expectations and behaviour of citizens, politicians, and pressure groups. This could entail that radical welfare reforms are likely to meet opposition from various interest groups. In addition, as the ‘varieties 356
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of capitalism’ literature (Hall and Soskice 2001) argues, different institutional settings can also lead to comparative institutional advantages. These advantages act as powerful inducements to replicate existing institutions. Central to the path dependence theory is that a number of welfare regimes or trajectories can be discerned, based on their institutional legacies. One of the most influential typologies of welfare states in this respect comes from Esping-Andersen (1990). He discerns three ideal type welfare regimes, which are the liberal, conservative and social democratic regime. Although this typology has been criticized by scholars for various reasons, there seems to be a consensus in the classification of the classic examples of the ideal types, namely Germany, the USA (and to a lesser extent, the UK) and Sweden (Arts and Gelissen 2002). The path dependence framework can be applied to reactive policies as follows. First, since reactive policies are used to address urgent crises in a short time frame, radical changes may be even more difficult to accomplish. Second, as argued in the varieties of capitalism approach, it could be that certain responses are expected by citizens and by pressure groups such as employer and employee organizations. For instance, there could be a demand for policies that enable society to do as much ‘business as usual’ as possible. Using these arguments, we should expect that countries stay close to their institutional legacies in times of crises, by using instruments that were in place or that have been used before. We would then expect distinctive differences in reactive policy strategies reflecting the countries’ institutional legacies, and we would not expect policy innovation to take place. Based on Esping-Andersen’s (1990) typology, we can derive specific hypotheses of the national reactive policy strategies from a path dependence perspective. We expect Germany to have adopted a conservative strategy, with a strong inclination to maintain traditional status relations. This implies that its main focus would be to keep insiders in their jobs to preserve their industrial and firm-specific skills, combined with a low emphasis on activation. The UK should follow a liberal laissez-faire crisis response strategy, characterized by reliance on market forces with only residual engagement in social policies. For Sweden we expect a social democratic strategy. This is characterized by a combination of focus on activation, whilst securing income by universal and generous social benefits.
Convergence theory and crisis response policies Contrary to the understanding of path dependence theorists, convergence theory claims that all welfare states are converging into a common model. Two important reasons are put forward why countries are slowly opting for more similar policy solutions (Starke et al. 2008). First, internationalization and global competition weaken the freedom of action of national states. Due to the increase in the dynamic nature of private economic forces, such as flows of capital and labour across national borders, governments are no longer capable of deviating much from other countries in their regulations and taxes. Second, countries are facing similar problems and have comparable constraints in their methods to deal with these problems. Low economic growth © 2011 Blackwell Publishing Ltd.
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and unfavourable demographic changes restrict states to pay for extensive social policies (Pierson 2002; Korpi and Palme 2003). There is consistent evidence that Western European countries have chosen similar strategies in response to this permanent austerity in their structural policy development, which are retrenchment and stimulation of employment. The sickness, work accident and unemployment benefits have been lowered in most countries in terms of both their proportion in spending, as well as in terms of replacement rates (Korpi and Palme 2003; Allan and Scruggs 2004; Adelantado and Calderón 2006). There has also been an increasing emphasis on activation and employability (Dingeldey 2007), including the development of various family policies to stimulate the employment of women (Mandel and Semyonov 2006; Lewis et al. 2008). However, this process of convergence and retrenchment seems to be a very gradual development, largely without radical reforms (Pierson 2002; Starke 2006). Using the logic of the convergence theory, there are several reasons why we would expect countries to have chosen similar reactive policy strategies to the crisis. First, our country cases are all members of the EU and their financial sectors are strongly internationalized. Second, the financial and economic crisis presented comparable problems of lower demands, bankruptcies and threats of mass unemployment. Taking all this into account, we could expect similar reactive policy strategies in all of the three countries under investigation, regardless of their institutional heritages.
Methods and Data Sources Based on Esping-Andersen’s framework, we compare the three classic examples of welfare regimes, which are Germany, the UK and Sweden. These three countries differ maximally in their institutional legacies, yet they share a number of important extraneous variables. First, all three countries have experienced a sudden economic shock in terms of bankruptcies, decrease in demands, leading to drops in GDP growth rates and increase in unemployment due to the crisis. This aspect is substantiated in the next section. Second, all countries are EU member states, and all implement European Monetary Union (EMU) policies, although Germany is the only one with the euro as its currency. Third, all countries have financial sectors that are strongly internationalized. These countries, however, differ in a number of important aspects, besides their institutional legacy, which are the affiliation of the government and the composition of their economies. During the crisis, Germany and Sweden were governed by a centre right cabinet, whilst the centre left Labour Party was in office in the UK. Unfortunately, there are no alternative countries that could represent the ideal types of the regime typologies as well as the UK and Sweden, which satisfied the other requirements. Second, our country cases differ in their national economic composition, although this could also be understood as part, or a consequence, of the institutional legacies in the development of the welfare state. In other words, it is endogenous to the characteristics of the welfare regimes. These points will be taken up later in our discussion section. 358
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A second methodological consideration is the type of policies under investigation. Although we also examine the general economic and financial policies to provide background information on how the crisis has been managed in each country, we concentrate on social and unemployment policies. We choose these policies because we are interested in welfare state policies and because the discussion of convergence versus divergence notably took place in this policy field (Vis 2009). In addition, we focus on state-level policies, although we also refer to some of the important sectoral and company level policies. The third consideration is the period under investigation. We focus on reactive policies, which are short-term measures in reaction to the crisis. Therefore, our focus is on the years 2008 and 2009. Concerning the choice of data, we rely on comparable data from various European data sources, such as the European Industrial Relations Observatory (EIRO) and the European Commission’s (EC) joint employment reports, supplemented by various documents from national sources.
The Crisis and Reactive Policies After years of relatively stable economic development, the crisis caused a severe and sudden decline in GDP in all European states. The crisis struck in a roughly similar fashion in Germany, the UK and Sweden. In 2007, the real GDP growth rates in the three countries were approximately 2 per cent (see figure 1). This reversed to an average decline of approximately minus 5 to 6 per cent in 2009. The unemployment rate shows a similar course, as is evident from figure 2. The unemployment rate was rather different until the first quarter of 2006, but Figure 1 Real GDP growth rates
Source: Eurostat, http://ec.europa.eu/eurostat. Note: Figures for 2010 are forecast projections. © 2011 Blackwell Publishing Ltd.
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Source: Eurostat, http://ec.europa.eu/eurostat.
it shows a converging pattern around the first and second quarter of 2008. In the third quarter of 2008, we can see an increase of unemployment in all countries, which continues until the third quarter of 2009. The exceptional case is Germany, which has not shown a stark increase in unemployment rates. This can be attributed to its reactive policies, which focused on keeping people in their jobs. We explain this in detail in the next section. Despite the fact that there are some deviations, it is clear that all countries faced the problem of bankruptcies, sharp decrease in demand, and a threat of mass redundancies. In the following sections, we examine what types of policies were implemented to address these issues in the three countries under investigation.
Conservative considerations – the case of Germany It has been noted that Germany departed from its conservative tradition before the crisis started. During the Hartz reforms in 2003–04, unemployment and social assistance benefits were lowered and activation became an essential element in German employment policies (Seeleib-Kaiser and Fleckenstein 2007). In addition, Germany has moved away from the male breadwinner model through implementing family policies to stimulate the employment of women (Lewis et al. 2008). Despite a favourable starting position, Germany was severely affected by the collapse in worldwide demand as a consequence of its reliance on exports (EC 2009). From September 2008 onwards, the centre right cabinet of CDU/ CSU (the Christian alliance) and FDP (the Liberals) turned to an active response strategy. The most important policies were the ‘Package of Measures to Reduce Tax Burdens, Stabilise Social Insurance Contributions and Invest 360
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in Families’, of October 2008, and two economic stimulus packages. The first package, ‘Securing Jobs by Strengthening Growth’, stimulated the economy with a government investment of €31 billion. Its main goal was to support the viability of the financial sector, but it also consisted of Keynesian investments in long-term public goods and support to the manufacturing industry. The second stimulus package, the ‘Pact for Employment and Stability in Germany’, of circa €50 billion, was used to relieve tax burdens, recuperate consumer demands, and to stimulate investments (EC 2009). The main German strategy in social and unemployment measures was to keep insiders in their jobs to preserve their skills by active state interventions. A number of measures were adopted to achieve this strategy. First, an existing tripartite agreement on short-term unemployment was extended and financially modified (ILO 2009). The agreement entailed that in case of temporary shortage of orders, employers could lower labour costs by reducing working time and wages of employees. This reduced wage was paid out by the government as partial unemployment benefits so that workers did not see a remarkable decrease in their wages. The measure enabled employers to maintain their trained and skilled workers, whilst in return the employees’ employment was safeguarded, occasionally supplemented with extra training. The short-time work allowances consisted of replacement rates of 60 per cent for employees without children, and 67 per cent for those with children. Before the crisis, the short-time work allowances were paid out of social security contributions of social partners, as part of the unemployment benefit scheme. Yet as a crisis measure, it was decided that the allowances were paid out of general taxes. In addition, the drawing period was temporarily extended from six to 24 months until 2009 (EIRO 2009a, 2009b, 2009c, 2009d). Over 3 per cent of all employees were participating in short-time work schemes in 2009 (OECD 2010: 52). This extensive use of short-term allowance schemes is the main reason why the overall unemployment rate in Germany did not rise as significantly as in other countries in Europe (see figure 2), regardless of the overall decrease in demands as shown in its GDP growth patterns. The measure especially helped to preserve jobs in the maledominated manufacturing industry (Eichhorst et al. 2010; EIRO 2010). A second measure that provided relief to insiders was the extension of the phased early retirement scheme for older employees (EC 2009: 24). This scheme aimed at facilitating a gradual transition of employees over 55 into retirement, subsidized by the state, to generate new positions to be replaced. When an employee over 55 cut his working time in half, the employers were to pay 70 per cent of the employee’s reduced wage and contribute to the pension schemes, whilst the Federal Government bore the additional expenses (EIRO 2009e). Third, Germany eased the burden of employers and employees by significantly lowering both their unemployment insurance contributions (from 6.5 to 2.8 per cent until 1 December 2010 and 3 per cent after that) and health insurance contributions (from 15.5 to 14.9 per cent from July 2009 onwards) (German Federal Ministry of Economics and Technology 2008). Germany also agreed on a number of complementary policies. In order to stimulate activation, the second stimulus package also consisted of investment on training on-the-job and job-to-job placements. In addition, the tax rate of © 2011 Blackwell Publishing Ltd.
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the first income bracket was lowered from 15 to 14 per cent and the personal allowance was increased to €7,834 from 2009, as an attempt to reduce the unemployment trap. Lastly, it adopted a number of family policies as part of the packages. For example, the universal child benefit and tax-free child allowance were raised by 4.3 per cent (German Federal Ministry of Economics and Technology 2008) and parents received a non-recursive €100 child bonus (EC 2009: 24).
Liberal legislation – the case of the UK Although the UK can still be characterized as a residual welfare state with a relatively low degree of social protection by the state, more recently the state has become increasingly involved in several aspects. First of all, there has been an increase in active labour market policies to stimulate employability of its workers (Dingeldey 2007). In addition, the state has taken an active role by both developing new family policies and increasing the amount of public investment spent on these policies (Lewis et al. 2008). The UK was one of the first European countries to be heavily hit by the global crisis. Its strong ties with the financial sector in the USA made the UK vulnerable to financial shocks (Hodson and Mabbett 2009). In 2007, Barclays Bank received two financial injections and mortgage lender Northern Rock was nationalized in 2008. The financial sector was further supported by a bailout package of £500 billion (€575 billion) of liquidity support, government guarantees of bank issuances, and the purchase of (toxic) bank equities. In responding to the negative effects of the financial crisis on the real economy, the Labour government implemented a number of additional policies. Most of these measures, for an amount of roughly £20 billion (€23 billion), were announced in the Pre-Budget Report 2008 (HM Treasury 2008). Supplementing measures were taken in the Budget Report 2009 (HM Treasury 2009). Many of these measures aimed to stimulate the economy, by means of Keynesian investments in infrastructure, support to the manufacturing industry and the severely afflicted housing market, and by temporary tax relief for businesses or consumers. The most important measure was a temporary cut in the value added tax (VAT) on consumption from 17.5 per cent to 15 per cent for 13 months (Clegg 2010). Although the British government was an active crisis manager in the financial sector, it chose a highly laissez-faire strategy in social and unemployment crisis policies. It was quite unwilling to improve, even temporarily, its already low supportive unemployment policies (Clegg 2010: 5). Almost all that the British government implemented as reactive measures were demand-led labour market measures to stimulate activation. Most importantly, from January 2009 onwards employers received a subsidy of £2,500 (€2,900) when recruiting a person who has been unemployed for over six months (HM Treasury 2009). Next to this demand-driven stimulus, activation was encouraged through increasing income tax allowances, except for high income groups (HM Government 2009). The administration also raised its funding for programmes designed to get the unemployed back to work. A total amount of £3 billion (€3.4 billion) was invested in 2009 in initiatives such as ‘Jobcentre 362
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Plus’, ‘Train to Gain’, and ‘Local Employment Partnerships’. Additionally, it mediated for apprenticeships tendered by private parties, and tried to enhance training possibilities for unemployed people (HM Government 2009; EIRO 2009f). Minimum engagements were observed in terms of passive labour market programmes as well. There was a slight increase in the maximum statutory redundancy pay for the middle and high income earners (HM Treasury 2009: 13), a marginal non-recurring bonuses for pensioners of £60 (€69) and for families with children £22 (€25), and a temporary increase of the child allowance (HM Treasury 2008: 6–7). This laissez-faire approach by the government resulted in involvement from the social partners. Social partners signed collective agreements concerning the reduction of working hours and respective wages to save jobs (EIRO 2009g). In 2009, the median pay settlement dropped to 1 per cent (EIRO 2009h). Moreover, occupational pensions have been cut in the hardest affected sectors (EIRO 2009h).
Social democratic strategies – the case of Sweden Although even Sweden has implemented cutbacks in its welfare state in recent times (Vis 2009), it is still exemplified by its generous social policies combined with supply-stimulus activation by public interventions and a large public sector employment. As Sweden was faring well before the crisis started, the centre-right four-party coalition was relatively late in its crisis reaction. The initial point of interest was the viability of the financial sector and the real economy (e.g. Swedish Ministry of Finance 2008a). The Swedish Central Bank supported the long-term credits with a loan facility of SEK 60 billion (€6.3 billion). Keynesian investments were implemented in education, infrastructure, and research and development (e.g. Swedish Ministry of Finance 2008b). Moreover, the corporate tax rate was lowered from 28 per cent to 26.3 per cent. Sweden was also relatively active in adopting social and unemployment reactive policies, compared to our other country cases. In total, the state has adopted crisis policies of SEK 45 billion in 2009 and SEK 60 billion in 2010 (€4.7 billion and €6.3 billion; Swedish Ministry of Finance 2009a). Its strategy consisted of a combination of striving for full employment, whilst at the same time providing income security and cushioning temporary unemployment (Swedish Prime Minister’s Office 2008: 1). The centre-right coalition adopted many activation programmes (the ‘work-first principle’). The Swedish government provided relief and employment incentives for employers and employees by lowering payroll tax and unemployment contributions (EIRO 2008). Both of these contributions were reduced even more for young employees, who were amongst the hardest hit during the crisis in Sweden (Swedish Ministry of Finance 2008b; EIRO 2008). Another incentive introduced by the Swedish government to increase employment was the reduction in the employment tax by half for employers hiring long-term unemployed persons. In the crisis package announced in December 2008, the administration also focused on creating jobs and education possibilities. To this end, the student grant for people over 25 was profoundly © 2011 Blackwell Publishing Ltd.
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increased to 80 per cent of the total study allowance (EIRO 2009i), and more was spent on different employment programmes. One of these programmes, Lyft (‘boost’), consisted of 40,000 temporary job positions in (semi-) public sectors (Swedish Ministry of Finance 2009b; EIRO 2009j). Alongside the activation incentives, the government tried to cushion temporary unemployment by means of expanding its already rather generous passive labour market programmes. The conditions to receive unemployment benefits were relaxed by reducing the qualifying period, and the complete abolishment of the requirement of a work history (Swedish Ministry of Finance 2008b; EIRO 2008). To ensure that these welfare programmes could be financed, municipalities received increasing grants of SEK 5 billion per year (€520 million), and a supplementary SEK 7 billion (€730 million) in 2010 (Swedish Ministry of Finance 2008b). Income security was also provided through changes in tax benefits. The in-work tax credit was lowered, whilst the income tax deduction was raised. The lower threshold for state income tax was also raised to increase personal allowance. Combined, these measures entailed a tax reduction of over SEK 1,000 per month (€105) for 97 per cent of full-time employees (Swedish Ministry of Finance 2008b). Additionally, taxes for pensioners with marginal income-based pensions were lowered, which affected up to 90 per cent of the country’s pensioners (Swedish Ministry of Finance 2008b). Although Sweden was active in stimulating employment whilst providing income security for individuals, it did not directly intervene in the labour market relations to protect jobs and salaries as seen in the German case. The negotiations concerning jobs and terms of employment in Sweden are bipartite and often sectoral (Van Ruysseveldt and Visser 1996). In these negotiations between social partners, historical agreements have been made in 2008 and 2009. Although comprehensive temporary layoffs were not officially provided as an instrument for employers, social partners have agreed upon agreements concerning temporary dismissals in many sectors to avoid massive redundancies (EIRO 2009l, 2009m, 2009n). In the manufacturing industry for instance, an agreement was reached in 2009 that salaries and working hours can be cut in case of decrease in orders, in exchange for no or less layoffs, sometimes complemented with training possibilities for employees (EIRO 2009k). Additionally, agreements have been made at the local level concerning cuts in holiday allowances, bonuses, and wage freeze.
Comparison of the Reactive Policy Strategies Our comparison of the reactive policies of Germany, the UK and Sweden shows that there are remarkable differences in their reactive strategies, as is shown in table 1. The German reactive policies can be interpreted as being designed to keep insiders in the labour market to preserve their skills, and provide companies with skill maintenance, through active state interventions. This was done by using short-time unemployment on a massive scale, subsidized by the state, which ensured that insiders, skilled workers, stayed in their specific jobs. This 364
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Family policies
Pensions, retirement
Partial retirement scheme for older employees, subsidized by state Increased child benefit, child allowance, child bonus
Extension of drawing period for short-time work allowances out of general taxes. State reimburses expenses of employers Tax rate first bracket lowered Allowances in personal income tax increased Social security contributions lowered Health insurance contributions lowered
Employment policies: passive programmes
Tax cuts/social security contribution cuts
State investments in training-on-the-job, job-to-job placements
Employment policies: activation programmes
Germany
Marginal non-recursive pension bonus Marginal non-recursive child bonus and child allowance
Allowances in personal income tax increased, except for high incomes
State investments in mediating for jobs Training possibilities for unemployed, esp. young persons Bonus for employers when recruiting long-term unemployed Increase in maximum weekly pay to calculate statutory redundancy benefit
UK
Overview of national social and unemployment policies
Table 1
First threshold income tax raised In-work tax credit lowered Income tax deduction raised Social security contributions lowered, especially for young people Payroll tax contributions lowered, especially for young people Tax rate of pensioners lowered
Places created for temporary work in (semi-) public sectors Student grant people over 25 increased Employer tax for hiring long-term unemployed decreased Qualifying period reduced, demand of work history dropped for unemployment benefits
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maintenance of jobs and firm- or sectoral-specific skills plays a crucial role in corporatist countries, such as Germany, to keep their competitive advantages in the global market (e.g. Hall and Soskice 2001). Germany also implemented a phased early retirement scheme for older employees, subsidized by the state. This scheme was designed to make space for new people, without insiders bearing any of the costs. Furthermore, the implemented tax cuts are typically conservative, due to the fact that the cuts, mostly found in health insurance and social benefit contributions, provided relief for employers and already employed, who are the insiders in the labour market. The active crisis labour market programmes were also made to benefit and maintain the insider market, by providing training mostly for workers with employment. Due to this, it has been noted that job losses during the crisis have been seen mostly in the margin, thus the temporary workforce (Eichhorst et al. 2010). In addition, it has been noted that the recovery packages have mostly been aimed towards male-dominated sectors, whilst no national plans were made to prevent a decline in female employment (EIRO 2010). Overall, Germany’s social and unemployment reactive policy strategy shows conservative characteristics, as its strategy has a profound inclination to maintain traditional status relations in labour markets. The social and unemployment reactive policy strategy of the UK can be largely typified by passively relying on market forces, with a low degree of government intervention and targeted residual social policies leading to low decommodification. The unwillingness of the British government to improve its low supportive unemployment policies led to involvement at the company level to set up agreements concerning reduction of working hours and wages, but it also ended in mass redundancies. The only passive labour market programme implemented was a modest increase in the statutory redundancy pay for medium and high earners, and marginal non-recurrent bonuses targeted to pensioners and families with children. Almost all policies that the UK government did implement can be characterized as demand stimulations, such as a stimulus for employers for new hires and a stimulus for consumers by the VAT decrease. This market system reliance and demand-driven policies, along with its residual welfare state approach can be considered typically liberal, reflecting its past legacies. The Swedish reaction is exemplified by its strong emphasis on activation, combined with the provision of income security. Sweden stimulated activation in the labour market by cutting income and employment taxes, and by actively creating places for temporary work in the (semi-) public sector to keep a skilled workforce. In addition, it has expanded its already generous income protection programmes for the general public and universal social policies. Whilst the Swedish government was very active in providing income security and stimulating activation, it did not so much directly protect jobs and salaries of employees as the German government did. Therefore, cuts in jobs, working hours and wages have occurred frequently through bipartite sectoral agreements. This approach of Sweden of providing generous universal income protection, and employment via the public sector, whilst focusing on activation can be understood as the typical sociodemocratic approach. 366
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Conclusions and Discussion This article aims to fill the gap in the research on short-term policy responses, by examining the reactive policy strategies of three welfare states, namely Germany, UK and Sweden. Our article shows that even though the crisis presented sudden and severe problems to the economies of all our three country cases, the reactive social and unemployment policy strategies of the three countries are remarkably different. These differences in reactive policy strategies can be understood largely by the different institutional legacies of the three countries as argued by Esping-Andersen (1990). Germany’s strategy shows conservative characteristics by maintaining the traditional status relations, as well as focusing on keeping the key skilled male workforce in their jobs. The UK, however, chose a liberal strategy, relying on market forces whilst providing residual policies to targeted groups. Sweden on the other hand adopted strong activation measures combined with generous passive labour market schemes to provide universal income security, which is typically socio-democratic in character. In addition, our study shows that the reactive policies adopted by the national governments were essentially not new, but can be seen as a succession or extension of existing ideas and paradigms from their institutional legacies. Therefore, the degree of policy innovation was limited. In their immediate reactions, our country cases seem to have fallen back on their old habits by using the tools they know best. As the adopted national reactive policy strategies can be largely explained by the countries’ institutional legacy, it suggests that the path dependence theory is applicable to reactive policies. This result is even stronger when we consider the fact that the centre-right cabinet of Sweden used a social democratic strategy, whilst the Labour Party in the UK largely relied on liberal rationales. Still, it is difficult to assess whether the policy responses would be the same when other political affiliations would be in office. Although the UK’s response was essentially based on a laissez-faire approach, it has intervened in market forces, for instance by fiscally stimulating employers to hire the long-term unemployed. Perhaps we can see here the leftist inclination, but it could also be due to the fact that the UK is less of a classic liberal example than for instance the USA (Arts and Gelissen 2002). In addition, our study suggests that reactive policy strategies are affected by different dynamics than structural long-term policy developments. We do not find evidence for a further process of convergence in reactive policy strategies, whereas a gradual process of retrenchment and employability in structural policy-making has been noted in long-term policy developments of the welfare states under investigation (Dingeldey 2007). This suggests that countries fall back on their institutional legacy in the first ‘fire fighting’ phase of social and unemployment crisis management. In addition, our study shows that in the immediate phase, this crisis was not used to implement cutbacks or reforms, as could be expected from agenda-setting theories. Whether this crisis will be used to implement major reforms in a later state, and whether the general process of retrenchment continues then, remains to be seen. There are some limitations to this study. It should be noted here that because of the strategic most-similar systems design case study with non© 2011 Blackwell Publishing Ltd.
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representative cases, the generalizability of the study is relatively marginal. We have compared the archetypical European examples of the different regimes, whereas other scholars have noted that other countries are more difficult to classify using Esping-Andersen’s framework (Arts and Gelissen 2002). It would be interesting to extend this study and look at the crisis response policies of more countries, including more ambiguous cases. A second downside of the most-similar systems design is the problem of possible extraneous variables. The countries roughly share a number of important characteristics, including their geography, their membership of the EU, and, to a certain extent, the consequences of the financial and economic crisis. Other characteristics differ, including the political affiliation and the economic composition of the three countries. For instance, Germany can be characterized by its manufacturing industry and export-driven economy, whereas the UK has a large global financial sector. Sweden is also an open economy which relies heavily on foreign markets. The differences in economic composition influenced the impact of the crisis on the national economies to a certain extent (Eichhorst et al. 2010). However, we can see that industrial differences do not seem to explain the dissimilarities we find in the reactive social and unemployment policy strategies as well as the path dependence theory of institutional legacies does. In addition, the industrial differences and composition are in some ways integral parts of the legacies of these welfare states, by reflecting their institutional advantages (Hall and Soskice 2001). In order to assess the influence of the political persuasion, more countries need to be compared. If data are available, it would also be interesting to compare previous crises responses, to see whether the conclusions made in our article can actually be applicable for different crises at different periods of time.
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The Impact of the Crisis on Australian Social Security Policy in Historical Perspective spol_780
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Peter Saunders and Chris Deeming Abstract The Labor government was elected in November 2007 with a commitment to reject the labour market deregulation and other neo-liberal policies of its predecessor, promote equality of opportunity and tackle entrenched social and economic disadvantage by implementing a new social inclusion agenda. In response to the financial crisis which had begun at the end of 2007 and had turned into a full global recession by the middle of 2008, the government introduced two substantial stimulus packages funded from the large budget surplus it had inherited from its predecessor. The fiscal stimulus has helped Australia to become the only advanced economy to avoid a technical recession (to date), although there is concern that the downturn has created a situation where social policy is being driven by political expediency rather than by the principles and commitments set out in the government’s pre-election social policy manifesto. Against this background, this article examines how the latest crisis has shaped social security policy in Australia and compares the recent policy response with the policy response to earlier crises. Analysis focuses not just on what was actually done, but also on the constraining role of prevailing economic and political circumstances and on the processes that were used to drive reform in a wage earners’ welfare state. spol_780
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Keywords Social security; Welfare reform; Global financial crisis; Targeting Introduction Thus far, the waves set in train by the global financial crisis have washed up rather gently on Australian shores. There is ongoing debate about the extent to which this is a consequence of the package of stimulus measures introduced by the government to offset its effects, and about when and how quickly these measures should be withdrawn. However, the overwhelming sense is one of relief that the impact has not been anywhere near as damaging as many were Address for correspondence: Peter Saunders, Social Policy Research Centre, Faculty of Arts and Social Sciences, University of New South Wales, Sydney, NSW 2052, Australia. Email: p.saunders @unsw.edu.au © 2011 Blackwell Publishing Ltd., 9600 Garsington Road, Oxford OX4 2DQ , UK and 350 Main Street, Malden, MA 02148, USA
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predicting when the crisis first broke. Despite this, there is anecdotal evidence that this experience has affected the attitudes of policymakers and the public in ways that could have long-lasting effects on policy. The Australian Labor Party (ALP) was swept into office in late 2007 on the back of a widespread revolt against the industrial relations policies of its predecessor, with a commitment to adopt a more compassionate interventionist approach across a broad range of areas including labour market and welfare reform, health and education, climate change, border protection and infrastructure (including broadband) development. Since the crisis broke, it has been using more interventionist rhetoric as the crisis provided the impetus for it to take urgent action to stabilize the economy. This in turn has given demand management (even the idea of deficit financing) greater credibility than such ideas have enjoyed for many years. Public confidence in the financial sector has also been eroded and claims that the remuneration packages of many CEOs are excessive have led to a broader questioning of the levels of executive pay – a situation that would have been unheard of five years ago. These developments sit awkwardly with the neo-liberal thinking that has played a major role in shaping Australian economic and social policy over the last two decades. They raise questions about the wisdom of a policy approach driven by an ideological obsession with small government, low taxes and relying on market forces driven by individual choice to allocate public and private resources. The current political situation in Australia provides fertile ground for policy reform, and social security is no exception because it absorbs a large proportion (despite means-testing) of federal government spending.1 However, the economic situation is fraught with uncertainty and this has constrained the ability of both major political parties to propose new ideas that may place at risk an economic recovery that is fragile and uncertain. Welfare reform is still on the agenda, but over 20 years of tighter targeting has left little room for further incremental tightening. Recent reform discussion has focused on the need to simplify the payment structure, reduce effective marginal tax rates (EMTRs) for those receiving working-age payments and better integration of tax and benefit arrangements in the superannuation system. One specific focus of recent welfare reform has been the introduction of income management, initially as part of the intervention in the Northern Territory aimed at tackling Indigenous violence and child abuse. The scope of income management has since been expanded there, and further expansion has been announced. This is a highly controversial policy, under which a proportion of income support entitlements is set aside to meet ‘essential household needs and expenses’ such as food, housing, clothing, education and health care. Recipients affected by income management are also prevented from spending income-managed income on alcohol, tobacco or gambling. This kind of specific initiative is not discussed further in this article, which adopts a broader and longer-term perspective to assess the impact on social security reform of the major economic crises that have been experienced in Australia over the last four decades. Its primary purpose is to examine whether the response to the current crisis is different from the responses to previous crises, and if so how. The analysis locates the findings within a broad 372
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framework that captures the basic elements of the Australian system and how these have evolved. The article is organised as follows: the second section provides a broad overview of economic developments since 1970, while the third section sets out the defining features of the Australian welfare state and briefly discusses the theoretical frameworks that have been used to understand the policy response to crisis. The fourth section compares the social security response to the recessions of the 1970s, 1980s and 1990s, and the fifth section describes in more detail the response to the latest financial crisis. Our main conclusions are summarized in the sixth section.
Background and Framework The policy background The relatively benign impact of the current economic downturn in Australia is illustrated in figure 1, which shows longer-term trends in unemployment over the past four decades. The figures refer to the total and long-term (one year or more) unemployment rates, and reveal that the upward shift in both since 2008 is far smaller than that experienced in the earlier crises of 1973–74, 1982–83 and 1990–93. Following the first oil shock, the unemployment rate almost doubled, from under 3 per cent at the end of 1973 to reach a peak of 5.4 per cent in February 1975 – a level that was unheralded in post-war Australian experience. Between August 1982 and May 1983, the unemployment rate started from a higher point, but increased by a similar degree, rising from 6.7 per cent to 10.3 per cent. Between August 1990 and February 1993, the unemployment rate rose even more, from 6.7 per cent to 11.9 per cent. These figures indicate that both the size and duration of the impact on unemployment increased across these three recessions. In contrast, the increase in the unemployment rate since the start of the current crisis has been far more modest, with unemployment rising from below 4 per cent in mid-2008 to a peak of 6.1 per cent in March 2009 (compared with a predicted peak of 8.5 per cent), since when it has been declining steadily and is now predicted to be back below 5 per cent by mid-2011. The trough-to-peak rise in the unemployment rate in the current period has thus been kept to around 2 percentage points, compared to around 5 percentage points in the two previous recessions and around half that in the 1970s. Furthermore, whereas unemployment never returned to its pre-crisis level in the 1970s and it took around six years for unemployment to fall back to its pre-recession level following the 1980s and 1990s recessions, unemployment is already heading back to its pre-crisis level. Broadly similar trends are apparent for the long-term unemployment rate, which has been declining since the recession of the early-1990s and has been much lower in recent years than in previous recessions. These labour market statistics tell only part of the story, since they take no account of labour force withdrawal and, more significantly, the decline in working hours that has been a deliberate response to the current downturn in © 2011 Blackwell Publishing Ltd.
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Source: Australian Bureau of Statistics, Labour Force, Australia, Catalogue No. 6202.0; various issues. Note: The vertical lines identify the timing of the elections of the Australian Labor Party (ALP) and Liberal-National Party Coalition (LNP) governments.
Trends in unemployment and long-term unemployment
Figure 1
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Australia. These developments have moderated the rise in involuntary joblessness but do not affect the overall picture. There is, however, evidence from recent studies showing that the impact of the current crisis on unemployment has been greatest for younger people (aged 18–24) (CBA/NATSEM 2010; Melbourne Institute 2010). The latter study also suggests that the financial crisis has had a relatively small impact on workers’ perceived chances of losing their job and their mean satisfaction with current job security. Another significant feature of figure 1 is that the crises hit at different points in the electoral cycle. Two of them (in 1973 and 2008) followed closely after the election of a new government and the other two hitting governments that had been in office for some time. These timing differences are likely to affect the nature of the political response to the crisis, and this theme is taken up later. It is one thing to describe trends in economic data but quite another to identify the factors that have contributed to the observed changes. Several factors have contributed to the strong resilience of the Australian economy in the face of the most recent economic shock. The first is the size and speed of the government’s stimulus measures introduced in response to the crisis, which have attracted wide praise from international agencies like the Organisation for Economic Co-operation and Development (OECD) and the International Monetary Fund (IMF), as well as from expert commentators.2 The second factor is the increased flexibility of the Australian labour market, which allowed the labour market to adjust in ways that did not increase unemployment.3 Third was the strong prudential regulatory framework of the financial system that was set in place in the 1980s and 1990s, and fourth was the unexpectedly quick economic recovery in China which produced a rapid increase in demand for Australian mineral exports. The last two of these factors, while undoubtedly important, are beyond the scope of this article, which focuses on the first two. In relation to the first, the government introduced a series of measures designed to increase domestic demand to offset the decline in global demand in the wake of the financial crisis. A series of one-off payments were paid in December 2008 to pensioners (but not to the unemployed or sole parents in receipt of Newstart Allowance or Parenting Payment) to boost consumption spending in what the government referred to as a ‘down payment to provide immediate financial help in the lead up to comprehensive pension reform’. This was followed by a second package in early 2009, which provided a further set of one-off payments to a range of taxpayers and certain groups of income support recipients (see ‘Policy Response to the Current Crisis’ below). These responses highlight that an important trend in recent years has been the tendency (with the notable exception of the 2009 pension increase discussed later) for governments in Australia faced with cyclical economic swings to favour one-off payments over permanent changes in social security payment rates and/or conditions. This is consistent with both short-run stabilization policy and with the longer-term focus on keeping the budget in surplus over the course of the cycle. The political popularity of these measures reveals how the social security system has been used as a conduit through which governments can shift spending power quickly and efficiently to consumers – a development that would not have been possible without the institutional and © 2011 Blackwell Publishing Ltd.
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administrative structures of the social security and tax systems. However, this trend also illustrates how short-run policy adjustments can become divorced from longer-run issues surrounding payment adequacy and eligibility conditions, and how economic policy can proceed independently of social security (and other social policy) reform.
Analytical Framework Australian exceptionalism In seeking to better understand the changes that have taken place in Australia in response to the financial crisis, it is necessary to set out some of the features of the system and to locate them within a broader policy and decision-making framework. Since much of this material will be familiar to readers, the discussion is brief and highlights only those points that are taken up later. The dominant framework for analyzing the Australian welfare state and its social security system in a comparative context is based on the work of Castles (1985, 1994, 1997). His characterization of Australia as a ‘wage earners’ welfare state’ focuses attention on the role of labour market policies in achieving welfare objectives, highlighting what Castles refers to as ‘Antipodean exceptionalism’, which he describes as follows: My portrayal of Antipodean exceptionalism . . . rests on the fact that support mechanisms which operate via the family wage and occupational benefits, or via a home ownership premised on long-term participation in the labour force, more directly privilege present and retired wage-earners and their dependents than do mechanisms resting on welfare state transfer payments in virtue of social citizenship (Castles 1997: 18) Castles’ work has attracted criticism domestically (Watts 1997), but wide interest internationally and his central point about the welfare role of the wage-fixing system cannot be ignored in any assessment of Australian social policy. His other principal insight – that Australian social policy goals have often been achieved in distinct ways – is also important when it comes to using conventional indicators like (public) social expenditure levels to indicate or compare welfare state effort. Policies that encourage home ownership or require employers to meet the cost of short-run sickness absences and the rapid expansion of occupational pensions all testify to the importance and relevance of this insight. However, these provisions have all been particularly prone to the risks that have accompanied the financial crisis, including increased house price uncertainty and the fluctuations in the financial returns earned by the huge privately-run superannuation funds. Another important feature of the Australian system is its heavy reliance on means-tested benefits and targeted assistance to reduce benefit churning and lower budgetary costs.4 These differ in that targeting has mainly been pursued through policies that restrict benefit eligibility rather than through using the means test to reduce benefit entitlements (Saunders 1991, 2000). However, 376
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there is little doubt that Australia’s reliance on a social assistance model has provided it with more flexibility to vary benefit rates and conditions in response to external conditions (and shocks) and over the last two decades, a series of innovative social security reforms have been introduced that exploit this opportunity. With means-testing firmly embedded in the Australian ethos, these reforms have eased spending constraints in some areas, providing opportunities for successive governments to either provide additional assistance elsewhere, cut taxes or consolidate their overall fiscal position.
Making policy The above features have played an important role in influencing the ability of governments to implement social security reform, including in response to external crises. However, while the shape of the system and the values and practices that underlie it are important, so too are the motivations of those with the political power to bring about change. It is common to distinguish between three broad groups of actors that can influence the policy reform agenda: politicians, bureaucrats (who together seek to protect the interest of the state) and the public (who articulate and promote the interests of citizens). Public choice theories examine the interplay between these three groups using the ideas of self-interest and constrained maximization that dominate economic thinking more generally. All three groups have an incentive to portray crises as threats in order to exploit the opportunities thereby presented to achieve their objectives by overcoming existing barriers or constraints. However, governments in particular must balance these opportunities against the risks that are often embedded within them if they want to maintain control of the policy agenda. They must emphasize that crisis provides a rationale for action without conveying an impression of lack of control since this could unleash unpredictable pressures. To quote a recent paper by Castles: Today, the standard governmental response to perceived crisis is to present it as a reason for adopting reform measures, whilst denying its emergency status and, particularly, denying any lack of control on the part of the government (Castles 2008: 14) Public servants are not constrained in this way (at least not publicly), but must still convince their political masters that reform is needed in response to crisis while emphasizing that the crisis itself is manageable and amenable to control. Meanwhile, the public is on the receiving end of whatever actions emerge from this dynamic, but can also exert an important influence if the crisis results in a change in attitudes (e.g. to inequality, and the relative treatment of rich and poor) that can bring about pressure for new policy initiatives.5 The complex dynamics created by this interplay between the actors that shape policy in the face of external crises was used 50 years ago by Peacock and Wiseman (1961) to explain longer-run trends in public expenditure in the UK. They developed a model in which, in normal times, the ability of government to raise its spending is constrained by the public’s wish to keep © 2011 Blackwell Publishing Ltd.
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taxes to a ‘tolerable level’. Economic growth will generate higher tax revenues automatically through fiscal drag, so that higher tax rates are not required to allow spending and taxation to increase in line with GDP, but this provides limited scope to introduce new programmes. When an external economic, social or political crisis emerges (Peacock and Wiseman’s focus was on the impact of war) higher spending (mainly on defence) is a necessary consequence and this in turn requires higher taxes. As this process unfolds, taxpayers undergo an ‘inspection effect’ focusing on the social problems that arise during (and after) the upheaval, and the government seizes the opportunity to retain taxes at the higher (crisis) level even after the crisis has passed. This leads to an upwards ‘displacement effect’ in which the ratio of spending (and taxation) to GDP shifts permanently upwards as civilian (mainly social) expenditures replace defence spending once the crisis has passed. The model has not been without its critics (Brown and Jackson 1978) who have argued that there is no logical reason why spending should rise permanently in response to taxpayer inspection, which could equally lead to a downwards or temporary shift. Even so, it seems plausible to hypothesize that the post-war development of the British welfare state was predicated in part on the changing attitudes that were a direct result of the war-time experience of the British public. It is this emphasis on how crises can affect policy by changing public opinion and attitudes that makes the approach pioneered by Peacock and Wiseman relevant to current circumstances.
Revisiting the 1970s, 1980s and 1990s Federal governments are elected to office for a maximum term of three years in Australia and often seek re-election before that term has expired. Voting is also compulsory, so that voting is frequent and unavoidable. These two features provide Australian voters with ample opportunity to rid themselves of unpopular governments although there have been only five changes of government in the 15 elections held between 1970 and 2010. With the ALP in power for all but 11 of the 28 years since 1972, it is no surprise that they experienced all but one of the four crises discussed here, with two of them (the 1970s oil shock and the recent financial crisis) occurring in the early years of the new government (see figure 1). Following the election of a Labor (ALP) government after the war, Australia was ruled by a succession of conservative governments between 1949 and 1972. In 1972 – just before the first oil shock – the ALP was returned to office and embarked on a radical agenda of social reform that included major reforms to a social security system that had hardly changed for more than two decades. After losing office in controversial circumstances in November 1975, a coalition between the conservative Liberal and Country (now National) Parties (LNP) was returned to power and held office until a dispute with the unions and a failed attempt to control inflation by direct control of wages caused it to lose office in 1983. Its replacement – led initially by a former leader of the union movement – promised a more conciliatory wages policy in the form of The Accord, an incomes policy agreement with the trade unions and employer groups.6 378
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In 1996, the LNP was re-elected to office and pursued a classic neo-liberal reform agenda built around increased competition, labour market deregulation, welfare conditionality, public debt reduction and surplus budgeting. After a decade of radical economic reform accompanied by a conservative, moralistic social policy, its election loss in 2007 was largely due to a public backlash over its industrial relations policy (Work Choices), which imposed a series of increasingly free-market reforms on the wage determination system that threatened job security and the traditional income support role of the minimum wage. Public opinion, it seemed, did not want to stray too far from the wage earners’ welfare state model by abandoning controls over wages and employment conditions and relying instead on unpredictable market forces.
The first oil shock, 1973–74 The years immediately preceding the first oil shock were characterized by intense social policy reform across a broad spectrum of areas. Federal government spending on social programmes in education, health and social security and welfare rose rapidly, with combined spending on these three programmes increasing from 32.6 per cent of total spending in 1972–73 to 45.2 per cent in 1975–76 (Manning 1998: Table 1.1). In social security, the government established (or expanded) several important new inquiries relating to poverty, tax reform, national superannuation and workers’ compensation (Saunders and Manning 1978). However, the landmark opportunities provided by these inquiries to radically reform the Australian welfare state were defeated by a combination of economic crisis and political weakness. For example, in 1973, the Poverty Commission released an Interim Report in the hope that it could influence a policy agenda that was fast becoming hostage to external economic and political events. It recommended large increases in benefit levels, the introduction of automatic payment indexation (increasingly important as inflation began to rise) and removal of the pension income test for older pensioners as the first step towards a universal pension scheme (Commission of Inquiry into Poverty 1973). Its main recommendation was that the existing patchwork of benefits be replaced by a guaranteed minimum income (GMI) scheme that would provide a universal payment (or social dividend), clawed back from those on higher incomes through a proportional income tax supplemented by a surcharge. The Poverty Commission’s GMI proposal was consistent with the recommendations of the tax review but represented a different approach to the earnings-related social insurance philosophy that underpinned the schemes recommended by the superannuation and compensation inquiries. All three reports were released too late to exert any influence on policy as the budget spiralled out of control and the government became enmeshed in a series of ministerial bungles that resulted in a political crisis. Although several significant social security reforms were introduced in this period, the really big policy ideas that emerged from the inquiries never made it onto the agenda as economic and political events overtook them. Although the recession triggered by the oil price shocks played a role in determining the course of events, its role was subsidiary to the constraining © 2011 Blackwell Publishing Ltd.
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influence of the huge budget deficit that was caused by the combination of policy reform, record inflation and the political ineptitude of the government. The major structural reforms of the social security system that had started before the oil shock stalled in the face of these exogenous economic and political developments, the latter leading to a constitutional crisis in 1975 that saw the dismissal of the government and its defeat in the election that followed.
The 1980s recession The government that won the 1975 election adopted a monetarist macroeconomic policy agenda backed by strong fiscal discipline for the remainder of the 1980s. Despite the introduction of a ‘razor gang’ of senior ministers charged with reviewing and reducing all areas of government spending, upward pressure on the social security budget continued as a result of policy initiatives (the introduction of a new universal family allowance payment in 1976) and the impact of growing unemployment on the numbers receiving unemployment benefit. The government responded to the latter by restricting the automatic indexation of some benefits and a considerable tightening of eligibility conditions through greater administrative surveillance of existing beneficiaries and new applicants (Scotton 1980: 16). This period thus saw the emergence of benefit targeting through tightened eligibility that has since become a hallmark of the Australian social security system. Many social security measures introduced in this period produced modest savings (e.g. the move from bi-annual to annual indexation of benefits) but generated considerable political hostility. The government’s economic policy was also relatively ineffective, as the policies introduced to address stagflation, despite the adoption of partial wage indexation, had little impact on unemployment, which was higher when the recession hit in 1981 than it had been when the government took office at the end of 1975 (see figure 1). By the late-1980s, other factors were again creating a climate of political as well as economic crisis. The centralized wage determination system was abandoned in 1980 with no coherent policy to replace it, and as the labour movement became more active and the number of industrial disputes rose, the government responded by introducing a freeze on wages. This had little impact and a severe drought led to demands for compensation from the powerful farm lobby that placed further upwards pressure on prices (which were not subject to the same control as wages) and it was against this backdrop of mounting pressure on the government that the recession hit. It is again difficult to argue convincingly that the 1980s recession-induced crisis gave new impetus to the social security reform agenda. The government increased unemployment benefits in 1982 (the first increase for single people aged under 18 since November 1974) but this was mainly designed to appease the growing army of government critics and can hardly be described as reform. Public opinion switched behind the consensus approach to wage determination being developed by the ALP Opposition in collaboration with the unions and employer groups, and the government was swept from office in March 1983. 380
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The 1990s recession It is ironic that the ALP government that ruled between 1983 and 1996 pursued an economic reform agenda that many had expected of its conservative predecessor. The Accord provided the framework and discipline within which the unions accepted wage restraint in exchange for increases in social spending (the social wage) and a macroeconomic policy approach focused on active job creation. Employment grew substantially and unemployment began a long-term decline from its peak of close to 12 per cent following the 1980s recession to below 4 per cent when the current crisis emerged in 2007–08 (figure 1). Significant economic reforms were introduced in this period, beginning with the floating of the dollar and deregulation of the financial system, followed by a gradual deregulation of the labour market and the introduction of a more market-oriented approach to all areas of government service delivery. It was through the Accord (which was successfully renegotiated on several occasions as policy priorities and economic conditions changed) that the government introduced a compulsory company-based superannuation scheme in 1992. Under the Superannuation Guarantee Charge (SGC) employers were required to set aside contributions for their employees into privately-run superannuation funds. Although the SGC was set at an initially low level, it represented a major shift in retirement incomes policy, away from the dominant role played by the means-tested pension system towards a combined public/private pension system that was consistent with the system being actively promoted by the World Bank (1994). By the time the recession hit, the government was in its fourth term, the Accord had been abandoned and the government was suffering from ‘reform fatigue’ after more than seven years of intense policy action. There was little sense of crisis and the then Treasurer and later Prime Minister Paul Keating famously described the downturn as ‘the recession we had to have’, in recognition of its role in dampening demand that was running ahead of supply. The introduction of the SCG was a key element of the government’s response to the recession, since it was negotiated with the trade unions as a way of avoiding the wage increases that would otherwise have occurred. The government argued that the trade-off of wage restraint for expanded superannuation coverage would benefit workers because the former would be taxed whereas the latter attracted very generous tax concessions, further supporting the view that this was a planned response to the crisis.7 This was a deliberate choice and is an example of a clear and important social policy initiative being introduced in response to the emergence of (economic) crisis. This brief overview of policy responses to the last three crises provides little evidence to support the proposition that Australian governments have taken advantage of the emergence of crisis to introduce social security (or other social policy) reforms that might otherwise have been considered too radical and hence politically unpopular. Instead, what seems to have happened is that the crises have either come at a time when the government was already facing political difficulties and struggling for survival, or have focused government © 2011 Blackwell Publishing Ltd.
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attention on the need for an appropriate economic response, with social policies left to play a largely passive and supportive role. The main exception is the introduction of the superannuation system under the SGC, which represents a shift in social policy that was made possible by the economic crisis that accompanied the 1990s recession. Although it is somewhat ironic that this major new piece of social policy legislation was driven by economic motivations (to constrain wage demands) rather than social objectives (to improve the adequacy and equity of the retirement income support system), it can also be seen as an attempt to forge a new bond between the wage and social security systems in a modernized (mixed economy) wage earners’ welfare state.
Policy Response to the Current Crisis The ALP Government elected in November 2007 found itself grappling with the global financial downturn almost immediately (Rudd 2009). At one level, this created a concern that policy was being driven by political expediency rather than by the principles and commitments set out in the government’s social policy manifesto, and that the reality of social reform in such areas as education, health care, pensions and tackling Indigenous disadvantage was lagging behind the government’s political rhetoric.8 At another level, however, there is evidence to suggest the beginnings of a strategy to build a more inclusive society.9 Reference has already been made to the one-off payments introduced as part of the stimulus package introduced in response to the financial crisis. These included payments of $1,400 for single pensioners and $2,100 for pensioner couples, which were complemented by a series of long-term (‘Nation Building’) infrastructure projects supported by $4.7 billion of new investment for road, rail and port infrastructure. Capital spending on national infrastructure projects was also brought forward to counter the worst of the economic effects of the recession. These measures were largely funded from the large budget surplus that the government had inherited from its predecessor, as the budget papers make clear (Department of Treasury 2007, 2008). By the beginning of 2009, most advanced economies were in recession and the government responded by announcing a second major economic stimulus package amid growing fears about rising unemployment and concerns that the economy might still retract. Announced in February 2009, the $42 billion Nation Building plan included funding for infrastructure projects such as public housing and school construction and modernization projects. The package also contained a second round of one-off cash stimulus payments at a cost of $12.2 billion, including a ‘tax bonus for working families’ of up to $900 (depending on income), a ‘single-income family bonus’ of $900 and a ‘back to school bonus’ of $950 per child to families receiving Family Tax Benefits A with school-age children. These payments were not subject to income tax and were not included as income for social security income testing purposes. Government calculations suggest that the stimulus packages raised GDP by 23/4 per cent in 2009–10 and by 11/2 per cent in 2010–11, and that in the absence of policy action, unemployment would have peaked 11/2 percentage 382
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points higher at around 10 per cent. Treasury analysis confirmed that without the Plan, including the stimulus payments, Australia would have entered a recession (Department of Treasury 2009). These calculations were supported by IMF analysis indicating that the measures introduced up to May 2009 were estimated to have a cumulative impact over five years of around 10 percentage points of GDP (IMF 2009). Early on, the government set about reviving Australia’s flagging industrial relations system by restoring the legal right of workers to appeal against harsh or unfair dismissals from their place of work – a right that had been taken away under the Work Choices legislation. The Fair Work Act was designed to strengthen collective bargaining for workers and provide them with a ‘fair safety net’ of employment conditions. The government also committed itself to promoting equality of opportunity and tackling entrenched social and economic disadvantage under its ‘Closing the Gap’ and social inclusion agendas (Department of Families, Housing, Community Services and Indigenous Affairs 2009a).10 In 2008, as the crisis gathered pace, the government announced that the National Health and Hospitals Reform Commission (NHHRC) would advise on future directions of health care delivery and that a major review of the Australian tax system (the Henry Review) would be conducted by a Review Panel headed by the Secretary of the Treasury. Two days later, partly in response to the political storm created by the Opposition about the inadequacy of the basic pension, it announced that the Secretary of the Department for Families Housing, Community Services and Indigenous Affairs would lead a review of Australia’s pension system (the Harmer Pension Review). Following an extensive process of community consultation, the Henry Review delivered its final report to government in December 2009 and it was released in May 2010 (Australia’s Future Tax System 2009a, 2009b). In the social security area, the Review recommended that the basic structure of income support payments be reformed through the introduction of three major categories: pensions (paid to those expected to have no attachment to the labour force); a participation payment (for people of working age); and a student assistance category. It also proposed a more consistent approach to payment relativities within each of the three payment categories, based on the single-to-couple pension relativity, and extensive simplification of the complex system of family payments. It argued that multiple family payments discourage the return to paid employment and recommended a new simplified family payment to ease existing disincentive problems and help cover the direct costs of bringing up children in low-income families. In its initial response to the Henry Review (delayed for several months), the government rejected many of its main recommendations, including the proposals to simplify the payment structure and the family payments system. It did, however, announce the introduction of a resources super profits tax that was a key recommendation of the Henry Review, with part of the estimated revenue of $12 billion in 2012–13 and beyond to be used to raise the SGC from 9 per cent to 12 per cent. The proposed resources rent tax met with strong resistance from the mining industry that led to a stand-off between the mining companies and the government. This fed growing discontent © 2011 Blackwell Publishing Ltd.
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within the government over its performance and produced a leadership spill that resulted in Prime Minister Rudd being replaced by his Deputy, Julia Gillard. The new Prime Minister reached a negotiated deal with the miners and called an election that produced a hung Parliament, with the ALP clinging to office with the support of a small group of independents. The resulting political uncertainty makes it difficult (at this stage and probably for the foreseeable future) to discern the longer-term impact of the Henry Review recommendations.11 However, the government has announced the introduction of a new package of resource taxation reforms in July 2012 and has established a Policy transition Group to oversee its implementation.12 In stark contrast with the muted response of the government to the Henry Review, its response to the Harmer Pension Review was prompt and decisive. The report was released in February 2009, and recommended a series of measures to strengthen the financial security of pensioners, particularly single pensioners, carers and people with a disability (Department of Families, Housing, Community Services and Indigenous Affairs 2009b). Most of these measures were implemented by the government in the Budget of that year, including an increase in the single rate of pension by $32 a week (10.6 per cent) increasing its value relative to the married rate of pension (which received a much smaller increase), from 61 per cent to around 67 per cent (Saunders 2010). These announcements were accompanied by the decision to introduce a phased increase in the pension age from 65 to 67 to take effect between 2017 and 2023. As noted earlier, Australia experienced marked changes in economic, social security and labour market policies during the 1980s and 1990s, similar to those experienced in many other OECD countries. The industrial relations reforms introduced by the previous government under Work Choices had undermined the system of arbitration and removed employment laws relating to unfair dismissals. These reforms were predicated on standard neo-liberal philosophy, under which greater labour market flexibility was seen as a necessary condition for improved economic performance in a globalised economy. Critics maintained that the laws stripped away basic employee rights and were fundamentally unfair. Certainly, the principal thrust of the Work Choices reforms was to further individualize employment relations under enterprise bargaining, with the effect of marginalizing trade unions and the industrial tribunals. In contrast, the Fair Work Australia initiative seeks to restore the legal right of workers to appeal against harsh or unfair dismissals from their place of work, and is designed to strengthen collective bargaining for workers. Importantly, as was the case with the reforms of the previous ALP government, support for both the superannuation system and the importance of an appropriate minimum wage for workers on social justice grounds was reconfirmed, heralding a return to the (enduring) idea of a wage earners’ welfare state.
Summary and Conclusions The Australian social security system has proved remarkably resilient despite several periods of major crises over the last three decades. This review and 384
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analysis of policy responses to the crises experienced over the last four decades provides little evidence to support the proposition that Australian governments have consistently sought to take advantage of moments of crisis to introduce social security (or other social policy) reforms that they might otherwise have regarded as unachievable. Australia has long held a reputation for having one of the most selective and highly targeted systems of social security in the Western world, and this has provided it with greater flexibility to implement change. Against this, it can be argued that there is limited scope in a targeted residual model to make outright cuts during periods of economic crisis (as is currently happening in Europe). It is also true that the oil shocks of the 1970s helped to usher in an era of neo-liberal reform that has been embraced by both major parties as a way of ensuring continued growth and rising living standards in a strong trading nation that is fully integrated into the global marketplace. One consequence is that social security spending became more targeted during the closing decades of the 20th century as successive governments attempted to keep control of the purse strings in the face of external competition and recessionary pressure. There is a sense today that the global financial crisis has helped to shift the political climate in Australia once again, towards bigger, more compassionate government, along social democratic lines. During its first term the Labor government, under Rudd and Gillard, had started to implement an agenda for social inclusion and the Fair Work Australia initiative reintroduced labour market regulation which, along with the proposed expansion of superannuation, serve as the cornerstone of a revitalized wage earners’ welfare state. Despite the outcome of the August 2010 federal election, the rejection of Work Choices in favour of a strengthened role for wage earning welfare under Labor has been significant. This view is reinforced by the observation that political competition over labour market and wage regulation has been more intense than differences in social security policy.
Notes 1. In contrast, in other areas of welfare state activity such as education, health and social or community services, spending (and policy responsibility) is shared between the federal and state governments. 2. In a recent visit to Australia, Nobel Prize winner and former World Bank chief economist Joseph Stiglitz was reported as saying that by introducing the stimulus measures the ALP government ‘did a fantastic job of saving Australia from the global economic crisis’ (Sydney Morning Herald 2010). 3. Factors identified as contributing to this development include the abolition of the Industrial Relations Commission that was responsible for setting the minimum wage by the Fair Pay Commission that, unlike its predecessor, was required to take account of its decisions on unemployment. The Fair Pay Commission was replaced by Fair Work Australia in 2009. 4. The OECD (2008: Chapter 4) confirms that in terms of its payment structure, cash transfers in Australia are the most progressive by ‘a wide margin’, particularly for working-age payments. However, Australia lags behind the Nordic countries (and others) in terms of the distributional impact, because its overall level of spending © 2011 Blackwell Publishing Ltd.
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5. 6.
7.
8.
9.
10.
11. 12.
is so low – although this result is sensitive to which counterfactual is used to estimate the impact. An example is the pressure from self-funded retirees who are denied a state pension under the income or assets tests to reconsider their treatment following changes in the level and volatility of interest rates in the wake of the financial crisis. Australia’s increased integration into the global economy has made it more difficult (perhaps now impossible) to exert effective internal control of wages, although as Castles (1985) has emphasized, centralized wage determination under the wage earners’ welfare state has always been accompanied by strict immigration controls to reduce an in-flow of foreign workers and cap labour supply. Subsequent governments may now rue this claim, as the revenue cost of the superannuation-related tax concessions has grown rapidly to cost $22.7 billion in 2009–10 (Department of Treasury 2010) and now exceeds spending on pensions (which has thus far remained relatively unaffected by the SGC reforms because of a combination of the low level of the SGC and the structure of the pension income test). In Rudd (2006), Prime Minister Rudd had set himself apart from New Right ideology, arguing for social democratic beliefs and principles that had been articulated by social thinkers such as Anthony Giddens (e.g. 1998) and politicians such as Blair and Schröder (Blair and Schröder 2000). The government has established a set of social inclusion principles covering the ends (or aspirational principles) and means (or principles of approach) of its social inclusion agenda (Australian Government 2008, 2009). It has also identified the following six early priorities: targeting jobless families; improving the life chances of children at risk; reducing homelessness; improving outcomes for people with a disability or mental illness and their carers; closing the gap for Indigenous Australians; and breaking the cycle of entrenched, multiple disadvantage (Saunders 2011). Indigenous Australians are at a marked disadvantage compared to nonIndigenous Australians and the social indicator gap between them has not declined over the past decade. The ‘Closing the Gap’ initiative aims to reduce Indigenous disadvantage with respect to life expectancy, child mortality, access to early childhood education, educational achievement and employment outcomes. The LNP party opposed the mining tax during the election campaign and promised to abolish it if elected. The new package will consist of a Minerals Resource Rent Tax and a Petroleum Resource Rent Tax, although there remains discontent within the mining sector and the passage of the relevant legislation through the new parliament is not guaranteed.
References Australia’s Future Tax System (2009a), Report to the Treasurer, Part One: Overview, Canberra: Commonwealth of Australia. Australia’s Future Tax System (2009b), Report to the Treasurer, Part Two: Detailed Analysis, Volumes 1 and 2, Canberra: Commonwealth of Australia. Australian Government (2008), Social Inclusion Principles for Australia, Canberra: Department of Prime Minister and Cabinet. Australian Government (2009), A Stronger, Fairer Australia. National Statement on Social Inclusion, Canberra: Department of Prime Minister and Cabinet. Blair, T. and G. Schröder (2000), Europe: the Third Way/die Neue Mitte. In B. Hombach (ed.), The Politics of the New Centre, Oxford: Blackwell, pp. 157–77.
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Brown, C. V. and Jackson, P. M. (1978), Public Sector Economics, Oxford: Martin Robertson. Castles, F. G. (1985), The Working Class and Welfare. Reflections on the Political Development of the Welfare State in Australia and New Zealand, 1890–1980, Sydney: Allen & Unwin. Castles, F. G. (1994), The Wage Earners’ Welfare State Revisited: Refurbishing the Established Model of Australian Social Protection, 1893–93, Australian Journal of Social Issues, 29: 120–45. Castles, F. G. (1997), Historical and Comparative Perspectives on the Australian Welfare State: A Response to Rob Watts, Australia and New Zealand Journal of Sociology, 33: 16–20. Castles, F. G. (2008), Black Swans and Elephants on the Move: How Emergencies Impact on the Welfare State, Research School of Social Sciences, Australian National University. Commission of Inquiry into Poverty (1973), Poverty in Australia. Interim Report, Canberra: AGPS. Commonwealth Bank of Australia (CBA)/National Centre for Social and Economic Modelling (NATSEM) (2010), The Economic Vitality Report. The Impact of the Global Financial Crisis on Australia, Issue One, CBA/NATSEM. Department of Families, Housing, Community Services and Indigenous Affairs (2009a), Closing the Gap on Indigenous Disadvantage: The Challenge For Australia, Canberra: Commonwealth of Australia. Department of Families, Housing, Community Services and Indigenous Affairs (2009b), Pension Review Report, Canberra: Commonwealth of Australia. Department of Treasury (2007), Budget Overview 2007–08, Canberra: Commonwealth of Australia. Department of Treasury (2008), Budget Overview 2008–09, Canberra: Commonwealth of Australia. Department of Treasury (2009), Mid-Term Progress Report, Canberra: Commonwealth of Australia. Department of Treasury (2010), Tax Expenditures Statement, 2009, Canberra: Commonwealth of Australia. Giddens, A. (1998), The Third Way, Cambridge: Polity Press. International Monetary Fund (IMF) (2009), Australia: Selected Issues, IMF Country Report No. 09/249, Washington, DC: IMF. Manning, I. (1998), Policies: Past and Present. In R. Fincher and J. Niewenhuysen (eds), Australian Poverty: Then and Now, Melbourne: Melbourne University Press, pp. 10–32. Melbourne Institute (2010), Household, Income and Labour Dynamics in Australia (HILDA) Survey. Annual Report 2009, Melbourne: Faculty of Business and Economics, University of Melbourne. Organisation for Economic Co-operation and Development (OECD) (2008), Growing Unequal? Income Distribution and Poverty in OECD Countries, Paris: OECD. Peacock, A. and Wiseman, J. (1961), The Growth of Public Expenditures in the United Kingdom, Princeton, NJ: Princeton University Press. Rudd, K. (2006), Howard’s Brutopia – the Battle for Ideas in Australian Politics, The Monthly 18: 46–50. Rudd, K. (2009), The Global Financial Crisis, The Monthly, 42: 20–9. Saunders, P. (1991), Selectivity and Targeting in Income Support: The Australian Experience, Journal of Social Policy, 20: 299–326. Saunders, P. (2000), Targeting Social Security in Australia and New Zealand: Means Tested or Just Mean? Social Policy & Administration, 34: 493–515. Saunders, P. (2010), Deprivation, Social Exclusion and Social Security in Australia. In P. Saunders and R. Sainsbury (eds), Social Security, Poverty and Social Exclusion in Rich and Poorer Countries, Antwerp: Intersentia, pp. 155–73. © 2011 Blackwell Publishing Ltd.
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Saunders, P. (2011), Down and Out: Poverty and Exclusion in Australia, Bristol: Policy Press. Saunders, P. and Manning, I. (1978), On the Reform of Taxation and Social Security in Australia, Australian Economic Review, 1: 51–7. Scotton, R. (1980), The Fraser Government and Social Expenditures. In R. Scotton and H. Ferber (eds), Public Expenditures and Social Policy in Australia. Volume II. The First Fraser Years, 1976–78, Melbourne: Longman Cheshire, pp. 1–27. Sydney Morning Herald (2010), Labor Saved Australia: Nobel Laureate Stiglitz, 6 August. Watts, R. (1997), Ten Years On: Francis G. Castles and the Australian Wage-earners Welfare State, Australia and New Zealand Journal of Sociology, 31: 1–15.
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Social Policy & Administration issn 0144–5596 DOI: 10.1111/j.1467-9515.2011.00781.x Vol. 45, No. 4, August 2011, pp. 389–407
US Social Policy in the 21st Century: The Difficulties of Comprehensive Social Reform spol_781
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Anne Daguerre Abstract In Western Europe, political commentators have been surprised by the apparent inability of President Barack Obama to implement comprehensive social policy reform, with the exception of health care legislation. Hopes that President Obama could become a new Roosevelt have been disappointed, precisely at a time when the ‘Great Recession’ (2007–09) has laid bare the challenge of economic insecurity and poverty in contemporary America. Paradoxically, it is the Presidency’s incapacity to address this challenge that partially explains the Democrats’ crushing electoral defeat in the mid-term congressional elections in November 2010. This article explains this apparent political paradox in four stages. First, it defines the American social contract – the dream of social mobility through hard work. Second, it shows how this dream has been severely tested by the rise of economic insecurity since the late 1970s and finally the Great Recession. Third, it analyses the social policy responses to the recession, namely the American Recovery Act. To conclude, the comparative timidity of the Obama administration’s response is explained by a series of circumstantial and institutional constraints that limit the capacity of the Presidency to implement comprehensive social reform. spol_781
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Keywords Welfare reform; American social policy; Social contract; Economic insecurity Introduction – A Fragmented Social Protection System Historically there has been a strong link between financial crises, economic recessions and social policy developments in the USA. Unemployment compensation represents a direct policy response to the massive layoffs that characterize the American labour market during financial crises. For instance, the Social Security Act of 1935 created unemployment insurance precisely to help workers mitigate the impact of employment loss. During the Great Recession of 2007–09, employers quickly adjusted the size of their workforces in response Address for correspondence: Anne Daguerre, Middlesex University, Business School, The Burroughs, London NW4 4BT. Email:
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to changes in demand (CBO 2010). The flexibility of the US labour market, with a low degree of employment protection, means that displaced workers become quickly exposed to social risks, notably a loss of health care coverage. As a result, Congress has to continuously extend unemployment insurance beyond the statutory 26 weeks. There is no comprehensive American welfare state in the European sense of the word, with universal coverage of social risks such as the loss of employment, old age and poor health. Instead, American social policy is a two-tier system, with the upper tier being social security, mostly contributory old age benefits, survivors and disability benefits administered by the federal government. The second lower tier represents the social assistance system. Programmes are built around the needs of poor families with children, practically excluding childless individuals (Berlin 2007: 17). Such programmes are generally demeaning and deliver extremely meagre benefits. I distinguish three periods in American social history. The first period corresponds to the enactment of the modern American welfare state with the Social Security Act of 1935. The second (1965–75) corresponds to the second stage of development of American social policies, with a piecemeal expansion of social security programmes and the creation of additional anti-poverty schemes. The third entails restructuring and retrenchment for the most vulnerable, notably with the replacement of Aid to Families with Dependant Children (AFDC) by Temporary Assistance with Needy Families (TANF) in 1996.
The Social Security Act (1935) The Social Security Act of 1935 established a sharp distinction between social insurance and public assistance programmes. Whereas social security was viewed as a ‘sacred governmental obligation’, welfare programmes were seen as a ‘handout to barely deserving people’ (Skocpol 1988: 296). The law established two social insurance programmes on a national scale to help meet the risks of old age and unemployment: a federal system of old-age benefits for retired workers and a federal-state system of unemployment insurance. The Act also provided federal grants-in-aid to the states for the means-tested programmes of Old-Age Assistance and Aid to the Blind. These programmes supplemented the incomes of individuals who were ineligible for social insurance programmes. Aid to Dependent Children (ADC) was the principal component of the lower tier of the social security system. The basic idea was that husbandless women should be able to look after their children in the same way as white married middle-class women did (Skocpol 1992). This programme was modified to Aid to Families with Dependent Children (AFDC) in 1961. The Age of Expansion (1965–75) Public assistance programmes were broadened and expanded in an ad hoc fashion between 1965 and 1975. The period 1960–75 corresponds to the 390
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second stage of the expansion of the American welfare state. The War on Poverty was launched through the Economic Opportunity Act of 1964 in order to improve the education and job opportunities of the poor. The programmes included Neighbourhood Youth Corps to provide local training, Community Action Programmes (CAPs) to promote urban renewal in deprived areas and Head Start. However, there was no attempt to coordinate anti-poverty programmes with economic policies. As a result, the Great Society programmes oscillated between the implementation of active labour market policies such as job-creation and training programmes and an attempt to change the behaviour of the poor (Russel 2004: 34–9). In addition, the Social Security Amendments of 1965 created Medicare and Medicaid. Medicare provided for the medical needs of persons aged 65 or older regardless of income. Medicaid (federal grants to the states for Medical Assistance Programmes) provided medical assistance for persons with low income and resources. Finally, the public assistance provisions of the Social Security Act were broadened in 1972. The cash assistance programmes for the aged, blind and disabled were replaced by the mainly federally administered Supplemental Security Income (SSI) programme. The Food Stamps programme was created in 1964 to improve the nutrition of low-income families. The programme was placed under the responsibility of the US Department of Agriculture (USDA). The other nationally uniform programme for low-income individuals is the Earned Income Tax Credit (EITC). EITC was initiated in 1975 as a means to stimulate employment and combat welfare dependency (Stoker and Wilson 2006: 35).
Restructuring and Retrenchment (1980–2008) From the 1980s onwards, support for working families was considerably extended, whilst anti-poverty programmes were radically scaled back. In the 1980s, the debate on public assistance was dominated by a moral underclass discourse with strong racial undertones (Gilens 1999). This discourse proved extremely pervasive, and progressive democrats lost the battle of ideas in the 1990s (Weaver 2000; Daguerre 2007, 2008). The fact that the welfare caseload expanded in the 1990s – the number of AFDC recipients rose from approximately 11 million in 1987 to 14 million in 1994 – accentuated the public perception according to which the public assistance system was too generous and unsustainable. By the early 1990s, AFDC had become the most unpopular social programme in the country (Weaver 2000). In August 1996, President Bill Clinton signed the Personal Responsibility and Work Opportunity Reconciliation Act, which replaced AFDC with Temporary Assistance for Needy Families (TANF). TANF ended entitlement to cash assistance and imposed a five-year limit on welfare benefits. TANF funding mechanism was a block grant to each individual state. The block grant was fixed and was based on the level of expenditure in the mid-1990s under the old AFDC programme. The primary goal of TANF was to reduce the welfare caseload, which had reached a peak in 1993–94. The TANF funding mechanism provided a © 2011 Blackwell Publishing Ltd.
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financial incentive for states to move families off welfare: if their caseload declined, states could retain the funds that were used to pay benefits. TANF was rated as a tremendous success on both sides of the political spectrum (Daguerre 2008). The welfare caseload dropped from 14.4 million recipients in March 1994 to approximately 6 million recipients in September 2002 (DHHS and TANF 2009). In 2006 TANF was reauthorized for another five years. Receipt of Food Stamps was also made increasingly conditional upon complying with stricter work requirements, although such requirements were much less draconian than those of the TANF programme. Work requirements apply to all working age individuals between 15 and 60. Individuals must participate in training and accept employment offers (Stoker and Wilson 2006: 43). Participation in Food Stamps declined dramatically from 1994 to 1995, but steadily increased in 2001, as the result of the recession. The Bush administration (2001–08) expanded the programme in 2002. The Farm Security and Rural Investment Act of 2002 (FSRIA) relaxed eligibility criteria, made Food Stamp benefits more accessible, softened sanctions in case of overpayments to Food Stamp recipients. As a result, and in contrast to TANF, Food Stamps represents the first most important programme for low income families in contemporary American society. The second most important programme for low-income families is the EITC, the scope and the generosity of which has been steadily increasing since the late 1980s, in an attempt to promote ‘an alternative to welfare’. Since 1993, EITC benefits have been extended to childless workers, but benefits are more generous if the individual has a qualifying child, that is, any child under the age of 19 or under age 24 if a full-time student. In the 1990s, Presidents Bush (senior) and Clinton took several important steps to provide medical assistance to children and to working families. In 1989, Medicaid coverage was expanded to include children under the age of six and pregnant women in families with incomes below 133 per cent of the poverty line. In an attempt to provide heath coverage to previously uninsured low-income children, the Balanced Budget Act of 1997 created the Children’s Health Insurance Program (CHIP), a matching federal grant programme to the states. CHIP does not provide coverage for parents and does not benefit low-income workers without children. State and federal policies have thus singled out children in the receipt of various cash assistance and in kind programmes, but adults are increasingly excluded from this expansion as they are expected to earn their living through paid work. American social policy is based on the premise that the main source of income for working age individuals should be their wages. Social programmes should focus on helping low income workers as opposed to providing social assistance recipients with hand outs (Stoker and Wilson 2006: 17). Benefits should encourage work efforts either directly through in work subsidies such as the EITC or directly through programmes such as Medicaid, Transitional Medical Assistance (TMA), and, to a lesser extent, Food Stamps. Out of work benefits are reduced to a meagre minimum and conditions of access are so restrictive (as in TANF) that they act as a deterrent, thus coaxing benefit recipients into taking any kind of paid employment. 392
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Rising Economic Insecurity and the Great Recession – The Road to Collapse The social equilibrium is based on the premise of a strong, dynamic labour market with an abundance of low paid jobs. This equilibrium became extremely fragile as a result of the continuing deterioration of labour market conditions, with an increasing fraction of the population being exposed to income insecurity and volatility (Hacker 2006). This equilibrium was also based on the availability of cheap credit to sustain individual consumption. With the rise in unemployment and the drying up of credit, as in the Great Recession of 2007–09, this equilibrium collapsed. Deterioration of labour market conditions One of the most fundamental changes in recent American history is the rising economic insecurity of the middle class. Such insecurity amounts to a fundamental breach in the American social contract as defined by the Social Security Act in 1935. This contract is based on the premise that working age individuals should support themselves and their families through paid employment. The problem is that work no longer provides adequate protection against social risks in contemporary American society. According to Hudson (2007: 289), three events increased the level of segmentation in the American labour market: deindustrialization and the decline of organized labour, a large increase in the relative size of immigrant workforce, and the growing prevalence of non-standard work arrangements. Secondary labour markets are characterized by poverty level earnings, the absence of employer provided health insurance, and employment in a job that is limited or uncertain in its duration (Hudson 2007: 294). There are in fact three labour markets, with a primary and secondary labour market but also an intermediary labour market whose workers have no access to pension or health insurance, or both. The intermediary labour market makes up about 42 per cent of the labour market for wage and salary workers. A little more than a third of American wage and salary workers have jobs in the primary market while almost one in five is employed in the secondary labour market. Crucially, ‘between the early 1970s and the late 1990s labour market dualism increased substantially and there was also a substantial redistribution of jobs from the primary to the secondary labour markets’ (Hudson 2007: 306). Since the mid-1970s the earnings of male workers have become more unstable, with a major effect on overall income stability. Transfer incomes – cash benefits received by families – have also grown more unstable since the 1970s (Rockefeller Foundation 2010: 17). Meanwhile, health care costs continued to increase and it was only during mid-1990s’ job miracle that employers in the retail and hospitality sector offered generous and affordable health care plans in an effort to lure prospective employees. As soon as the economy started to deteriorate again, in 2001, employers dropped the comprehensive health care plans which had benefited low-paid workers. But neither the expansion of EITC nor the piecemeal broadening in Medicaid coverage could compensate for the decline in wages © 2011 Blackwell Publishing Ltd.
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and the rise in health care costs respectively. This explains the major increase in financial insecurity since the mid-1980s.
Rising economic insecurity The most significant phenomenon in the last 25 years has been the rise of financial insecurity as measured by the economic security index (Rockefeller Foundation 2010). This measures the share of Americans who experience at least a 25 per cent drop in their available family income whether due to a decline in income or an increase in medical spending or a combination of the two, and who lack an adequate financial safety net to catch them when they fall. A higher ESI therefore indicates greater insecurity. According to the ESI, financial insecurity has increased. Indeed, in 1985, 12.2 per cent of Americans experienced a major economic loss sufficient to classify them as insecure in the ESI. During the recession of the early 2000s, this had risen to 17 per cent. In 2007, the picture had improved (13.7 per cent), but measured insecurity remained higher than in the 1980s. Projections suggest that in 2009, the level of economic insecurity experienced by Americans was greater than at any time over the past quarter century, with approximately one in five Americans (20.4 per cent) experiencing a decline in available household income of 25 per cent or greater (see figure 1). Figure 1 Risk of financial loss has increased from 1985 to 2007 for all Americans (with 2008–09 projections) 25%
20.4% (PROJECTED)
20%
17.0% 13.7%
15% 12.2% 10%
ESI ESI Trend (1985-2007)
5%
0%
85 86 87 88 91 92 93 94 95 97 98 99 02 03 05 06 07 08 09 (PROJECTED)
Source: Rockefeller 2010: 3.
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By the early 2000s the purchase of the American dream – an education, a car, a house, combined with regular trips to the mall – had become increasingly unaffordable, thus squeezing middle-class families, precisely when labour market rewards reached an all time low (Hacker 2006). However, there was no political pressure to expand income transfers partially because of the low salience of inequality-related issues but also because of easy access to borrowing allowed low and middle-income households to sustain consumption or to purchase a home (Brandolini 2010: 219–20; Appelbaum 2010). The American dream rested on gigantic levels of personal debt, with devastating consequences for those households affected by the mortgage crisis in the summer of 2007, which marked the onset of the Great Recession (2007–09).
The Great Recession Because so many Americans rely solely on the labour market and access to credit to sustain their livelihoods, when these two sources of income dried up simultaneously, as in 2007–09, American citizens found their lives literally turned upside down. Even prior to the Great Recession, there was a gradual increase in national poverty rates in the previous 10–15 years. While there was a sizeable decline from 1993 until 2000, poverty rates have increased to almost the same rates since the early 1980s and 1990s in similar recessionary periods (see figure 2). A similar trend occurs by age. With the exception of seniors of 65 years and older, the poverty rate for all other age groups has risen with the highest increase for individuals under 18 at 20.7 per cent (see figure 3). The rates for poverty in minors are reaching recessionary levels from the early 1990s and Figure 2 Number in poverty and poverty rate: 1959–2009
50
Recession
Number in millions, rates in percent
45
43.6 million
Number in poverty
40 35 30 25 20
Poverty rate
15
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Source: US Census Bureau, Current Population Survey 1960 to 2010 Annual Social and Economic Supplements. © 2011 Blackwell Publishing Ltd.
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Recession
Percent
45 40 35
65 years and older
30 25
Under 18 years
20
20.7 percent
15 12.9 percent 8.9 percent
10 5 0 1959
18 to 64 years
1965
1970
1975
1980
1985
1990
1995
2000
2005 2009
Source: US Census Bureau, Current Population Survey 1960 to 2010 Annual Social and Economic Supplements.
1980s. Among ethnic groups, Blacks have the highest poverty rate reaching 25.8 per cent, followed by Hispanics with 25.3 per cent; however, poverty rates are still below those during the 1990s and 1980s (see figure 4). Although income insecurity and poverty were by no means the sole problems of a minority, the Great Recession laid bare the holes of the American safety net. In a context of historically high unemployment rates by US standards (10 per cent in December 2009, 9.6 per cent in November 2010), the social protection system was unable to contend the rising tide of poverty and hunger. In 2008, nearly 50 million Americans were poor, including nearly one in five children, and hunger – defined as inadequate access to food – affected more than 50 million Americans, including almost one in four children (Institute for Policy Studies 2009). The crisis had been most severe in America’s industrial heartland. Two million manufacturing jobs had been lost in the recession, thus accentuating the pattern of de-industrialization which has characterized the evolution of the economy since the 1970s (Institute of Policy Studies 2009: 4). Moreover, underemployment was also on the rise, with blue-collar workers being the hardest hit. The study Battered by the Storm estimates that the number of underemployed workers had risen to 11 million, which made the combined total of underemployed and unemployed 27.4 million workers, or 17.5 per cent of the workforce. Poverty had also risen, and in 2008 about 40 million people, or 13.2 per cent of the population were living in poverty, the highest level in over a decade. In addition, people of colour and children were suffering the most. As housing aid programmes had been cut back since the 1980s, low income individuals were often left with the option of either paying for food or rent. Food Stamps had become the only means-tested programme for lowincome individuals and their dependants, but benefits levels are very low and 396
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His panic
White, non-His panic
Afric an Americ an
Source: US Census Bureau, Current Population Survey 1960 to 2010 Annual Social and Economic Supplements.
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
30.0%
35.0%
40.0%
Racial and ethnic disparities persist over time: poverty rate by race and ethnicity, 1973–2009
9.4%
25.3%
25.8%
1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
S hare of the population below the poverty line
Figure 4
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Social Policy & Administration, Vol. 45, No. 4, August 2011 Figure 5 Unemployment rate and number of supplemental nutrition assistance program (SNAP), unemployment insurance, temporary assistance for needy families (TANF) recipients 19 Unemployment Rate Supplemental Nutrition Assistance Program, SNAP (Households in Millions) 17
16.6
Unemployment Insurance; Initial Claims (Hundred Thousands) Temporary Assistance for Needy Families, TANF (Families in Millions)
Supplemental Nutrition Assistance Program, SNAP (Households in Millions)
15
Unemployment Rate or Number of Recipients
14.1
13
12.2
11
10.0 9 Unemployment Rate
7
6.2 5 4.7
Dec-09
Oct-09
Nov-09
Sep-09
Jul-09
Aug-09
Jun-09
Apr-09
May-09
Mar-09
Jan-09
Temporary Assistance for Needy Families, TANF (Families in Millions) Feb-09
Dec-08
Oct-08
Nov-08
Jul-08
Aug-08
Jun-08
Apr-08
May-08
Mar-08
Jan-08
Feb-08
Dec-07
Nov-07
1.69
1.64
1.66 1
5.2
3.3
Sep-08
3
Unemployment Insurance; Initial Claims (Hundred Thousands)
4.7
Date
Source: Ron Haskins, the Brookings Institution, 5 January 2010, Comments on Social Safety Net Volume, http://www.urban.org/events/firsttuesdays/upload/Haskins-Social-SafetyNet.pdf (accessed 7 January 2011).
only cover food expenses. In the recession, as unemployment increased, more individuals qualified for Food Stamps (SNAP), thus increasing the volume of Food Stamps caseloads (see figure 5). According to the report Battered by the Storm, in August 2009, 36.5 million Americans (16.5 million households) 398
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received SNAP benefits, a one-third increase in participation since the recession began, and one in eight Americans was receiving Food Stamps, an all-time high (Institute for Policy Studies 2009: 21). Political commentators and scholars multiplied the calls for ‘a society of opportunity’, in true American tradition (Hacker 2006; Haskins and Sawhill 2007). But in extremely unequal society, social opportunity had become the privilege of an oligarchy, whose capacity to influence policymakers was much greater than that of the middle class (Winters and Page 2009). It was in this context that the presidential candidate Barack Obama ran his campaign in 2008. For the first time in decades, the presidential hopeful raised the issue of social justice and ran on a platform of change, repeatedly challenging the Republican policies of tax cuts for the most affluent (Mettler 2010: 803). In his accepting nomination speech at the Democratic National Convention in July 2008 in Denver, he underlined that he was here to restore America’s promise, a society of opportunity for those who work hard: Our government should work for us, not against us. It should help us, not hurt us. It should ensure opportunity not just for those with the most money and influence, but for every American who’s willing to work. That’s the promise of America – the idea that we are responsible for ourselves, but that we also rise or fall as one nation; the fundamental belief that I am my brother’s keeper; I am my sister’s keeper. It is important to underline, however, that it was only in the last stages of the presidential campaign, in September 2008, that the financial crisis really started to unfold. Whilst the Bush administration adopted the Economic Stimulus Act in February 2008, its main intervention consisted in bailing out the banks with the Troubled Asset Relief Program (TARP). In January 2009 the new Obama administration had to address the social consequences of the crisis. What has been the Obama administration’s response to the plight of middle-class and low-income individuals?
The Obama Administration’s Policy Response – Not Bold Enough? The apparent similarities between the Great Depression and the Great Recession led pundits to draw parallels between Franklin Delano Roosevelt and Barack Obama. George Packer in The New Yorker wrote: For the first time since the Johnson Administration, the idea that government should take bold action to create equal opportunity for all citizens doesn’t have to explain itself in a defensive mumble. That idea is ascendant in 2008 because it answers the times. These political circumstances, even more than the election of the first black American to the highest office, make Obama’s victory historic. Whether his Presidency will be transformative, in the manner of Roosevelt and the handful of predecessors named by F.D.R. in 1932, will depend, in part, on history – © 2011 Blackwell Publishing Ltd.
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it’s unclear whether today’s financial troubles will offer a political challenge, and an opportunity, of the magnitude of the Great Depression. (Packer 2008) In the early months of the Obama presidency there was a sense of opportunity, neatly captured by Rahm Emanuel, the White House chief of staff, when he declared ‘you don’t ever want a crisis to go to waste’ (cited in Krugman 2008). Similarly, in the Washington Post, President Obama wrote about the sense of urgency of his fellow citizens: What Americans expect from Washington is action that matches the urgency they feel in their daily lives – action that’s swift, bold and wise enough for us to climb out of this crisis. Because each day we wait to begin the work of turning our economy around, more people lose their jobs, their savings and their homes. And if nothing is done, this recession might linger for years. Our economy will lose 5 million more jobs. Unemployment will approach double digits. Our nation will sink deeper into a crisis that, at some point, we may not be able to reverse. That’s why I feel such a sense of urgency about the recovery plan before Congress. (Obama 2009b) The tone of these speeches, the sentiment that these were extraordinary times for America and that the country was at a crossroad owing to the financial meltdown, allowed the media to replay the drama of the Great Depression, with Barack Obama stepping in the shoes of FDR. However, as pointed out by Skocpol and Jacobs (2010), and Mettler (2010), the analogies between the Great Depression and the Great Recession are more apparent than real. Three main differences can be identified. First, a crucial difference was the timing of Obama’s access to power. By contrast to Franklyn Delano Roosevelt, who acceded to the Presidency in 1932, i.e. three years after the financial crisis of 1929, Barack Obama became President in January 2009, at a time when the full consequences of the crisis were still unknown – and, as it turned out, vastly underestimated (Krugman 2010; Appelbaum 2010). Second, Republicans and Southern Democrats were ready to support very extensive job creation programmes as a result of the severity and the length of the Great Depression. Indeed, by 1932 all other courses of action had been exhausted. This was not the case for Barack Obama, who faced from the start fierce opposition from the Republicans in Congress, notably in the Senate. He thus had to compromise to obtain the vote of Independents such as Joe Lieberman and moderate Republicans like Olympia Snowe in order to avoid a filibuster. Unfortunately for Barack Obama, he looked increasingly like a talented deal broker as opposed to a decisive President inspired by a vision for America. To disillusioned voters, talks behind closed doors seemed very similar to the ‘old Washington ways’ that the President had so eloquently denounced in his campaign. Third, unlike FDR, with the exception of health care reform, Barack Obama did not plan to create new social programmes. Instead, the White 400
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House intended to build upon existing social policies, largely continuing the politics of tax cuts and piecemeal extension of Medicaid and Food Stamps which characterized the action of the Clinton and Bush administrations. The strategy of expansion by stealth underpinned the Recovery Act signed by President Obama in February 2009. The Recovery Act made tax cuts the primary vehicle for providing relief to Americans: tax cuts amounting to US$288 billion, 37 per cent of the US$787 billion stimulus package. The largest of these tax cuts was the President’s Proposal Making Work Pay Tax Credits which was based on extension of EITC (Mettler 2010: 810). The Recovery Act represented an extremely generous stimulus package that sought to counteract the absence of automatic stabilizers in the US social protection system. According to the Center on Budget and Policy Priorities, ‘seven provisions of the recovery act . . . – including three tax credits for working families, two improvements in unemployment insurance, expanded nutrition assistance, and one-time payments to senior citizens, veterans, and people with disabilities – and estimated that these provisions will result in 6.2 fewer Americans (including 2.4 million children under 18) being counted among the nation’s poor in 2009’ (Pavetti 2009). Unemployment insurance (UI) provides a safety net for workers who have lost their jobs through no fault of their own. The duration of unemployment insurance is 26 weeks in most states, but historically the federal government funds additional weeks of benefits in response to an economic downturn. American social policy rests on the assumption that unemployment will be necessarily of short duration, except in harsh economic times, when Congress can extend the duration of benefits. Neither Food Stamps nor Medicaid represents a nationwide safety net for the unemployed, as these programmes provide benefits in kind (Atkinson and Micklewright 1991). Moreover, unemployment insurance excludes a great number of people with erratic work history or who have left their employment without ‘good cause’, accentuating further the economic hardship of these individuals and their dependants. Indeed, in 2008 only 22 per cent of unemployed workers in low-income families reported receiving unemployment compensation, compared with 34 per cent in moderate-income families and 39 per cent in higher income families. Former TANF recipients are particularly vulnerable and very few qualify for the benefits when losing their jobs (Simms 2008: 3). As many low-wage workers tend to be new entrants into the labour market or have difficulties holding down jobs especially when they have family dependants and child care issues, cycling back between benefits and jobs is a relatively common occurrence. Short-term job tenure reduces workers’ chances of qualifying for unemployment compensation. The earning requirement is usually based on income earned in the earliest four of the five quarters completed before unemployment, and as a result earnings in the last quarter do not count. Typically short-term employees find it hard to qualify. In addition, in order to qualify, workers must have left their employment for a good cause. Pregnancy, child care issues, domestic problems or a spouse’s job-related move are not considered good reasons for employment contract termination, thus making it difficult for women with © 2011 Blackwell Publishing Ltd.
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child care responsibilities or domestic issues to qualify for UI in a number of states. Women who may want only part-time work do not qualify for UI in 20 states. In addition, due to the severity and the length of the current recession, nearly 51 per cent of UI claimants had exhausted their regular UI benefits in 2009. In response to the recession, in 2008 Congress created the Emergency Unemployment Compensation Programme (EUC), which provides up to 33 weeks of additional benefits to unemployed individuals who have exhausted their state benefits. The Recovery Act adopted in February 2009 extended this programme through December 2009 (Pavetti 2009). The Recovery Act included financial incentives for states to broaden the scope of unemployment benefits. Additional funding (US$40 billion) was allocated to increase benefit levels by US$25 a week. In November 2009, Congress approved a further extension of up to 14 additional weeks in every state, with an extra six weeks of benefits for those workers in states with an average three month unemployment rate above 8.5 per cent (Institute for Policy Studies 2009: 14–15). The most recent additions to unemployment insurance and benefit extensions came with HR 4853, The Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act in November of 2010. The bill extended tax cuts while simultaneously extending unemployment insurance and unemployment benefits until December 2012. Under the Recovery Act, all public assistance programmes received additional funding whilst the scope and the level of benefits was tremendously enhanced. Last but not least, the Recovery Act also provided an additional US$4 billion for employment and training initiatives under the Work Investment Act of 1998 (WIA). The Act also made clear that services should be provided primarily to recipients of public assistance and other low-income individuals. This provision existed already in the WIA, but this clause was never really implemented, which justified this precision in legislative language. How can we qualify the approach of the Obama administration in relation to welfare reform and the safety net and was there a break with the approach of the Bush administration (2001–08)? Three characteristics emerge from the analysis of the Recovery Act and from interviews conducted in December 2009 with senior officials from the Department of Labor and the Office of Family Assistance in the Department of Health and Human Services (DHHS). Experts within various think tanks such as the Center for American Progress, Brookings and the Center on Budget and Policy Priorities were also interviewed. First, the Obama administration’s response built upon existing public assistance programmes, notably Food Stamps, unemployment insurance and, to a lesser extent, TANF. The Recovery Act, however insufficient according to many liberals, remained an exceptionally generous financial effort to raise the nation’s safety net and to alleviate the plight of low-income families. According to Ron Haskins, a Republican expert on welfare reform at Brookings, ‘the act was very generous. The Obama administration is outrageously liberal, they have done a lot for low-income families’ (interview with Ron Haskins, Brookings, Washington DC, December 2009). In the words of a career civil servant in the Office of Family Assistance commenting 402
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on the Obama administration, ‘their heart is in the right place. The others could not care less’ (interview, Office of Family Assistance, Washington DC, December 2009). Second, there is a new emphasis on well-paid jobs which require postsecondary education, as the best way to raise the general level of skills, promote the competitiveness of the US workforce at the global level and ensure that Americans are prepared to take up new job opportunities (Office of Management and Budget 2009). The administration believes that some of the jobs that have been destroyed in the manufacturing sector will not come back, thus enhancing the need to prepare American workers and young people to get a better education in order to have access to good jobs. This agenda is driven by the President himself, who has called for each American to commit ‘at least one year or more of higher education or career training’ (Obama 2009a). To this end the administration has launched the New American Graduation Initiative, announced by Barack Obama on 14 July 2009. The initiative aims to add 5 million college graduates by 2020, and devotes US$12 billion to community colleges. The programme will help students who cannot afford four-year university education as well as adults who want to get better skills (Washington Post 2009). In sum, for the Obama administration, individuals must become or remain employable in a competitive labour market. An improved distribution of skills and education in the US labour force should suffice to address the problems of income insecurity. The problem is that the unemployment remains high (9.4 per cent in December 2010). According to some critics (Krugman 2010), the Obama administration has failed to respond adequately to the severity of the job crisis. However, social policy reform in the USA remains extremely difficult due to a set of circumstantial and institutional constraints.
Conclusion – Circumstantial and Institutional Constraints Impede Social Reform By circumstantial constraints I essentially mean two different but interrelated phenomena. First, the polarization of American politics and the shift to the right. Second, the incapacity of the White House to frame a coherent economic narrative that would win over voters disappointed by the partial failure of the Recovery Act. Since the mid-1990s the centre of political gravity has decisively moved to the right, both within the Democratic and Republican parties. Although President Barack Obama repeatedly urged Republicans and Democrats to overcome their differences for the greater good of the nation in extremely difficult times, this bipartisan rhetoric was completely ineffective and, to some extent, counterproductive. Even in early 2009, that is, before the mid-term 2010 elections, the chronic lack of discipline amongst Congressional Democrats meant that President Obama had to compromise with Conservative Democrats and Independents to ensure support for legislative reform, especially in the Senate (Skocpol and Jacobs 2010: 35–6). By contrast, there was much more unity within the Republican party, and Obama’s original stimulus © 2011 Blackwell Publishing Ltd.
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plan gained virtually no votes from Congressional Republicans (Skocpol and Jacobs 2010: 28). Moreover, Republican opposition hardened and became bolder as the Tea Party movement gained political momentum, thus weakening the White House and its political allies. In this adversarial climate, any seemingly liberal initiative is immediately seized upon by Republicans, thus paralyzing the administration. A typical example is TANF reauthorization: any attempt to change the legislation and to re-establish a sense of entitlement to cash assistance would be immediately exploited by Republicans as an attempt to undermine the work ethic and to reward welfare dependency. In the words of an interviewee, ‘this is a highly toxic debate’. As a result, the administration has preferred to steer clear of any controversy and has chosen not to reopen this Pandora’s box publicly. Second, the Recovery Act failed to win over impoverished Americans to the cause of social spending precisely because it was not bold enough to visibly improve the daily experiences of these citizens. The White House’s strategy was based on the hope that jobs would come back in tandem with economic growth, and it did not seem to have any other plan when this hope failed to be realized in 2010 (Skocpol and Jacobs 2010: 28). Moreover, expansionary policy at the federal level was undercut by spending cuts and tax increases at the state level, especially as states are not allowed to run a deficit. Finally, the White House, then absorbed in the battle over health care, did not explain the Recovery Act’s incomplete success. To keep repeating, as Democrats did during the mid-term election campaign, that job losses would have been far worse without the stimulus package was essentially a defensive position. This line could not measure up to the incessant Republican message that federal spending was the cause of the nation’s economic woes, and that there was no difference between the bail out (TARP) and the Recovery Act. The Tea Party movement played on the idea that Washington politics always benefit the rich and powerful, which again reinforced the ideological backlash against federal government and social spending. Alongside these circumstantial constraints, three sets of institutional constraints impede the development of comprehensive social reform in the USA. First, the White House’s strategy of building upon existing social programmes is limited by the invisibility and the fragmentation of these programmes. Second, political institutions in the USA are much more responsive to probusiness and wealthy individuals’ interests. Third, the complexities of the legislative process limit the influence of the presidency and make it difficult to enact ambitious new social welfare programmes (Jacobs and King 2010: 799). First, the American welfare state is hidden (Howard 1997), divided (Hacker 2002) and submerged (Mettler 2010). Almost a third of social spending in the American welfare state consists of tax breaks, notably the EITC and home mortgage reduction, which are much less visible than social programmes such as TANF, unemployment insurance, Food Stamps and social security. The problem with tax breaks is that they have less of a simulative effect than direct spending, which means that they are also less likely to be supported by potential beneficiaries. Moreover, the lack of comprehensive coverage, the superposition of layers of social programmes without any single coherent logic, the superposition of federal and state rules add to the complexity of 404
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social policies. The invisibility and complexity of social programmes ‘do little to engender positive attitudes among recipients toward such policies’ (Mettler 2010: 809). Unlike FDR in 1934–35, Barack Obama is not starting from scratch but is instead trying to redirect resources and programmes in a more redistributive way. Health care reform is a case in point. Historically the pre-eminence of market mechanisms in health care conditioned the development of the American welfare state. Indeed, as Béland and Hacker explain (2004: 47), private social benefits originally limited the scope of government intervention. National health insurance plans were rejected when the Social Security Act was adopted in 1935; the multiplication of tax breaks for employers and fringe benefits in the 1940s and 1950s enabled to establish private schemes as a credible alternative to a federal health insurance scheme, thus limiting the scope of government intervention to older workers and to the poor, with the creation of Medicare and Medicaid in 1965. This is what Béland and Hacker (2004) call private policy feedbacks. With the benefit of insight, this helps understand why a public health insurance proposal – the public option in the Obama health care plan – was swiftly rejected in the Senate in the fall of 2009. Health care reform takes place under totally opposite premises in Europe and the USA: whilst in Europe health care provision has been subjected to a logic a logic of creeping privatization, in the USA health care has been nationalized by stealth, almost timidly except for the elderly and to a lesser extent young people, with considerable state variation in terms of health coverage. Second, comprehensive social reform is particularly difficult enterprise as pro-business interests enjoy much more political influence than low income Americans who may not even vote regularly (Skocpol and Jacobs 2010: 55). Moreover, there is no organic alliance between organized labour and the Democratic Party, and the influence of trade unions has been in steady decline since the mid-1970s. Congress is much less responsive to the demands of low income citizens than to the demands of wealthy individuals and corporations (Bartels 2008). In fact, American political scientists have recently rediscovered the mechanisms of contemporary class war: Hacker and Pierson (2010) explain how since the late 1970s the most affluent members of society continuously expanded their financial position to the detriment of labour and middle class interests through a logic of policy drift. In this context, any additional spending on existing programmes or the introduction of new social policies can be portrayed as socialist or anti-American, as the influence of the Tea Party movement, duly relayed by Fox News, has made it clear over the summers of 2009 and 2010. In short, opponents of social programmes are much better funded, organized and programmatically coherent than their supporters (Jacobs and King 2010: 796). Third, the power of the Presidency in initiating legislative reforms is severely limited by the complexities of a legislative process that is both ‘individualised and diffuse, and therefore nearly immune to efforts by presidents to form supportive coalitions’ (Jacobs and King 2010: 798). Indeed, as neither Congressional leaders nor presidents can control the vote of legislators even when one party is in control of both the White House and Congress, as was the case before the mid-term congressional elections in November 2010, the © 2011 Blackwell Publishing Ltd.
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lawmaking capacity of the White House is extremely constrained (Jacobs and King 2010: 799). There is considerable delay and deadlock in the legislative process, which reinforces the rejection of Washington politics by ordinary citizens and accentuates the impression of elites talking to themselves over byzantine legislative details.
References Appelbaum, E. (2010), Obama Administration Economic Policy in the Great Recession, Symposium A New American Deal, for Whom? Work, Employment and Society Conference, September, Brighton. Atkinson, A. B. and Micklewright, J. (1991), Unemployment Compensation and Labor Market Transitions: A Critical Review, Journal of Economic Literature, XXIX: 1679– 727. Béland D. and Hacker J. (2004), Ideas, Private Institutions, and American Welfare State ‘Exceptionalism’: The Case of Health and Old-Age Insurance, 1915–1965, International Journal of Social Welfare, 13, 1: 42–4. Bartels, L. M. (2008), Unequal Democracy: The Political Economy of the New Gilded Age, Princeton, NJ: Princeton University Press. Berlin, G. L. (2007), Rewarding the Work of Individuals: A Counterintuitive Approach to Reducing Poverty and Strengthening Families, The Future of Children, special issue, The Next Generation of Antipoverty Policies, 17, 2: 17–42. Brandolini, A. (2010), Political Economy and the Mechanics of Politics, Politics and Society 38, 2: 212–26. Congressional Budget Office (CBO) (2010), Losing a Job During a Recession, 22 April, http://www.cbo.gov/ftpdocs/114xx/doc11429/JobLoss_Brief.pdf (accessed 13 January 2011). Daguerre, A. (2007), Active Labour Market Policies and Welfare Reform: Europe and the US in Comparative Perspective, Houndmills: Palgrave Macmillan. Daguerre, Anne (2008), The second phase of US Welfare Reform, 2000–2006: blaming the poor again? Social Policy and Administration, 42, 4: 362–78. Department of Health and Human Services (DHHS) and Temporary Assistance for Needy Families (TANF) (2009), Eighth Annual Report to Congress, Washington, DC: Office of Planning, Research and Evaluation. Gilens, M. (1999), Why Americans Hate Welfare, Chicago, IL: The University of Chicago Press. Hacker, J. (2002), The Divided Welfare State, Cambridge: Cambridge University Press. Hacker, J. S. (2006) The Great Risk Shift, New York, NY: Oxford University Press. Hacker, J. S. and Pierson P. (2010), Winner-Take-All Politics: Public Policy, Political Organisations, and the Precipitous Rise of Top Incomes in the United States, Politics and Society, 38, 2: 152–204. Haskins, R. and Sawhill I. (2007), Introducing the Issue, The Future of Children, special issue, The Next Generation of Antipoverty Policies, 17, 2: 3–16. Howard, C. (1997), The Hidden Welfare State, Princeton, NJ: Princeton University Press. Hudson, K. (2007), The new labour market segmentation: Labour market dualism in the new economy, Social Science Research, 36: 286–312. Institute for Policy Studies (2009), Battered by the Storm, http://www.ips-dc.org/reports/ battered-by-the-storm. Jacobs, L. R. and King D. S (2010), Varieties of Obamaism: Structure, Agency, and the Obama Presidency, Perspectives on Politics, 8, 3: 793–802. Krugman, P. (2008), Franklyn Delano Obama? New York Times, 10 November. Krugman, P. (2010), This is not a recovery, New York Times, 26 August.
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Mettler, S. (2010), Reconstituting the Submerged State: The Challenges of Social Policy Reform in the Obama Era, Perspectives on Politics, 8: 803–24. Obama, B. (2009a), Excerpts of the President’s remarks in Warren, Michigan, July, http://www.whitehouse.gov/the_press_office/excerpts-of-the-presidents-remarksin-warren-michigan-and-fact-sheet-on-the-american-graduation-initiative. Obama, B. (2009b), The Action Americans Need, Washington Post, 5 February. Office of Management and Budget (OMB) (2009), A New Era of Responsibility, Renewing America’s Promise, http://www.whitehouse.gov/omb/assets/fy2010_new_era/a_ new_era_of_responsibility2.pdf (accessed 28 December 2009). Packer, G (2008), The New liberalism, how the economic crisis can help Obama redefine the Democrats, The Yew Yorker, 17 November. Pavetti, LaDonna (2009), Testimony: LaDonna Pavetti, Director of Welfare Reform and Income Support, on the Safety Net’s Response to the Recession, Before the House Subcommittee on Income Security and Family Support, October, http:// www.cbpp.org/files/10-8-09testimony.pdf (accessed 29 December 2009), p. 2. Rockefeller Foundation (2010), Economic Security at Risk, http://www. economicsecurityindex.org/assets/Economic%20Security%20Index%20Full%20 Report.pdf (accessed 3 December 2010). Russel, J. (2004), Economics, Bureaucracy, and Race, How Keynesians Misguided the War on Poverty, New York, NY: Columbia University Press. Simms, M. (2008): Weathering Job Loss: Unemployment Insurance, Urban Institute, http:// www.urban.org/UploadedPDF/411730_job_loss.pdf (accessed 28 December 2009). Skocpol, T. (1988), The Limits of the New Deal System and the Roots of Contemporary Welfare Dilemmas. In M. Weir, A. S. Orloff and T. Skocpol, The Politics of Social Policy in the United States, Princeton, NJ: Princeton University Press, pp. 293– 311. Skocpol, T. (1992), Protecting mothers and soldiers: The Political Origins of Social Policy in the United-States, Cambridge, MA: Harvard University Press. Skocpol, T. and Jacobs, L. R. (2010), Reaching for a New Deal: Ambitious Governance, Economic Meltdown, and Polarized Politics in Obama’s First Two Years, prepared for the Working Group on Obama’s Agenda and The Dynamics of US Politics, Russel Sage Foundation, New York. Stoker, R. P. and Wilson, L. A. (2006), When Work is Not Enough, Washington, DC: The Brookings Institution. Washington Post (2009), Obama announces community college plan, 15 July. Weaver, K. (2000), Ending Welfare as we know it, Washington, DC: The Brookings Institution. Winters, J. A. and Page, B. I. (2009), Oligarchy in the United States? Perspectives on Politics 7: 731–51.
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Social Policy & Administration issn 0144–5596 DOI: 10.1111/j.1467-9515.2011.00782.x Vol. 45, No. 4, August 2011, pp. 408–429
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Fiona Dukelow Abstract This article juxtaposes the impact of the current economic crisis on the Irish welfare state with the impact of the international economic crisis of the 1970s which had a sustained effect in Ireland during much of the 1980s. The analysis focuses on the consequences for social security programmes during both crisis periods, each of which was marked by intractable socio-economic and budgetary pressures. However, while elements of welfare retrenchment can be observed during the economic crisis of the 1980s, these appeared more difficult to instigate and sustain in comparison to the present period. As an inter-temporal qualitative case study, this article aims to identify key drivers influencing why welfare retrenchment has more readily occurred and, it would appear so far, at a potentially deeper level than during the 1980s. As of yet the economic crisis is unabated, and as welfare state changes typically occur in relatively slow motion (Castles 2010), outcomes of the process remain uncertain. However, it seems that if Ireland continues on the path it has instigated, the liberal disposition of the Irish welfare state will intensify. spol_782
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Keywords Economic crisis; Welfare retrenchment; Irish welfare state Introduction Since the emergence of the global financial crisis in 2008, Ireland represents one of the most severe cases of economic adversity. As the International Monetary Fund (IMF) (2009: 28) comments, the impact of the crisis in Ireland ‘exceeds that being faced currently by any other advanced economy and matches episodes of the most severe economic distress in post-World War II history’. This assessment has become even more compelling following the emergence of the debt crisis in the Eurozone as Ireland became the second member after Greece to access funding from the EU and the IMF1 in the face Address for correspondence: Fiona Dukelow, School of Applied Social Studies, University College, Cork, Ireland. Email:
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of mounting fiscal and banking debt problems. In contrast with the majority of the Organisation for Economic Co-operation and Development (OECD) countries which adopted fiscal stimulus measures in their early response to the crisis (OECD 2009a; Bonnet et al. 2010), Ireland rapidly undertook a strategy of fiscal retrenchment which has produced a series of cuts to social security programmes, and this strategy has escalated since recourse to EU/IMF funding. The economic problems of the 1970s and the 1980s, though different in many respects in comparison to the present crisis, nevertheless contributed to pressure to retrench the welfare state at that time. In particular, concern about a growing debt crisis in the 1980s influenced one of the ‘presiding phrases of Irish political discourse’ of the period, which was the need to ‘restore order to the public finances’ (Jacobsen 1994: 160). However, the analysis in this article demonstrates that the impulse towards retrenchment did not appear to occur as readily nor affect social security as deeply as the retrenchment response to the current crisis. Comparison of the policy responses of both periods and the conditions in which they unfolded offers an insight into how the relationship between economic crisis and the welfare state is framed in each period and the mediating factors which translate retrenchment politics into retrenchment policy.
Contextualizing Ireland and the Irish Welfare State Ireland is one of the smallest countries in the EU, representing 1.4 per cent of the total GDP and 0.9 per cent of the total population of the EU27 countries in 2009. It ranks highly in terms of indicators of economic globalization. In 2007 for example, its share of trade as a percentage of GDP was 74.1 per cent, ranking it as the sixth most globalized economy in the EU27 (OECD 2009b). This high level of trading activity and openness has been a feature of the Irish economy since the 1960s, and Ireland is considered one of the pioneers of a deliberate strategy of globalizing its economy (Ginsburg 2001; Ruane and Görg 1997) with active state pursuit of foreign direct investment. However, the economic effectiveness of that strategy has been uneven, and it was not until the mid-1990s that Ireland began to register relatively high growth rates that continued for over a decade. This economic success led Ireland to reach average living standards within the EU, and subsequently surpass them. Paralleling this economic trajectory, Ireland exhibited a residual model of the welfare state until the 1960s (Kaim-Caudle 1967). Unlike other Western European welfare states, it did not have a prolonged golden age of growth. Ireland’s trajectory has been marked by economic crises of varying degrees of severity since it gained independence in 1921, and lack of substantial economic growth prohibited extensive welfare development. Other prohibiting factors included the country’s strong liberal orientation owing to the historical legacy of its colonial ties with the UK (Cook 1986). The minimalist consequences this had for state welfare development were reinforced by the role of the Catholic Church and the agrarian base of the country, and in these two respects Ireland shares characteristics with the development of welfare states in Southern Europe. The Church’s ‘suspicion of state schemes of income distri© 2011 Blackwell Publishing Ltd.
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bution and other social services’ (Fahey and McLaughlin 1999: 125) combined with agrarian influences to effect a preference for means-tested programmes funded by general taxation over social insurance based programmes (Fahey 2002). The Irish political system also merits comment in contextualizing the Irish welfare state. Class-based politics has not been an overt feature in Irish welfare development and labour has not been a powerful force in Irish politics. While the Labour Party is more predisposed to social policy issues, and these became more politically salient as the welfare state developed (Maguire 1986), Labour has been described as the ‘third party in a three party system’ (Coakley 1993: 18). The two main political parties, Fianna Fáil and Fine Gael are traditionally distinguished by the opposing sides they took in relation to the Treaty of Independence in 1921. Both parties tend to garner cross-class support and operate in a populist mode. As a consequence, ideological discourse and preferences are typically concealed in Irish political discourse (Lynch 2010). Recent Irish social policy debate has raised the question of whether the path-dependency effects of these influences have been altered by the impact of unprecedented economic growth and the institutional change represented by neo-corporatism or social partnership which has been in place since 1987. In contrast to the onset of ‘permanent austerity’ (Pierson 1998) created by the mounting challenges welfare states faced in the post-industrial era, in recent years Irish social policy appeared to be ‘on an expansionary course’ (Daly and Yeates 2003: 94). This entailed greater recognition of post-industrial needs and risks such as caring and lone parenthood, and growth in social insurance based schemes and universal benefits. Such trends seemed to complicate Ireland’s usual pairing with the UK as the most liberal welfare states in the EU and led to a description of the Irish social security system as a hybrid system (NESC 2005). Similarly, the institutional innovation associated with social partnership raised questions as to whether Ireland was moving away from its liberal market orientation. During the 1990s and 2000s, Ireland’s adoption of a social partnership model of policy-making grew in significance. Participation was extended to community and voluntary sector actors alongside the original set of partners from government, trade unions, employer organizations and farming organizations. The capacity of social partnership also grew as social policy decisions increasingly came under its remit and a range of commitments were made with regard to addressing poverty and improving the value of social security benefits. As social partnership grew more influential, the power and position of the Catholic Church waned (Moran 2010), and the gradual decline of its once dominant and authoritative stance in social policy-making was further undermined by the exposure of the role of religious orders in institutional child abuse. These trends, when taken together with the fact that Ireland strongly benefited from the deepening of globalization during this period, might lend weight to the idea that the Irish case can be more closely aligned with the social compensation thesis than the efficiency thesis (Glatzer and Rueschemeyer 2005) in the debate regarding the relationship between globalization and welfare states. In this respect, Ireland’s ability at managing a successful relationship with economic globalization whilst simultaneously maintaining and 410
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Social Policy & Administration, Vol. 45, No. 4, August 2011 Table 1 Social expenditure as a percentage of GDP, Ireland and the OECD total, 1980–2007
Ireland OECD total
1980
1985
1990
1995
2000
2005
2007
16.7 15.6
21.3 17.3
14.9 17.6
15.7 19.5
13.3 18.9
15.8 19.8
16.3 19.3
Source: OECD 2011.
expanding its social security provision potentially bears the mark of another departure from the historical legacy of prohibitory influences on welfare development. Equally, this might lead to the expectation that retrenchment would therefore not easily take hold in the policy responses to Ireland’s current economic crisis, during which the risks of economic openness have intensified and the necessity for compensatory policies should become more evident. However, consideration of Ireland’s pattern of social expenditure over time demonstrates the limits of its departure from liberal strictures. While in the long run since the 1960s expenditure on social benefits has grown, Ireland’s expenditure pattern remains substantially below average figures for the EU and the wider OECD grouping (see table 1). The trend over time demonstrates a picture of what Murphy calls ‘ “arrested development”, where government abstained from using the fruits of economic growth to expand and improve social protection to the degree that might have been anticipated in a period of economic growth’ (Murphy 2008: 14). While real spending did grow during Ireland’s period of unprecedented growth, it declined as a proportion of the more rapidly growing GDP, thus preserving Ireland’s predisposition to low-spend model in terms of its overall welfare effort (Timonen 2003). Moreover, the Irish pattern also demonstrates a notable degree of fluctuation over time, with social expenditure as a proportion of GDP rising quite sharply during the crisis in the 1980s and showing signs of repeating that trend in the current crisis. However, this trend alone cannot be interpreted as confirmation of the absence of retrenchment, being more a product of stagnant or declining GDP coinciding with an automatic rise in expenditure mainly through demand created by increased unemployment than any deliberate political effort to maintain or improve welfare effort. While the study of retrenchment poses complex conceptual and methodological difficulties and elicits a number of approaches (Starke 2006), this article focuses on political and policy discourse and changes at programme level in order to arrive at a more nuanced picture of retrenchment in both periods. In the following sections, comparison of the impact of the pressures of economic adversity on the Irish welfare state during the 1970s and 1980s and the present suggest that, on balance, the pursuit of retrenchment in social security policy has met with fewer obstacles and more favourable conditions than in the previous period. Moreover, this generally shows that the changes, albeit relatively limited, to © 2011 Blackwell Publishing Ltd.
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Ireland’s social policy development in the intervening period have not acted as buffers to retrenchment; on the contrary, they have in many respects been used to advance the case for the necessity of retrenchment.
Economic Crisis and Policy Responses in the 1970s The impact of the oil price crises in the 1970s elicited a very different response in comparison to the present period. During this time a Keynesian repertoire of policy instruments was only beginning to be used in conjunction with welfare development and the Irish welfare state was in a belated period of progress. The influence of these factors meant that the impact of the oil price shocks did not deter the general policy thrust of augmenting the rudimentary welfare institutions put in place during the previous decades. The state’s more active stance in economic and social policy grew in the 1960s following a change in the dominant economic policy paradigm. Ireland abandoned its policy of protectionism and restrictions on foreign ownership of Irish manufacturing. By the 1950s these policies had led to a series of balance of payments crises and a stagnant economy. With the passing of the Industrial Development (Encouragement of External Investment) Act 1958, the state began to invest heavily in a project of attracting foreign direct investment with a range of generous fiscal instruments. This entailed a significant shift in fiscal policy, turning from a policy of demand deflation during the 1950s towards an expansionary stance, and by the mid-1960s ‘taboos on State borrowing in foreign capital markets were cast aside’ (Norton 1975: 193). However, a deliberate policy decision was made to delay welfare developments, in the words of one of the key policy actors ‘the national candle can not be burned at both ends’ (Whitaker 1958: 24). The orthodoxy of balancing current expenditure with current revenue continued and it was not until 1972 that planned deficit financing became acceptable in practice for current spending (Norton 1975). GNP grew at an unprecedented annual average of 4.25 per cent during the 1960s. The revenue this generated meant that by the mid-1960s the state’s expansionary stance towards the economy spread to social policy, and investment in social services and benefits grew. Despite economic success, unemployment and other social problems, such as a high rate of poverty (Ó Cinnéide 1972) remained. Demand grew for an upgrade of the existing poor standards of social services and for improving the paucity of entitlements in comparison to those pertaining in the UK and elsewhere in the European Economic Community.2 In response, the main political parties could be said to have undergone a social democratic turn in their stance towards welfare (Bew et al. 1989). The upshot was that many of the improvements to social security policy were in their infancy (see table 2) when the first oil price crisis occurred. The oil crisis produced Ireland’s ‘deepest recession’ since the postwar period (OECD 1975). By mid-1974 unemployment rose rapidly, though wage demands remained high and the rate of inflation accelerated to the highest level in the OECD. In response, the expansionary stance of fiscal policy was maintained. Budgetary policy for 1974 and 1975 was particularly expansionary and wage policy, 412
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Social Policy & Administration, Vol. 45, No. 4, August 2011 Table 2 Growth of social security programmes during the 1970s Improved entitlements 1970 Earnings related component added to maternity benefit 1974 Earnings related component added to sickness and unemployment benefits 1975 Period of entitlement to pay-related unemployment and sickness benefit increased twice during the year, from 147 to 303 days in total 1977 Public assistance scheme reformed and renamed supplementary welfare allowance – entitlement put on a statutory basis and level of payments raised Extension of coverage 1970 Maternity insurance extended to all female employees 1974 Pension, sickness and unemployment insurance extended to all employees (upper earning limit removed) Child benefit extended to dependent children aged between 16 and 18 1974–77 Progressive reduction of pension qualification age from 70 to 66 years 1974 Means-test for old age pension significantly relaxed New schemes introduced 1970 Invalidity and retirement pensions Means-tested deserted wives allowance 1973 Means-tested unmarried mothers allowance Social insurance benefit for deserted wives 1974 Means-tested prisoner’s wives allowance Means-tested single woman’s allowance (aged 58–68)
determined by successive national wage agreements since 1970, aimed to maintain real incomes. Reflecting the primary concern with unemployment, this approach was adopted despite the risks it posed for increasing inflation and the national debt. Similarly, the commitment to improve social security continued, which was described by the Minister for Finance as ‘putting a more human face on the social welfare services’ (Dáil Éireann 1974: vol. 271, col. 1456). Benefit rates increased above the rate of inflation and a range of entitlements were improved. During the 1970s as a whole, however, the income tax burden increased as tax allowances were subject to fiscal drag and fell far behind nominal increases in wages (Hardiman 2000). Yet the gap between revenue and expenditure widened. Growth in social service expenditure stemmed not just from a commitment to improve services but from the fact that © 2011 Blackwell Publishing Ltd.
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Ireland’s dependency ratio was the highest in Europe at the time; a baby boom continued in Ireland long after the general trend in Europe had subsided (OECD 1975). Changing migration patterns also contributed to population growth as immigration became the norm for many years of the 1970s. In all, the policy of developing social services and devoting a greater share of resources to them was defended, for example a Green Paper on Economic and Social Development 1976–1980 argued that ‘the correctness of these policies during the recession, even though they involved increases in expenditure, cannot be seriously challenged’ (Government of Ireland 1976: 20). Ireland had a relatively successful and rapid recovery from the first oil price shock. Inflation fell and Ireland performed very well in international trade so that budget deficits did not pose a constraint on policy-making (OECD 1978). However, unemployment did not fall significantly. A more cautious budgetary approach in 1976 and 1977 was replaced with a return to a more obvious expansionary stance after the government changed in 1977 with a majority Fianna Fáil government replacing the Fine Gael/Labour coalition that had been in power since 1973. Though Fianna Fáil was formerly critical of the coalition government for producing ‘some sort of super welfare state’ (Dáil Éireann 1975: vol. 282 col. 2139) which it felt the country could not afford, it quickly implemented an extremely stimulatory fiscal policy aimed at solving the continuing high rate of unemployment. The official plan was to reach full employment which would require a temporary increase in exchequer borrowing (Government of Ireland 1979). Budgetary measures for 1978 and 1979 involved significant tax concessions, a major capital expenditure programme, and substantial growth in public sector employment. The scope of the social security system was not greatly altered though the real value of payments continued to grow. Ireland became the fastest growing economy in the OECD in the late 1970s and unemployment fell contrary to the trend elsewhere (OECD 1979). The strategy of expanding employment in the public sector was not exclusive to Ireland, other small states opted for a similar approach to stem unemployment during the crises of the 1970s (Schwartz 1994). However, for such states the second oil price crisis entailed deep yet relatively shorterlived recessions compared to Ireland (Mjøset 1992). The impact of the crisis had more far reaching effects in Ireland on foot of the policy decisions made in the late 1970s.
Economic Crisis and Policy Responses in the 1980s Internationally, the second oil price shock in 1979 gave rise to stagflation and in the Irish case inflation rose to 20 per cent and unemployment surpassed the peak reached after the first oil price crisis. Net emigration also resumed in 1979. The positive effects of the expansionary budgets of the late 1970s petered out and GDP growth slowed significantly (see table 3). A growing sense of crisis prevailed and the Taoiseach3 gave a high profile television address in January 1980 aiming to frame this idea in the public consciousness. He declared that ‘we have been living at a rate which is simply not justified by the amount of goods and services we are producing’ and ‘we 414
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1.3 -3 – 5.9
3.1 -11.2 69.1 7.3
Sources: OECD 2002, 2010a, European Commission 2009.
Real GDP growth General government net borrowing/ lending as a percentage of GDP General government debt/as a percentage of GDP Unemployment rate (per cent of the labour force)
OECD total
Ireland
1980
11.4
83.8
2.3 -13.3
Ireland
8.0
–
– -4.4
OECD total
1982
15.6
97.8
4.4 -9.5
8.1
–
4.6 -4.1
OECD total
1984 Ireland
Key indicators, 1980–88
Table 3
17.4
111.8
-0.4 -10.6
Ireland
7.9
–
3 -3.9
OECD total
1986
16.7
108.7
5.2 -4.6
Ireland
6.8
–
4.5 -2
OECD total
1988
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will have to cut down on Government spending. . . . there are many things which will just have to be curtailed or postponed until such time as we can get the financial situation right’ (Haughey, cited in Irish Times 1980). However, fiscal policy remained largely stimulatory in 1980 and 1981 and the general goal of government policy continued to focus on full employment and higher living standards. Taxes were also raised and overall it seemed that political factors trumped early economic problem pressure to retrench: ‘Haughey judged that the balance of electoral gain still lay in raising taxes rather than reducing “free” services’ (Lee 1989: 501–2). In this context some changes were made to social security policy which in the main extended the scope of existing schemes and enhanced benefits (see table 4). General demands on social security continued to grow due to Ireland’s continuing high dependency rates and rising level of unemployment. As a consequence, there was significant slippage in budgetary projections for current expenditure. Fiscal problems began to mount and were primarily debt-related. The country had to deal with the legacy of an already large stock of debt built up during the 1970s and the borrowing requirements in the early 1980s were not declining. The cost of debt servicing began to pose significant hardship; the amount of finance raised from abroad had risen significantly and international interest rates were rising. Servicing foreign borrowing also meant resources were lost to the domestic economy. Calls for retrenchment and the adoption of a monetarist approach became more evident amongst economic commentators. Debate was framed in terms of a choice between ‘deflation and more unemployment now on the one hand, and financial collapse and vastly greater unemployment at some later stage on the other’ (Magill 1981 in Bew et al. 1989: 119). A disparity was noted between political rhetoric and political action, for being ‘all bark and no bite’ (McCarthy and Walsh 1980),4 and from this perspective ‘the real problem [lay] in converting the unanimity that exists among commentators on the need for retrenchment into a realistic programme for achieving it’ (McCarthy and Walsh 1980). At the same time there was mounting public dissatisfaction with the tax system. As taxation grew in the 1970s it imposed a far heavier burden on employees compared to other contributors, and a series of mass protests and work stoppages was organized between 1979 and 1983. Trade union leaders feared that tax backlash would translate into a welfare backlash. As Hardiman (2000: 827) notes ‘danger loomed that the electoral base for the expansion of the public sector would break apart, opening the way for a political project of welfare retrenchment and state roll back analogous to that emerging in Britain under Margaret Thatcher’. However, this did not transpire. Protest faded out despite lack of tax reform and the propensity to address budget deficits by raising taxes over cutting expenditure. Political instability impeded a concerted plan to deal with the problems. Three general elections were held between June 1981 and November 1982. Each election was precipitated by budgetary disputes and before a Fianna Fáil minority government collapsed in November 1982 it published a policy document, The Way Forward (Government of Ireland 1982), which signalled quite a radical turn towards retrenchment. Yet over successive elections no party went ‘before the electorate waving a monetarist banner and pledged to cut 416
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Improved entitlements 1980 Introduction of Christmas bonus – an extra payment in December provided to recipients of long-term benefits 1981 Introduction of earnings related maternity benefit Extension of scheme coverage 1981 15 years’ residence requirement for means-tested old age pension removed Free telephone rental scheme extended to invalidity pensions and recipients of disabled person’s maintenance allowance Allowance for care by relative extended to survivor pensioners Definition of child dependent and adult dependent extended in some pension schemes 1982 Free telephone rental scheme extended to blind pensioners under 66 Unemployment assistance scheme extended to married women without dependent children who are separated from husband Easing of means-test for social assistance allowances for widows, deserted wives, unmarried mothers and prisoner’s wives 1984 Free travel on public transport extended to all blind pensioners New schemes 1984 Family Income Supplement New activation-based schemes 1984 Enterprise allowance scheme 1985 Social Employment Scheme 1986 Educational Opportunities Scheme 1987 Jobsearch scheme
Growth
Retrenchment
© 2011 Blackwell Publishing Ltd. Abolition of schemes 1983 Maternity grant
Increased conditionality 1980 3-day waiting period for sickness benefit extended to all claims (with some limited exceptions) 1981 Waiting period of 12 days applied to all earnings related supplement to sickness benefit (formerly waived in some cases) 1982 Greater scrutiny of sickness and unemployment benefit claims 1983 Waiting period for earnings related unemployment benefit increased from 12 to 18 days 1984 ‘Genuinely seeking work clause’ applied to Unemployment Benefit
Reduced entitlements 1983 Reduction in the value of earnings related sickness, unemployment and maternity benefits
Changes to social security programmes 1980–87
Table 4
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spending on social services’ (Coughlan 1984: 42), reflecting the context in which the vote-seeking behaviour of politicians operated in the 1980s. In 1983, the Fine-Gael/Labour coalition elected in November 1982 introduced the most restrictive budget of this period. It aimed to reduce the exchequer borrowing requirement from 16.5 per cent to 13 per cent of GNP. Again, the means of achieving this concentrated mainly on taxation. Tighter control was applied to public sector wages and restrictions on public sector recruitment first introduced in 1981 continued. A number of changes were introduced to social security policy reflecting concerns about the disincentive effects of social welfare and the issue of fraud. These began to feature more frequently in political debate, though this did not turn as overtly anti-welfarist as evident in Thatcherite discourse of the time. Some changes involved programme innovation, such as the introduction of a means-tested Family Income Supplement which aimed to incentivize employment over social welfare. The first of a number of activation schemes was also introduced. Possibly the most significant retrenchment measure during the 1980s crisis which bore consequences for the long-term development of the system was also introduced in this budget. This was the decision to reduce pay-related benefits in 1983 which paved the way for their eventual abolition in 1994. Announcing this departure, the Minister for Finance argued that ‘the work incentive is suffering and there is an unacceptable inducement to exploit the social welfare system’ (Dáil Éireann 1983: vol. 339 col. 1513). Beyond this measure, the presence of the Labour Party in government served as a ‘restraining influence on the more swingeing proposals for radical cuts in public expenditure’ (Bew et al. 1989: 120). The Party was also influential in the decision to establish a commission on social welfare to review the system, focusing on its impact in terms of equity and incentive effects (Commission on Social Welfare 1986). Some positive economic results were evident following the 1983 Budget; wage increases moderated and inflation declined. Subsequent policy was guided by the government’s plan Building on Reality 1985–87. This was not as radical in terms of retrenchment as The Way Forward but was significant for its change of emphasis in economic policy: it signified the end of the commitment to a policy of full employment and switched government attention from job creation to the quality of jobs created and the overall stability of the economy (Brunt 1988). It aimed to stabilize the exchequer borrowing requirement by 1987, primarily by securing pay restraint in the public sector and reducing capital expenditure. In a continuation of the previous policy, no cuts to the real value of social welfare payments (with the exception of the effect of reducing earnings-related benefit) were envisaged. However, the extent of retrenchment slackened considerably thereafter, budget slippage continued and the stock of debt also grew. So too did taxation. By the mid-1980s Ireland had the highest personal tax burden in the OECD. Increasing taxation became ineffective at stalling or reducing the borrowing requirement and Ireland now had one of the highest debt to GDP/GNP ratios amongst industrialized countries. The level of debt incurred had reached a point where it seemed to have crowded out any room for manoeuvre other than retrenchment; a large portion of the taxes raised as well as current 418
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borrowing were needed to service the cost of the debt (OECD 1987). The possibility of a debt payment crisis intensified (Somers 1992) and the prospect of needing IMF assistance became very real (Baccaro and Lim 2007). In the 1987 election Fianna Fáil generated support by criticizing the previous government’s ‘“monetarist” austerity policies’ (Mjøset 1992: 382), however, after being elected as a minority government the party responded with a policy which was not unlike its earlier unsuccessful intentions to address the deficit. This time retrenchment efforts coincided with a number of other factors that made the efforts more durable and more successful. The government’s first budget aimed to significantly reduce the budget deficit. This was followed by adoption of a Programme for National Recovery in October 1987. In agreement with the trade unions it set out a programme of reducing the exchequer borrowing requirement further by 1990 and stabilizing the national debt. This was to be achieved by adhering to pay restraint in return for income tax concessions. The programme also included a commitment not to cut social welfare payments and an agreement to achieve a reduction in public sector staff numbers through a combination of early retirement and voluntary redundancy. Unlike the wage agreements of the 1970s and early 1980s,5 this agreement signalled a weaker position for labour, typical of the corporatist agreements which emerged in European countries in the 1980s and 1990s (Schmidt 2008). In the Irish case, some unions participated against a background fear of ‘fully-fledged Thatcherism’ (Mjøset 1992: 382). In November, further cutbacks equivalent to 6 per cent of total expenditure planned for 1988 were proposed as a result of the work of an Expenditure Review Group established by the Minister for Finance. This move represented the first absolute cut in expenditure over a period of 30 years. The political viability of these plans was potentially vulnerable, however, given the precarious state of the country’s finances the main opposition party, Fine Gael, agreed not to oppose the government’s proposals. This provided greater stability in comparison to the fate of minority governments proposing retrenchment earlier in the decade. The re-emergence of corporatism also contributed in this regard. In all, however, social welfare largely continued to be shielded from the retrenchment plans. The bulk of current expenditure cuts were imposed on health services, public housing programmes and education and the exchequer borrowing requirement was significantly cut. Reflecting favourable international conditions, economic growth rates picked up considerably. In this context, by 1989 the policy of fiscal restraint was modified to a degree and attention turned to effecting some improvements in social security, particularly for the long-term unemployed and those in receipt of payments that were of the lowest value within the social security system in line with recommendations made by the Commission on Social Welfare (1986). Its recommendations had been stalled until now but served to contribute to debate about inadequacies and inequities in the system. Looking over this period as a whole, there was widespread debate internationally about the future viability of welfare states in the wake of the oil price shocks and the emergence of serious fiscal deficits. Scepticism abounded about the ability of welfare states to survive the crisis (OECD 1981). The welfare state was also subject to more direct ideological attack with the rise of the new right discourse evident in Thatcherism and Reganism. This accompanied an eco© 2011 Blackwell Publishing Ltd.
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Social Policy & Administration, Vol. 45, No. 4, August 2011 Table 5 Key indicators 2008–10 2008
Real GDP growth rate Public balance as a percentage of GDP General government debt as a percentage of GDP Unemployment rate
2009
2010 (forecast)
Ireland
EU
OECD total
Ireland
EU
OECD total
Ireland
EU
OECD total
-3.5 -7.3
0.5 -2.3
0.3 -3.3
-7.6 -14.4
-4.2 -6.8
-3.4 -7.9
-0.2 -32.3
1.8 -6.8
2.8 -7.6
44.3
61.8
79.1
65.5
74.0
90.6
97.4
79.1
96.9
6.3
7.0
6.0
11.9
8.9
8.1
13.7
9.6
8.3
Sources: European Commission 2010; OECD 2010b.
nomic paradigm shift from Keynesianism to monetarism which had potentially strong retrenchment implications for welfare states. As Ireland was one of the most crisis-ridden countries in this context, it would have seemed a prime candidate for welfare dismantlement. From early on in the crisis it is evident that the idea and necessity of retrenchment was not absent from public and political debate, though its ideological tone was muted. For the most part the retrenchment ideas did not translate into substantial retrenchment policy and, as elsewhere (Pierson 1994), developments in social security which had built up during the 1970s and early 1980s were not dismantled. The adjustments and curtailments that did occur were in large part out-weighed by the continued rise in the real value of benefits. NESC (1986) for example calculated that during the period 1980–85, on average across all social security programmes 49.6 per cent of the real increase in expenditure could be attributed to a real increase in payments, with the balance varying between programmes. There was a slow and uneven shift in policy ideas and instruments from fiscal stimulus to fiscal retrenchment, and political instability and the nature of the political system played a role in this. When the policy shift gained greater traction in the face of economic calamity in 1987, social security continued to be shielded from the brunt of the cuts which took place. The scale of need and hardship associated with extremely high levels of unemployment; relatively poor levels of assistance, especially for the long-term unemployed; and high levels of poverty and reliance on the social security system (Commission on Social Welfare 1986; Layte et al. 2000; Ó Riain and O’Connell 2000) served as defence mechanisms against cutbacks.
Economic Crisis and Policy Responses Since 2008 Since 2008 Ireland has entered an economic crisis the speed and severity of which fast overtook the 1980s crisis in many respects. Economic pressures have reached a state of emergency similar to that which prevailed in 1987 via a much faster timeline (see table 5). This dramatic decline in economic fortunes set off a heavy and precarious dependence on borrowing from inter420
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national bond markets which ultimately resulted in Ireland having to turn the EU/IMF for financial assistance as interest rates on the bond markets became prohibitive by late 2010. Although Ireland’s economy has become more globally integrated since the 1980s, the sharp decline in economic activity is characterized not so much by a decline in exports than by a largely domestically generated property crash and banking crisis. Ireland’s property boom and bust has been the most dramatic of the property asset bubbles which have been the core of the global crisis (André 2010). In turn, Ireland’s banking crisis is rooted in ‘plain vanilla property lending . . . facilitated by heavy non-deposit funding, and in governance weaknesses’ (Regling and Watson 2010: 29). This situation has produced enormous fiscal challenges. The property crash triggered a dramatic decline in government revenue as property-related transactional taxes constituted a significant portion of revenue during the housing boom. Substantial reductions in income tax rates and increases in tax allowances which occurred over the course of the 1990s and early 2000s also contributed. Furthermore, the state’s response to the banking crisis has added greatly to the debt crisis due to a decision in September 2008 to implement a blanket, system-wide guarantee of bank deposits and other liabilities, with the gross amount of liabilities valued at €365 billion, more than 2.5 times GNP (Honohan 2010). The subsequent level of insolvency within the Irish banking system has had costly repercussions for the state, and this has played a major part in requiring external assistance. The severity and instability of the fiscal and banking situation have relegated the social costs of the recession far down the list of government priorities. From a trough of 4.4 per cent unemployment in August 2007, the rate tripled by August 2010 and long-term unemployment currently accounts for 40.9 per cent of those unemployed (CSO 2010). Other social problems have also escalated, such as the level of mortgage holders under stress and the level of over-indebtedness (NESC 2009), the latter problem being particularly prevalent amongst people living below the poverty line (CSO 2009). The numbers in receipt of jobseeker’s supports have seen an exponential rise and social security expenditure rose by 14.8 per cent in 2008 and 15.3 per cent in 2009 (Department of Social and Family Affairs 2009; Department of Social Protection 2010), though this masks the curtailments and cutbacks which have occurred at programme level. Even prior to the programme of cutbacks triggered by the EU/IMF intervention, Ireland’s policy response to the economic crisis was described as ‘aggressive’ (IMF 2010: 1) and it gained particular approval in international business media and neo-liberal think tanks (Wall Street Journal 2010; Adam Smith Institute 2010) where the Irish case was held up as a model of the necessity of cuts in what are considered to have become unsustainable welfare states. In a series of measures from an efficiency review in 2008 to the 2010 Budget, expenditure cuts of €10 billion equivalent to 8 per cent of 2010 GNP were implemented (Government of Ireland 2010). Under the National Recovery Plan 2011–2014 (Government of Ireland 2010), which plays an important part in meeting the conditions associated with EU/IMF loan assistance, another €10 billion of expenditure cuts are planned along with €5 billion worth of revenue raising measures. Social security programmes have been targeted to © 2011 Blackwell Publishing Ltd.
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yield €2.8 billion of the expenditure reduction plans. Initially in the 2009 Budget, prior to the full onslaught of the economic crisis, benefit rates were increased between 3 and 4 per cent and retrenchment focused on the less visible areas of the conditions and entitlements. Subsequent retrenchment has focused more on outright cuts (see table 6). Within Irish political and economic discourse the debate has overwhelmingly favoured the necessity of retrenchment and promoted the idea that there are very quick limits to be reached with respect to taxation increases. While the government response to the banking crisis has generated controversy, there appears to be more widespread agreement amongst the main political actors that retrenchment is a necessary response to the fiscal crisis and contest has tended to focus more on how the cuts should be devised. The turn to assistance from the EU/IMF has not greatly altered this debate, though a more even balance between expenditure cuts and taxation measures has been advocated by the Labour Party, which may serve as a restraining factor in any future coalition government that includes Labour. The question remains as to why retrenchment has more readily occurred in contrast to past economic crises. The most direct difference is the strength of the economic problem pressure as a driver of the policy response; generally size and strength of economic problems play an influencing role in the policy response and degree of retrenchment (Castles 2010; Huber and Stephens 2001). Clearly the magnitude and nature of the current crisis, involving both fiscal and banking problems, and the speed with which it occurred differs to the type and evolution of economic problems in the 1980s. In addition, by the mid-1980s Ireland was relatively unique in its degree of trouble (Economist 1988). At the present juncture its dependence on international borrowing is compounded by the global credit crunch and the subsequent Eurozone debt crisis, and the consequential pressure to produce policy responses that ensure ‘market credibility’ in the context of being one of a number of vulnerable states under pressure to control spending. Altogether this provided little room for fiscal manoeuvre even before recourse to EU/IMF funding. In addition, independent of the creation of the European Financial Stabilisation Mechanism and the European Financial Stability Facility, the impact of deepening Europeanization has had a reinforcing effect on this lack of manoeuvrability. In particular, the excessive deficit exit strategy set for Ireland under the Stability and Growth Pact has served to create parameters around the debate about deficit reduction which are largely uncontested.6 Notwithstanding the fact that a general election has yet to occur at the time this article was written (late 2010), this situation differs to the 1980s when different political parties set targets which were open to criticism from opposition parties and liable to alteration once governments changed without repercussions from external actors. These drivers alone, however, do not account for particular policy preferences. Other factors, such as political and welfare institutions and ideas, as well as the interaction between them shape the repertoire of policy responses (Campbell 1998; Schmidt 2003; Béland 2009), and in this case help to account for the propensity to pursue retrenchment over taxation. In this regard the role of the interaction between politics and ideas has been particularly influential in the framing of the policy legacy of the 1980s, which is used by political 422
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Increased conditionality 2009 Minimum number of social insurance contributions required to qualify for Jobseekers Benefit and for Illness Benefit doubled Minimum contribution towards rent supplement increased 2010 Rate for Jobseeker’s Allowance and Supplementary Welfare Allowance reduced by 23 per cent where job offers or activation measures are refused by claimant 2011 Minimum contribution towards rent supplement increased Curtailed entitlements 2009 Maximum duration of entitlement to Jobseekers Benefit reduced from 15 to 12 months (and nine months where the person has made less than 260 contributions) Entitlement to illness benefit limited to two years for new claimants Child benefit for those aged 18 years and over to be withdrawn on a phased basis Cuts to payment levels 2009 Double social security payment made in December withdrawn – equivalent to 1.9 per cent cut Jobseeker’s and Supplementary Welfare Allowances cut by 51 per cent for new claimants aged under 20 years who do not participate in a training programme Reduction in rent supplement 2010 Weekly welfare payments to all working age adults reduced by between 3.5 and 4.2 per cent. Jobseeker’s and Supplementary Welfare Allowances reduced by 51 per cent for 18–21 year olds and by 23 per cent for 22–24 year olds Child Benefit rates reduced by between 8.2 and 9.6 per cent Reduction in rent supplement 2011 Weekly welfare payments to all working age adults reduced by between 3.8 and 5.1 per cent Jobseeker’s and Supplementary Welfare Allowances for 22–24 year olds cut by 6 per cent Child Benefit rates reduced by between 6.3 and 8.2 per cent Abolition of schemes 2009 Universal early child care supplement withdrawn and replaced with one year of free pre-school
Social security retrenchment, 2008–2011
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actors to constrain policy choices in the current crisis. The policy responses of the 1980s are directly implicated in the economic hardship of that decade. In one of the first speeches concerning the current crisis, for example, the Taoiseach declared that ‘we cannot simply borrow our way out of trouble or return to the days of punitive tax rates that stifled economic growth and resulted in high unemployment’ (Cowen 2008). In turn, the policy legacy of the prosperous years between the two crises has a mutually reinforcing influence on the rejection of borrowing and taxation for being ineffective policy responses. Although themes such as openness and the imperative of competitiveness have been evident in policy debates in Ireland since the 1970s, the significance of these ideas grew as Ireland became a ‘showpiece of globalisation’ (Smith 2005). Economic success engendered by increased globalization produced what Antoniades (2007: 327) describes as a ‘positive social shock’ that created a rupture with previous decades of economic failure. The legacy of this is a continued faith in the existing policy paradigm and an amplification of the policy instruments considered crucial to recent success, not least of which is maintaining a ‘credible tax regime’ (Lenihan 2008). In this regard a current government minister makes the case that: International evidence and our own past experience make it clear that continuously increasing personal taxes is a disastrous policy . . . heaping more tax on people working in Ireland will drive jobs elsewhere making the problem that raising taxes is intended to solve worse. (Roche, n.d) On the expenditure side, the construction of the legacy of welfare growth during the 1990s and 2000s also plays a role in the retrenchment response. The social security system’s growth after the 1980s, albeit modest as previously discussed, has become a source of justification for retrenchment. The highly visible and potentially politically risky decision to cut benefit rates has been framed by the Minister for Finance with reference to the ‘generous system we have’ (Lenihan 2009a) and the idea that ‘payments compare very well internationally, particularly with payments in Britain and Northern Ireland’ (Lenihan 2009b). This in turn is linked to the need to ensure that levels of benefit do not pose the risk of a disincentive to work (Government of Ireland 2010) despite the lack of employment indicated by the escalation in unemployment. The idea of a generous social security system that needs scaling back was bolstered the publication of the Report of the Special Group on Public Service Numbers and Expenditure Programmes (McCarthy 2009a), whose proposals for retrenchment generated widespread largely uncontroversial media attention and economic commentary. Framing the legacy of growth since the 1980s, its Chair commented for example that ‘on the plus side, the extraordinary pace of spending increases in the last decade means that [the group] has been operating in a target-rich environment, which was not the case in 1987’ (McCarthy 2010: 47). The idea of generosity has not gone uncontested and as EAPN Ireland (2009: 4) for example points out, ‘Contrary to popular belief – social welfare payments in Ireland are average to low compared to social welfare rates in the European Union’. However, there has been little effective mobilization against the cuts implemented to date.7 Although no major welfare backlash is evident, 424
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absence of strong resistance to welfare retrenchment may potentially be a product of the politics of social partnership during the more prosperous years. As Hardiman et al. (2008: 621) note, social partnership’s modus operandi of wage restraint in return for tax cuts, or improvements to disposable income over improvements in collective welfare consumption, has meant that ‘there seems to be little basis either in Irish public attitudes or in Irish political discourse for the politics of redistribution or collective consumption’. In a recessionary setting, therefore, a preference for a low taxation regime may outweigh what might otherwise be highly unpopular cuts to welfare. The social partnership model itself has become the target of criticism and is implicated in the idea that a major part of the current problem is not just the effects of a property bubble but a public expenditure bubble (McCarthy 2009b) that occurred on the social partnership’s watch. Perhaps not unrelated is the diminution of the role of social partnership during the crisis as the government implemented two rounds of cuts to public sector pay without social partnership agreement, and a subsequent agreement reached on freezing pay until 2014 may be superseded by failure to reach fiscal targets agreed with the EU/IMF.
Conclusion This article has documented a noticeably rapid turn to retrenchment in response to the current economic crisis in Ireland in contrast to the 1980s. The analysis has demonstrated that retrenchment featured in debate and policy proposals in the earlier period, however, a number of mediating factors served to hinder its implementation. These include the fact that the dominant economic policy paradigm was still in a process of transition from the Keynesian legacy of the 1970s, together with political instability, and social conditions which were influential in prohibiting deep welfare cutbacks. In the meantime, the transformation of the Irish economy, the deepening influence of neoliberalist globalization, Ireland’s membership of the EMU, and the framing of the policy legacy of the 1980s have produced institutional and ideational conditions which effect a much more forceful retrenchment response in reaction to the re-occurrence of economic problem pressure, which significantly is also more severe than the previous occasion. The issue remains as to how far retrenchment can go whilst the social fallout of the recession grows and cuts in both social security and other social services take deeper hold. However, the early political and policy response appears to more clearly reveal the contours of the Irish welfare state’s liberal identity. Notes 1. The funding assistance for Ireland is sourced from the European Financial Stabilisation Mechanism, the European Financial Stability Facility, the IMF and bilateral loans from the UK, Sweden and Denmark. For convenience, this is hereafter referred to as EU/IMF funding. 2. Ireland applied to join the EEC in 1963 but did not become a member until 1973. 3. Irish prime minister. 4. McCarthy, one of the authors of this comment piece, subsequently became a member of the Expenditure Review Group (1987) and chaired the Special Group © 2011 Blackwell Publishing Ltd.
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on Public Service Numbers and Expenditure Programmes (2009), both of which are discussed later in the article. 5. National Wage Agreements were in place from 1970 to 1978. These were replaced by National Understandings for Social and Economic Development from 1979 to 1980 in which wage agreements were part of a larger programme of policy reform. 6. Although the original target for reducing the budget was 2013, this has since been extended twice by the European Commission, first to 2014 and subsequently to 2015 following further deterioration in Ireland’s deficit. 7. The most prominent exception to this is the success of older people at substantially modifying a proposal to end the automatic entitlement to medical cards (free healthcare) for the over 70s in 2008. This display of resistance is perhaps not unrelated to subsequent budgetary decisions not to extend social security cuts to state pensions.
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Crisis and Welfare State Change in the Netherlands
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Mara Yerkes and Romke van der Veen Abstract The current economic crisis is assumed to create new pressures for the welfare state. In this article we investigate to what extent the crisis leads to changes in Dutch welfare state policies and institutions. Usually these changes are operationalized in terms of retrenchment (cost reduction) or restructuring (institutions). We focus, however, on developments in social rights in the hope of gaining better insight into the content and extent of policy change. This perspective combines attention for costs and institutional structure with attention for the content and substance of social rights. We start by analyzing the development of social rights in the Dutch welfare state as a reaction to the economic crisis of the 1970s and 1980s. Consequently, we will analyze current perceptions of social risks and social rights as well as how we think these perceptions will be affected by the pressures brought on by the economic crisis of 2008–09. Using an institutional perspective, we examine the consequences of the current economic crisis for perceptions of social citizenship and entitlement to social risk protection within the welfare state. spol_783
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Keywords Crisis; Institutional change; Netherlands; Social rights; Social risks; Welfare state reform Introduction The current economic crisis may well create a new crisis of the welfare state. This assumption is based on the period of welfare state reforms that followed the economic crisis of the 1970s. Up until the 1970s, western welfare states expanded during the ‘golden age’ of welfare development. However, the oil crises, high unemployment levels, stagflation and serious economic downturn of the late 1970s and early 1980s marked the end of the golden era of western welfare states and ushered in a period of reform and retrenchment (Huber and Stephens 2001). In short, the economic crisis of the 1970s provided a window of opportunity to affect path-dependent institutions and limit expanding welfare state costs. Address for correspondence: Mara Yerkes, Institute for Social Science Research, The University of Queensland, Room 451, Level 4, GPN3 (Building 39A), Campbell Road, St Lucia QLD 4072, Australia. Email:
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The financial and economic crisis that erupted in 2008 has once again fuelled concerns for the viability of the welfare state. But welfare states today are not the same welfare states that faced the crisis of the 1970s. Welfare state retrenchment and reform that followed the crisis of the 1970s initially led to systemic change and later to programmatic change (Pierson 1994; Van der Veen and Trommel 1999) affecting the contemporary make-up of welfare states. In addition, socio-economic circumstances have changed since the 1970s. So-called ‘new’ social risks have arisen due to changed socio-economic circumstances and these risks affect other groups of people previously unaffected or less affected by social risks (Bonoli 2005; Taylor-Gooby 2004a), and this also affects welfare state programmes (Yerkes 2011). With the presence of a new economic crisis and the changed context of the welfare state, the question is how reformed welfare states will respond to this latest crisis. We will analyze this question by investigating the development and the perception of social rights in the Dutch welfare state. Welfare state arrangements such as health care, housing or social security define the social rights of citizens (Marshall 1950). Social rights can be more or less universal, more or less comprehensive and more or less generous. By analyzing social rights we intend to gain better insight into the content and extent of policy change than when we use the – more common – notion of retrenchment, which focuses on expenditure, or restructuring, which focuses on the institutional characteristics of welfare states. In doing so, attention is given not only to costs and structure but also to the content and substance of social rights, such as the nature of the social risks being covered, the extent of reciprocity and the obligations attached to social rights. Relying on institutional theoretical analysis, we apply a framework of institutional change to examine the development of social security policy following the economic crisis of the 1970s and its effect on social rights in the Dutch welfare state. Using the same analytical framework we then analyze current perceptions of social risks and social rights and how these perceptions are affected by the pressures brought on by the economic crisis of 2008–09. While economic crises may provide a window of opportunity for change, retrenchment, or a rolling back of the welfare state, is difficult (Pierson 1994). Welfare state institutions exhibit a degree of path dependency and have created constituencies of support, whose interests are not served by a dismantling of the welfare state. Despite the difficulties associated with retrenchment, however, systemic, long-term change is possible. Significant systemic changes to the welfare system, including changes in funding, changes in public support for welfare policies, changes to political institutions and/or a weakening of coalitions which support the welfare state, were evident to varying degrees across western welfare states following the crisis of the 1970s, and have led to (sometimes dramatic) changes in welfare programmes in the decades that followed. Institutional change can also be viewed in terms of gradual change. As Hacker (2004, 2005) and Streeck and Thelen (2005) have argued, fundamental change can occur outside systemic change through gradual transformations of welfare state policies, leading to institutional change across time. Through changes taking place in barriers preventing internal change, i.e. changes in © 2011 Blackwell Publishing Ltd.
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political institutions and policy feedback mechanisms, and/or in the external environment, i.e. political opposition to changing the status quo, welfare state policies and institutions can slowly evolve in a direction different from their original intention. In the following section, we use this theoretical framework to compare social rights in the Dutch welfare state following the crisis of the 1970s with social rights following the more recent economic crisis of 2008–09. Regarding the current crisis, it is clear that in comparison to many other European countries, the Dutch welfare state is performing relatively well economically. Gross domestic product (GDP), which increased by 4 per cent in 2007 and 2 per cent in 2008, has bounced back from a four per cent decrease in 2009 to a projected two per cent increase in 2010 and a continued two per cent increase in 2011 (OECD 2010c). Unemployment, already at an acceptable level prior to the crisis, has not risen above 5 per cent, much lower than the 10 per cent average present in the Eurozone (OECD 2010a). All in all, the Dutch economy has seemingly been able to bounce back from the financial and economic crisis relatively well. This does not mean, however, that the Dutch economy and the Dutch welfare state do not face future problems. As the Organisation for Economic Co-operation and Development (OECD) warns in its 2010 economic study of the Netherlands, there is a concern that the increase in cyclical unemployment will become structural. Moreover, the increased deficit, in part a result of government measures to counter problems associated with the crisis, needs to be dealt with as does the long-term fiscal sustainability of welfare state programmes (OECD 2010b). To address these problems, the government is looking to increase labour market participation and once again, to reduce the costs of the welfare state through retrenchment. Continued financial sustainability is also necessary to avoid problems outside the labour market, such as rising health care costs for the elderly, which can lead to increased selectivity in social protection in the long run. The article is divided into four sections. Following this introduction, we look at the effects of the earlier financial crisis of the 1970s on the Dutch welfare state and ensuing welfare state reforms that took place during the 1980s and 1990s. This period of welfare state reform is integral to understanding the development of social rights and citizenship in the Netherlands. In the third section, we look at the current perception of social rights in the Dutch welfare state, specifically whether the economic crisis has affected perceptions of risks and social rights within the welfare state and how to explain these developments. In the final section, some conclusions are provided.
Social Rights in the Dutch Welfare State: Paradoxical Reform of the 1980s and 1990s As in many other welfare states, the oil crises, high unemployment levels, stagflation and serious economic downturn of the late 1970s and early 1980s marked the end of the golden era of the Dutch welfare state and ushered in a period of reform. As our analysis will show, the crisis of the 1970s initially had no effect on social rights, as no reforms were undertaken. But by the early 1980s, modest, programmatic reform of the Dutch welfare state occurred. 432
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And as the economic crisis abated, it became clear that a limitation on welfare state expenditures was insufficient and serious problems remained. Rampant long-term unemployment and the perverse effects of generous welfare programmes such as sickness and disability benefits continued to afflict the Dutch welfare state, causing reforms to continue well into the 1990s. These reforms are indicative of systemic and programmatic change and demonstrate a gradual shift from original policy designs to a different model of welfare. In short, the reforms of the 1980s and 1990s were particularly focused on a reduction of administrative discretion, an increase and strengthening of incentives and systemic institutional redesign (Van der Veen and Trommel 1999) leading to a market-driven managed liberalization of the welfare state. As a consequence, the universal entitlement to social rights remained but the content and the provision of social rights changed. Welfare schemes are now developed along two lines: welfare, collective social protection in the form of passive income protection, and workfare, collective social protection provided in an attempt to improve employment.1 While workfare is more commonly used to refer to increased selectivity in social assistance programmes and obligations of benefit recipients to accept employment, our definition is more encompassing and refers to the more general shift of social protection in exchange for improved labour market participation and mobility. The reforms of the Dutch welfare state are best illustrated by looking at the reform of social security, in particular Dutch sickness and disability policy. Following the crisis of the 1970s, disability insurance became a means to an end for dealing with the (long-term) unemployed as well as a means for employers to dispose of unwanted older workers while avoiding strict dismissal rules (Van Oorschot 2000). This led to a disproportionate number of benefit claimants and a necessity for reform. Reforms to disability started in the early 1980s and are often traced back to the Wassenaar Agreement of 1982. This agreement between centralized employers organizations and trade union confederations, whereby a reduction in working hours was offered in exchange for wage moderation (Visser and Hemerijck 1997) was symbolic of a trade-off between social security (wage moderation) and labour market participation (employment creation realized via a collective reduction of the working week). This agreement marked a period of long-term policy change and a renewal of consultation between the social partners (and increasingly, the state). Such consultation is typical in the Dutch welfare state. The ensuing period of reform took place in four phases. Initially, following the crisis of the 1970s, no reform took place. Rather, the first significant changes were made to Dutch sickness and disability benefits during the midto late-1980s, entailing primarily a reduction of the duration and amount of benefits provided for by the welfare state. Moreover, an initial attempt was made to activate benefit recipients, with little success. These initial reforms were programme-oriented. Programmatic change continued during the second phase of reform in the early 1990s, where the focus was on activation and a further reduction of social protection. The duration of disability benefits was adjusted once again, by introducing an age-dependent continuation of benefits. In addition, the obligations of benefit recipients became more pronounced, particularly in regard to what was considered ‘suitable’ work for the © 2011 Blackwell Publishing Ltd.
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re-integration of sick or disabled workers. Also, it was now necessary to show a causal relationship between illness or disability and being occupationally disabled. The reforms that were implemented during this second phase increased cost control (simply because the duration and the amount of the benefit decreased) but the take-up of disability benefits continued to rise. This continued increase in the take-up of disability benefits led to the creation of a parliamentary committee to investigate these extremely high levels of disability in 1993. The committee concluded that privatization of social security administration was necessary and that disability benefits should be restricted to individuals who are fully incapacitated. The third phase of reform takes place following this parliamentary inquiry and is indicative of systemic change. In the years following and in line with this advice, partial privatization of sickness and disability occurred when the Sickness Act was abolished in 1996, which shifted financial responsibility for the first two years of disability or illness from the welfare state to employers. In addition, the influence of the social partners in social security administration was gradually diminished. The administration of social insurance, previously run by the social partners, was first restructured into a private organization but eventually into a state agency in the early 2000s after the Dutch Parliament was unwilling to fully privatize administration in 1999. In addition, in 1994 the role of the Social and Economic Council (SER) – a tripartite consultative body representing trade unions, employers’ organizations and independent advisors (kroonleden) – changed, when Parliament abolished the obligation to obtain SER advice before passing new legislation. Together, these systemic changes created room for more fundamental, programmatic changes during the final phase of reform. By the end of the fourth phase, the change in disability insurance was complete, resulting in a clear dichotomy between welfare and workfare. In 2006, reform of disability policy in the Netherlands was completed with passage of new legislation: the Work and Income according to Labour Capacity Act (Wet Werk en Inkomen naar Arbeidsvermogen [WIA]).2 The WIA legislation is a good example of the welfare/workfare divide now evident in Dutch social protection. Full, collective welfare state protection is provided for a select, needy group (welfare). Other forms of collective protection (such as reintegration services, temporary welfare state protection or collective protection via employers) are provided in such a way (obligating, privatized) that high levels of labour market participation are stimulated (workfare). The result of these fundamental, programmatic changes in disability and sickness policy is that the universality of social rights remains intact but access to these rights has become increasingly selective and conditional and there is more emphasis on activation. These four phases of reform can also be interpreted in terms of gradual change (Hacker 2005; Streeck and Thelen 2005). The changes made to sickness and disability policy are made possible through a reduction of structural barriers to reform. In other words, the internal malleability of sickness and disability policy gradually increased as the feedback effects of this policy were no longer self-enforcing (Hacker 2005). This is similar to Pierson’s argument about systemic change, that a modification of political institutions leads to a 434
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Social Policy & Administration, Vol. 45, No. 4, August 2011 Figure 1 Four forms of gradual institutional change Barriers to internal change
High Low
Status quo bias of political environment
High
Low
Drift
Conversion
(Transformation of stable policies due to changing circumstances)
(Internal adaptation of existing policies)
Layering
Elimination/replacement
(Creation of new policies without elimination of old)
Source: Hacker 2005: 48.
decrease in barriers to programmatic change (Pierson 1994). By changing the role the social partners play in decision-making, the state changed the ‘rules of the game’. Moreover, reduced political opposition to reform among lawmakers and the social partners, as a consequence of the parliamentary committee’s report of 1993, meant that resistance to change in the status quo decreased. In Pierson’s terms, external conditions changed through a weakening of pro-welfare state groups. Combined, these shifts in both internal and external conditions created room for gradual policy change in the Netherlands. It can be useful to interpret gradual change in terms of these internal and external conditions. Using Hacker’s (2005) two by two matrix, four forms of institutional change can be distinguished (see figure 1). High barriers and high political resistance (wanting to maintain the status quo) can cause policy drift or a change in stable policies only when circumstances change. High barriers and low external political resistance to changing the status quo leads to policy layering, as newer policies are layered onto existing ones. This differs from conversion, whereby existing policies are adapted to meet new goals, which is more likely to occur when political opposition is high and barriers to internal change are low. Lastly, Hacker describes elimination or replacement, which happens when both internal barriers and external insistence on maintaining the status quo are low, allowing for the elimination or replacement of policy. As our analysis shows, Dutch sickness and disability policy is a prime example of conversion and layering, resulting eventually in replacement. As barriers to internal change diminished and political opposition to change declined, gradual institutional change took place, with attempts to convert existing © 2011 Blackwell Publishing Ltd.
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Social Policy & Administration, Vol. 45, No. 4, August 2011 Figure 2 Social security expenditure: the Netherlands and the OECD (1980–2005) 30
25
%GDP
20 Netherlands
15
OECD
10
2005
2003
2004
2002
2001
1999
2000
1998
1997
1995
1996
1994
1993
1992
1991
1989
1990
1988
1986
1987
1984
1985
1982
1983
1981
0
1980
5
year
Source: OECD social expenditure database (SOCX), 1980–2005, http://www.oecd.org (accessed 28 March 2009).
policy, adding to these policies and eventually the replacement of sickness and disability policy with the WIA in 2006. The changes made to Dutch disability insurance help illustrate the more general changes that occurred in Dutch social security following the crisis of the 1970s. In comparison to other OECD countries, the Netherlands has gone from a country of high social security expenditures (measured as a percentage of GDP) to a country with relatively average welfare state spending. This development makes the Netherlands somewhat unique in Europe – while several countries have attempted to restrict welfare state spending, the Netherlands is one of the more successful examples (see figure 2). The Dutch welfare state, then, has managed to reduce social security expenditures more than most European countries, in part by gradually changing rights to social protection. While universality has remained (either in the form of welfare or in combination with workfare) conditionality and targeting has increased and activation has become increasingly important. As a result, Dutch social security expenditures now include a new area of spending: active labour market policy. In line with our observation that there has been an increased focus on forms of welfare or social protection that benefit employment levels, social security expenditures on active labour market policies have more than quadrupled in the past 25 years. In particular, there has been a significant increase in expenditures in the re-integration of disability benefit recipients, from €1 billion in 1980 to €5 billion by 2003 (Van der Veen 2009). We note a final yet important shift in social protection in our analysis of the Dutch welfare state. Social security financing increasingly stems from private expenditures, for example from employers, not in the form of social security premiums but in the form of direct wage replacement. Private financing made 436
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up 14 per cent of collective social security expenditures in 1980; by 2003, this share had increased to 28 per cent (Van der Veen 2009). The Netherlands is rather exceptional in this regard, in that the share of private social security expenditures is closer to shares seen in the UK and the USA than in other European countries. Together with our analysis of disability reforms, this short look at expenditure data illustrates quite clearly the changes that have occurred in the Dutch welfare state. In the end, these systemic and programmatic changes to Dutch social security have resulted in a fundamental transformation of social rights and social protection. Social rights have become increasingly conditional, targeted and directed at re-commodification (Gilbert 2002). Generous and unconditional benefits are only provided when re-commodification is judged to be impossible. Therefore, social protection in the Netherlands is now structured along two lines: welfare and workfare (Yerkes 2011). Individuals are entitled to collective welfare protection when they have little or no chance in the labour market and when they cannot be held individually responsible for a social risk. Workfare, in contrast, is collective welfare state policy in the form of social investment in human resources in order to improve labour market participation. This investment can take place through employer compensation or through the arrangements of the welfare state itself. In the next section, we investigate how the recent economic crisis has affected social rights and whether the crisis reinforces this dichotomy of social rights and citizenship.
Social Rights and the Current Economic Crisis: Changing Perceptions? In the previous section, we argued that in essence, a development in the design of social rights in the Dutch welfare state towards a combination of workfare and welfare policies can be observed. This shift is attributable to systemic and programmatic institutional change. Will the recent crisis again change the design of social rights and the extent of social protection in the Dutch welfare state? On the one hand, social rights are evolving in a changed context of social risks. Social risks are no longer centred on a male breadwinner; they affect other groups of individuals previously unaffected or less affected by social risks, at different stages across the life course, and contemporary social risks blur the division between public and private life creating new manifestations of social inequalities (Bonoli 2005; Taylor-Gooby 2004b). On the other hand, the development of social rights is dependent on the workings of the welfare state. One could assert that further reforms are unlikely given the far-reaching reforms of the previous decades. But, theoretically, it can also be said that precisely the opposite will occur – as a result of these fundamental changes, future welfare state reform is more likely to occur (Hacker 2005; Pierson 1994). We will analyze the current economic crisis and ensuing fiscal problems within this context of changing social risks and a reformed welfare state. If our theoretical assumptions are correct – that previous decades of reform and changing social risks, in combination with the current economic crisis, will © 2011 Blackwell Publishing Ltd.
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lead to further changes in social rights in the welfare state – then we should see evidence of this across different risk forms. Using the institutional theoretical framework applied above, we consider how the new economic crisis is likely to affect the development of social rights using two examples, employability policy and health care policy, in particular the AWBZ (Algemene Wet Bijzondere Ziektekosten), a law covering exceptional medical expenses (e.g. long-term care) in the Netherlands. Employability provides an example of social rights development in a ‘new’ social risk area. Health care policy, in contrast, offers evidence of the development of social rights in relation to expected fiscal problems in the future. Both examples help illustrate how the reforms that have taken place in the previous decades, together with the current economic crisis and a changing political climate, are creating the possibility for even more fundamental institutional change and a shift in social rights in the future.
Employability Policy Insufficient employability is a risk that has continued to garner increased interest in welfare state discussions as the shift to more lengthy educational trajectories and an increased emphasis on individual responsibility in obtaining skills and training places for low-educated individuals or individuals with outdated skills in an increasingly precarious position (Elchardus et al. 2003). Insufficient employability can make it more difficult for individuals to move from job to job and can increase labour market uncertainty for individuals being dismissed from employment or for those attempting to re-enter the labour market following a period of absence. In that sense, the risk of insufficient employability is broad and diffuse and can affect a variety of individuals at different stages during the life course. The existing policies intended to stimulate employability are centred on workfare. The idea is that investments in employability (such as training, job rotation) by employers will improve employment and labour market mobility. Yet despite substantial state involvement in employability policy in a facilitating role, responsibility for employability protection has, until now, primarily rested in the hands of the social partners, where employability protection is created in collective bargaining.3 Although the state was involved as facilitator, prior to 2008, no universal protection for employability policy developed within the welfare state (Yerkes 2011). However, this has changed since 2008. Prior to the crisis, there seemed to be little reason for the state to become more involved in financing employability measures. Employability deals primarily with post-initial education, which is seen to be the responsibility of the social partners. The state’s financial responsibility was limited to initial educational trajectories. At first glance, it would appear that the ‘window of opportunity’ provided by the recent economic crisis is rather small and little change is observed. Employability agreements offer less amelioration for the current crisis than disability did following the crisis of the 1970s. Whereas disability policy could be used to absorb structural unemployment following the crisis of the 1970s, employability policy cannot provide comparable relief in the current crisis. However, in an attempt to improve mobility between labour market sectors, the state 438
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created a crisis-related measure to subsidize training that specifically targets employees who are at risk of losing their job. Specifically, the state doubles the money that collectively negotiated sector funds allocated for training, allowing employees to move into a new line of work in another sector. This subsidy is financially interesting for the state because it can help limit unemployment costs. But the subsidy is a temporary, crisis-related initiative and does not show a shift in either internal barriers to change (policy feedback effects in collective bargaining remain positive, with the locus of responsibility on the social partners) or in external resistance to the status quo. But a closer examination of Dutch welfare policy reveals that the crisis could produce more far-reaching change in employability, and hence social rights, in the future. In response to the crisis, the Dutch welfare state began offering otherwise healthy firms facing temporary, crisis-related, economic difficulties the opportunity to retain employees through a partial unemployment arrangement. Referred to as ‘part-time’ unemployment (Deeltijd Werkloosheidswet or Deeltijd WW), the arrangement allows employers to temporarily reduce the working hours of an employee by a minimum of 20 per cent and a maximum of 50 per cent. Employees receive a partial unemployment benefit to compensate the reduction in working hours.4 Part-time unemployment is not meant to assist firms that would otherwise fail, or those firms that are likely to fail after the crisis. Rather, part-time unemployment helps successful firms to maintain a well-skilled workforce even in times of crisis. As the arrangement is directly linked to maintaining investments in employees’ skills and training, part-time unemployment can also be viewed as an employability arrangement with direct financial compensation from the state. In return for this compensation, employers must create schooling agreements, allowing employees either to be schooled or to use well-skilled employees to train newer employees or interns during the hours not being worked. And while the part-time unemployment arrangement is temporary and crisisrelated, it represents a shift in internal political barriers more so than the intersectoral mobility funding discussed above. In this case, the state has taken direct financial responsibility, thereby providing employers more time and money to invest in employee skills and training. This arrangement has also been enormously successful from the perspective of the social partners. After initial funds from the state were depleted within the first few months of the arrangement during 2009, the state increased available funding through 2011. The success of this arrangement once again changes the structural dynamic of state and social partner involvement in employability arrangements. Taken together, these two arrangements demonstrate how the crisis has affected perceptions of risk. To understand why this is likely to cause continued emphasis on workfare in the future, we return to the theoretical arguments posited in the previous section. Reforms following the crisis of the 1970s significantly changed the structure of the Dutch welfare state and the ability of unions, and the social partners in general, to influence future reform. Now, with the crisis of 2008–09, internal structural barriers to change are weakening and the external political environment is changing. Successful state involvement in employability, while © 2011 Blackwell Publishing Ltd.
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crisis related, makes it more difficult for the social partners to oppose future changes. In other words, internal barriers to change are decreasing. In addition, the changed context of welfare states and the necessity to address new and changed forms of social risks is changing social risk perception and risk management (Yerkes 2011), causing a shift in external barriers to change. Parties on the political left are increasingly open to changing how risks are managed as they fight for the rights of labour market ‘outsiders’ and groups affected by ‘new’ social risks. For example, the Green Party recently argued for an increase in unemployment benefits but a decrease in duration and both the Green Party and the Liberal Democrats (D66) continue to push for social rights for the independent self-employed (one-person businesses). Lastly, in a recent turn of events, eight years of moderate, Christian Democrat-led politics came to an end following the parliamentary elections of May 2010. The success of the Conservative Party, but also Geert Wilder’s PVV party (Partij voor de Vrijheid) resulted in a shift to the political right, which also significantly changes the external political context in which social rights are developed. Taken together, the change in internal barriers resulting from the new economic crisis, the shift in the external political context and the earlier significant reforms of the Dutch welfare state have created a window of opportunity for future reform of welfare state policy, reform that is likely to emphasize the workfare aspect of social rights. We expect that the changes in internal and external barriers will lead to an increased emphasis on workfare for insufficient employability. As more and more emphasis is placed on individual responsibility, in combination with the shift to the political right and increased support for labour market outsiders, earlier proposals to trade strict dismissal protection for a right to life-long learning could gain momentum, causing a significant shift in social rights. Currently, employees are legally entitled to favourable financial compensation upon termination of their employment contract. Compensation is based on their employment duration. The intent behind combining employability and dismissal law is to create a training voucher system, whereby employees are entitled to schooling and training from their employer. If the employment contract is to be terminated, the courts can determine whether the employer has done enough to optimize the employee’s employability. If this is not the case, an individual employee may be entitled to more generous financial compensation. The court can also decide that an employee has not done enough to optimize their own employability, thereby concluding that they do not have a right to dismissal compensation. Such a development would signify a distinct change in social rights away from welfare in the direction of workfare.
Health Care Policy The increased emphasis on selectivity and the decrease of universalism is also evident outside of labour market related programmes. For example, it can be observed in the development of health care insurance. Due to continued questions about the fiscal viability of the welfare state, health care insurance in the Netherlands has undergone reforms and continues to be a subject of reform. 440
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In the Netherlands, health care insurance is divided into two parts. First, there is health care insurance (focused on ‘cure’) that covers medical expenses. The development of this insurance during the last 20 years is partly comparable with developments in income insurance (Van der Veen 2006). In the first place, health care has remained a universal social right – in fact, it has become even more universal than it previously was, because it developed from a workers’ insurance to a national insurance. Second, health care insurance has been largely privatized in the direction of managed competition, a shift intended to reduce the cost of health care. Simultaneously and to obtain political legitimacy for this shift, health care insurance was transformed into a national insurance. The second tier of the Dutch health care system concerns the AWBZ. The AWBZ is a social right covering so-called ‘exception medical expenses’, which in fact is insurance for the long-term care of the elderly and the handicapped. The AWBZ was developed as a national insurance. In the last decades, however, the cost of the AWBZ has risen steeply due to the ageing of the population. At the moment, health care expenditures are equal to expenditures on long-term care. Politically, then, the rising costs of the AWBZ (and hence the cost of ‘care’) are seen as a threat to the fiscal viability of the welfare state. During the previous decades, policymakers viewed health care expenditures as out of control, a view that led to reform and a universal health care system under managed competition. Currently, AWBZ expenditures are viewed as being out of control and the economic crisis has only brought this issue even more to the forefront of the debate about the future viability of the welfare state. What, then, will the consequences of the crisis be for the AWBZ and social rights? In the previous paragraphs, we have shown that the support for universalism in the welfare state is changing. Internal barriers against increased selectivity in social rights are declining because of the welfare/workfare divide. The targeted character of workfare and the limited provision of welfare facilitate a decline in universalism. At the same time, external political barriers against increasing selectivity are declining as a result of the changing context of social risks and because of changes in the political climate as discussed above. Both anti-welfare parties and modern, left-wing parties have gained an increase in political power. Political parties which are against the welfare state argue for a retrenchment of universal welfare protection in favour of arrangements based on deservingness and reciprocity, thus favouring selective arrangements. Modern, left-wing parties, or the ‘new’ left (the Green Party and the Liberal Democrats [D66]), see themselves as the defenders of labour market outsiders and groups affected by ‘new’ social risks, and in that sense they perceive the structure of universal rights as a system of privileges for the insiders of the labour market and groups affected by ‘old’ social risks. By limiting the social rights of the insiders, they hope to gain support for creating arrangements for protection against new social risks. In short, changes in the internal and external barriers open the door for significant changes in the AWBZ, changes that are viewed as politically inevitable given the increased costs of long-term care. The current crisis not only creates a window of opportunity to address the problem of cost-containment, it also increases © 2011 Blackwell Publishing Ltd.
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the necessity of addressing cost-containment and political legitimacy in the long run. Whereas the reform of health care insurance developed in the direction of universal rights and managed competition, based on the theoretical arguments outlined here, we expect the reform of the AWBZ to develop in the direction of increased selectivity, based on notions of need and reciprocity, and in the direction of increased individual responsibility (Van der Veen 2010). Managed competition can play a role in this development as well, but probably less so than it did with health care because privatization and managed competition have become politically less acceptable during the past years. A more likely development is a decentralization of responsibilities to the municipal level to facilitate a more individualized approach, suitable in a system that emphasizes individual responsibility. Such a development would signal another significant shift in social rights in the Dutch welfare state.
Conclusions As our analysis of the Dutch welfare state has shown, the relationship between economic crisis and welfare state change is not a simple one. In the Dutch case, the conditions necessary for change are present. Significant past reforms have paved the way for future reforms (Hacker 2005; Pierson 1994). Internal barriers to change, in the form of self-enforcing policy feedback effects, are weakening in certain areas and political institutions of the welfare state have been modified, significantly changing the ‘rules of the game’. Moreover, political opposition to further alterations of the welfare state is slowly declining – due in part to the changed context of social risks in the modern welfare state, but also due to a shift towards the political right and the increased popularity of ‘new’ left parties focused on the protection of labour market outsiders. So, while we might be tempted to assume that a welfare state like the Netherlands, where significant systemic and programmatic change has already taken place, is unlikely to pursue continued reforms following the new economic crisis, we suggest this assumption is incorrect. The reformed Dutch welfare state has created a situation in which a significant shift in social rights can occur, a situation strengthened by decreasing external barriers. Whereas the reforms following the crisis of the 1970s led to changes in social rights, including increased conditionality and selectivity, the basic premise of universal welfare rights remained. Welfare and workfare rights existed side-by-side. Following the most recent crisis, we expect to see a shift in social rights in the direction of increasing selectivity and an emphasis on workfare. Our two examples of employability policy and health care policy highlight this shift. To a certain extent, the issues facing the Dutch welfare state are distinctive to the Netherlands. The generosity and structure of sickness and disability policy prior to reforms were unique in welfare state terms, just as the AWBZ is unique in its universal coverage of long-term care for the elderly and the handicapped. The institutional context in which these arrangements were and are embedded is also distinctly Dutch, with a specific role for the social partners and a unique mix of public and private expenditure for social protection. But the shift towards increasingly selective and decreasingly universal 442
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social rights is not distinctly Dutch. A more universal shift to workfare has been noted by various authors to different degrees, noted as a shift to a social investment state, the enabling state or a push towards new welfarism (EspingAndersen 2000; Gilbert 2002; Taylor-Gooby 1997). The evidence presented here shows that the current economic crisis, in combination with previous reforms and changing social risks, creates the potential for an even greater transformation of social rights.
Notes 1. The notion of workfare is often used in relation to the reform of social assistance. Under a regime of workfare, social assistance is only given under the condition that the recipient is obliged to work in return for assistance (under sheltered conditions, in public works, etc.). Our use of the notion of workfare is, however, more comprehensive. We use it to refer to all policies that are meant to increase labour market participation and include obligations for the recipient. In other words, workfare policies are those policies that are intended to transform the welfare state into a social investment state (Giddens 1998; Taylor-Gooby 1997). 2. The WIA is divided into two parts, the IVA and the WGA. IVA (Wet Inkomensvoorziening Volledig Arbeidsongeschikten; Income Provision Scheme for People Fully Occupationally Disabled) provides income protection for individuals deemed to be fully sick or disabled (with at least an 80 per cent loss of income) with little to no chance of recovery in the long-term. The second part of the legislation, the WGA (Wet Werkhervatting Gedeeltelijk Arbeidsgeschikten; Return to Work Scheme for the Partially Disabled) regulates the responsibilities of employers and employees when an individual is deemed to be partially sick or disabled (a loss of income between 35 and 80 per cent). We note that the English translation of these arrangements is taken from the Ministry of Social Affairs and Employment website: http://www. minszw.nl. The translated titles do not convey the important change in discourse, however. Previously referred to as occupational disability, the new law refers to occupation ability. 3. Significant collective protection for employability has developed in collective bargaining in the Netherlands. See Pruijt and Derogee (2010) for a detailed analysis. While a significant percentage of employees are covered by collective bargaining in the Netherlands, this is not universal. In particular, collective bargaining coverage is absent for the growing number of independent self-employed. 4. The duration for which firms can use the part-time unemployment arrangement is dependent upon the coverage they are requesting, both in the number of employees and the percentage in working hours reduction.
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Explaining Welfare Reforms in Italy between Economy and Politics: External Constraints and Endogenous Dynamics* spol_784
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Franca Maino and Stefano Neri Abstract Since the end of the ‘golden age’ of the welfare state, in Italy as in most European countries the reform of social protection has progressively emerged as one of the key issues in political debate. In this article we describe the evolution of the Italian welfare state over the past three decades, highlighting the distinctiveness of each decade. The analysis is mainly focused on three policy sectors: pension, health care and social assistance. After a policy stalemate, which lasted throughout the 1980s, far-reaching reforms took place in the 1990s and in the early 2000s. We will argue that the sequence of reforms was the result of a change that had both endogenous and exogenous sources. In particular, relevant changes in the political system emerged after 1992 and international constraints on public expenditure and debt combined to stimulate co-operation between the government and its social partners in the case of pension reforms and joint policy-making between central government and the regions in health care and social assistance reforms. During the 2000s, actors continued to carry out agreed reforms to adjust the pension system, even though co-operation was made difficult by the conflicts on the labour market front. In health and social care, which are matters devolved to the regions after the 1990s and the 2001 constitutional reform, central government and the regions sought to implement and stabilize new mechanisms for the governance of both sectors. Although conflict alternated with co-operation, nevertheless both external and internal constraints induced actors, often reluctantly, to develop and institutionalize joint policy-making.
Keywords Italy; Welfare reforms; Pension; Health care; Social care Introduction Since the economic crisis of the 1970s and the end of the ‘golden age’ of the welfare state, in most European countries the reform of the welfare state has spol_784
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Addresses for correspondence: Franca Maino, Department of Labour and Welfare Studies, University of Milan, Via Conservatorio 7 – 20122 Milan, Italy. Email:
[email protected]. Stefano Neri, Department of Labour and Welfare Studies, University of Milan, Via Conservatorio 7 – 20122 Milan, Italy. Email:
[email protected] © 2011 Blackwell Publishing Ltd., 9600 Garsington Road, Oxford OX4 2DQ , UK and 350 Main Street, Malden, MA 02148, USA
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progressively emerged as one of the key issues in the political debate. In the new context of economic and financial globalization and fiscal austerity (Pierson 1998; Pierson 2001b), there was a growing awareness of the need to reform or recalibrate (Ferrera and Hemerijck 2003) national welfare institutions and programmes, according to the specific economic and social needs, as well as to the existing features of the welfare state (Esping-Andersen 1990, 1999; Pierson 2001a; Ferrera 2008). Obviously, this does not mean that welfare reforms followed from economic change in a deterministic way. Economic pressures, on the one hand, and political and institutional factors, on the other, interacted either facilitating or hindering welfare recalibration, and in some cases they prevented reforms from being approved and implemented (cf. Pierson 2004; Streeck and Thelen 2005). Even conditions of severe economic crisis either made the adoption of structural reforms easier or exacerbated political and social tensions, pushing policy-makers to remove the reforms from the political agenda. The story of the reform of the Italian welfare state shows how the interplay between economic and political factors may determine different results in terms of success of the specific reform’s attempts and of change in the welfare state institutions. In the following pages we describe the evolution of the welfare state in Italy over the past three decades, highlighting the distinctiveness of each decade and the factors that have operated on it. The analysis is mainly focused on three policy sectors: pension, which is perhaps the core of welfare reform in Italy; health care, which has been subject to an intense devolution process; and social care, where the need to reduce the traditional strong territorial differences clashed with both institutional reforms and financial conditions. The three policy sectors are characterized by different actors, and policymaking takes place in different arenas. In the pension sector the main actors are central government, unions and employers’ organizations and policymaking is concentrated at the national level. In health care, national policymaking is increasingly negotiated between central government and the regions; while in social care, policy-making is partly similar to health care, but the arena is populated by other relevant actors such as local government (provinces and municipalities) and non-profit organizations. As we will see, after a policy stalemate which lasted throughout the 1980s, far-reaching reforms took place in Italy in the 1990s and in the early 2000s. In recent years, reforms have partially continued, but actors have concentrated their efforts in consolidating the institutional framework derived from the structural reforms of the previous decade. We will argue that in the 1990s the sequence of reforms was the result of a change in the actor constellation of the political and industrial relations systems, a change that had both internal and external sources. First, the crumbling of the so-called First Republic (the political regime from 1948 through 1992) and the transition to the Second (from 1992 onwards) brought new actors into the scene, such as the regions, or helped traditional actors, such as the unions, to enhance their role. Then, the definitive collapse of the old party system transformed the rules both of political competition and of the policy-making process, generating opportunity windows (Kingdon 1984) for structural reform, especially in the mid-1990s 446
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transition phase to a new party system. These changes were matched with the external pressures exerted by financial markets and the run-up to Economic and Monetary Union (EMU), which significantly altered the costs and benefits of domestic policy options and their distributive implications for national actors. In particular, external constraints prompted a process of political and social learning1 among key actors, who became aware of the need to modify the status quo. This awareness encouraged concertation between the government and the social partners in the case of pension reforms, as well as the creation of new practices of intergovernmental joint policy-making between central government and the regions in the case of health care and social assistance reforms.2 During the 2000s, actors continued to carry out substantially agreed reforms to adjust the pension system, even though co-operation was made difficult by the conflicts on labour market policies and concertation was not considered the preferred means to undertake reforms, as it had been in the previous decade. In health and social care, which became devolved matters after the 1990s and the 2001 constitutional reform, central government and the regions sought to strengthen, implement and stabilize the mechanisms for the multi-level governance of these sectors introduced in the previous decade. Although conflict alternated with co-operation, external and also internal constraints induced actors, often reluctantly, to institutionalize joint policymaking in the health and social care sectors. The economic crisis which started in 2007–08 and pressures on the sovereign debts exerted by the financial markets might indirectly promote the beginning of a new cycle of structural reforms, but so far this has not happened, as we describe in the fourth section.
The Eighties: A Decade of Policy Stalemate During the 1950s and the 1960s the Italian welfare state underwent a period of rapid expansion, which in many ways aligned Italy with most of the European countries. However, from the second half of the 1970s the worsening of the economic crisis gradually shifted the emphasis of reforms from expansion to retrenchment of welfare expenditures in response to growing fiscal problems. Nevertheless, during the 1980s little political action was taken in terms of pension, health care and social assistance. For instance, in the course of the 1980s the retirement system was becoming unsustainable because of many factors: demographic trends, leading to higher percentages of elderly people and lower percentages of active people; unclear distinction between retirement benefits and social assistance; a funding mechanism which was using resources necessary for the future; corporate mechanisms which privileged specific positions. However, only some relatively marginal and ineffective ‘cuts’ to the pension system were passed and the various governments did not accomplish much in terms of structural measures in order to tackle a series of shortcomings, which contributed to produce a serious economic crisis. As far as health care is concerned, Italy adopted a National Health Service (NHS) in 1978. Law no. 833/1978 suppressed the numerous separate sickness © 2011 Blackwell Publishing Ltd.
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funds and established a uniform structure for service provision based on regions and local health units. The 1978 legislation also introduced a new model of administration based on three distinct tiers: central government (Ministry of Health), responsible for national planning and overall financing through compulsory contributions and taxes; regional governments, responsible for local planning and for the organization of services within their jurisdictions; local health units, responsible for the provision of services through their own structures (outpatient services, hospitals) or through contracts with private providers. In the course of the 1980s, the institutional framework introduced in 1978 started to reveal its lack of rational financial incentives, stemming from the sharp division between financing responsibilities, assigned to the centre, and spending responsibilities, assigned to the regions and ultimately to the local health units, whose boards were not appointed by regions themselves but by municipalities. This separation initiated a permanent clash between central government and the regions over the allocation of funds. From the second half of the 1980s the NHS entered into a serious crisis (Maino 1999, 2001a). The low levels of efficiency and quality in service provision caused widespread dissatisfaction among citizens, while the increasing costs of the health care system determined a financial crisis which became progressively more serious through the 1980s. The government tried to face the financial crisis adopting a policy of ‘financial management’ for the NHS aimed at curbing the demand for services, by underfunding the regions, which were subject to expenditure ceilings, introducing co-payments for drugs and outpatient services, and rationalizing the supply structure, especially in the hospital sector. The annual budget became the instrument for controlling health care expenditure by the central government. Social assistance and social services have traditionally played a minor role in the Italian welfare state and their provision differs substantially among different regions and single municipalities. The main factor explaining the modest provision of personal social services concerns the family role in the culture of the country (Saraceno 1998). However, as Gori and Pasini (2001) have pointed out, the family has been facing growing strains due to the fact that the population is ageing, family networks are weakening and more women are working. The overall result of these tendencies has been, from the late 1980s onwards, the increasing demand for personal social services, which have not been met with adequate supply. Generally speaking, up to the 1980s a set of distinctive traits characterized the Italian welfare state (cf. Ascoli 1984; Paci 1989; Ferrera 1998). First of all, the unbalanced distribution of protection against standard risks. In fact, old age risk and the aged as a social group were overprotected, while family benefits, social services and housing benefits were underdeveloped.3 Second, the internal polarization of the income maintenance system, in the sense that the system of protection (differently from the other Continental welfare states) provided generous protection to the core sectors of the labour force, located within the regular labour market, while it provided weak subsidization to those located in the irregular market. Regarding the latter, Italy was and still is characterized by the lack of a national minimum income. The third trait 448
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had to do with a highly uneven distribution of financing burdens across the various occupational groups due to legal disparities and by the high incidence of black economy and tax evasion, above all in the southern regions.4 A fourth trait was the presence of a highly articulated mix between public and nonpublic actors and institutions in health and social care. A final characteristic had to do with the persistence of an institutional particularism that, in some cases (invalidity benefits, for example), had implied the formation of a fairly elaborated ‘patronage’ machine for the distribution of cash benefits (cf. Ferrera 1984). However, while no important measures were passed in the 1980s and the decade was characterized by policy stalemate, by contrast the 1990s witnessed several important welfare reforms.
The Nineties: A Decade of Far-reaching Welfare Reforms At the beginning of the 1990s the Maastricht Treaty required the recovery of public finance (and hence the reform of economic and social policy). The international pressures to adjust intertwined with the deep political changes following the crisis of the ‘First Republic’, due especially to judges’ investigations on corruption. The rapid transformation of the domestic political system and of the international economic arena forced politicians to change their strategies and introduce important social policy reforms. The following section analyzes the main characteristics of these reforms with reference to pensions, health care and social assistance. From an earnings-related to a contributory pension system Since the beginning of the 1990s, new proposals of pension reform started being discussed in Parliament, all aimed at rationalizing the pension system, raising the age of retirement and trimming old-age benefit formulas in order to restore financial balances. In fact, the 1990s have been characterized by three major pension reforms approved respectively in 1992, 1995 and 1997.5 In 1992 the Amato government (1992–93) approved a reform, which maintained the overall architecture of the system (occupational schemes and earnings-related formulas) but introduced several restrictive changes after decades of expansive measures. Summing up, the reform gradually elevated the minimum contribution requirement for old age benefits (from 15 to 20 years) as well as the retirement age (from 55 to 60 for women and from 60 to 65 for men); extended the reference period for pensionable earnings from the last five years to the last 10 years (and to the whole working life for new entrants in the labour market); gradually increased the contribution requirement for seniority (early retirement) pensions to 36 years for all workers, including civil servants, who previously enjoyed the privilege of a much lower 20-year requirement. Despite the Amato reform, the persistent crisis of public finances, the upward trend in pension expenditure and pressures from international agencies like the Organisation for Economic Co-operation and Development (OECD), the International Monetary Fund and the EU, all convinced the Dini government (1995–96) that a more decisive reform was necessary. In May 1995 a second © 2011 Blackwell Publishing Ltd.
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pension reform was approved. The Dini reform introduced the following changes: a shift from the old earnings-related formula to a new contributionrelated formula, to be phased in by 2013; the introduction of a flexible retirement age (57–65); the introduction of an age threshold for seniority pensions (57 years) for all workers, to be phased in by 2008; the gradual standardization of rules for public and private employees; a graduation of survivor benefits according to income; stricter rules on the cumulability of disability benefits and incomes from work, as well as tighter controls on beneficiaries; an increase of contribution rates and the widening of contribution base by extending compulsory pension insurance to special categories of self-employed workers. But the EMU deadlines kept Italian governments under constant budgetary pressures. Soon after each new compromise was struck, the government re-launched its efforts, thus widening the aim of its ambitions of reform even further. In this spirit, the new centre-left ‘Olive-Tree’ coalition led first by Romano Prodi (1996–98), then by Massimo D’Alema (1998–2000) and Giuliano Amato (2000–01) made comprehensive reform of the welfare state one of its main priorities. In 1997, the Prodi government passed a new pension reform, which included more severe contributory/age requirements for receiving a seniority pension; the harmonization of contributory and age requirement between private and public employees; an increase of contributions for many groups of self-employed and autonomous workers; the re-introduction of cumulability of a seniority pension and income from work; the increase of the amount of social pensions and minimum pensions as well as higher tax deductions for pensioners with lower incomes. The stabilization of pension expenditure was not enough to fully cure the long-standing disease of Italy’s unbalanced welfare state, but it certainly contained its worsening (Ferrera and Gualmini 2004). At the end of the 1990s, and in spite of these three reforms, Italy still had one of the highest ratios of pension expenditure to GDP in the entire OECD countries and the situation was only going to get worse. But the significance of these three pension reforms must be appreciated by contrast with the status quo. Without reforms, spending on pensions would have peaked at an impressive 23.2 per cent of GDP by 2040 before starting to decline. With reforms, the peak was expected to reach ‘only’ 15.9 per cent of GDP by 2031 (cf. Il Sole-24 Ore, 30 January 2001). Moreover, the 1992, 1995 and 1997 reforms represented major breakthroughs with respect to the institutional legacies of the past (Ferrera and Jessoula 2007). They were also, however, the result of social and political compromises in which the government had to make several concessions. All the three reforms were defined and approved through explicit concertation with unions and employers’ association. This strongly contrasted with the failed attempt of the first Berlusconi government (1994–95), which had to face the strong unions’ opposition, to reform the pension system.
Health care reforms between decentralization and managed competition In health care the Amato government and the subsequent Ciampi government (1993–94) approved a wide structural reform (Legislative Decree nos 450
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502/1992 and 517/1993). Although health expenditure was not excessive in relation to GDP, there was a growing dissatisfaction in public opinion towards the Italian NHS, which was characterized by a decision-making process unresponsive to patient needs, inefficient resource allocation and deficient audit mechanisms for quality services. External constraints, such as the increase of inflation, deficit and debts (especially with the perspective of EMU and the respect of the Maastricht criteria) and the dramatic financial crisis of September 1992 opened up, as for pensions, the political opportunity to push through the health reform, changing the organization of the NHS (Maino 2001a, 2001b). The 1992–93 reform started the regionalization process of the NHS, concentrating the powers of organization and management of the health care services into the 20 regions and the two autonomous provinces of Trento and Bolzano, while legislative powers are shared between central and regional tiers. The regionalization of the Italian NHS has been both a decentralization process from state to regions and a centralization process from municipalities to the meso level of government. Local governments were indeed deprived of the management powers they had held since 1978 and, for the most part, of the possibility to intervene in health care decisions. Although municipalities regained some relevant powers with the 1999 health care reform, regionalization was substantially confirmed during the 1990s, until it was strengthened by the amendments to Title V of the Constitution introduced by Constitutional Act no. 3/2001, which may be considered as the last act of the long reform cycle started in 1992. As to competences on expenditure and financial matters, the 1992–93 reform confirmed the discretionary power on the expenditure side of the budget accumulated by the regions over the years since the 1978, and matched this with an extension of powers and responsibilities of the regions on the revenue side, which were progressively increased in the following years, until the 2001 Constitutional reform. After this reform – also discussed in the fourth section – regions are responsible for guaranteeing the delivery of the (wide) service packages defined by the ‘Essential Levels of Care’ (Livelli Essenziali di Assistenza [LEA]), which are set out by the central government, given financial resources transferred by the central level (which must cover the LEA costs) and collected at the regional level. Regions are responsible for covering any additional cost due to lower levels of efficiency than those assumed by the Ministry of Health in calculating the financial resources necessary to provide LEA. Regions may also decide the provision of publicly funded services in addition to the package defined by the LEAs (cf. Tognetti Bordogna 2010), but additional services must be financed by regional revenues. This became very important after the 1998 and 2000 legislation, which allowed regions to share part of the revenue of some taxes, thanks to the regional additional tax on income tax (no less than 1.5 per cent), the excise on petrol and the co-sharing on VAT (no more than 20 per cent). Regions may also introduce co-payments, especially on medicines. However, so far fiscal autonomy has counted for less than 10 per cent of any regional health budget and it is constrained in its use by political priorities (cf. Lega 2008; Maino 2009a). The © 2011 Blackwell Publishing Ltd.
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attainment of more fiscal autonomy by the regions has become an important issue since the second half of the 1990s, but it proved to be very problematic, making ineffective the relevant innovations introduced by the Legislative Decree no. 56/2000.6 To stimulate greater efficiency and more attention to quality of service, the 1992–93 reform introduced managerialization and, in some ways, managed competition (Enthoven 1985) among health care public and private providers. Regions had to transform the 659 local health units into local health enterprises (Aziende Sanitarie Locali [ASL]), which initially amounted to 197 and were further reduced in their number in the following years. National legislation also gave regions the possibility of creating hospital enterprises (Aziende Ospedaliere [AO]), gathering public hospitals independent from ASL. In a few years about 100 AOs were created, with regional differences in the extension of the purchaser–providers split (Neri 2006, 2009). ASLs and AOs represent one of the main expressions of the introduction of the new public management principles in the Italian public administration. Directed by senior managers appointed by the regions and in charge for five years, they enjoy wide organizational and managerial autonomy, use commercial accounting procedures and performance evaluations systems, and adopt performance-related pay schemes for managers and staff. The reform also introduced a new remuneration system for providers, based on the use of tariffs linked to the DRGs. Matched with the attribution of a wide freedom of choice to patients, and also considering the significant presence of private providers (about 20 per cent of the hospital beds as a national average), the new remuneration system created a quite competitive environment. However, the degree of competition was highly dependent on regional choices, given that national legislation leaves regions free to adopt very different arrangements in matters such as the configuration of supply, the accreditation procedures regulating the access of providers to the publicly funded system, the use of tariffs as well as that of purchaser–provider contracts (Maino 2001a; Neri 2006, 2009). As a result, some regions emphasized more managed competition, while others preferred to adopt forms of managed co-operation (Light 1997), based on ‘negotiated planning’ among public and private health care organizations. The second option became prevalent in the 2000s (Neri 2009, 2010). This evolution was consistent with that of national legislation. In spring 1999 the D’Alema government approved a new reform (Legislative Decree no. 229/1999), which converted managed competition into managed cooperation and strengthened the operational autonomy of ASLs and AOs (Maino 2001b; Vicarelli 2005a). The reform provided for a greater emphasis on regional and territorial planning versus competition, and on public providers versus the private ones. It tried to reinforce the role of community care and primary care services, provided by the ASLs in co-operation with the independent GPs. A highly controversial point of the 1999 bill was in relation to physicians employed by NHS hospitals: if opting for full-time contractual relationships with their hospital, physicians are forbidden to practice for a fee outside the hospital itself. Hospitals, however, have to set up internal facilities for fee-for-service care supplied by doctors on top of their contractual obligations (cf. Vicarelli 2005b). 452
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The reform of social assistance and of personal social services The sector of social assistance and personal social services is under the responsibility of regional and local governments and a wide range of targeted programmes operates within it. In principle, the situation is such that all cash payments paid by municipalities are subject to means-tests, with varying regulations. As far as personal social services and other public services are concerned, the norm is that family income is taken into consideration to determine user co-payments and/or fees. Targeting rules also apply in respect of tax regulations (e.g. housing taxes), both at national and local level. In reality, Italian selectivity measures are characterized by a wide variation in the criteria used for targeting (Ferrera 2000): across time, across benefits, across levels of government, and across territorial areas. Second, there are problems with the definition of the income thresholds for the receipt of or the exclusion from various benefits. Finally, there are problems at the point of implementation and in relation to overall reliability of the selectivity instruments. In the 1990s, the issue of selectivity gained visibility in the national social policy agenda and the Prodi government, elected in 1996, made this issue a central point in its plan to reform the welfare state (Bosi and Matteuzzi 1997). The budget law for 1998 delegated the executive to take measures for the introduction of a new ‘Indicator of socio-economic conditions’ (Indicatore della situazione economica equivalente [ISEE]) to be used as a yardstick for all means-tested benefits and for the introduction of a new experimental scheme of ‘minimum insertion income’ (Reddito minimo di inserimento [RMI]). These reforms did not fully eliminate the distributive and allocative distortions of the Italian welfare state but they contributed to set more transparent and clear-cut boundaries between social insurance and social assistance. The new ISEE was finally introduced by a governmental decree in March 1998 (for details cf. Ferrera 2000). The new instrument was considered an important innovation with respect to the status quo. However, the ISEE decree limited itself to only setting national guidelines. It was the responsibility of benefit and service agencies themselves (the INPS, the NHS, and local governments) to issue detailed regulations concerning their sphere of action, with some margins for discretion. Another limitation was the fact that the scope of application of the ISEE did not include the main means-tested cash benefits. Upon insistence of the unions (and also the centre-right parties in opposition) social insurance benefits have been exempted from the application of the ISEE in order to be delivered under the old rules. This had been justified by the need to experiment with the new criteria ‘at the margins’, before applying them on a generalized basis. In June 1998 another decree introduced a second important innovation, the Reddito minimo di inserimento (cf. Alti and Maino 2000). This scheme was meant to be a non-categorical guaranteed safety net to counter poverty and social exclusion, through the support of economic and social conditions of persons exposed to the risk of social marginalization and unable to support themselves and their children for psychical, physical or social causes. The scheme consisted of two elements. First, a cash transfer equal to the difference between the available income of the household and a pre-defined poverty threshold, to © 2011 Blackwell Publishing Ltd.
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be adjusted with an equivalence scale. Second, an insertion programme aimed at fostering the ‘individual capacities’ and the ‘economic autonomy’ of the recipients. This programme has to be elaborated by the local government and required attendance at some training programme or the performance of some socially useful task for all those of working age. The Italian RMI was originally introduced experimentally in 39 municipalities, selected on the basis of socioeconomic indicators. This experimentation was evaluated at the end of 2000, with a view to transforming the scheme into a national (though decentralized) programme. Due to the lack of funds and to the high costs of implementation, after two more years the experimentation of the RMI scheme was definitely concluded. At the end of 2000 the reform of social assistance was finally approved. The scope of this reform was the creation of an integrated system of intervention and social services. Among the main points of the reform, we must mention new policies for family support, rearrangement of invalidity benefits and definition of professional skills of social workers. Regarding the criteria of eligibility, Law no. 328/2000 established universal eligibility to benefits with priority of intervention for individuals and families in economic need, physical and psychical inability. The economic conditions must be assessed through the ISEE test. Moreover, Law no. 328/2000 also established new procedures for monitoring and evaluation the quality of social services and structures and the creation of a social services data collection system. Competences are clearly defined and divided among local municipalities, provinces, regions and the state, and also the third sector is acknowledged. By the second half of the 1990s, the Prodi government were thus marked by a comprehensive reform of the social assistance sector.7 Financial problems were the spur for reforms that had modified the previous model of welfare state, which was no longer sustainable. The centre-left governments in place in the second half of the 1990s and their commitment to social reform opened up a window of opportunity for the social assistance sector – as was the case in the first half of the decade for the 1992–93 health care reform. The assessment of the social assistance reforms can be based on three main aspects that were also considered by the Onofri Commission in 1997 as the main objects to be achieved: the increase of social assistance expenditure; the introduction of a coherent and inclusive anti-poverty scheme; the re-launching of social services. First of all, as shown by Madama (2010), spending on social assistance policies, notwithstanding the increase of social needs, has decreased in ratio both to GDP (from 3.5 per cent to 3 per cent) and to total social expenditure (from 16.1 per cent to 11.9 per cent). Looking at the internal distribution of social assistance expenditure, still in the mid-2000s approximately 70 per cent of social assistance expenditure was, in fact, allocated to old age and disability functions. Second, the 1990s did not see any structural reorganization of anti-poverty measures. The monetary redistribution schemes of the early 1990s (the pension minima, the social pension, the civil invalidity pension with its accompaniment allowance, the family allowance, which had been made more generous yet without extending its coverage still reserved to employees) had been supplemented with further meanstested benefits.8 Third, the re-launch of social services had not come about. In 454
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fact, the only two exceptions are represented by Law no. 285/1997 on childhood and adolescence, the Childcare National Plan, and, as we mention in the fourth section, the 2007 Fund for long-term care.
The Two-Thousands: The Berlusconi Era between Conflict and Co-operation In 2001, two main events changed both the political scenario and the institutional framework of the second part of the 1990s. In May 2001, the centreright coalition won the national elections with a strong majority. Since 2001 (except for the new Prodi government in the years 2006–08), the centre-right coalition and its leader Silvio Berlusconi have ruled Italy. In October 2001, a national referendum confirmed the constitutional reform approved by the then-centre-left parliamentary majority in March 2001. Building on the legacy of the 1990s, the reform strengthened political decentralization, with a significant change in the constitutional balance of powers between central government and the sub-national levels of government. Political change brought a new set of priorities in the welfare reform agenda: the centre-right government concentrated its efforts on labour market and pension reforms. Compared to the centre-left, the Berlusconi government had a different attitude toward concertation. As it became clear with the publication of the White Paper on the Labour Market in October 2001, the centre-right government and, especially, the Minister of Welfare, Roberto Maroni, and its Deputy Minister, Maurizio Sacconi, wanted to shift from the 1990s concertation to new forms of ‘social dialogue’, in which the role of the government and social actors (unions and employers’ associations) was more distinct and clear-cut. Co-operation with unions and employers’ organizations had to be pursued to the extent that it might help policy design and implementation, but the consensus of social actors should not be considered as a necessary condition to promote structural reforms. This new attitude was reflected in the labour market reform, which generated very harsh conflicts with CGIL, the main, left-wing oriented union confederation. The reform, presented in 2001, was finally approved in 2003 (Law no. 30/2003), but the government failed in its attempt to modify Amendment 18 of the ‘Statute of Workers’, regulating the discipline on reintegration into the workplace in case of unfair dismissal, which had a very strong symbolic value. During these conflicts the government was initially successful in separating CGIL from the other main union confederations, CISL and UIL, which signed a new social pact (the ‘Patto per l’Italia’) in 2002, but the strength of the opposition to the Amendment 18 reform, mobilized by CGIL, as well as further political developments reduced the division among unions.9 However, similar dynamics in the relationship between government and social actors occurred in 2009–10, as is shown by the pact aimed at reforming the structure of collective bargaining signed by the government, CISL, UIL and other unions, but not signed by CGIL. Conflicts about labour market reform made it initially difficult to undertake a new pension reform, aimed at developing private pensions which should integrate the public ones (the ‘second pillar’ of the pension system) and at © 2011 Blackwell Publishing Ltd.
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introducing some restrictive adjustment to the 1990s reforms. However, this did not prevent government and Parliament from approving a substantially agreed pension reform in 2004 (Law no. 243/2004), after a policy-making process that lasted three years. The final version of the reform took into account many unions’ claims, along with those of the employers’ associations and of a part of the parliamentary majority. Although there was no concertation and unions made a number of relevant objections to the reform, the central government and the social partners were able to co-operate to introduce another important reform in the pension system. The former did not repeat the experience of 1994, when the first Berlusconi government failed to introduce a pension reform without the consent of the unions. Unions and employers’ associations, as in the 1990s, became aware of the need for a new reform in order to make the system sustainable and the external constraints directly or indirectly imposed by the EU and financial markets played an important role in the development of this awareness. Social consensus to the reform was then strengthened by the incremental and limited innovations introduced by the centre-left in 2007, which eliminated some disparities existing in the retirement conditions for different groups of workers, softening some restrictive clauses introduced by the 2004 reform. The impact of these changes on pension expenditure was expected to be insignificant in both the short and long term. While it was very active in labour market and pension policies, the Berlusconi government did not promote any structural reform in health care. This choice was determined, in part, by the new balance of powers between state and regions created by the 2001 constitutional reform. Since 2001, the central government has found it very difficult to implement significant reforms without the consent and the involvement of the regions. This is true not only for reforms aimed at changing the organization and management of the health care system, but also for any policy aimed at pursuing relevant health targets and, in part, also at containing the health care costs. However, 1990s decentralization and 2001 constitutional reform have not deprived the state of all powers and responsibilities in the health care sector. Instead, central and regional governments are involved in a permanent political and technical confrontation that might result in a substantial paralysis in national health policy-making or in the development of negotiated policies. In this context, practices of institutionalized joint policy-making have been developing from 2000–01 onwards, leading to a series of ‘Accordi’ (agreements) or ‘Patti’ (pacts) signed in the State–Regions Conference and then converted into legislation by the Parliament. The State–Regions Conference includes the Prime Minister as President of the Conference, the Presidents (or ‘Governors’) of the regions or other ministers whenever matters related to areas of their competence are discussed. Instituted in 1988 and strengthened in 1997, after 2001 the Conference came to play a leading role in policy-making for those sectors, which were the object of an intense devolution, such as health care. It should ensure means of close co-operation and well-timed collaboration between state and regions, respecting, at the same time, the decentralized nature acquired by the NHS. 456
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So far, the Conference has concentrated its main efforts on financial matters and the issue of regional deficits. The most relevant agreements signed in the Conference have concerned the control of expenditure growth. These agreements are among the main instruments employed by central government to oblige regions to respect financial conditions agreed with the Pact of Stability.10 As we have seen in the previous sections, cost-containment policy has always been prominent in health care policy-making. Disputes between state and regions about the attribution of responsibility for deficits and recovery interventions have been very frequent since the foundation of the NHS, but after entry into the EMU and the decentralization process it became urgent to define stable arrangements to tackle the problem (cf. Maino 2001a, 2009a). In the 2005 Entente, central government and the regions agreed on a multi-step mechanism of regional expenditure monitoring and recovery plans in case of excessive deficits. In case the regions accumulate serious deficits and miss spending targets, the agreement includes the activation of automatic mechanisms (like an increase in regional taxes) and that of a strict supervision of regional expenditure policies by the Treasury. The Treasury may appoint a commissioner in charge of NHS administration in that region and impose specific measures to reduce deficits, thereby introducing severe limitations to regional autonomy. So far, the recovery plan mechanism has been implemented in seven regions, all located (apart from Liguria) in the centre-south and five of them have been the object of administration by a commissioner. In the second part of the decade, joint policy-making has been extended to non-financial issues, though with difficulties. Specific clauses or parts of the state–regions agreements concerned the design and implementation, at regional level, of national prevention strategies, programmes of promotion of population health or waiting list targets negotiated among central and regional governments. Beyond health care, social care is included in the devolved sectors as well, although powers and responsibilities are shared with local governments (provinces and municipalities), which have an important role in local planning, financing and in providing services, along with the private sector (especially the not-for-profit organizations). As happens in health, joint policy-making in the social assistance sector may be developed in the Conference of State, Cities and Local Autonomies, which includes central government and local government representatives, and in the State–Regions Conference itself. However, decentralization had a different impact on social care, where national policy has historically been weak, and most initiatives have been carried out by local government. The 2001 constitutional reform complicated the implementation of Law no. 328/2000, thus hindering the process of homogenization in social services provision, which would have been triggered by the 2000 social assistance reform (cf. Naldini and Saraceno 2008; Madama 2010). Beyond this, the reform did not help the institutionalization of a national social policy, which had always been low, while the State–Regions Conference and the other co-operation mechanisms among different tiers of government were not able to develop an effective alternative framework for national policy-making. In the context of cost-containment policy, this contributed to the scarce investment in social policy matters at national level. © 2011 Blackwell Publishing Ltd.
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While in November 2001 the Minister of Health set out the ‘Essential Levels of Care’, defining the (wide) health care service packages which have to be provided by regional health services and guaranteed by the central government (see the third section), the ‘Essential Levels of Social Care’ (Livelli Essenziali di Assistenza Sociale [LIVEAS]) have never been determined by central government, even though this may be considered one of its main competences after political decentralization. Moreover, although it was long requested by the regions and its urgent need was widely recognized, fears of an expenditure explosion induced central government to progressively postpone the introduction of a national Long Term Care (LTC) Fund for dependent elderly people, many times publicly announced between 2001 and 2005. The LTC Fund was then instituted by the centre-left government in 2007 to develop care services, but its budget has always been largely insufficient compared to needs. The main national policy in this field, however, was the regularization of individual carers, mostly foreign women, in the illegal market existing in social home care. The regularization, carried out in 2009– 10, was mainly managed by the Ministry of Interior, as were similar policies undertaken in the past. The economic and financial crisis, which started in 2007–08, pushed central government to severe cuts in public expenditures, especially after the explosion of the Greek case in 2010. The pressures exerted by financial markets on the sovereign debt of European countries with a huge public debt, obliged the Italian central government to respect the conditions of severe financial discipline. Since 2008, the public sector has been subjected to severe cost-containment policies. Among the public services, schools and education have been subjected to severe cuts in the budget, matched with structural reforms. In 2010 the government adopted a three-year freeze on salary increases and strict limitations to new recruitment in the public sector as a whole. Change in the public sector also includes the decision to raise the retirement age for women from 60 to 65 years, as it is for men, from 2012, while the alignment was previously expected to be gradual and completed by 2018. However, the acceleration was forced by a 2008 sentence of the European Court of Justice, which judged the gender difference in retirement age provided for in the public pension scheme to be at odds with the EU principle of equal treatment. Except for this change, so far the retirement system has not been modified. After the radical changes of the 1990s and the 2000s, contribution and expenditure in the pension system are perceived as being in balance, though pension expenditure is still burdensome for public finance and, despite this, future pensions risk being very low for many groups of young workers. Further restrictive reforms would encounter the close-knit opposition of all the unions in the case of the pension system, thwarting the centre-right government strategy aimed at dividing CGIL left-wing unions’ confederation from the other main confederations. The financial crisis strengthened the already existing cost-containment policies in health and social care, while structural reforms are not on the political agenda and would be probably made ineffective by the regions’ opposition. In the health sector, central government once again focused its 458
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policy almost exclusively on the control of regional expenditures. However, this choice was also related to its general attitude of co-operation with regions and sub-national levels of government. Taken as a whole, the Berlusconi government has shown a limited interest in developing joint policy-making, interpreting its role primarily in terms of ‘financial watchdog’, emphasizing the functions of monitoring and control of the regions’ expenditure behaviour. This attitude, typical of the period 2001–05, re-emerged in 2009–10, with a key role, in both periods, played by the Treasury.11 Apart from education, in 2010 social assistance was one of the main victims of the budget cuts. National funds as well as regional transfers for social policy were object of severe curtailments and the State–Regions Conference was not able to redress these decisions, which caused harsh conflicts between central government and the regions. As a result, social care provision is likely to continue showing relevant territorial differences in the future, as it has always been in Italy. In 2009–10 the employment consequences of the crisis made evident the deficiencies of the Italian system of protection against job loss, which leaves important segments of the labour force (such as many employees of small enterprises and non-standard workers) with inadequate or absent coverage. This is worsened by the absence of a generalized minimum income scheme. Although stimulated by a wide intellectual debate, the government did not take any relevant measure, except for loosening the eligibility requirements and extending the maximum duration of the main social shock absorber, the Cassa Integrazione Guadagni (CIG). This is a short-time work scheme aimed at subsidizing a temporary reduction in working time, maintaining the employment relationship. The measures adopted by the government extended CIG to previously excluded sectors, but left a considerable number of workers (especially non-standard workers) without social protection, given the persistent difficulty, for these sectors of the labour force, to enjoy unemployment benefits (cf. Sacchi et al. 2011 (this issue)). A redistributive reform, aimed at including outsiders, is considered neither necessary nor economically and financially sustainable by central government. In brief, so far the economic and financial crisis has stimulated relevant budget cuts, but has not resulted in any attempt towards structural reform in the welfare system. Key actors perceive the condition of the public finances as needing constant monitoring, but not so serious as to require structural changes to welfare institutions and programmes. Although the level of public debt as a percentage of GDP approximated 120 per cent in 2010, it is considered to be under control. Moreover, in 2011, after the split suffered by the Berlusconi party in the second part of 2010, the government holds a very weak majority in the Senate and it does not seem to be in the position to undertake relevant reforms without the consent of the social partners.
Conclusions – Welfare Reforms between External Constraints and Endogenous Dynamics Welfare state reforms carried out in the last three decades look different both in process and in results. During the 1980s, political actors began to recognize © 2011 Blackwell Publishing Ltd.
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demographic and welfare expenditure problems, issuing some alarming reports and establishing various commissions to tackle the problems, thus sustaining the debate on social policy reforms. But no important measures were adopted and the decade was characterized by policy stalemate. By contrast, more far-reaching reforms have taken place in Italy in the 1990s. The pension reforms of 1992–93, 1995 and 1997 fundamentally altered the structure of the Italian public pension system, stabilizing old-age expenditure and introducing mechanisms to contain future costs. The health care reforms of 1992–93 and 1999 contributed both to progressively decentralize the Italian health care system and to introduce managerialization and managed competition, then converted into managed co-operation. In 2000 the long-awaited framework law on social assistance was finally approved, setting general principles and guidelines along which the integrated system of interventions and social services should have developed. Therefore, the 1990s have marked a turning point in the development of the welfare state as well as in Italian politics as a whole, with the collapse of the old party system. This, in turn, has been paralleled by a significant change in the style and the content of policy-making. Such change is most clearly visible in macro-economic and financial policies, but even the reforms in the fields of pension, health care and social assistance can be considered as good cases in point, representing a serious attempt to redress the major distortions of the Italian welfare model. Difficulties and hesitations – as well as the legacy of the past – certainly slowed down this process of adjustment. However, the constraints imposed directly or indirectly by international regimes and especially by the EU became an increasingly powerful stimulus for pushing through measures of welfare retrenchment and rationalization of the social protection system. Another important feature of the 1990s reform cycle is the strongly negotiated character of innovations: almost all reforms were introduced via consensual concertation between the government and organized interests (Regini 2000; Fargion 2001; Ferrera and Gualmini 2004; Baccaro and Lim 2007). The agreements of 1992 and 1993, the 1992 reform of both pension and health care, and the new pension reform of 1997 were outcomes of that strategy. With Prodi’s ‘Pact for Employment’ in 1996 and D’Alema’s ‘Christmas Pact’ in 1998, concertation became a structural strategy. However, concertation and social pacts are a method that cannot be taken for granted. Since 2001, the new centre-right government tried to carry out important reforms in the labour market substituting concertation with forms of softer ‘social dialogue’ with the social partners, and was willing to proceed without the consent of all relevant actors. This attempt was only partially successful and the 2004 pension reform represented a return to a more consensual approach. However, after the brief experience of the new Prodi government between 2006 and 2008, the Berlusconi government elected in April 2008 adopted the same partially exclusive strategy of the early 2000s, determining a serious conflict with the biggest left-wing oriented confederation, CGIL, about the new contract model. Many signs indicate that the government is determined to pursue this strategy to reform industrial relations and in future years it might try to extend it to labour and pension policies. 460
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At the same time, joint policy-making between different levels of government has been developed in health and social care, in order to coordinate national and regional policies after the 2001 constitutional reform. The need to respect the European and the internal pacts of stability had a double effect on joint policy-making in these two sectors. First, it contributed to stabilizing the new governance mechanisms based on the role of the State–Regions Conference and of the other similar instruments designed to promote co-operation among the different tiers of government. The institutional framework inherited by the reforms of the 1990s and 2001 certainly acted as an internal constraint on central government and the regions. Both actors became increasingly aware that strict policy coordination was necessary, especially in health care, if they wanted to avoid substantial paralysis in national policy-making. In this respect, the main actors were subject to the well-known mechanism of institutional path dependence (Pierson 2004), which limited their options and made co-operation a very convenient choice, even if they were not originally oriented toward this option. However, the EMU rules and financial market pressures strengthened the necessity of co-operation, continuing to call central government and the regions to coordinate their actions in order to keep health and social expenditure under control. Second, the external constraints heavily conditioned the content of the joint policy-making, which was mainly, though not exclusively, focused on cost containment. In social care, where devolution hindered the implementation of the 2000 reform in many ways, the need for discipline in public finances contributed to the confirmation of the traditional scarce investment in this sector by central government. This set of external and internal factors proved to be directly or indirectly effective even in the presence of an actor, such as central government, which was often reluctant to co-operate with the regions, regardless of the political orientation of their governments, tending to emphasize its functions of control of the regional expenditures and adopting in many cases an adversarial approach. Joint policy-making is still not fully institutionalized but it showed an unsuspected resilience. In this context, the economic crisis that struck the world economy in 2007–08 and the related financial crisis have not yet stimulated new reforms. Social tensions and unemployment problems prompted by the crisis seem to have pushed political and social actors to remove structural reforms from the political agenda. Like that of the 1970s, the crisis of the late 2000s seems to show, with reference to the reform of the Italian welfare state, that economic and financial crises contribute to reveal and exacerbate the problem, but they do not necessarily help to introduce structural reforms. The 1990s’ experience seems to show that welfare reforms require two specific conditions. The first is the perception of the existence of a real economic, social or financial emergency by all the key actors. This perception is at the moment lacking, but it might emerge in the future, given the pressure exerted by financial markets on countries with high sovereign debt. Second, a reform of the Italian welfare system needs changes in the political system, that in turn might generate windows of opportunity and widespread © 2011 Blackwell Publishing Ltd.
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consensus or willingness to reform. This second factor seems to be very far from being realized, even though political difficulties encountered by the centre-right government in 2010 and early 2011 might evolve into a wide restructuring of the party system. Therefore, crises tend to favour buffer solutions, as shown by the system of job loss protection, or push actors to concentrate on budget cuts without changing welfare institutions. Economic factors need to be matched with political factors that, in the last resort, seem to be decisive in triggering the process of welfare recalibration.
Notes * 1. 2. 3.
4.
5. 6.
7. 8. 9. 10. 11.
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Although this article is the fruit of common work, the second and third sections were written by Franca Maino, and the first, fourth and fifth sections by Stefano Neri. On the concepts of political and social learning, see Hall (1993) and Schmidt (2008). These practices were fostered by the process of regional strengthening, which took place in the 1990s (cf. Maino 2001a, 2009b). Traditionally, old age pensions absorbed ca. 65 per cent of total social protection expenditure compared to an average of 45 per cent in the other European member states, while family benefits absorbed ca. 3 per cent of total social protection expenditure compared to an average of 8 per cent (cf. Eurostat dataset, http://epp.eurostat.ec.europa.eu/portal/page/portal/eurostat/home/). Italy is traditionally characterized by very remarkable geographical differences in social and economic terms, which is known as the north-south divide: lower economic development and income levels as well as higher unemployment rates in the southern regions; different mix between public–private employment in the south compared to the centre-north, with the former more dependent on the public sector. For more details on Italian pension reforms, including that of 2004, see also Natali (2007) and Jessoula (2009). The process might have recently come to a turning point, with the approval of Law no. 42 in May 2009, which introduces forms of fiscal federalism giving the regions substantial powers of taxation and other significant innovations in the state–regions relationships in the financial field. However, in order to be implemented, the reform will require the approval by Parliament of other bills in the next two years. This process should clarify the real character and impact of a reform whose functioning and effects are still unclear and in practice unpredictable. For further details on social assistance reforms in Italy, see also Fargion (2004) and Madama (2009). Among them a fund to support access to rented accommodation, an allowance for families with three or more under-age children and a maternity allowance for mothers without insurance coverage, all introduced in 1997–98. For details on the labour market reforms in Italy in the 1990s and in the 2000s, see Samek Lodovici and Semenza (2008). Of these agreements, the most important are perhaps the ones of 3 August 2000 and 8 August 2001, the Intesa (Entente) signed on 23 March 2005, the ‘Patto per la salute’ (Pact for Health) signed in 2006, then renewed in 2009. For deeper analysis of the role of the State–Regions Conference in the governance of the NHS, cf. Neri (2009, 2010). © 2011 Blackwell Publishing Ltd.
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The Economic Crisis as a Trigger of Convergence? Short-time Work in Italy, Germany and Austria spol_785
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Stefano Sacchi, Federico Pancaldi and Claudia Arisi Abstract In all European countries, emergency policy measures have been introduced in order to counteract the employment consequences of the economic crisis. In the context of variously composed anti-crisis packages, many European countries have used Short-Time Work (STW) schemes, that is measures to subsidize a temporary reduction in working time intended to maintain an employment relationship. This article focuses on the issue of whether the economic crisis has spurred any convergence in the use of STW in three social-insurance countries – Austria, Germany and Italy – or whether policy change has rather occurred in a path-dependent fashion. In order to do so, the article also adopts a systemic approach, focusing on relationships of complementarity or functional substitution and equivalence among the various schemes comprising income maintenance systems to tackle the risks of partial or total unemployment. spol_785
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Keywords Short-time work; Unemployment compensation; Social protection; Convergence; Path dependence Introduction As the crisis started to hit their economies, all European countries adopted more or less comprehensive policy packages in order to sustain employment levels, offset the social consequences of the crisis, and enhance firms’ competitiveness (Eurofound 2009; European Commission 2010). The actual composition of anti-crisis packages differed widely across Europe by type of intervention (Pisani-Ferry and Van Pottelsberghe 2009) and financial effort (Watt 2009). Most countries, though, have adopted measures to subsidize temporary reductions in working time, by strengthening existing programmes or introducing brand new ones (Arpaia et al. 2010; Eurofound 2010). Following the terminology in use, we refer to these schemes as Short-Time Work (STW). Address for correspondence: Stefano Sacchi, Department of Labour and Welfare Studies, University of Milan, Via Conservatorio 7, 20122 Milan, Italy. Email:
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As compared to other instruments of income support, STW is fundamentally aimed at avoiding the dissolution of employment relationships. Its political attractiveness thus results from the fact that it upholds employment levels. However, it is a discretionary measure, in that the concession of benefits does not automatically stem from the emergence of a social risk but is rather dependent on approval on the part of the public authority. Also, it is generally for employers – or in certain cases, works councils – rather than workers to file a request for the concession of benefits. On the whole, STW does not constitute an individual social right for workers. STW schemes can nonetheless be framed as part of the broader income maintenance system in many welfare states, and especially in Bismarckian ones, within and outside Europe. It seems interesting to analyze comparatively the strategies of use of STW during the economic crisis which started in 2008. We do so upon the theoretical presumption that an exogenous shock of such magnitude could bear the ‘capacity’ (Cartwright 1994) to trigger processes of change able to overcome differing institutional legacies, and to induce phenomena of policy convergence in advanced capitalist countries. This article focuses in particular on the issue of whether there has been convergence in the use of STW in three social-insurance countries – Austria, Germany and Italy – where it has been in place for decades but has always served quite different purposes, or whether policy change has rather occurred in a path-dependent fashion. In Italy, STW has constituted an inherent part of the post-war unemployment compensation system. To be precise, it has been the pivotal scheme of income protection, at least for workers in the core sectors of the economy. In Austria, STW has been in place for some 40 years, but the presence of functionally equivalent schemes has limited its scope and institutional importance. Germany seems an intermediate case, where STW has long been an important element in the income maintenance system, but it has been traditionally used with a very specific political economic purpose, namely that of hoarding skilled labour in firms in the face of strong fluctuations of product demand. As a matter of fact, STW displays a dual nature. On the one hand, it is a social policy instrument, aimed at supporting worker income in case of joblessness. On the other hand, it is intended to allow firms to retain their highly trained workforce, so as to avoid human capital dispersion as a consequence of redundancies. As such, STW constitutes an industrial policy instrument, particularly in those models of capitalism which rely on the production and reproduction of asset-specific skills (Estevez Abe et al. 2001; Thelen 2001). From a theoretical point of view, therefore, one can expect relevant differences in the configuration, development and effective use of STW in countries belonging to different varieties of capitalism. A good deal of institutional difference between STW schemes in Italy, on the one hand, and Austria and Germany on the other hand can be understood in this way. Despite differences in their institutional design and role, STW schemes have constituted the principal policy instrument for counteracting the employment crisis in all three countries. Governments have implemented policy adjustments to such schemes in order to modify their conditions of use, which made them prima facie more similar than could have been expected on 466
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the grounds of the varieties of capitalism (VoC) literature (Hall and Soskice 2001; Hancké et al. 2007). However, the assessment of convergence in the functioning and use of STW schemes becomes more blurred if, rather than considering STW schemes per se, a systemic approach is adopted, whereby the analysis focuses on relationships of complementarity or functional substitution and equivalence among the various schemes comprising income maintenance systems to tackle the risks of partial or total unemployment. When seen under these analytical lenses, STW schemes still perform persistently divergent functions in the three countries. The next section provides an institutional contextualization of STW. The third section describes the institutional features of STW schemes in Italy, Germany and Austria prior to the economic crisis, while the fourth section focuses on the STW within the income-maintenance system in the three countries. The fifth section compares the main policy adjustments enacted in the three countries during the crisis. The article concludes by interpreting the different policy responses in the light of institutional complementarities, investigating whether convergence in the use of STW can be ascertained, despite different policy legacies.
Short-time Work in Different Institutional Arrangements Although widely used during economic downturns, STW has been relatively under-researched by social policy scholars. With notable exceptions, the comparative study of income maintenance schemes has tended to focus on more conventional unemployment benefits (UB).1 STW provides a wage replacement allowance in order to compensate a temporary reduction in working time set in place in order to ensure the continuity of an existing employment relationship. It can generally cover two distinct types of risks: conjunctural crises – stemming from temporary downturns, thus limited in time and consequences – and structural crises, due to lengthier processes of firm restructuring which may still result in future redundancies. While employees may chiefly regard STW as an instrument of job and income security, from the employers’ point of view STW allows the management to hoard labour – in particular, skilled labour – during temporary downturns without incurring turnover costs: dismissal costs on the one hand, and costs pertaining to recruiting and training the new workforce after weathering the storm on the other hand. Differences can be expected in the institutional design and role performed by STW in a given country’s political economy, according to which variety of capitalism it belongs to: • in liberal market economies (LMEs), characterized by general skills, low employment protection and low UB, STW can be expected to play a residual role, as firms need only retain a small portion of the trained workforce and will generally opt for (external) numerical flexibility as the most convenient strategy. In these countries, STW actually takes the shape of temporary lay-offs, during which workers count as unemployed; © 2011 Blackwell Publishing Ltd.
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• in coordinated market economies (CMEs), the enabling role of the state (Streeck 1997) and co-operative industrial relations push firms to seek for consensual plant-level strategies during downturns, in order to retain their skilled workforce and maintain employment. This takes place on the background of relatively strict dismissal protection and the diffusion of asset-specific skills in the core workforce which makes workers costly to train and less interchangeable than in LMEs. STW performs the function of helping firms retaining their skilled workforce, while comparatively generous UB and activation measures provide an active safety net for workers made redundant; • mixed market economies (MMEs) constitute a hybrid model, in which a dualistic production system, with a minority of large manufacturing companies and a diffuse layer of micro- and small enterprises, creates multiple differentiations in terms of needed skills (Regini 1997). Hence, MMEs are associated with a fragmented configuration of varying levels of job protection and UB, pertaining to specific segments of the workforce (Molina and Rhodes 2007). Given adversarial industrial relations and a pervasive role of the state (Schmidt 2002), STW is oversized as compared to CMEs as its resources are used as currency of ‘political exchange’ between the social partners and parties in government for the purpose of maintaining the income of the core workforce (Pizzorno 1978). Although the VoC approach provides useful insights in broadly understanding the role of STW schemes in different political economy regimes, its utility seems limited when one intends to consider the possibility of policy change induced by exogenous shocks, as was the case with the 2008 financial crisis. The VoC approach naturally leans towards emphasizing persistence, insofar as actors’ expectations are patterned and stabilized by existing institutions, which – as regards welfare institutions – are basically the outcome of production necessities (hence the concept of welfare production regime: see Estevez-Abe et al. 2001; Iversen 2005). Given these premises, shocks will be absorbed within each political economy regime, inducing largely path-dependent policy change. The analytical level and the theoretical tenets of the VoC approach tend to pre-structure the answer to the question whether massive exogenous shocks can induce policy convergence in countries belonging to different political economy regimes, or policy innovations tend to be incremental instead. Hinrichs (2000) moves a similar criticism to the analytical perspective that focuses on regimes in order to study social policies.2 He contrasts a programme approach to the regime approach as the best suited analytical perspective in order empirically to answer research questions concerning issues of change and convergence in social policy. However, it seems that two levels of understanding of the concept of ‘single policy programme’ can be identified. While the general examples made to illustrate the programme approach refer to broad entities, often overlapping with policy fields (Hinrichs himself refers to pension policy), the empirical referents of the concept tend to be, in practical terms, single policy measures, understood as social protection schemes performing a specific function, such as the STW. 468
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In light of this, we find it particularly promising, for heuristic purposes, to adopt a middle-ground perspective between the one focused on regimes and that focused on single social policy schemes. Following an intuition by Kvist (1998), this analytical perspective can be identified as a systemic one, focusing on the various measures that empirically contribute to fulfil given social needs, and on the relations that occur between them, be they of functional complementarity, overlapping, or substitution. In this article, adopting a system approach entails focusing on the overall income maintenance system in case of no or reduced employment, comprising various programmes in addition to the STW, notably unemployment insurance and unemployment assistance, but also social assistance, and even temporary suspension schemes. We will thus ascertain whether possible convergence in the policy design of specific measures such as STW schemes is matched by convergence in the role played by such measures in the overall system, or whether there could be convergence at the specific programme level, coupled with persisting divergence at the system level. In order to do so, it is however necessary to sketch out the design and institutional features of STW in Italy, Austria and Germany as they were regulated before the changes introduced to counteract the economic crisis. While such changes are analyzed in the fifth section, it is the functioning of STW before the crisis that has moulded its role in each country’s income maintenance system.
STW before the Crisis In all the countries considered, conjunctural STW schemes have long been inherent parts of the income maintenance system in case of non-employment.3 However, only Italy (in 1968) and Germany (in the late 1980s) introduced structural schemes. The granting of STW is conditional to an evaluation of the economic reasons put forward by the employer, and in all three countries workers on STW are retained on the firm’s payroll. Further similarities concern the contributory basis of the schemes, their targeting at the firms’ core workforce, and the exclusion (at least before the anti-crisis interventions) of apprentices, temporary agency workers (TAW), ‘economically dependent workers’ and managers. Upon these shared bases, STW schemes differ between the three countries. Table 1 provides a synoptic view of the institutional aspects of greater difference before the changes introduced to counteract the employment crisis: eligibility rules for firms and workers, generosity in terms of length and wage replacement level, and costs for firms. To begin with, Kurzarbeit schemes in Germany and Austria are accessible to all types of firm, regardless of their size or economic sector, whereas in Italy, both conjunctural (Cassa Integrazione Guadagni Ordinaria [CIGO]) and structural (Cassa Integrazione Guadagni Straordinaria [CIGS]) STW are reserved to particular sectors (and CIGS to large firms only). By contrast, in Germany and Austria firms must have exhausted all other alternative options (holidays, work-sharing arrangements, etc.) before accessing Kurzarbeit, and requirements regarding the involvement of a minimum © 2011 Blackwell Publishing Ltd.
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Costs for employers
Specific contribution to CIGO insurance: 1.90% (2.20% for firms with more than 50 employees) Upon usage, 4% of STW benefit (8% for firms with more than 50 employees) Social contributions entirely taken over by the state (both employer’s and employee’s share; the employee pays 5.84% of the STW benefit)
Specific contribution to CIGS insurance: 0.90% (2/3 employer, 1/3 employee) Upon usage, 3% of STW benefit (4.5% for firms with more than 50 employees) Social contributions: as for CIGO
Three months in a row, extendable Up to 48 months for restructuring (24 up to 12 months in two years + 12 + 12) 80% of hourly gross wage per non-worked hour; ceilings: €892 gross per month for gross monthly wage up to €1,931; €1,073 per month above
Benefit length
Benefit amount
Dependent workers No apprentices, no TAW, no independent contractors
Eligibility – workers
Manufacturing, crafts tied to manufacturing Must employ more than 15 employees (some more than 50, others more than 200) Dependent workers, at least 90 days of firm seniority Excluded workers as CIGO
Manufacturing, agriculture Excluded: crafts, services
Italy – CIGS (structural)
Eligibility – firms
Italy – CIGO (conjunctural)
Six months, extensions up to 24 months Same level as UB: 60% of net wage per non-worked hour (67% with children) + possible top-up to wage at the firm level Unemployment insurance contribution rate: 4.2% until 2008; 2.8% between 2008 and 2010; 3% as of 2011 (1/2 employer, 1/2 employee) Upon usage, employer charged with social contributions (including the employee’s share) on 80% of the wage for non-worked hours (worked hours as usual) Reduced social contributions after six months, or if training provided
Dependent workers No apprentices, no TAW, no independent contractors
All firms At least 1/3 of workforce with loss of 10% monthly wage STW as last resort
Germany – Kurzarbeit
Institutional features of STW schemes before the crisis in Italy, Germany and Austria
Table 1
Same level as UB: 55% of net wage per nonworked hour + possible top-up to wage at the firm level Unemployment insurance contribution rate: 6% (1/2 employer, 1 /2 employee) Upon usage, employer charged with social contributions on the full wage for non-worked hours (while not mandated by law, collective agreements generally charge the employer also with the employee’s share)
Dependent workers covered by social insurance No apprentices, no TAW, no independent contractors Three months
All firms Max 80% working time reduction STW as last resort
Austria – Kurzarbeit
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share of the workforce (Germany) or a maximum reduction in working hours (Austria) are set.4 Also, while in Italy CIG constitutes a separated fund vis-à-vis the unemployment insurance fund, in Germany and Austria financial resources are drawn from a single fund. This helps in understanding some of the following differences in terms of generosity for workers and of costs for firms. In general, the Italian CIG appears comparatively more generous in replacement rates and length of benefits than the German and Austrian Kurzarbeit. CIG replaces up to 80 per cent of the wage as opposed to 60 per cent of ordinary unemployment benefits, while in Austria and Germany there is no difference between the two schemes in this respect.5 Moreover, if the length of CIGO is comparable to Kurzarbeit in Austria and Germany, the maximum length of CIGS by far exceeds all other schemes (up to 48 months, including all extensions). Costs of STW for employers are also lower in Italy. True, a firm eligible for CIGS has to pay an overall contribution (for CIGO, CIGS and UB: 4.71 per cent) higher than an Austrian or a German firm. The difference lies in the costs for firms upon usage. When using STW, the only cost for employers is a special contribution to the STW insurance which is never higher than 8 per cent of the STW benefit. Social contributions are completely taken over by the state for the part exceeding a flat-rate contribution paid by workers. In Germany and Austria employers incur in much higher costs. In Germany they are charged with the total amount of social contributions (including the employee’s share) for the first six months, albeit calculated on 80 per cent of the wage corresponding to non-worked hours; in Austria, thanks to collective agreements, this takes place on the entire wage corresponding to non-worked hours.6 Moreover, in both countries collective agreements at the firm level may – and generally do – provide that the employer tops up the benefit. Finally, the Italian CIG stands out for the discretionary role assigned to the public authority. Consultation with works councils is mandatory for a CIG request to be filed. Nonetheless, an agreement between the social partners at the firm level is not binding for the concession of benefits, as it is a tripartite committee at the local level chaired by representatives of the Labour Ministry which ultimately decides over the granting of CIG, and negotiates possible extensions, on a case-by-case basis. By contrast, in Austria and Germany the gatekeepers of the whole process are instead the works council, whose agreement is mandatory for an STW request to be valid. To sum up, already at the programme level Italy’s CIG displays rather peculiar features as compared to its Austrian and German counterparts. However, it is the systemic placement of STW schemes in the overall institutional framework of income compensation systems that make a real difference between Italy, on the one hand, and Germany and Austria, on the other. This is what we turn to in the next section.
A Systemic Approach: STW and Income Maintenance The cases of Italy, Germany and Austria display different models of institutional interplay between STW and unemployment benefit systems, albeit on the grounds of a similar insurance-based logic. In fact, the Italian CIG © 2011 Blackwell Publishing Ltd.
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has traditionally worked as a functional substitute for a weak UB system, which also provides for no general minimum income scheme. In contrast, German and Austrian Kurzarbeit seems to exert a complementary function on a comprehensive set of UB, despite some differences between the two cases.
Italy Italy features a UB system exclusively centred on social insurance, accompanied by neither unemployment assistance nor any generalized social assistance scheme. Table 2 provides the institutional characteristics of the main existing schemes. Ordinary unemployment benefits (indennità di disoccupazione a requisiti pieni [OUB]) are formally accessible to all dependent workers, with the exception of apprentices and independent contractors, the latter being considered as self-employed. In fact, as Berton et al. (2009) show, the fulfilment of a double eligibility threshold (insurance seniority coupled with accrued contributions) constitutes a severe barrier to new entrants in the labour market as well as to workers with discontinuous employment histories stemming from nonstandard employment: although formally entitled, only 40 per cent of fixedterm workers, and as little as a third of TAW manage to receive such benefit when they become unemployed. Maximum benefit length (eight months; 12 for elder workers) is generally shorter than CIGO (12 months) and certainly than CIGS (four years). Although targeted at discontinuous workers (fixed-term, TAW and seasonal workers), the scheme with reduced eligibility requirements (indennità di disoccupazione a requisiti ridotti [RUB]) maintains a fully-fledged social insurance logic. While the contributory requirement is sensibly diminished, the insurance seniority requirement remains unvaried. All in all, almost 40 per cent of fixed-term workers and half of TAW do not get any kind of benefit when they become unemployed (Berton et al. 2009). As mentioned, there is no minimum income scheme, thus those who do not qualify for either FUB or RUB are left without any resources from the welfare state. Besides ordinary and reduced UB schemes, a non-rights based scheme stands out in the Italian unemployment compensation system: mobility allowance (indennità di mobilità). This very generous scheme (particularly in terms of length) caters only to those open-ended workers made redundant by large industrial firms, typically as a consequence of the exhaustion of CIGS benefits or of collective dismissals. It does not qualify as a proper social right, as it is subject to the same procedures as CIG, and therefore to a discretional approval on the part of the public authority. To summarize, the traditional configuration of institutional complementarities in the Italian welfare system leans towards the prominence of STW as a functional substitute for a defective set of automatic and inclusive UB, to the sole advantage of workers in the more unionized sectors. On the firm side, STW constitutes an instrument of internal flexibility against the background of the strictest regulation in the Organisation for Economic Co-operation and Development as regards collective dismissals. 472
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Insurance seniority: two years; contributory requirement: 52 full weekly contributions in the last two years Eight months, 12 months if aged over 50
60% of gross wage up to six months; 40% for the following two months; 30% for further months; ceilings as for CIG
Eligibility
Amount
Length
Only dependent workers, no apprentices, no independent contractors
Entitlement
FUB
35% of previous wage up to 120 days; 40% afterwards; ceilings as for CIG
Number of days in the reference year, with a maximum of 180 days
Only dependent workers, apprentices only if previously qualifying job spell, no independent contractors Insurance seniority: two years; work requirement: at least 78 worked days in the year the benefit is claimed for
RUB
The Italian income maintenance system (2010)
Table 2
Dependent on worker’s age and geographical location: south – up to 48 months for individuals aged over 50; north – max. 24 months 80% of previous wage during first year, 64% for the following years; ceilings as for CIG
Firm seniority over 12 months (of which six months effectively worked)
Only dependent, open-ended workers in firms eligible for CIGS
Mobility allowance
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Germany Contrary to what happens in Italy, German Kurzarbeit provides no better treatment than unemployment insurance (Arbeitslosengeld [ALG I]), as shown in table 3. Also, as regards coverage, the German UB system is more inclusive than the Italian one. Eligibility to ALG I requires a contributory record of one year in the last two, but no insurance seniority. Moreover, under certain conditions (basically, having been previously insured by virtue of a qualifying job) the self-employed can (since 2006) voluntarily opt-in to unemployment insurance. Marginal workers, i.e. part-timers earning less than a given threshold, are excluded.7 On the other hand, the 2005 Hartz reforms markedly reduced the length of ALG I especially for older workers. Finally, unlike Italy, Germany has in place a comprehensive social assistance package, comprising a minimum income scheme for those unable to work (Sozialhilfe) on the one hand, and social assistance for jobseekers and their families (Grundsicherung für Arbeitsuchende) on the other. The latter comprises Arbeitslosengeld II (ALG II), which in 2005 replaced the old unemployment assistance and merged it with social assistance for those able to work, and a benefit (Sozialgeld), which can be accessed by ALG II recipients’ family members unable to work. Austria STW has traditionally played a limited role in Austria, as compared to Germany and Italy. This is due to the configuration of the income maintenance system in Austria, which provides alternatives to Kurtzarbeit which are better valued by the employers. In particular, temporary suspension arrangements (Aussetzverträge) are a functional equivalent to STW. These consist of a voluntary agreement between employees and their employer to terminate the employment relationship in time of crisis and re-establish it during good weather. The agreement can entail a unilateral obligation on the part of the employer only, or be binding also for the employee. Suspension arrangements are far more attractive to employers than STW. They are cheaper for them, as workers register as normal unemployed and income support is provided by unemployment insurance or social assistance, so employers do not pay any social contributions for the suspended workers. Besides, employers are forced neither to prove their economic condition before the public authority and bear administrative costs, nor to enter negotiations with works councils. Not only is there a well-oiled functional equivalent to STW, but Austrian workers can access a more encompassing income maintenance system than the German and Italian ones (see table 4). Compulsory unemployment insurance (Arbeitslosenversicherung) is granted upon the same contributory requirement as the German ALG I (reduced for the young unemployed) and covers all dependent workers and, since 2008, also Freie DienstnehmerInnen, economically dependent workers which the law equates to dependent ones. The other self-employed can opt-in to the scheme, paying voluntary contributions. The sole workers not covered by unemployment insurance are marginal workers. Upon exhausting unemployment insurance, workers can access means-tested 474
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Amount
Length
Eligibility
Entitlement
All dependent workers enrolled in social insurance Self-employed can opt-in (under conditions) Excluded: students, marginal workers (mini-jobs) One year of contributions over the last two Registration to public employment services and availability for work Up to 12 months for workers aged under 50; 15 months aged over 50; 18 months aged over 55; 24 months aged over 58 60% of net wage (67% with children)
Unemployment insurance (ALG I )
Flat rate (€359 per month in 2010 for a single person) plus housing and heating (€318 per month in 2010) and children allowances; special rules for children from 2011
Indefinite but conditional on activation for work
Need (subject to means test) Registration to public employment services and availability for work
Universal (subject to means test), but conditional upon ability to work (for ALG II recipients’ family members unable to work: Sozialgeld)
Social assistance for those able to work (ALG II )
The German income maintainance system (2010)
Table 3
As ALG II
Need (subject to means test) Incapacity to work more than three hours per day (e.g. disease, handicaps) or old age Indefinite
Universal (subject to means test), but conditional upon incapacity to work
Social assistance (Sozialhilfe)
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Dependent and economically dependent workers Self-employed can opt in Excluded: public employees, marginal workers (mini-jobs) 52 weeks within previous 24 months Aged under 25: 26 weeks within previous 12 months 20 to 52 weeks depending on age and contribution record 55% of net wage; family supplements possible
Indefinite
52 weeks (renewable, but conditional to activation for work) 92%–95% of UI benefit
€720 per month for a single person
Need (subject to means-test)
Universal (subject to means-test)
Social assistance (Mindestsicherung)*
Exhaustion of UI Need (subject to means-test)
Those eligible for UI (subject to means-test)
Unemployment assistance (Notstandshilfe)
Note: * Nationwide scheme has been progressively replacing previous regionally differentiated Sozialhilfe, since July 2010.
Amount
Length
Eligibility
Entitlement
Unemployment insurance (Arbeitslosenversicherung)
The Austrian income-maintenance system (2010)
Table 4
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unemployment assistance (Notstandshilfe), in principle for an unlimited length (conditional to activation of the beneficiary). Finally, a brand new nationwide minimum income scheme (Mindestsicherung) will progressively replace the former scheme (Sozialhilfe) which was administered by Länder according to local-specific regulations.
Adjusting STW Rules to Face the Crisis The impact of the financial crisis was larger in Italy than in Germany and Austria. Also, recovery was quicker in Germany and Austria than in Italy during 2010, and projections for 2011 and 2012 confirm this trend (table 5). This was reflected in occupational levels: whereas job loss in 2009 was relatively moderate in Germany and Austria, in Italy losses in 2009 significantly eroded increases occurred in previous years (see table 6). By the same token, Italy’s unemployment rates rose during 2010, while they receded in Germany and Austria (table 7). Table 5 GDP growth (percentages), 2008–12
Austria Germany Italy Euro area
2008
2009
2010
2011 (forecast)
2012 (forecast)
2.2 1.0 -1.3 0.5
-3.9 -4.7 -5.0 -4.1
1.6 (forecast) 3.6* 1.0* 1.8*
1.6 2.2* 1.0* 1.5*
n.a. 2.0* 1.3* 1.7*
Source: IMF 2010. Note: * Updated January 2011.
Table 6 Employment (15–64 years), annual averages (thousands)
Austria Germany Italy Euro area EU27
2007
2008
2009
2008/07 (%)
2009/08 (%)
3,963 37,611 22,846 137,703 215,276
4,020 38,239 23,010 139,631 217,751
4,002 38,131 22,650 139,430 213,887
1.4 1.7 0.7 1.4 1.2
-0.4 -0.3 -1.6 -0.1 -1.8
Source: Eurostat, Labour Force Survey Database, accessible at http://epp.eurostat.ec.europa.eu/ portal/page/portal/employment_unemployment_lfs/data/database. © 2011 Blackwell Publishing Ltd.
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Social Policy & Administration, Vol. 45, No. 4, August 2011 Table 7 Unemployment rates (percentages), quarterly data (seasonally adjusted)
Austria Germany Italy Euro area EU27
2009 Q1
2009 Q2
2009 Q3
2009 Q4
2010 Q1
2010 Q2
2010 Q3
2010 Q4
4.4 7.6 7.3 8.9 8.3
4.8 7.8 7.5 9.4 8.9
5.0 7.9 8.0 9.8 9.3
4.8 7.7 8.3 10.0 9.5
4.5 7.5 8.5 10.0 9.6
4.5 7.2 8.5 10.1 9.7
4.4 6.9 8.3 10.1 9.6
4.2 6.7 8.4 10.0 9.6
Source: Eurostat, Labour Force Survery Database, accessible at http://epp.eurostat.ec.europa.eu/ portal/page/portal/employment_unemployment_lfs/data/database.
Yet, it seems plausible to say that in all three countries unemployment rates would have been higher if governments had not resorted to STW schemes in such an extensive way as they actually did. All three countries introduced adjustments in order to render such schemes more accessible and flexible. Austria and Germany modified rules in such a way that made their STW somewhat more ‘Italian’, in terms of length and costs for employers. At the same time, Italy flanked adjustments to the traditional CIG with a vast array of exemptions to existing rules, attempting to fix the holes in the coverage of the income maintenance system through existing discretionary instruments, without creating new social rights.
Italy In order to counteract the employment consequences of the crisis, the Italian government intervened by trying to fill the gaps in the coverage of CIGO and CIGS. So-called ‘emergency social shock absorbers’ (ammortizzatori in deroga [AD]) were introduced, i.e. new measures created by relaxing eligibility rules to CIG and mobility allowance (MA) to include firms previously not covered for reasons of size or economic sector, and non-standard dependent workers when previously excluded; at the same time the length of CIGO and CIGS was extended virtually indefinitely, by allowing for the possibility to freely convert the former into the latter without any new assessment.8 To fund the the AD (‘emergency’ CIG, ‘emergency’ MA) the government appropriated €8 billion for the years 2009–10 (€2.65 billion of which was provided by the regions through the European Social Fund) and €1 billion for 2011. Their introduction clearly constitutes a major institutional innovation in Italian labour market policy. First, the extension of CIG and MA entitlement to the small firms (which had never contributed to the CIG fund, so that AD is completely funded out of the general revenue) may shift such schemes away from large industrial firms and their workers. Second, the inclusion of all non-standard employees among the workers eligible for AD seems to pave the way for the opening of schemes typically reserved to standard workers such as CIG and MA. However, no changes were made to eligibility requirements 478
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Social Policy & Administration, Vol. 45, No. 4, August 2011 Figure 1 Authorized hours of CIG (January 2005 – October 2010, data in millions of hours)
Source: own elaboration on data from UIL (2010) and ISTAT, Osservatorio sulle ore autorizzate di cassa integrazione guadagni, accessible at http://www.inps.it/webidentity/banchedatistatistiche/ menu/cig/main1.html.
with respect to firm seniority (see table 1 for CIG and table 2 for MA). Also, the granting of benefits must be authorized by the regional authorities, while benefit length is regulated by regional tripartite agreements, conditionally on actual availability of resources in the regional budgets (resources for AD are given to the regions after rounds of negotiations with the Treasury). Beside the institutional innovation of AD, ‘regular’ CIG has actually constituted the main labour market policy instrument during the crisis in terms of the number of workers involved. The amount of available financial resources was increased by the state intervention, evaluation of admissibility has presumably become looser, and firms have been allowed to extend and cumulate the length of CIGO and CIGS beyond their normal limits. As a result, the use of CIG during the crisis has been considerable: the number of authorized hours was, in 2009 and 2010, five times higher than in previous years (figure 1). Figure 1 shows how, after a peak in 2009, the use of CIGO slowed down, to be outpaced in 2010 by emergency and regular CIGS. In particular, during 2010, the number of authorized hours of emergency CIG took over that of CIGO, making up one third of the overall figure. This trend is also visible by looking at the increasing number of beneficiaries of emergency CIG (figure 2), presumably due to previously excluded categories, such as small crafts and retail, now resorting to the scheme.
Germany Building on the post-reunification experience, the German federal government identified Kurzarbeit as a valuable instrument in order to limit employ© 2011 Blackwell Publishing Ltd.
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Social Policy & Administration, Vol. 45, No. 4, August 2011 Figure 2 Workers covered by emergency CIG (January 2009 – October 2010, full-time equivalents)
Source: UIL 2010.
ment losses during the crisis. Especially with the second Conjunctural Package (Kunjunkturpaket II) – approved in January 2009 – the then Grand Coalition cabinet adjusted Kurzarbeit schemes along various dimensions: • eligibility conditions for firms were loosened. The one-third-of-workforce threshold was abolished, thus STW can now apply even to a single worker, provided s/he undergoes a wage reduction of at least 10 per cent. Moreover, applications for STW are no longer conditional upon the exhaustion of alternative measures; • extension of the legal length of STW from six to 18 months; • the Federal Employment Office (BA) takes charge of 50 per cent of social contributions, which increases to 100 per cent after six months or if the firm provides training measures;9 • inclusion of TAW. Not surprisingly, 2009 marked one of the highest peaks of use of STW in the post-war history of Germany (Brenke et al. 2010). Arguably, the relaxation of access rules to Kurzarbeit contributed to this result. As Eichhorst and Marx (2009) recall, in the early 1990s German firms pursued alternative strategies of flexibilization, such as the preventive exhaustion of hours accounts and job-sharing. Precisely lifting this requirement in 2009 rendered STW a more immediate solution for firms than before. Besides, Kurzarbeit became much less expensive for employers, as they benefited from partial or total exemptions from social contributions, and were left with the sole cost of possible wage 480
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Social Policy & Administration, Vol. 45, No. 4, August 2011 Figure 3 Kurzarbeit recipients in Germany (1991–2009, firms and workers)
Source: BA 2010a. Notes: Line = workers (left-hand scale). Bars = firms (right-hand scale).
top-ups regulated by in-firm collective agreements. As a consequence, in 2009 many more firms used Kurzarbeit than in the early 1990s (figure 3). After the peak reached in May 2009, when as many as 1.5 million German workers were in STW, figures constantly diminished. However, the number of beneficiary firms tended to remain stable (about 60,000 firms) even into 2010 (figure 4).
Austria In the initial phase of the crisis the use of Kurzarbeit was very limited, especially in comparison with functional equivalents, such as suspension arrangements. Following the amendments passed in February 2009, take up rates increased remarkably. Changes, introduced to make STW more appealing especially to small and medium enterprises, consisted of: • clearer eligibility criteria, to be provided by the Federal Employment Service (AMS); • basic length extended from three to six months, with possible further extensions up to 18 months; • possible variation of working hours between 10 per cent and 90 per cent (previously 80 per cent) of normal working hours; • introduction of a special training subsidy co-financed through the ESF (Kurzabeitshilfe mit Qualifizierung) for employers that offer training courses to their employees during the hours not worked, with the AMS covering up to 60 per cent of expenses. © 2011 Blackwell Publishing Ltd.
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Social Policy & Administration, Vol. 45, No. 4, August 2011 Figure 4 Kurzarbeit recipients in Germany (January 2008 – March 2010, firms and workers)
Source: BA 2010b. Notes: Line = workers (left-hand scale). Bars = firms (right-hand scale).
In July 2009, further changes extended the length to 24 months for the period 2010–12 and made STW more attractive by waiving the share of social contributions statutorily weighing on the employer (about 50 per cent of total social contributions) after six months of an employee’s benefit recipiency. As collective agreements typically provide that the employer also takes charge of the employee’s share (see table 1), this amounts to halving social contributions paid by the employer from the seventh month onwards. Also, TAW became eligible. Firms reacted quickly to the new rules: at the zenith of the crisis in Austria in mid-2009, the number of workers under Kurzarbeit greatly outreached levels touched in previous crises (figure 5). Yet, the figures on beneficiaries started shrinking shortly after this peak, and Kurzarbeit usage returned to its physiological levels relatively soon (see figure 6). As in Germany, however, figures pertaining to firms went down much more slowly than those pertaining to workers: in Austria too employers chose to maintain a measure of internal flexibility, albeit for a reducing number of workers. Overall, estimates show that Kurzarbeit in Austria involved some 600 firms (European Commission 2010).
Conclusions This article has highlighted how Austria, Germany and Italy all have strengthened STW in order to buffer the occupational impact of the crisis, no matter 482
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Social Policy & Administration, Vol. 45, No. 4, August 2011 Figure 5 Kurzarbeit beneficiaries in Austria (2001–10; selected months for 2008, 2009 and 2010)
Source: own elaboration on data from BMASK 2009 for data until 2007, BMASK 2010 for data since 2008. Figure 6 Kurzarbeit beneficiaries in Austria during the crisis (October 2008 – March 2010)
Source: own elaboration on data from BMASK 2010. © 2011 Blackwell Publishing Ltd.
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what its role within each country’s income maintenance system. If we consider its original design, it may well seem that the German and Austrian STW has now become more ‘Italian’. Access requirements were loosened, benefit length extended, and costs for firms remarkably decreased (see table 8). Moreover, all three countries have extended eligibility rules to atypical workers – TAW in particular. The Italian case stands out in many respects, however. Given the uneveness of CIG coverage, benefiting large industrial firms and their workers, the massive extension of ‘emergency’ CIG to the whole production structure made Italian STW a blanket scheme, intended to pursue multiple policy objectives. On the one hand, it serves ersatz industrial policy aims, trying to allow as many firms as possible to remain operational, rather than favouring genuine processes of restructuring and re-investment. On the other hand, it also seems to depart from social policy aims to embrace a somewhat macroeconomic goal, backing effective demand through a generalized support to household spending capability. By contrast, in Germany and Austria STW by and large maintained its specific function of hoarding skilled labour within firms in order to sustain the competitiveness of the economic system during and after the crisis. Such functional specialization is arguably possible in these countries given the complementary role of Kurzarbeit vis-à-vis UB and social assistance schemes within an articulated income protection system. In Italy, this interplay is encumbered by the fact that CIG exerts a substitutive function in place of a skimpy unemployment compensation system and missing social assistance. It follows that our initial research question – whether the magnitude of the crisis actually produced policy convergence among STW schemes in Italy, Germany and Austria – calls for a multiple answer. From a programmecentred point of view, looking at governance rules and institutional characteristics of STW schemes, the answer is yes: all three countries introduced remarkable innovations, and path-breaking policy changes in Austria and Germany made their STW schemes at least partially converging towards an ‘Italian’ design. From a systemic perspective however, considering the role of STW schemes within the larger system of income protection, programmelevel convergence gives way to rather differentiated trajectories of development which tend to reinforce existing divergencies between Germany and Austria, on the one hand, and Italy on the other.
Notes 1. Among the few who studied STW, Seifert (1994) focused on Germany, Gualmini (1998) on Italy. Mosley and Kruppe (1996) comparatively analyze Italy, France, Germany and Spain. 2. While Hinrichs’ polemical target is Esping-Andersen’s (1990) welfare regime approach, his criticism is obviously generalizable to the study of political economy regimes, as in the VoC literature. 3. The first scheme (Kurzarbeit) was instituted in Germany in 1918. The Italian Cassa integrazione guadagni (CIG) dates back to 1947. Finally, Austria introduced Kurzarbeit in 1968. 4. All these provisions were changed in the context of anti-crisis interventions.
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Costs for firms
Length
Coverage
Dimensions of reform
Inclusion of atypical workers Inclusion of all firm types No formal limit Discretionary decisions of public authority on extensions and renovations Unaltered (very high) for traditional beneficiaries Newly admitted firms free-ride on insurance funds
Italy
Loosening of (formal/informal) access rules Social contributions halved (beyond six months)
Increased to six months; extensions up to 24 months
Increased to 18 months; extensions up to 24 months
Loosening of (formal/informal) access rules Social contributions halved (up to six months) or entirely taken over by the state (beyond six months or if training provided)
Inclusion of TAW
Austria
Inclusion of TAW
Germany
Adjustments to STW during the crisis in a comparative perspective
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5. Ceilings are, however, applied to hourly wage replacements both to CIG and to UB in Italy, so that the actual replacement rates will be considerably lower than the nominal ones for many beneficiaries. 6. Provisions changed in the context of anti-crisis interventions in both countries. 7. In Germany and Austria marginal workers are those employed in so-called mini-jobs, i.e. with part-time contracts below given wage ceilings (€400 per month in Germany; €366.33 per month in Austria) and reduced social contributions and entitlements (among which no entitlement to unemployment insurance). 8. Both measures are intended to be in place at least until the end of 2011. 9. All of the provisions above are meant to expire in March 2012.
References Arpaia, A., Curci, N., Meyermans, E., Peschner, J. and Pierini, F. (2010), Short-time working arrangements as response to cyclical fluctuations, Occasional Paper 64, Bruxelles: European Commission, DG Economic and Financial Affairs – DG Employment, Social Affairs and Equal Opportunities. Berton, F., Richiardi, M. and Sacchi, S. (2009), Flex-insecurity. Perché in Italia la flessibilità diventa precarietà, Bologna: Il Mulino. Brenke, K., Rinne, U. and Zimmermann, K. F. (2010), Kurzarbeit: Nützlich in der Krise, aber nun den Ausstieg einleiten, DIW-Wochenbericht, Berlin: Deutsches Institut für Wirtschaftsforschung. Bundesagentur für Arbeit (BA) (2010a), Zeitreihe zu Kurzarbeiter 1991 bis aktuell – Deutschland mit Ländern, Nürnberg: Bundesagentur für Arbeit. Bundesagentur für Arbeit (BA) (2010b), Kurzarbeit: Anzeigen (und bis März 2010 realisierte Kurzarbeit) – Deutschland, Nürnberg: Bundesagentur für Arbeit. Bundesministerium für Arbeit, Soziales und Konsumentenschutz (BMASK) (2009), Arbeitsmarktpolitik in Österreich 2008, Wien: BMASK. Bundesministerium für Arbeit, Soziales und Konsumentenschutz (BMASK) (2010), Arbeitsmarktpolitik in Österreich 2009, Wien: BMASK. Cartwright, N. (1994), Nature’s Capacities and their Measurement, Oxford: Oxford University Press. Eichhorst, W. and Marx, P. (2009), Kurzarbeit: Sinnvoller Konjunkturpuffer oder verlängertes Arbeitslosengeld? IZA Standpunkte, Bonn: Institute for the Study of Labor (IZA), p. 5. Esping Andersen, G. (1990), The Three Worlds of Welfare Capitalism, Cambridge: Polity Press and Princeton, NJ: Princeton University Press. Estevez-Abe, M., Iversen, T. and Soskice, D. (2001), Social protection and the formation of skills: a reinterpretation of the welfare state. In P. Hall and D. Soskice (eds), Varieties of Capitalism. The Institutional Foundations of Comparative Advantage, Oxford: Oxford University Press, pp. 145–83. Eurofound (2009), Tackling the Recession: Employment-related public initiatives in the EU Member States and Norway, Dublin: European Foundation for the Improvement of Living and Working Conditions. Eurofound (2010), Extending flexicurity – The potential of short-time working schemes: ERM Report 2010, Dublin: European Foundation for the Improvement of Living and Working Conditions. European Commission (2010), European Economic Forecast, Spring 2010, Brussels: DG Economic and Financial Affairs. Gualmini, E. (1998), La politica del lavoro in Italia, Bologna: Il Mulino. Hall, P. and Soskice, D. (eds) (2001), Varieties of Capitalism. The Institutional Foundations of Comparative Advantage, Oxford: Oxford University Press.
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Hancké, B., Rhodes, M. and Thatcher, M. (eds) (2007), Beyond Varieties of Capitalism: Contradictions, Complementarities and Change, Oxford: Oxford University Press. Hinrichs, K. (2000), Elephants on the move. Patterns of public pension reform in OECD countries, European Review, 8: 353–78. International Monetary Fund (IMF) (2010), World Economic Outlook October 2010. Recovery, Risk and Rebalancing, Washington DC: International Monetary Fund. Iversen, T. (2005), Capitalism, Democracy and Welfare, Cambridge: Cambridge University Press. Kvist, J. (1998), Complexities in assessing unemployment benefits and policies, International Social Security Review, 51, 4: 33–55. Molina, O. and Rhodes, M. (2007), The political economy of adjustment in Mixed Market Economies: a study of Spain and Italy. In B. Hancké, M. Rhodes and M. Thatcher (eds), Beyond Varieties of Capitalism: Contradictions, Complementarities and Change, Oxford: Oxford University Press, pp. 223–52. Mosley, H. and Kruppe, T. (1996), Short-time Work in Structural Adjustment: European Experience, European Journal of Industrial Relations, 2: 131–51. Pisani-Ferry, J. and Van Pottelsberghe, B. (2009), Handle with care! Post-crisis growth in the EU, Bruegel Policy Brief, 2, Brussels. Pizzorno, A. (1978), Political Exchange and Collective Identity in Industrial Conflict. In C. Crouch and A. Pizzorno (eds), The Resurgence of Class Conflict in Western Europe Since 1968, London: Macmillan, pp. 227–98. Regini, M. (1997), Social institutions and production structure: the Italian variety of capitalism in the 1980s. In C. Crouch and W. Streeck (eds), Political Economy of Modern Capitalism: Mapping Convergence and Diversity, London: Sage, pp. 102–16. Schmidt, V. (2002), The Futures of European Capitalism, Oxford: Oxford University Press. Seifert, H. (1994), Kurzarbeit und Qualifizierung – ein neues Instrument zur Förderung des Strukturswandels? In H. Heinelt, G. Bosch and B. Reissert (eds), Arbeitsmarktpolitik nach der Vereinigung, Berlin: Sigma, pp. 100–14. Streeck, W. (1997), German Capitalism: Does It Exist? Can It Survive? In C. Crouch and W. Streeck (eds.), Political Economy of Modern Capitalism: Mapping Convergence and Diversity, London: Sage, pp. 33-54. Thelen, K. (2001), Varieties of Labor Politics in Developed Democracies. In P. Hall and D. Soskice (eds), Varieties of Capitalism. The Institutional Foundations of Comparative Advantage, Oxford: Oxford University Press, pp. 71–103. Unione Italiana del Lavoro (UIL) (2010), 22° rapporto UIL (ottobre 2010). La cassa integrazione nelle regioni e nelle province, Rome: UIL. Watt, A. (2009), A Quantum of Solace? An Assessment of Fiscal Stimulus Packages by EU Member States in response to the Economic Crisis, ETUI Working Paper, 5, Brussels: European Trade Union Institute.
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Social Policy & Administration issn 0144–5596 DOI: 10.1111/j.1467-9515.2011.00786.x Vol. 45, No. 4, August 2011, pp. 488–505
Health Care Policy for Better or for Worse? Examining NHS Reforms During Times of Economic Crisis versus Relative Stability spol_786
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Lorraine Frisina Doetter and Ralf Götze1 Abstract Economic crises are said to challenge welfare states by forcing them to cut expenditure by pursuing reforms aimed at cost containment and efficiency enhancing strategies. The oil crises of the 1970s and early 1980s, the global financial crisis of the early 1990s, and those of the 2000s marked acute economic phases rooted within a larger period of austerity politics in which welfare states have been observed to undergo major changes. However, the question has yet to be posed as to whether decisions affecting health care policy during acute economic crises are indeed fundamentally different than what can normally be observed over the longer period of cost containment policy. Moreover, where policy differences do exist between economic periods, are these differences consistent over time and across health care systems? To answer these questions we examine changes in regulation over the past four decades for two cases of National Health Services (NHS): England and Italy. More specifically, we examine the underlying causes for reforms in order to identify whether economic crises versus ‘system-specific deficits’ (i.e. those deficits or sources for inefficiency lodged within the health care system itself) are the true causes for motivating change in and across NHS systems. Our findings establish that while acute economic crises create windows of opportunity for change, it is the interaction of system-specific deficits and the role of ideas and political factors that largely condition the content and timing of reforms. Regarding the nature of reforms passed, our findings reveal consistency over time and across health care systems in the types of regulatory measures adopted and advanced. spol_786
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Keywords Health care systems; Health care policy; Economic crisis; NHS; England; Italy
Addresses for correspondence: Dr. Lorraine Frisina Doetter, Senior Research Fellow, TranState Research Center at the University of Bremen, Linzer Str. 9a, 28359, Bremen, Germany. Email: lorraine.frisina@ sfb597.uni-bremen.de. Ralf Götze, Research Associate, TranState Research Center at the University of Bremen, Linzer Str. 9a, 28359 Bremen, Germany. Email:
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Introduction Economic crises are said to challenge welfare states by forcing them to cut expenditure by pursuing reforms aimed at cost containment and efficiency enhancing strategies. The oil crises of the 1970s and early 1980s, the global financial crisis of the early 1990s, and those of the 2000s marked acute economic phases rooted within a larger period of austerity politics in which welfare states have been observed to undergo major changes. This is especially true in the case of health care policy, which consumes the lion’s share of welfare state spending after pensions. However, unlike the latter, where the state can influence the role of spending by pushing beneficiaries into early retirement or onto unemployment benefits, in the case of health care policy the state faces greater constraints, not least of all due to the often powerful role of providers in the system. Therefore, health care policy represents an important and complex field for analysis and comparison. Thus far, Organisation for Economic Co-operation and Development (OECD) health care systems have been seen to pursue key reforms that have led some observers to refer to the emergence of international trends in hybridization, privatization and convergence (Rothgang et al. 2008). However, the question has yet to be posed as to whether decisions affecting health care policy during economic crises are indeed fundamentally different than what can normally be observed over the longer period of cost containment policy that followed from the first oil price shocks of the early 1970s. That is, is it of conceptual and empirical significance to distinguish between periods of relative economic stability versus those of acute volatility in understanding policy change? Moreover, where policy differences do exist between economic periods, are these differences consistent over time and across health care systems? To answer these questions we examine changes over the past four decades for two cases of National Health Services (NHS): England and Italy. These cases represent health care systems at different stages of development, with the English NHS, established in 1948, representing the archetype and forerunner of this system type, and the Italian NHS, founded in 1978, a relatively late bloomer. Such variation in our case selection allows us to identify potential differences in system-specific developments that may be rooted in questions of institutional maturation. For each of our cases, we trace major policy changes over time along the dimension of regulation.2 Major policy changes are taken to be those most profoundly affecting the structure and fundamentals of regulatory principles in that country. In doing so, we examine the underlying logic for reforms to identify whether economic constraints are the true causes for motivating change in and across health care systems. Our research also allows us to explore whether the English NHS and Italian NHS have distinct or rather shared approaches to dealing with economic constraints on health care policy. Moreover, being state-based by nature, NHS system types can be said to be part and parcel of the larger welfare state. By looking at trends in NHS systems, we can therefore derive developments in the latter. Our article is organized as follows: we begin our study by defining what is meant by a period of economic crisis and when such periods have arisen for © 2011 Blackwell Publishing Ltd.
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each of our cases. We then reflect on the particular characteristics of NHS systems, looking especially at what we elsewhere have referred to as ‘systemspecific deficits’ (Schmid et al. 2010). We argue that in trying to analyze the effects that economic crises have on health care systems, one must begin by identifying the perennial defects lodged within the system itself. This helps us to distinguish between the roles that exogenous versus endogenous shocks play in explaining health care system change, as well as their potentially significant interplay. Once NHS-specific deficits are established, we begin our empirical study with the case of the English NHS, examining major changes in regulation across four decades. We then proceed to do the same for Italy. In the subsequent section we draw our findings into comparative perspective before concluding on the nature of policy during times of crisis versus stability. In the final section we reflect upon developments that can be expected to unfold during the coming years as we either continue to face or proceed beyond the current financial crisis.
Economic Crises in England and Italy Naturally, open economies such as are found in England and Italy are affected by global economic downturns but differ with respect to their vulnerability and problem solving capacity. Moreover, some problems are solely homegrown. Therefore, in order to have a comprehensive measure of national economic developments, we examine GDP growth, unemployment, inflation and public household deficits over our entire period of observation. By specifying key periods of acute economic crisis for each of our cases, we have a reference point by which to assess our findings for changes in health care regulation which are presented in a latter section of this article. The English economy had already undergone below-average development in the postwar period. Unsurprisingly, the so-called ‘sick man of Europe’ (Nickell and Van Reenen 2002: 178) was especially affected by the first oil crisis of 1973, contributing – together with excessive strikes – to an entire decade of economic recession and stagflation. Thatcher’s harsh reforms put the English economy back on the growth track at the price of de-industrialization and high unemployment. The failure to permanently adopt the European exchange rate mechanism (ERM) caused a severe recession in the early 1990s, with tremendous public deficits. From 1993 onward, the entire UK entered a prosperous phase which lasted 15 years and was only slowed down but not interrupted by the dot-com recession in the early 2000s. As the de-industrialized British economy relied heavily on the financial sector, it became one of the earliest and hardest hit victims of the US subprime market crisis. Since 2008 the country has been struggling with the effects of the financial crisis. The Italian economy grew strongly in the postwar period. The first oil crisis and the 1977 recession temporarily interrupted the ‘Italian miracle’ but economic growth recovered afterwards, albeit at the cost of high public deficits and inflation rates. This growth, fueled by deficit-spending and high inflation rates, ended in the late-1970s when Italy entered the European ERM and granted the central bank an independent role. Between 1980 and 1981, Italy 490
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Social Policy & Administration, Vol. 45, No. 4, August 2011 Table 1 Periods of economic crises in England and Italy First oil crisis
Mid-1970s recession
Second oil crisis
Early 1990s recession
Dot-com bubble
Financial crisis
England
Q3/74–Q3/76 13 quarters DGDP: -3.5%
–
Q3/79–Q2/83 16 quarters DGDP: -5.9%
Q3/90–Q2/93 12 quarters DGDP: -2.5%
–
since Q2/08 >12 quarters DGDP: -6.4%
Italy
Q4/74–Q4/75 five quarters DGDP: -3.8%
Q2/77–Q4/77 three quarters DGDP: -1.5%
Q1/82–Q2/83 six quarters DGDP: -0.7%
Q2/92–Q1/94 eight quarters DGDP: -1.9%
Q2/02–Q3/03 seven quarters* DGDP: -0.6%
since Q4/07 >14 quarters DGDP: -6.8%
Note: * The short recovery period in double-dip recessions is not included in the duration.
faced a stagflation followed by a serious recession in the aftermath of the second oil crisis. Although economic growth was subsequently re-established which led to the ‘sorpasso’ of 1987 when the Italian GDP temporally overtook the British, comparatively high public deficits and inflation rates persisted. In order to meet the Maastricht criteria, Italy had to tackle this inherited burden. Accordingly, the economy only returned to modest growth rates after the global recession of the early 1990s (Zamagni 2003). As the Italian economy lost competitiveness, it was directly affected by the bursting of the dot-com bubble in the early 2000s, as well as the recent global financial crisis, without having stable phases of recovery in between. Summarized in table 1 are our findings which identify global economic crises (row 1) and the periods in which England (row 2) and Italy (row 3) were individually affected by these developments. As concerns the latter, we took the seasonal adjusted GDP in constant prices into account using the Quarterly National Accounts database of the OECD. We defined an economic recession as a period starting with a GDP decline (i.e. growth below zero) in two consecutive quarters and ending when the GDP surpasses the pre-recession level. The first line of a data cell represents the dating of the recession giving information on its first and the final quarter (‘Q3/76’ is the third quarter of 1976). The second reflects the duration of the recession measured in quarters. Finally, the variable DGDP in the third line indicates the depth of a recession by comparing the lowest quarterly GDP with the pre-recession level. Hence, we observe that England has faced four relatively severe economic recessions since 1970. In contrast, Italy had to tackle six mostly shorter and – due to deficit spending – less severe recessions with also shorter and far less pronounced recovery periods. This has led to constant underperformance compared to the OECD average in terms of economic growth since the early 1990s.3
The NHS System Type NHS systems are characterized by universal coverage based on citizenship and services that are free at the point of delivery. Accordingly, health care is © 2011 Blackwell Publishing Ltd.
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mainly financed through taxation and services are dominated by public providers. Where regulation is concerned, relations among financing institutions, service providers, and (potential) beneficiaries are mainly regulated through state hierarchy (Wendt et al. 2009). NHS systems operate on the basis of budgets which typically allow for better cost containment, but which also come at the cost of other benefits: system deficiencies in the form of long waiting lists, insufficient investment in health care facilities, poor responsiveness and low productivity of providers are typical of NHS systems (Schmid et al. 2010). These problems are related to under-funding, which entails forms of rationing, but also state failure due to the lack of appropriate incentives for state employees to use funds efficiently and to continue working within the public system (Scott 2001). Therefore, NHS reforms that adequately respond to system-specific deficits should be seen to target under-funding by increasing financial resources, as well as state failure by addressing access to and quality of services provided, and by incentivizing and reigning in provider behaviour particularly where budget utilization is concerned. As concerns the relationship between changes driven by system-specific deficits and economic crises, we may tentatively hypothesize that the urgency of measures that address state failure may become more pronounced during periods of economic instability, whereas under-funding can be expected to worsen rather than improve.
Changes in Regulation in the English NHS Since its inception in 1948, the English NHS has undergone numerous transformations due to structural reforms, particularly during the period marking the 1970s to the present. More specifically, four key developments can be said to define this substantial era in English health care history: (1) the managerialist reorganization of 1974; which was further advanced by (2) the management revolution of the 1980s; and (3) the introduction of the internal market and competition during the 1990s; followed by (4) the reassertion of the state in financing and the regulation of quality during the 2000s. The cumulative efforts of these policy changes have led to profound alterations in the shape and substance of health care regulation in England, particularly with regard to the redistribution of authority (e.g. purchasing powers given over to trusts, along with self-regulatory capacities), which has loosened the hierarchical modes of interaction between the state and local actors in favor of more horizontal ties that foster competition amongst service providers (Grimmeisen and Frisina 2010). While these developments have been described at length by numerous authors (see e.g. Ham 2009; Rothgang et al. 2008), the aim of this section is, in a first step, to uncover why these changes in regulation have taken place in order to understand the role that economic crises (vs. system-specific deficits) may have played in driving policy reform and whether differences in policy solutions can be detected during times of crisis versus that of relative stability. While much debate had already emerged a decade earlier regarding the structural challenges facing the English NHS, it was not until the early 1970s – which ushered in the first oil price shocks of the era – that the call for reform would be answered by government. Responding to the need to make the NHS 492
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more accountable but also more efficient, the National Health Service Reorganisation Act 1973 was passed under the leadership of Edward Heath’s Conservative party (1970–74). By and large, the various organizational changes brought about by this reform reflected an interest in creating a new management structure which followed the principle of ‘maximum delegation downwards’ by ‘maximum accountability upwards’ (Rivett 1998). Such an orientation decentralized responsibility in a hierarchical manner, strengthening especially the regional tier of government, and reflected the Conservative party’s interest in introducing business-style management practices into public policy. Management and decentralization were expected to increase both the accountability and efficiency of the system, thereby also cutting costs. It is important to note that this emphasis on management was not unique to the Conservative party, but rather built upon earlier attempts to improve management in the NHS first proposed during the 1960s in the Salmon Report, the so-called ‘cogwheel’ reports, and the Farquharson Lang Report, which were produced under the leadership of the Labour party (Ham 2009). However, the Conservative party drew this agenda into the foreground and translated the need for structural reform into one of economic urgency as much as political accountability. Of little coincidence, the reform was passed just before England would face a dramatic downturn in economic development, suggesting that policymakers foresaw the need for austerity. In this way, the Conservative party would lay claim to the management approach as its key policy legacy in health care – one which it would continue to revert to in the decades to come. After suffering a five-year political hiatus, the Conservative government returned to office in 1979 with Margaret Thatcher at its helm. With this electoral homecoming which would go on to last some 18 years, the party renewed its initial interest in revamping the NHS to meet the increasing demands of its population, as well as to compensate for the economic stagnation witnessed throughout the 1970s. Central to the new Prime Minister’s political and economic agenda was a strong belief in de-regulation and economic liberalism. In the case of health care policy, this essentially translated into a revivification and elaboration of the managerialist approach applied in earlier years, which subsequently played a key part in defining the structural reforms of the early 1980s. While growing patient demand and global economic concerns may have set the tone for the second round of NHS reforms, it was countering the effects of the large costs of reorganization that had been brought on by the aforementioned National Health Service Reorganisation Act 1973 that presented the greatest urgency for action. Not only had reorganization generated significant financial costs for the NHS, it had a negative impact on staff morale (Brown 1979; Haywood and Alaszewski 1980). Moreover, political opposition mounted during the mid-1970s, as did the number of additional clerical and administrative positions created by the structural changes (Ham 2009; Webster 1996; Public Accounts Committee 1977). Accordingly, when the Conservative party retook office in 1979, one of its first objectives was to correct these problems. Rather than propose a new set of policy solutions, however, the party returned to its commitment to managerialism (although © 2011 Blackwell Publishing Ltd.
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this time general management took the place of consensus management) and business-style practices. These would culminate in an additional round of structural reforms which, amongst other things, sought to cut down the administrative size of the NHS and continued to decentralize authority, however, in a distinctly hierarchical manner befitting a state-based health care system. Just as in earlier years, the reorganization of the NHS in the 1980s produced its own burden of costs, and talk of the urgent need to improve the health care system’s efficiency would remerge in the years that followed. Many of the challenges facing the NHS were identified in the 1989 government White Paper entitled, Working for Patients. Amongst other things, the paper addressed the growing problem of waiting lists, bed shortages and staffing insufficiencies that had worsened due to the funding crisis of the 1980s (Ham 2009).Of less prominence was the role that the larger context of economic constraint played in defining the need for NHS reform. Interestingly, after a brief yet serious consideration to radically reform the NHS’ financing system – one that provoked policymakers to carry out a comparative review of international health care systems (Lawson 1992) and the possible adoption of a private insurance model – the Thatcher and subsequent John Major governments decided to leave the tenets of tax financing intact, in favour of another round of structural reform in 1990. By far the most groundbreaking of all reforms, the National Health Service and Community Care Act 1990 introduced, for the first time in NHS history, competition and an internal market for the purchasing (later commissioning) and selling of health care services. Accordingly, whereas previous efforts at reorganizing the NHS surmounted in the reassignment of long-standing policy activities, the restructuring of the 1990 reform introduced new modes of coordination and a novel basis for regulation in the NHS – namely, competition. This stark shift in policy solutions is highly reflective of the change in policy values at the time that increasingly favoured market solutions and greater choice for patients in health policy (Frisina 2008). The timing of this change is somewhat ironic, given the economic climate at the time: the early 1990s were marked by a period of dramatic economic downturn that had reached its apex just as the National Health Service and Community Care Act 1990 was being passed. However, rather than shirking from the use of market principles, the Conservative government – in line with its long-standing economic doctrine – reasserted the role of the market and did so in a novel policy context of health care. As the Conservative party gave way to New Labour’s tenure in office led by Tony Blair and subsequently Gordon Brown (1997–2009), pledges were made to come up with ‘a third way’ (Department of Health 1997) for the NHS that would be situated somewhere between the centralized command and control of the system’s earliest years and the new internal market of the Conservative period. Essentially, the reforms of this period continued to advance conditions for competition and the internal market; thereby suggesting path dependency where this policy course was concerned. Differently, however, New Labour also sought to address the enduring problem of under-funding in the NHS by injecting significantly more money into the system. In doing so, the 494
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government also placed a special emphasis on increasing quality – a hitherto neglected system-specific deficiency of the NHS.4 With the introduction of more financing and a greater concern for quality, the Blair government also saw to the introduction of standard setting and regulatory bodies such as NICE, Monitor and the Care Quality Commission (Ham 2009). This move towards greater re-regulation represented a fundamental shift in ideology that took place when New Labour took over office: the state would now reassert itself in assuring the quality of care, not only market-driven choice and efficiency as in the Thatcher years. Interestingly, these policy developments took place within an uncertain economic climate: although England, with the exception of 2002, entertained relative economic stability across the years 2000–07, the decade was nevertheless marked by global economic volatility, particularly in the USA. Ultimately, this larger economic context would also catch up with England in 2008, when the country faced a sharp downturn that worsened in the year to follow. At present, it remains to be seen whether current proposals (Department of Health 2010) to reform the NHS put forth by the incumbent Conservative government led by David Cameron will be realized. If so, the NHS stands to undergo another round of structural reforms that aim to cut bureaucracy and improve efficiency, while also improving patient choice and clinical outcomes. Amongst the reasons cited for advancing this reform are England’s ‘massive deficit and growing debt’ (Department of Health 2010: 1). Accordingly, economic crisis seems to play an explicit role in driving current policy efforts. With the exception of the new focus on clinical outcomes, the content of the proposed reform appears, however, to be more of the same: a mix of market principles wed by structural reorganization that is set against the backdrop of state-led monitoring. By way of summary, the English NHS has undergone comprehensive regulatory changes over the past four decades – a period which has been marked by austerity politics due to economic constraints. However, even within this period, economic instability has been more acute during certain phases than others. By examining the nature and underlying causes for reforms passed, several findings come to the fore for this case: first, time and again English policymakers have sought to address efficiency and accountability problems by turning to solutions in the private sector, whether in the form of the New Public Management or the internal market. With the exception of re-regulation and the increase in state spending emerging under New Labour in the 2000s, policy responses to NHS problems have been largely consistent. Second, the causes of these problems have been largely rooted in the health care system itself, i.e. in the institutions, operation and policy affecting health care financing, service provision and regulation in the NHS (system-specific) and are therefore rather endogenous. Third, this finding does not suggest that economic crises do not play a role in driving policy change; rather, acute periods of economic instability have often set the pace for reforms by emphasizing their urgency without actually defining their content or true underlying causes. Taken together, system-specific deficits have met economic crises to drive policy change. However, as bears repeating, the content of that change has been determined by the policymakers themselves, © 2011 Blackwell Publishing Ltd.
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with ideologically defined policy solutions often surfacing and resurfacing despite their incongruity with economic crises. The latter emphasizes the role of agency, but also that of political ideology in explaining health care system change in England.
Changes in Regulation in the Italian NHS Prior to the establishment of the Italian NHS in 1978, the Italian health care system was characterized by principles of selective coverage, according to which citizens were insured on the basis of occupation, mainly agrarian versus industrial, but also in terms of geographic area, with central-northern regions as well as urban areas entertaining better access to primary and hospital care than their southern and suburban counterparts (Fargion 2006). Within this system of social insurance, several sickness funds offered coverage that varied widely; and the provision of services rested informally with the family and formally with solidaristic networks of a secular, religious, or professional kind (Ferrera 1993, 1998; Vicarelli 1997; Paci 1989; Fargion 2006). This left little space for state involvement in health care, and immense disparities between demographic groups quickly ensued. These inequalities, coupled with a social insurance system that had essentially gone bankrupt5 by the mid-1970s, growing public dissatisfaction, and strong social and political support for change, induced policymakers to search for radically new solutions outside the health care system (Neri 2009). By virtue of its highly centralized and universalistic nature, the NHS represented the most viable alternative both financially and politically. Following the English model, the Italian NHS established universality, equality and uniformity of services that were free at the point of delivery (France 2006). By turning to an English-style NHS, not only could Italy solve the problem of selective coverage by introducing universalism, it was also argued that a centralized system of financing would allow the government to retain better control of spending. However, unlike in England, the setting of budgets in the Italian context would not prove to be effective, as the regions were not held accountable for overspending. Where the regions exceeded their limits, the central government covered the deficit; thereby creating negative incentives for both regions and providers to exceed their budgets. As such, NHS spending quickly escalated during the 1980s making a second round of reforms during the early 1990s necessary.6 As will soon become evident in tracking the developments for this case, regulatory activity in Italy has been mainly targeted at meeting the challenges brought on by problems associated with the controlling of regional spending and overall financing in health care – a rather atypical feature for an NHS system. However, the problem of expenditure in the Italian case is very much related to the challenge of controlling provider (but also regional) behaviour, which is typical for NHS systems. The central government’s response to these challenges has been manifold; however, due to limitations in space, we wish to highlight two of the main trends affecting regulation that began during the 1990s: (1) the progressive decentralization of health care financing; and (2) the introduction of the 496
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internal market. It is particularly the latter development that has had profound implications for provider behaviour. As a first step at understanding why and what changes were made to the financing of this health care system, one must begin by looking at provisions set up in the originally established NHS in 1978. These included a three-tier structure involving the national government, the regions, and local health authorities (currently the Aziende sanitarie locali [ASL]), the latter of which were organized by local governments in order to reflect the balance of power existing between locally elected political parties. Whereas the central government was tasked with setting ceilings on spending by the regions, as well as redistributing tax financing through the National Health Fund (NHF) which favored the poorer south, it was the ASL that ultimately decided on how funding would be spent within the regions. Indeed, as Fargion (1992, 2006) reports, this policy did initially succeed: whereas in 1977 regional health care expenditure varied from 36 percentage points above the national average in the center-north and expenditure in the south fell 28 percentage points below the national average in the south, by 1987 this variation had been successfully halved. Despite the success of reducing inter-regional disparities, the decoupling of centralized financing and decentralized spending, together with poor oversight and monitoring on the part of the central government led to gross fiscal irresponsibility during the 1980s (France 2006; France and Taroni 2005) and ceilings set by the Treasury were regularly exceeded by the regions’ ASL. In part, this was due to the fact that these ceilings were systematically set at a low level by the Treasury, thereby making it necessary for the regions to spend beyond their means. Consequently, budget deficits became the norm. These financing problems, specific to the Italian NHS, met with a highly unstable economic climate in which, despite annual GDP growth, extraordinarily high public household deficits, unemployment and inflation rates marked the entire period of the 1980s and which accelerated into the early 1990s in Italy (Frisina Doetter and Götze 2011). This unfavorable constellation of factors quickly led to the need for reform. As a result, two laws were passed under the center-left Giuliano Amato and Carlo A. Ciampi cabinets in 1992 and 1993 (Legislative Decree nos 502 and 517, respectively) that gave the regions greater responsibility in covering deficit spending for any costs not associated with centralized standards for care, the latter of which became the main focus of the central government. The rationale behind the two laws rested on the notion that by allocating financial responsibility for health care at a more local, or in this case, intermediary level, the health care needs of regional populations would be better served, as the regions – not the central government – would have a clearer understanding of the strengths and weaknesses of their local system of services and could better sustain economies of scale (Maino 2010; Neri 2009). Decentralization, in turn, would have positive consequences for efficiency and thereby health care spending. Not only setting in motion what would become a lengthy and ongoing process of decentralization, the 1992/93 laws also introduced the opportunity for a radically new model of governance to emerge within Italian health care. © 2011 Blackwell Publishing Ltd.
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More specifically, greater financial responsibilities for the regions were coupled with greater authority to organize and administer health care services locally (Petretto et al. 2003). This was largely due to the introduction of a new governance model that allowed for three inter-related changes in regulation: (1) the regions were given the freedom of infusing greater competition into their regional health care services; (2) this meant the possible introduction of a purchaser–provider split; and (3) it also implied a change in administrative style and orientation, away from traditional top-down decision-making that disadvantaged regions, to the principles of the New Public Management which favoured business-style management practices that would be instituted at the regional level. Accordingly, Italian regulatory developments mimicked those seen in England just two years earlier, however, unlike in England where the internal market had been uniformly introduced, in Italy the regions were given the liberty of deciding how and in what manner they would adopt this new form of regulation and significant inter-regional differences have since emerged. Whereas Lombardy has actively embraced the internal market principles advanced by the 1992/93 reforms, the remaining regions have largely engaged in one of two types of alternative governance models. The one, prevalent amongst the regions of the centre-north and north-east, has elsewhere been referred to as a governance model of ‘co-operation and integration’ that sees regional health services as forming a network in which each provider – whether public or private – is an irreplaceable node that complements rather than competes with other providers in the system; the second model, prevalent amongst the regions of the south, has been referred to as a governance model of ‘residual-incrementalism’ that is defined by an absence of a clear regulatory style and is characterized by a tendency to waver between integration and co-operation as governance tools (Neri 2006, 2008). Despite this variation in governance models, the introduction of the internal market has had a significant impact on service providers in Italy, as it has meant a greater influx of private providers in many regions, as well as a significant redefinition of remuneration and accreditation practices (Neri 2009). Taken together, the new emphasis on competition and market principles in the Italian NHS represents a significant break in regulatory style and ideology. Interestingly, the first proposals for such changes can be traced back to as early as 1984 in Italy, however, it was not until the early 1990s when similar developments across Europe were taking place and when public dissatisfaction with the health care system in Italy had reached 88 per cent that the 1992/93 reforms would be realized (Neri 2009; Mossialos 1997). Accordingly, the confluence of system-specific deficits, public pressure, and an international policy zeitgeist significantly contributed to, if not determined, the timing of the Italian reforms, whereas the surrounding economic climate only helped to highlight their urgency. While reform efforts to introduce a new model of competition-based governance within the Italian NHS did not have the dramatic impact they had promised, the process of decentralizing health care financing that the 1992/93 laws set in place would not be contained. Recall that in holding the regions financially responsible for deficits, the reforms aimed at reducing NHS 498
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spending. However, the ongoing under-funding and poor monitoring of the regions resulted in little change in performance. Moreover, as Italy approached the prospects of having to meet the qualification criteria for European monetary union in the late 1990s, an additional round of health care reforms would soon be deemed necessary in order to contain costs (France 2009). Indeed, the pressure of qualifying for European monetary union detracted from what was otherwise a period of economic upturn in Italy starting in 1997. Interestingly, despite what had hitherto been an unsuccessful attempt at reigning in NHS spending, the central government continued on its path of decentralizing health care in the late 1990s. This development can be explained along two lines, both defined politically. First, after a short governmental interlude, the centre-left regained office under the leadership of Romano Prodi (1996–98), followed by Massimo D’Alema (1998–2000), who was then succeeded by Giuliano Amato (2000–01) who had first held office during the very passing of Legislative Decree no. 517 in 1993. Given this consistency in political leadership, it is therefore altogether unsurprising to see at this time a continuation of decentralization as a policy solution for reigning in the perennial problem of uncontrollable health care spending. However, national electoral politics alone do not tell the whole story; rather developments also taking place at the regional level in the form of the political mobilization of the (far) right also play an important role in explaining the advancement of decentralization in health care during the late 1990s. These are discussed at length elsewhere (Fargion 2006) and are summarized here briefly by stating that the emergence of the political party Lega Nord was a source of great political pressure, such that regional empowerment in many areas of social policy including health care was granted by the central government as a means of quelling political unrest and separationist tendencies in the north. Decentralization was therefore a kind of panacea: an important policy legacy for the centre-left to return to as it grappled with the ongoing financing woes of the NHS, as well as the political interests of what had become a very vocal opposition. But how exactly was decentralization furthered in the reforms of the late 1990s? Mainly, changes during this period surmounted in the total regionalization of financing with the establishment of a regional tax (IRAP) in 1998 (Legislative Decree no. 446 in 1997) and a system of revenue sharing between the regions based on valued added tax (VAT) and an increased share in excise duties on oil products and, to a lesser extent, income tax (Legislative Decree no. 56 in 2000). This radical new system of financing did away with the earmarked funding coming from the central government’s NHF, which was instead replaced by an Equalization Fund that was created to redistribute financing to the regions on the basis of geographic and population size, health care needs of the population and fiscal capacity. The rationale behind these reforms was to better couple economic trends with health care expenditure (Bordignon and Giarda 2004). Given the climate of economic growth that Italy experienced at the end of the 1990s until 2001, such reasoning was well received as a step forward in better financing the NHS. However, the regionalization of financing was also intended to hold the © 2011 Blackwell Publishing Ltd.
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regions more accountable for their spending by giving them various sources of financing to draw from. These sources were expanded when, in August 2000, the central government gave the regions the green light to various other means of revenue raising for any costs exceeding regional thresholds. This has meant the introduction or increase of patient co-payments, the introduction of a regional addition to personal income tax and the possibility of further increases to IRAP (Fargion 2006). As the Amato cabinet gave way to the centre-right party led by Silvio Berlusconi in 2001, the regulation of health care financing saw further changes in the way of a heightened emphasis on privatization and the passing of a constitutional amendment in March 2001 (Title V) that re-emphasized both the responsibilities of the regions in organizing and delivering health care services, as well as the rights of Italian residents to care that is free at the point of delivery. This placed greater pressure on the regions to assure their populations’ coverage in line with lists of services defined by the central government. By most accounts, the constitutional amendment of 2001 represents an important first step by the central government at trying to counter the centrifugal forces of health care decentralization that had been taking place within a larger context of political devolution within Italy (France 2009). As the past decade has unfolded, the Italian central government would go on to place greater emphasis on monitoring regional performance in health care. Within this context, it is important to note the role that the State and Regional Accords – established at the State–Regions Conference – have played in defining regulatory policy during this period. Of particular importance were those meetings of 3 and 8 August 2001 which aimed at controlling health care spending, as well as that of 23 March 2005, which established the ‘Pact for Health’ (Ministero della Salute 2006) between the state and the regions. Amongst other things, the pact defines a greater role for the state in financially supporting the regions, which, in turn, are to be held highly accountable for the efficient usage of funds granted by the state and the balancing of regional budgets. One driving force for this renewed effort to control health care spending concerns the ongoing pressure on the Italian government to meet its financial obligations to the EU regarding aggregate levels of public expenditure and public debt. These obligations have been aggravated by the economic instability brought on by the global financial crisis that began in 2001, which has caused Italy to experience acute economic downturn in 2005 and 2008 to the present. Despite a small interlude of the central government’s reassertion in health care, Italy’s current economic circumstances have led to even greater decentralization in health care, with the passing of the most recent reform on fiscal federalism in May 2009 (Legislative Decree no. 42) under the ongoing leadership of the Berlusconi government. Much in the spirit of its predecessors, this reform grants the regions greater revenue raising powers in order to better match their spending powers in social policy. This is especially relevant where health care is concerned, as the regions currently dedicate 70 per cent of their budgets to health care services and manage 90 per cent of total public expenditure on health care. To be introduced over the mid-term, the rationale behind the 2009 law mimics that of all pre-existing efforts at 500
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decentralizing health care in Italy: by granting the regions more financial autonomy, the regions can be expected to better live within their means and spend more responsibly. In other words, the policy solution to the perennial problem of health care financing remains the same even some 20 years after its first emergence in 1992 – namely, continued decentralization. Since its inception in 1978, the Italian NHS has undergone a significant transformation in the way of decentralization and the introduction of the internal market. These changes in regulation have been direct responses both to the system-specific deficiencies typical of an NHS, but also the particular failings of the Italian health care system in controlling regional spending. Within this context, economic crises have served to stress the need for reforms, without actually driving them. Of greater significance in explaining changes in regulation for this case has been the interaction between system-specific deficits and institutional factors lodged especially within the regions such as political-administrative culture, political interests, as well as levels of corruption. These factors, coupled with the significant role of policy ideas in shaping policy solutions, as well as pressure brought on by public dissatisfaction with the health care system have determined the content and timing of reforms. Interestingly, despite the persistence of system-specific problems over our period of observation, the Italian government has responded with great consistency in its reform measures, both in periods of acute economic crisis and that of relative stability – namely, decentralization or the regionalization of health care financing and a (varied) reliance on the internal market.
NHS Reforms: System-specific Deficits versus Economic Crises Viewed comparatively, findings for the English and Italian NHS point to the significant role that system-specific deficits play in driving policy change. For both cases, these included the need to correct for the limitations of the health care system itself. Suffering from the perennial problems of under-funding and state failure, the English NHS and the Italian NHS have both sought out solutions in the private sector with the introduction of the New Public Management and the internal market. These shared solutions provide strong evidence for the role of system-specific deficits in explaining policy change. In the case of Italy, however, whose health care system suffers from the peculiar problem of unruly regional spending, the government has also seen fit to radically decentralize health care financing in line with its larger agenda of political devolution. This said, the need for change – whether driven by system-specific deficits or country-specific factors – does not necessarily lead to the adoption of one or another set of policy solutions. Rather, as seen in our case studies, ideas and the competing role of political ideology and/or institutional factors play an equally important role in defining the content and timing of regulatory changes. In this light, acute economic crises have served to highlight the urgency of reforms without actually driving them; meanwhile system-specific deficits, the overwhelming driving force of reforms, have generated the need for reforms without defining their actual content. Across our period of observation, we therefore find that reforms passed during acute © 2011 Blackwell Publishing Ltd.
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phases of economic instability do not substantially differ from those passed over the larger period of austerity politics, which was first triggered by the oil price shocks of the early 1970s. Moreover, the nature of reforms passed over time for each our two cases show remarkable consistency, thereby suggesting that health care system responses to crisis – whether prolonged or acute – are essentially more of the same.
Conclusion In examining regulatory changes, their content, their timing, and their underlying causes over the past four decades for two NHS systems, the present study has sought to establish whether (and to what extent) acute economic crises play a part in driving health care policy change; and if so, whether reforms passed during such phases are substantively different than those passed during periods of relative economic stability. Moreover, we have asked whether health care systems of the same type – here, NHS – derive shared approaches to dealing with policy challenges. In doing so, we have also examined the effects that the competing role of system-specific deficits play in driving policy change. Our findings for England and Italy lead us to conclude that economic shocks, while creating windows of opportunity for significant policy change to take place, do not play as significant a role as system-specific deficits in driving reforms. However, system-specific deficits and thereby functional arguments alone do not suffice in explaining changes in regulation for our cases. Rather, the content, timing and successful passing of reforms depend largely on the acceptance and diffusion of policy ideas by political actors who, driven by political ideology and/or necessity, push certain policy solutions through. In the case of Italy, other institutional factors lodged deeply within the regions themselves also play a major role in defining and driving change. But what can be said of the nature of health care policy itself during times of economic crisis? Here too our findings suggest that periods of acute economic downturn versus those of relative stability do not produce inherently different policy solutions. Rather, developments in regulation for our cases demonstrate remarkable consistency in the choice of policy instruments and paradigms adopted over time: in both England and Italy, the use of private market principles takes off with the introduction of the New Public Management and internal market, which has since been successively reinforced in all reforms thereafter. In Italy, these developments have also been coupled with the full regionalization of health care financing, which has seen consistent advancement over time. Taken together, these developments point to the emergence of a path-dependent phenomenon in the face of perennial problems. While the results of our study provide strong evidence for the role of system-specific deficits and the persistence of policy ideas or paths where NHS reforms are concerned, it remains to be seen as to whether similar findings characterize other health care system types, especially where the state is not as directly and deeply involved in health care policy and where many other actors, interests and ideas are at stake. In the case of social insurance or private 502
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insurance systems, for example, changes in health care policy might be the result of a more diverse array of factors. Nevertheless, findings observed for the NHS system type point to the strong role of system-specific deficits and ideas, which can affect all health care systems albeit in different forms. To speak of future developments for the NHS, our findings suggest that we can expect to see more of the same policy developments as we continue to face our current global economic crisis and as we move past it. In this vein, it would appear that only the spread of radically new policy ideas met by strong political support will lead to new directions in health care policy.
Notes 1. The authors wish to thank the Deutsche Forschungsgemeinschaft for its generous and ongoing support to carry out this research. 2. For a detailed conceptualization of health care system regulation, see Wendt et al. 2009. 3. For a detailed account of economic developments and health care system financing in Italy, see Frisina Doetter and Götze 2011. 4. Quality as a system-specific deficit is discussed on p. 491. 5. This was due to the mismanagement of funds, high administrative and bureaucratic costs for social insurance actors, and a cost explosion in the hospital sector: in the inpatient sector alone, expenditure tripled between the years 1969 and 1974, with an average annual growth rate of 24.6 per cent (Neri 2009). 6. Whereas total health care expenditure as a percentage of GDP did not show much increase or fluctuation during this time, annual growth per capita nearly doubled from 1.5 per cent to 2.6 per cent between 1979 and 1980. During the 1980s, growth spiked regularly above 5 per cent and twice above 9 per cent, with some intermittent years of negative growth as well (Frisina Doetter and Götze 2011).
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