Unit 1. Economics and Public Finance PDF

Unit 1 THE PUBLIC SECTOR IN THE WELFARE STATE Kristina Avramchenko Public Sector Economics 2024-2025  UNIT 1: THE PUBLIC SECTOR IN THE WELFARE STATE 1.1 Concept, aim of the Public Sector. 1.2...

Unit 1 THE PUBLIC SECTOR IN THE WELFARE STATE Kristina Avramchenko Public Sector Economics 2024-2025  UNIT 1: THE PUBLIC SECTOR IN THE WELFARE STATE 1.1 Concept, aim of the Public Sector. 1.2 Functions of the Public Sector 1.3 Public Sector Failures 1.4 The Public Sector of the XXI century: main challenges 2 Unit 1  UNIT 1: THE PUBLIC SECTOR IN THE WELFARE STATE References:  Musgrave, Richard A. and Musgrave, Penny B. (1989): Public Finance in Theory and Practice. Fifth edition. Mc. Graw-Hill. (Chapter 1)  Rosen, H. S. y Gayer, T. (2017): Public Finance, The McGraw-Hill Series in Economics. (Chapters 1, 4 and 5)  European System of Accounts. ESA (2010).https://ec.europa.eu/eurostat/documents/3859598/5925693/KS-02-13-269- EN.PDF/44cd9d01-bc64-40e5-bd40-d17df0c69334  https://data.oecd.org/gga/general-government-spending.htm  https://ec.europa.eu/eurostat/statistics-explained/index.php?title=Government_expenditur e_by_function  https://data.imf.org/?sk=a0867067-d23c-4ebc-ad23-d3b015045405 3 Unit 1 1.1.- CONCEPT, AIM OF THE PUBLIC SECTOR 4 Unit 1 1.1- CONCEPT, AIM OF THE PUBLIC SECTOR Public finance / Public sector economics / Public economics The field of economics that analyzes government taxation and spending (Rosen, 2017). 5 Unit 1 1.1- CONCEPT, AIM OF THE PUBLIC SECTOR Government expenditure, % of GDP, 2022 Source: IMF 6 Unit 1 1.1- CONCEPT, AIM OF THE PUBLIC SECTOR General government spending, total, % of GDP, 2021 or latest available 70.00 60.00 59,05 50,62 50.00 40.00 36,47 30.00 24,38 20.00 10.00 0.00 d ia le d ia el ia ia rg d ia n s lic s lic al y ry m n ia d rk i n y ly m d ia e e l an mb Chi rlan an sra ton tral ou lan atv apa tate ub and ub tug rwa ga do ede en lan ma pa an Ita giu lan str eec anc rI e lo e u I s s b o L J S p rl p r o n g v e n S rm l i n u r r o itz Lit h E Au em P d e he e Po N Hu in Sw Slo Ic e e Be F A G F C x ite ak R et ch R K D G Sw L u n N e te d U lov z ni S C U Source: OECD (2023), General government spending (indicator). 7 Unit 1  1.1- CONCEPT, AIM OF THE PUBLIC SECTOR (%) Share of population who indicate high or moderately high trust in their national government (on a 0-10 scale), 2023 70 60 50 40 36.77 30 20 10 0 E X X N R EL IN RL S L K D E D T R P L U A I A L C T K L A N R E C H L U ME C A N O B F I AU NZ DN NL SW EC ES KO ES IS DE IT CR FR CO GR PR SV CH LV SV GB CZ O Source: OECD (2023), Trust in government (indicator). 8 Unit 1  1.1- CONCEPT, AIM OF THE PUBLIC SECTOR General government expenditure by function (COFOG), % of GDP, Spain, 2021 Social protection 20.6 Health 7.3 Economic affairs 6.5 General public services 5.9 Education 4.6 Public order and safety 2 Recreation, culture and religion 1.2 Environmental protection 1 Defence 1 Housing and community 0.5 amenities 0 5 10 15 20 25 Source of data: Eurostat 9 Unit 1 1.1- CONCEPT, AIM OF THE PUBLIC SECTOR General government spending, Spain, total, % of GDP, 1995 - 2021 54 51,95 52 50 48 46 44 42 40 38 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 Source: OECD (2023), General government spending (indicator). 10 Unit 1 1.1- CONCEPT, AIM OF THE PUBLIC SECTOR General government revenue, total, % of GDP, 2022 70 65,24 60 50 46,38 42,99 40 30 22,95 20 10 0 l nd ia ia ia ca nd lic lic da ry nd m ia n s g n y a k n y a e d ai nd our uga nio an are ar de Ital stri ium ec lan nc wa e y ela atv uan ton Ri ola ub ub na nga ela gdo ven p S erla b ort U rm ro m e u l g re n ra r Ir L t h Es t a p p i o Li s P Re Re Ca Hu I c K in S lo th xe m P an e G Eu D en Sw A Be G F F N Co ak c h d e u pe ov Cze n it e N L ro S l U Eu Source: OECD (2023), General government revenue (indicator). 11 Unit 1 1.1- CONCEPT, AIM OF THE PUBLIC SECTOR General government revenue, Spain, total, % of GDP, 1995-2022 43,74 44 42 40 38 36 34 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20 21 22 19 19 19 19 19 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 Source: OECD (2023), General government revenue (indicator). 12 Unit 1 1.1- CONCEPT, AIM OF THE PUBLIC SECTOR 13 Unit 1 1.1- CONCEPT, AIM OF THE PUBLIC SECTOR General Government Debt, Spain, % of GDP 140 120 100 80 60 40 20 0 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 Source: IMF 14 Unit 1 What do we understand by Public Sector? 15 Unit 1 1.1- CONCEPT, AIM OF THE PUBLIC SECTOR  The general government sector consists of institutional units which are non- market producers whose output is intended for individual and collective consumption, and are financed by compulsory payments made by units belonging to other sectors, and institutional units principally engaged in the redistribution of national income and wealth (European system of accounts (ESA) 2010 §2.111).  The general government sector is subdivided into four subsectors: central government, state government (where applicable), local government, and social security funds (where applicable). 16 Unit 1 1.1- CONCEPT, AIM OF THE PUBLIC SECTOR  Classification of economic agents (following European System of Accounts, ESA 2010):  Non financial companies  Financial companies  Public Sector  Non-profit institutions serving households, NPISH  Households  Rest of the world 17 Unit 1 1.1- CONCEPT, AIM OF THE PUBLIC SECTOR 18 Unit 1 1.1- CONCEPT, AIM OF THE PUBLIC SECTOR  Public Sector (Spain):  Public Sector (stricto sensu): General Government (Public administrations) - WT (State, Direct, Assets, te:  Public Sectorworldwide (lato sensu), takesowned assets into account by public owned enterprises => General individuals, Government accrual: + Public 31 Owned st Non financial enterprises (50% operational costs financed through sales, board members named December) by Government) and Public Financial Institutions (eg. Bank of Spain) (Public administrations + Public enterprises)  Central Government: its scope is defined by the Central Government Budget => Social Security, Public Enterprises belonging to the Central Government, and Central Government stricto sensu 19 Unit 1  1.1- CONCEPT, AIM OF THE PUBLIC SECTOR Public Sector stricto sensu: General Government Central Government Regional and Local Social Security Government - Ministries, - Regions - Central Parliament, - Local entities: - Regional Senate… municipalities, - Agencies: Spanish counties, provinces Statistical Office… 20 Unit 1 What should be the size of the government in the economy? 21 Unit 1 1.1- CONCEPT, AIM OF THE PUBLIC SECTOR How can we measure the weight of the Public Sector within the economy?  The number of workers in the public sector (often used by journalists and politicians)  A more common approach is to measure the size of government by the volume of its annual expenditures (three types): 1. Purchases of goods and services. 2. Transfers of income to people, businesses, or other governments. The government takes income from some individuals or organizations and gives it to others. 3. Interest payments.  The cost of regulation? Issuing regulations per se is not very expensive, but compliance with the rules can be very costly. (E.g. Air bag requirements raise the cost of cars.) 22 Unit 1  1.1- CONCEPT, AIM OF THE PUBLIC SECTOR SPAIN Index of economic freedom (2023) Overal Score – 65 World Rank – 51 Property Rights 87,2 Judical Effectiveness 73,1 Govt Integrity 66,9 Tax Burden 58,2 Gov't Spending 30,2 Fiscal Health 7,4 Business Freedom 75,2 Labor Freedom 62,1 Monetary Freedom 80,6 2023 Score Trade Freedom 83,6 Investment Freedom 85 Financial Freedom 70 Source: Heritage Foundation (2023) 23 Unit 1 1.1- CONCEPT, AIM OF THE PUBLIC SECTOR  Problem: Non-monetary nature of many of the operations of the Public Sector. Lack of homogeneous statistical series.  Solution: Measurement tends to focus on those activities with a monetary reflection that are more easily identifiable.  Aggregate indices based on the budgetary operations of the Public Administrations. The most used are those that refer to public income and expenditures. 24 Unit 1 1.1- CONCEPT, AIM OF THE PUBLIC SECTOR Exercise 1 Based on the data provided in a separate Excel spreadsheet, please calculate the following for the Spanish economy from 2021 to 2022: 1. The absolute change in government expenditures. 2. The change in government expenditures in real (i.e., inflation-adjusted) terms. 3. The change in real government expenditures per capita. 4. The total government expenditure as a percentage of GDP. 5. The change in expenditures as a percentage of GDP. 6. Additionally, identify which components of the budget experienced the largest relative increases and the largest relative decreases from 2021 to 2022. 25 Unit 1 1.1- CONCEPT, AIM OF THE PUBLIC SECTOR The Spanish economy is a mixed economy  A part of the economic activity responds to market principles:  Individuals and companies make decisions in a decentralized way.  Ownership of resources is private.  Prices result from the interaction between supply and demand.  There is a Public Sector that has been gaining weight in the economy:  That part of the national economy whose decisions and activities depend on the authority of the public powers.  Power of coercion (Ex: Tax collection, compulsory expropriation).  Political-social criteria (No profit maximization).  Centralized decision making 26 Unit 1 1.1- CONCEPT, AIM OF THE PUBLIC SECTOR Organic vs Mechanistic view of the government  Organic Perspective:  Society is conceived of as a natural organism. Each individual is a part of it, and the government can be thought of as its heart.  The individual has significance only as a part of the community and the good of the individual is defined with respect to the good of the whole. 27 Unit 1 1.1- CONCEPT, AIM OF THE PUBLIC SECTOR  Community is stressed above the individual.  The goals of the society are set by the state, which leads society towards their realization.  Because societal goals can differ, a crucial question is how they are to be selected. Proponents of the organic view usually argue that certain goals are natural for the societal organism to purse (e.g, pursuit of sovereignty over some geographical area). 28 Unit 1 1.1- CONCEPT, AIM OF THE PUBLIC SECTOR  Mechanistic View:  Government is not an organic part of society. It is a contrivance created by individuals to better achieve their individual goals.  The individual rather than the group is at center stage. 29 Unit 1 1.1- CONCEPT, AIM OF THE PUBLIC SECTOR  The State exists to ensure the good of the people. What does good mean and how should the government act to promote it?  There is a practically universal agreement in the sense of recognizing that it is good for people that the State protects them from violence.  In order to do so, the State must have a monopoly on coercive power.  The state must provide the infrastructures required for any society to function. 30 Unit 1 1.1- CONCEPT, AIM OF THE PUBLIC SECTOR Indicate whether each of the following statements is consistent with an organic or mechanistic view of government: a. “If you want to believe in a national purpose that is greater than our individual interests, join us” [Senator John McCain]. b. “Freedom of men under government is to have a standing rule to live by, common to every one of that society, and made by the legislative power vested in it; a liberty to follow my own will in all things, when the rule prescribes not, and not to be subject to the inconstant, unknown, arbitrary will of another man” [British Philosºopher John Locke]. c. “The old values of individualism, capitalism and egoism must be demolished” [Venezuelan President Hugo Chavez]. 31 Unit 1 How do we analyze the Public Sector? 32 Unit 1 1.1- CONCEPT, AIM OF THE PUBLIC SECTOR Models of analysis of the public sector The Normative The Positive Ethical framework Empirical analysis Makes value judgments (preferences) Describe facts 33 Unit 1 1.1- CONCEPT, AIM OF THE PUBLIC SECTOR Are these questions normative or positive? 1. What criteria should be applied when one is judging the merit of various budget policies? 2. What are the responses of the private sector to various fiscal measures, such as tax and expenditure changes? 3. What are the social, political, and historical forces which have shaped the present fiscal institutions, and which have determined the formulation of contemporary fiscal policy? 34 Unit 1 1.2.- FUNCTIONS OF THE PUBLIC SECTOR 35 Unit 1 What should be the role of the Public Sector? 36 Unit 1 1.2- FUNCTIONS OF THE PUBLIC SECTOR Traditionally the basic task of the Public Sector has been to guarantee the administration of the State  That is to say:  General Administration Services.  National defense.  Order and Justice.  Later he took over two essential functions:  Develop the Social Welfare Policy.  Organize common services that would not otherwise be produced to the socially desirable extent (infrastructure, health, education, etc.) 37 Unit 1  1.2- FUNCTIONS OF THE PUBLIC SECTOR Major Functions (R.A. Musgrave):  Allocation function:  It seeks to optimize the allocation of resources between alternative uses.  Public interventions that affect the quality and quantity of production factors or their sectoral or regional distribution.  Provision of Public Goods.  Stabilization function: the use of budget policy as a means of maintaining high employment, a reasonable degree of price level stability, and an appropriate rate of economic growth, with allowances for effects on trade and on the balance of payments (macroeconomic goals).  Redistribution function: adjustment of the distribution of income and wealth to ensure conformance with what society considers a ''fair‘’ or ‘’just'' state of distribution:  Between agents or regions.  Policies designed to modify the primary distribution of income.  Progressive taxation, social transfers, education and public health 38 Unit 1 1.2- FUNCTIONS OF THE PUBLIC SECTOR Public intervention is produced, fundamentally, through the following instruments:  Basic legislation.  Regulation.  The public sector financing and that of the private sector expenses and productions.  Public production.  Income transfers associated with redistributive policies. 39 Unit 1 1.2- FUNCTIONS OF THE PUBLIC SECTOR Welfare Economics  Pareto efficient An allocation of resources such that no person can be made better off without making another person worse off.  Pareto improvement a reallocation of resources that makes one person better off without making anyone else worse off.  If a Pareto improvement is possible the current allocation is not Pareto efficient  Example (parking) 40 Unit 1 1.2- FUNCTIONS OF THE PUBLIC SECTOR 41 Unit 1 1.2- FUNCTIONS OF THE PUBLIC SECTOR 42 Unit 1 1.2- FUNCTIONS OF THE PUBLIC SECTOR 43 Unit 1 1.2- FUNCTIONS OF THE PUBLIC SECTOR Fundamental theorems of the Welfare Economics.  First fundamental theorem of welfare economics ( “Invisible Hand Theorem”):  Any competitive equilibrium leads to a Pareto efficient allocation of resources.  The conditions required by the First Fundamental Theorem of Welfare Economics are difficult to fulfill in the real world:  Perfectly competitive markets (no one has any market power).  Existence of markets for all goods. In the reality markets are not perfectly competitive What economic role does the government have to play? 44 Unit 1 1.2- FUNCTIONS OF THE PUBLIC SECTOR Fundamental theorems of the Welfare Economics.  Fairness and the second fundamental theorem of welfare economics:  It has been implicitly assumed that efficiency is the only criterion for deciding if a given allocation of resources is good. 45 Unit 1 1.2- FUNCTIONS OF THE PUBLIC SECTOR Fundamental theorems of the Welfare Economics.  Fairness and the second fundamental theorem of welfare economics:  Even if the economy generates a Pareto efficient allocation of resources, government intervention may be necessary to achieve a “fair” distribution of utility.  Second Fundamental Theorem of Welfare Economics, society can attain any Pareto efficient allocation of resources by making a suitable assignment of initial endowments and then letting people freely trade with each other. 46 Unit 1 1.2- FUNCTIONS OF THE PUBLIC SECTOR  Market Failures constitute an argument in favor of state intervention:  There are conditions in which markets are not Pareto efficient:  Public Goods.  Imperfect competition.  Market Incompleteness.  Asymmetric information.  Externalities. 47 Unit 1 1.2- FUNCTIONS OF THE PUBLIC SECTOR Public goods:  Pure Public Goods are characterized by the following properties:  Nonrival in consumption. The fact that one person consume it does not prevent anyone else from doing so as well.  Exclusion is not possible: Preventing someone else from consuming it is impossible or very expensive. Prices result from the interaction between supply and demand.  E.g. lighthouse  On the contrary, a private good is rival and excludable in consumption. 48 Unit 1 1.2- FUNCTIONS OF THE PUBLIC SECTOR Public goods: Rival in consumption Nonrival in consumption Excludable Private goods Impure public good Food Natural monopolies Clothes Patents Nonexcludable Impure public good Pure public goods Common resources Police Defense Lighthouse Classification as public good is not an absolute; It depends on the market conditions and the state of technology. 49 Unit 1 1.2- FUNCTIONS OF THE PUBLIC SECTOR Public goods:  Although everyone consumes the same amount of the good, this consumption does not have to be valued in the same way by everyone.  People may have an incentive to hide how much they value a public good (“free ride”).  The classification of public good is not absolute: it depends on market conditions and the state of technology. We say that we are facing an impure public good when there is rivalry or the possibility of exclusion in some measure.  Private goods are not necessarily provided only by the private sector.  The public provision of a good does not necessarily imply that it is also produced by the public sector. Public sector finances the production of these goods 50 Unit 1 1.2- FUNCTIONS OF THE PUBLIC SECTOR Imperfect Competition:  E.g.: Monopoly. The quantity supplied of goods and services is less than that demanded by society.  Public services: They can originate natural monopolies since they require high initial investments and expelling small companies from the market. E.g.: Railway infrastructure.  Solutions: Need for public sector intervention.  Measures: Sales price regulation, antitrust regulations, etc. 51 Unit 1 1.2- FUNCTIONS OF THE PUBLIC SECTOR Nonexistance of Markets and Asymmetric Information:  Sometimes there are no certain private markets due to asymmetric information (information between economic agents is different).  Example: there are no offers of “poverty insurance”  Asymmetric information: one party in a transaction has information that is not available to another. 52 Unit 1 1.2- FUNCTIONS OF THE PUBLIC SECTOR Externalities:  There are many cases in which the actions of a person or a company affect other people or other companies, in which a company imposes a cost on others but does not compensate them, or in which a company generates a benefit to others, but does not receive any compensation in return. Like smoking  Externalities can be produced by consumers as well as firms  Externalities are reciprocal in nature  Externalities can be positive 53 Unit 1 1.2- FUNCTIONS OF THE PUBLIC SECTOR 54 Unit 1 1.2- FUNCTIONS OF THE PUBLIC SECTOR 55 Unit 1 1.2- FUNCTIONS OF THE PUBLIC SECTOR Solutions to externalities:  Direct Regulation.  Taxes and Subsidies.  Issuance of Pollution Rights (EU Emission Trading System).  Definition of Property Rights: Coase 56 Unit 1 1.2- FUNCTIONS OF THE PUBLIC SECTOR Coase Theorem 57 Unit 1 1.2- FUNCTIONS OF THE PUBLIC SECTOR Coase Theorem  The root cause of inefficiencies associated with externalities is the absence of property rights.  When property rights are assigned individuals may respond to the externality by bargaining with each other.  Coase Theorem implies that once property rights are established, government intervention is not required to deal with externalities.  Two assumptions: 1. The cost to the parties of bargaining is low. 2. The owners of the resources can identify the source of damages to their property and legally prevent the damages.  In reality, the 2 assumptions do not always hold. For example: air pollution. 58 Unit 1 1.3- PUBLIC SECTOR FAILURES 59 Unit 1 1.3- PUBLIC SECTOR FAILURES  Government failure occurs when the government intervenes to correct a market failure but ends up causing a net loss of economic welfare. In other words, the costs of the intervention are greater than the benefits provided by it.  Government failures types:  Imperfections derived from the political market. Due to that politicians promote their self-interest, such as gaining votes or political power.  Inefficiencies in the production of public and social goods. It is caused by limited information the government has to determine the type and quantity of goods to be provided.  Difficulties in controlling natural monopolies. The cost structure of these services (e.g., water or electricity) is often not transparent. Bureaucrats may prioritize their interests, leading to pricing decisions that benefit the public companies rather than consumers. 60 Unit 1 1.3- PUBLIC SECTOR FAILURES Government failures types (cont.):  Existence of internalities in contrast to externalities in the private sector. Internalities imply that certain private costs or benefits are considered in public decision-making.  Existence of externalities assumed by public authorities due to the activities of organized interest groups. This can lead to policies that favor certain groups at the expense of others.  Ignorance of the real costs due to the absence of competition and the risk of bankruptcy. Over time, this can lead to increased operating costs within the public sector. 61 Unit 1 1.4.- THE PUBLIC SECTOR OF THE XXI CENTURY: MAIN CHALLENGES 62 Unit 1  What should be the role of the Welfare State in the 21st century? Recommended reading 63 Unit 1  1.4.- THE PUBLIC SECTOR OF THE XXI CENTURY: MAIN CHALLENGES Proportion of population aged 60 or over in 2015 and 2050 Challenge 1: Ageing and intergenerational equity.  By 2050, the proportion of the world’s population that will be over 60 will double from 12% to 22%.  80 % of the increase in the population over 60 will be in low and middle income countries which will have to adjust to ageing about 3 times faster than the advanced economies.  The working age population is declining dramatically as a share of the world population – implying the need for ever more taxation of the Source: UNDESA Population division, World population prospects: the working age population and/or the 2015 revision imperative to extend what working age means. 64 Unit 1 1.4.- THE PUBLIC SECTOR OF THE XXI CENTURY: MAIN CHALLENGES Challenge 2: Globalisation  The competition associated with increasingly integrated global markets is often blamed for putting greater pressure on welfare states.  If countries have to compete with others with lower wages or weaker social protection, there is a risk of downward pressure on wages in advanced economies.  The debate is often framed as a competition between workers in rich countries versus workers in poorer countries. But the real issue is more one between capital (which is highly mobile) versus labour (which is much less mobile). 65 Unit 1 1.4.- THE PUBLIC SECTOR OF THE XXI CENTURY: MAIN CHALLENGES Challenge 3: Inequality  Convergence of incomes between countries, increase of inequality within countries.  In Europe in 1980, 38% of private wealth was inherited whereas in 2010 that share had risen to 54%.  Declining trend in tax progressivity in OECD countries. Corporate tax has fallen and consumption tax have risen. 66 Unit 1 1.4.- THE PUBLIC SECTOR OF THE XXI CENTURY: MAIN CHALLENGES Challenge 4: Technology and Automation.  The biggest driver for the fall in wages for low skilled workers has been technology.  Estimates vary, but artificial intelligence and automation will probably affect about 50% of jobs within the next 2 decades.  Technological revolution will make professional services like accounting, legal services, general medicine and education more affordable.  While the nature of work will change and new jobs will emerge, it is not clear whether there will be fewer jobs per se. The only certainty is that most workers will have to be ready to adjust to these changes and their ability to work. 67 Unit 1 1.4.- THE PUBLIC SECTOR OF THE XXI CENTURY: MAIN CHALLENGES Challenge 4: Fiscal sustainability. Public social spending as a %  In virtually all advanced GDP, Spain (1980 - 2022) economies, the welfare state 35.0 has expanded massively and 30.0 28.1 pressures on spending are 25.0 likely to rise further in part 20.0 because of pensions and 14.9 15.0 health costs for ageing 10.0 populations. 5.0 0.0 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12 14 16 18 20 22  These increased demands 19 19 19 19 19 19 19 19 19 19 20 20 20 20 20 20 20 20 20 20 20 20 have to be met in the context of diminished fiscal space after Source: OECD (2023), Social Expenditure (SOCX) the 2008 financial crisis and The range of social purposes addressed by policies captured in SOCX include: Old age and Survivors, Incapacity-related benefits, Health, COVID-19. Family (e.g. child allowances, paid parental leave), Active Labour Market Policies, Unemployment, Housing. Other Contingencies. 68 Unit 1 1.4.- THE PUBLIC SECTOR OF THE XXI CENTURY: MAIN CHALLENGES Challenge 4: Fiscal sustainability. Public social spending is worth 21% of GDP in 2022 on average across the OECD but levels differ greatly across countries Public social expenditure as a percent of GDP, 2019-2022 2019 2020 (p) 2021 (p) latest 2022 (e) latest 35 30 25 20 15 10 5 ce nd rk m aly ria ny ay ce en in nd an al rg ia nd lia D lic m da nd es ia ry lic ia via ds nd el ia nd iye ica ea ile ico r an inla nma elgiu It ust rma orw ree wed Spa eala Jap rtug bou oven ola stra OEC pub gdo ana cela Stat ston nga pub huan Lat rlan erla Isra lomb rela ürk a R Kor Ch ex F F e B A e N G S Z Po xem Sl P Au e in C I d E Hu Re it e itz Co I T st M D G ew u ch R ed K nite ak L N eth Sw C o N L e it U v Cz Un Slo Source: OECD (2023), Social Expenditure (SOCX) 69 Unit 1 1.4.- THE PUBLIC SECTOR OF THE XXI CENTURY: MAIN CHALLENGES Proposed solutions:  Retirement ages. Linking retirement ages mechanically to life expectancy.  Make lifelong learning real. Access to student loans at any age. Provide training vouchers. Public spending on transition to new career.  Flexicurity and active labour market policies. “Flexicurity,” a model associated with the Netherlands and Denmark, is based on three principles: (1) highly flexible labour market; (2) generous social security for workers; and (3) active labour market policies including comprehensive life long learning.  Universal basic income (UBI). UBI can be expensive, inefficient compared to most alternatives because it goes to the non-poor. 70 Unit 1 1.4.- THE PUBLIC SECTOR OF THE XXI CENTURY: MAIN CHALLENGES Proposed solutions:  Is part time work the future of work? The routine aspects are likely to be done by machines. In Netherlands the law prohibits discrimination against part time workers including access to social security. As a result, 76.6% of women and 26.8% of men in the Netherlands work part-time, compared to about 20% on average across the European Union.  Pay for socially useful but historically unremunerated work? Governments could consider public funding to pay for work that provides significant social benefits (such as taking care of the elderly at home).  Preventative and proactive policies (early education and preventative health interventions). The long run effect. 71 Unit 1 1.4.- THE PUBLIC SECTOR OF THE XXI CENTURY: MAIN CHALLENGES Public debate about intergenerational equity “The welfare state is 3/4 piggy bank (mutual insurance over the life cycle) and only 1/4 Robin Hood (transferring resources from the rich to the poor)” Nick Barr Source: OBR – Fiscal Sustainability Report – June 2015 But this intergenerational contract breaks down if there are big differences in the size of generations and in their economics circumstances 72 Unit 1