Lecture 10 Welfare State Expenditure ANDREEA STOIAN, PHD PROFESSOR OF FINANCE DEPARTMENT OF FINANCE AND CEFIMO BUCHAREST UNIVERSITY OF ECONOMIC STUDIES
Social welfare The level of well being of the society Welfare economics The study of the determinants of the well-being, or welfare in society
First Fundamental Theorem of Welfare Economics The competitive equilibrium, where supply equals demand, maximizes the social efficiency. Social efficiency represents the net gains to society from all trades that are made in a particular market and consists of consumer and producer surplus Second Theorem of Welfare Economics Society can attain any efficient outcome by suitably redistributing resources among individuals and them allowing them to freely trade
Consumer surplus Producer surplus Total social surplus (social surplus) First Fundamental Theorem The benefit that consumers derive from consuming a good, above and beyond the price they paid for the good The benefit that producers derive from selling a good, above and beyond the cost or producing that good The sum of consumer surplus and of producer surplus
Second Fundamental Theorem 2.Society can be captured as simply the sum of the individuals that make it up 1.Each individual is taken to be the best judge of his/her own welfare or utility 3.Welfare society is raised, when a reallocation of resources to increase the utility of one individual without decreasing the utility of any other individual The notion of Pareto optimality
Efficiency: - Macro efficiency: Policy should seek to avoid distortions which lead to cost explosion; the efficient share of GDP should be devoted to the totality of welfare state institutions -Micro efficiency: policy should ensure the efficient division of total welfare state resources between different cash benefits and different types of medical treatment -Incentives: the finance and construction of benefits should minimize adverse effects on labour supply, employment and saving Supporting living standards: -Poverty relief: no individual should fall below a minimum standard of living -Protection of accustomed standard living: nobody should face unexpected and unacceptably large drop in their living standards -Income smoothing: institutions should enable individuals to reallocate consumption over their lifetime Welfare state refers to state s activities in the following areas: cash benefits, health care, education, food, housing etc.. Inequality reduction: -Vertical equity: the system should redistribute towards individuals/families with lower income -Horizontal equity: differences in benefits should take account of age, family size, etc. Social integration: -Dignity: cash benefits and health care should be delivered so as to preserve individual dignity -Social solidarity: cash benefits and health care should foster social solidarity
How big is the welfare state? 1. Public social spending is worth 22% of GDP on average across the OECD Public social expenditure as a percent of GDP, 2007, peak level after 2007, and 2014 1,2 35 30 2014 ( ) Peak level after 2007 2007 25 20 15 10 5 0 Source: OECD
The development of the social welfare system across countries Public social spending in selected OECD countries, in percent of GDP 1, 1960-2014 30 Mexico Japan Korea United States EU-21 OECD 25 20 15 10 5 0 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 12 2014 Source: OECD
Observed income distribution
Statistics, Thomas Piketty, L economie des inegualites, 2014 Norway 2.0 Portugal 2.7 Sweden 2.1 Japan 2.8 Denmark 2.2 France 3.1 The Netherlands 2.3 UK 3.4 Belgium 2.3 Austria 3.5 Italy 2.4 Canada 4.4 Germany 2.5 USA 4.5 The distribution of income salary in OECD in 1990, P90/P10
Income distribution and inequality in selected OECD countries in 2012 0.6 12 0.5 0.482 10 10 0.4 0.3 0.2 0.1 0.249 0.251 0.252 0.252 0.261 0.262 0.276 0.278 3.2 3.3 2.9 2.9 3.1 3.3 3.5 3.3 0.29 0.299 0.3 0.302 3.8 3.9 3.8 3.5 0.324 0.326 0.326 0.335 0.34 0.341 4.4 4.4 4.3 4.9 4.9 4.7 0.389 6.2 8 6 4 2 0 0 Gini coefficient of disposable income post-tax and transfers P90/P10 Source: OECD
Government expenditure on education Why? Productivity Improving the health of citizens Social responsability Reducing the number of crimes Redistribution Increasing political responsability Increasing the quality of human capital Failure of the education credit market
Increasing government expenditure on education Why? Demografics Politics Economics Social
Provision of education Fixed quantity
Provision of education Vouchers
Outcomes of education, HDR 2016
European Union targets on education 2020 Education and Training Monitor 2016
Government expenditure od education, 2014 Education and Training Monitor 2016
Price Index for education,2014 Education and Training Monitor 2016
Households expenditure on education out of total government expenditure on education, 2014 Education and Training Monitor 2016
Government expenditure on healthcare There has been observed an increasing tendency over the past decades Why? Increasing the number of population Changing the demographic composition Increasing exposure to various and new risks New diseases Increasing the cost of medical assistance Increasing the life expectancy
Financing the healthcare system German model (Bismark) Mandatory contributions paid by employers and employees The contributions are managed by dedicated institutions (national houses of assurance) The patients do not pay the costs of the treatments and other medical interventions Germany, Belgium, Luxembourg, The Netherlands, France, Austria
Financing the healthcare system British model Provides medical care free of charge for any patient Financed through the taxes paid by British contributors Patients do not pay for the medical services but they have to enrol with a physician rewarded by the National System of Healthcare Financial support of the public budget: 85% Denmark, Finland, Iceland, Norway, Sweeden, Greece, Italy, Canada, UK
Financing the healthcare system US model The medical care service is provided by the market The individuals have to buy private insurance for the healthcare They are not mandatory The private assurance is on individual and contractual basis Provision of the medical care services is through the private institutions and are profit oriented The US government supports the following healthcare public systems MEDICARE: Federal program funded by a payroll tax, that provides health insurance to all elderly over age 65 and disabled persons under age 65 MEDICAID: Federal and state program, funded by general tax revenues, that provides health care for poor families, elderly and disabled CHIP (Children Health Insurance Program): introduced in 1997 to expand eligibility of children for public health insurance beyond the existing limits of the Madicaid
Outcomes od healthcare spending, HDR 2016
Healthcare personnel in the EU, 2014, Eurostat
Government spending on healthcare, 2014, Eurostat
Healthcare spending depending on the financing source, 2014, Eurostat
Social insurance programs Government interventions in the provision of insurance against adverse events. Social Security: provides insurance against earnings loss due to death or retirement Unemployment Insurance: provides insurance against job loss Disability Insurance: provides insurance against career-ending disability Workers Compensation: provides insurance against on-the-job accidents Healthcare Insurance: provides insurance against medical expenditure
Government spending on social protection in EU, Eurostat
The composition of government expenditure on social protection, Eurostat
Government spending on social security in 2013, Eurostat