sou · GOB383 · 2001-01-01 00:00:00 — In the light of the information presented some major differences in budgetary adaptation between the two countries can be detected: the savings worth 8 percent of GDP in both countries seem to be spread over a longer time period in ; according to information from the Finnish (1998) concerning the share of cuts between the two Finnish governments, most of the savings, i.e. 60 percent, were introduced between 1991 and 1995, specially in 1992 and 1993. Information for suggests the share of cuts prior to 1994 of all cutbacks Balancing of public budgets 45 was about 19 percent. On the basis of this comparison, was quicker to introduce balancing measures; the savings in were thus weighted in the early 1990s, while in the severest cutbacks took place between 1994 and 1995; the consolidation was achieved in a different way: opted far more for cuts in expenditures, while in the consolidation programme was based almost half-and-half on tax increases and cuts in expenditures; these different consolidation strategies mean that cuts carried out in social policy appear both absolutely and relatively higher in , when contrasted with the size of social protection expen- ditures; looking only at cuts, the division between social policy cuts and other cuts was estimated at about 70/30 in , while in the share of social policy – related cuts appears lower; the division between cuts in transfers and services was estimated at roughly 70/30 in , while social policy cuts in Swedish state budgets were intentionally targeted exclusively at cash benefits; According to the latest policy formulations seems to be con- tinuing its tight budget policy, while has decided to use part of the surplus for policy reforms. 4 Adaptation in social policy After the assessment of budget consolidation as a whole, we next concentrate on policy changes in the social field. A group of Nordic economists has suggested that countries which have achieved success in budget consolidation are characterised by an emphasis on expendi- ture cutbacks, particularly in transfer payments (TemaNord 1997:19). In addition to such transfer cuts, social policy has been affected by changes in the local arena responsible for welfare services. In the previous section it was possible to show that countries differed in the way they implemented revenue and expenditure strategies, with regard to timing of adaptation measures and in the way cutbacks were divided between different policy sectors. Here the interest is on how adaptation is achieved within the social policy sector.1 The section starts with a more general description of adjustment regarding total social protection expenditure and premises for service provision. Thereafter follows a separate focus on changes in four policy areas. 1 While economic reasons have been the main justifications for policy adaptation, not all changes in social policy have aimed at cost-containment. Reforms have been implemented to make the social policy system more responsive to changed circumstances and new needs. 48 Adaptation in social policy Notwithstanding the problems involved2, a description of development of social expenditure as a share of GDP may be a helpful starting point to reveal the trends and difference in levels (Figure 15). Despite the marked difference in unemployment between the countries, the share of social expenditure as a percentage of GDP has always been on a much lower level in . Simplifying a lot, one can say that coverage- wise the differences have been smaller than in a comparison of compensation rates: has usually had lower compensation rates than Sweden3. The sharp increase in the share of social protection expenditure in between 1990 and 1993 is very visible, and owes much to the steep rise in unemployment. Since 1993 social expenditure as a share of GDP has decreased in both countries, but levels are still very differ- ent. It may be that the slightly faster growth and greater reduc- tions in unemployment in contribute to the somewhat more pronounced drop in social protection spending, although the cuts certainly affected it too. According to the estimates for 1998 and 1999, the drop continues to be rapid, and in 1999 the share of social protec- tion expenditure as percentage of GDP was expected to be 27.0 percent (Social assistance 1997). In a EU comparison this means returns to average, even though unemployment is still among the highest in Europe. The disparity with is considerable, both when one considers the relative scope of social 2On a macro-level an increase or reduction in the social expenditure share of GDP may be caused more by changes in the economy than in the social policy system itself. A further problem concerning the interpretation is that needs for support from various programmes also change over time. Changes in unemployment account for much of the changes in the expenditure for unemployment programmes and, indeed, of the whole of social security expenditure. In other words, benefit levels and changes in compensation rates explain only a part of the expenditure development. Thus, for example, even harsh reductions in benefit levels may not bring savings if the number of beneficiaries increases. Besides, there is a certain flow of people from one programme to another. Rule changes may be efficient e.g. in reducing the number of benefit recipients in one programme, but may not result in a reduction of total numbers of benefit recipients if people move from one benefit to another. 3The fact that developed its system later is one reason that contributes to the difference. For instance, in pensions introduced the earnings- related pension scheme later than and therefore average pensions paid out are on a lower level. Adaptation in social policy 49 protection spending in the overall economy and with regard to the downward trends in expenditure share during the latter part of the decade. Social protection expenditure in and – 98, percent of GDP Source: Nososco 1999, 2000. 4.2Premises for service provision It holds for both countries that while cash benefits are the responsi- bility of the state (or other institutions at the national level), services are a local responsibility. Throughout the Nordic countries municipalities or other local authorities are, together with the state, key actors in social policy, unlike in many other welfare states. Municipalities are legally responsible for providing services to their residents. Depending on the nature of the service, a municipality may decide to provide the service itself, buy it from another provider, or unite with other municipalities to secure a better financing base in relation to the size of its population. Local authorities provide the majority of social and health care services themselves, and to a large extent are also responsible for their financing. The state channels subsidies to them to guide the provision and ensure a certain level and quality of services, as well as to even out regional differences. Since the mid-1980s the relation between the central and local governments has been shifting, and following a long process of decentralisation 50 Adaptation in social policy local authorities in the 1990s found themselves with considerably more independence in how services within their area were arranged. Considerable autonomy in provision, funding and decision-making are believed to account for the large variations between the municipalities in the quantity and quality of services, and this certainly presents a major challenge to any attempts to describe developments on the national level. There are differences between municipalities and, within service production in individual municipalities, between different services. In addition to this variation, the administrative shifts that have occurred, together with reforms in the way statistics are compiled, make it difficult to construct a clear picture of the development. For instance, in the shift of elderly care services from the health sector to the social care sector has complicated the compilation of reliable time-series regarding elderly care, even on such crucial issues as resources, personnel and functions. Nevertheless, if one wants to assess development trends between two countries the only real option is to rely on national statistics. While variation within a country cannot be captured, an assessment of the direction of national development should be attainable. In addition to a wave of reforms concerning the position of the municipalities and their powers to decide on service provision,4 local authorities were also faced with a very different economic setting at the dawn of the 1990s. The economic crisis naturally also hit the munici- palities, thereby affecting the options for service provision in various ways. Firstly, the economic situation and unemployment undermined municipal tax revenues. Secondly, as local authorities in and are partly dependent on state subsidies, the problems in state finances were also felt at the local level if and when cuts in subsidies were implemented. To balance this loss and the rising running costs of services, municipalities increased local taxes and user fees for health and social services. Table 5 gives some basic background figures on the size and role of local authorities in and by comparing the situation in 1990 to that prevailing in 1995. The table suggests local authorities in both countries were quick to adjust their expenditures to changes in GDP, and then to re-structure their financing. As can be seen, the share of local authorities expenditure as percentage of GDP remained about the same in both countries, whereas as a share of total public expendi- ture it decreased markedly. In both countries subsidies played a lesser role in local authorities total financing, while user fees increased their relative weight. Tax incomes in total financing increased, especially in 4 State subsidy reforms are undoubtedly among the most important ones. Adaptation in social policy 51 The declining impact of subsidies, especially the faster decrease in their role as a source of income in , is noteworthy. The role of local authorities in the public sector in and and 1995 Local authority expenditures, Expenditures of local authority sector, % of public sector expenditures Taxes, % of local authorities income State subsidies, % of local authorities Fees, % of local authorities income Source: Kurri & Loikkanen 1998, collected from different tables. Note: expenditures are total expenditures, including capital expenditures, but excluding business firms owned by municipalities. The changed circumstances at the local level also meant changes on the demand-side. For instance, increased unemployment in meant that the demand for child day care decreased. Furthermore, there were changes in the political balance, ideological changes concerning the role of public authorities, and calls for more citizen participation in the running of services. By and large then, the economic premises for local service provision altered considerably, but there is also a mixture of other reasons and justifications for the changes in the ways and means of service provision (see SOU 2000:38). These, too, probably influ- enced access to services during the period. In short, there are many reasons to believe that major changes have taken place in all areas of social protection, both in cash benefits and in care services. In the following, adaptation in the social sphere is illus- trated by examining changes in cash benefits, elderly care, child care and activation measures. 4.3Case 1: Adjustments in income transfers In both countries social expenditure accounts for more than a third of all public expenditure and is thus a natural target for savings measures. And as we have seen, the bulk of savings measures were realised in the transfer sphere. The 1990s economic situation and accompanying 52 Adaptation in social policy public discourse about the detrimental effects of the welfare state on the overall economy and on incentive problems may have enhanced the willingness for cutbacks in the social field. Although the economic crisis emphasised the economic motivation for cutbacks, there were ideological motives involved, too. However, as Pierson (1994) has shown, reducing social expenditure is not a simple task. From a savings perspective the benefits that account for most of the expenditure could yield the biggest savings, even with minor cuts. However, from a political perspective the benefits accounting for the highest expenditure usually serve a large part of the population. Pensions are a case in point: a cut in pensions would affect a great number of benefit recipi- ents (and voters) and thereby result in significant political losses. Earlier research on cutbacks (1988; 1988; Pierson 1994) has showed that cuts are often targeted at more selective programmes. Institutional factors, government composition (majority/- minority governments) and parliamentary procedures may also have an important influence on the passage of savings laws. Thus, where cuts should be attempted, and which will ultimately succeed, are by no means obvious. Figure 15 showed how on an aggregate level social protection expenditure share has declined in both countries since 1993, but because this provides no clues on where and how cutbacks have been implemented a more detailed look is needed. However, comparing cutbacks between two countries is complicated by the many areas where cutbacks are possible and by the variety of ways of implement- ing cost-containment. Even such an easy question as how much was cut? may be difficult to answer, as some savings have had a cumulative effect. Delaying indexation is an example of a savings measure that cannot be detected as a cut in expenditures. Some of the cuts affect future benefits, as is the case for pensions in . For the purposes of this report there was no easy way to compare the severity of cutbacks in the two countries, at least in numerical terms. has a Social Expenditure Database (SOCX) that gives statistics on expenditure development in the period 1980–95. However, certain administrative shifts, as well as differences between the countries on what is classified under different categories, meant that efforts based on this data to compare expenditure development for different programmes sometimes proved more misleading than enlight- ening. From the point of view of Nordicness it is most important to assess whether the adjustments have resulted in structural changes. Plougs examination of cuts and reforms of the cash benefit systems in four Nordic countries suggests that between 1980 and 1995 there had Adaptation in social policy 53 been changes in most programmes by differing methods, yet the basic elements and structures had remained intact (1999). It has also been suggested that the adjustments to benefit levels in the four Nordic countries have been changes in degree, not in kind (1999). and Wennemo (1998: 37) conclude that the Swedish system has remained encompassing. Similarly, and Uusitalo (1997: 183) state that the cuts carried out in have not changed the basic features of the Finnish system. Yet it is not very easy to make a qualitative assessment. Although social policy cutbacks often involve savings of hundreds of millions, even billions of or SEK, researchers have paid scant attention to the overall cash benefit changes. One explanation is the multiplicity of programmes with different rules, which would be very demanding to ; there are so many different programmes containing a variety of benefits and forms of assistance. Some offer basic security and some earnings-related security, while some are means-tested. The coverage of programmes also varies, not to speak of calculation rules for determining benefit levels (see e.g. Korpi and 1998). Most importantly, policy changes can affect qualifying conditions, coverage, compensation rates and the length of benefit recipiency, but there are still other influences on the conditions for receiving a benefit. The way programmes in a country are designed varies, and there are differences between countries in this design variation. Here, no frame for a more qualitative comparison could be developed. For these reasons there are no easy ways to summarise the changes, not to speak of comparing them, as there are few overall assessments of changes during the 1990s available to start from. There are three concise national assessments of how cutbacks in social security systems were implemented; one for by Kosunen (1997) and two for by and Wennemo (1998) and (2000). With the help of these an overall description of adaptation patterns is drawn on a country by country basis. 54 Adaptation in social policy In the first tough measures to stem the growth of public expen- ditures were presented as early as 1991 (Kosunen 1997:31). The first savings programme was introduced to parliament in the summer of 1991 and contained estimated savings worth 10 billion in 1992. This savings package involved a large number of cuts in social benefits and services. However, differing opinions over the cuts meant that only 4 billion of savings was actually achieved. With the economic outlook growing ever more gloomy, tougher measures were deemed necessary. The job of looking for further savings was given to the budget chief in the , who presented a major savings plan in October 1992. It is revealing that some of the suggestions in this Sailas Paper were implemented as early as the beginning of 1993. The Sailas Paper proved the most comprehensive agenda of cutbacks, as it suggested reductions in almost all social policy programmes. (Kosunen 1997: 29–39.) Until 1993 there were no major changes in unemployment benefits; the basic unemployment allowance remained at the level of 1991. Earnings-related benefits were cut by 3 percent from the beginning of 1992, and in 1993 the qualifying conditions were tightened. In 1994 the structure of unemployment security was renewed; work history was introduced as a precondition for obtaining the basic unemployment allowance and a limit to the payment period was introduced. Those without a work history would henceforth receive labour market support, which equalled the allowance in its level, but differed in the qualifying conditions. Thus young people entering the labour market with no previous work experience would only qualify for labour market support, while long-term unemployed would become recipients of labour market support after the unemployment benefit or allowance period (500 days) was exhausted. Activation measures were also intro- duced in connection with the new allowance system. In 1995 qualifying conditions for receiving unemployment benefits were again tightened, in 1996 qualifying conditions for labour market support for the young were tightened, and in 1997 there were further changes in qualifying conditions. Sickness benefits have been revised often. Party -led governments raising of the basic security allowance was index-linked, but the compensation rates of earnings-related sickness benefits were 5 What follows is mainly based on the cuts-register compiled by at Stakes, Kosunen 1997 and 1998. This is still far from being a complete and systematic list of changes. SOU 2000:83 Adaptation in social policy 55 reduced in 1992 and 1993. The thresholds of subsidies for medicines, examinations and care were raised. In 1994 child extras were abolished. In 1996 the rules for receiving sickness benefits were revised to reduce the coverage of the system. In 1997 paid maternity leave was slightly extended. The housing allowance was the target of major cuts in 1993, but some 25 percent of those living in rented apartments had already stopped receiving assistance in 1992 after reforms affecting qualifying conditions. Forty-two percent of home owners stopped receiving assistance. The 1994 reform of family supports targeted housing allowances to families with children by relaxing the terms for receiving them. At the same time the terms for childless couples and single adults were tightened. In 1995 further cutbacks were introduced. Family policy changed substantially. Tax deductions for children were abolished and the saving gained was shifted to the amelioration of family benefits. Child allowances therefore increased from their 1990 level. In 1990 the annual child allowance for one child was 3 060 , whereas by 1995 it had grown to 6 840 . In 1990 there was a reform in the child day-care law which allowed the choice of either municipal child day-care or home care allowance. The law guaranteed child day-care or a home care allowance for parents of children under the age of three. Yearly home care allowance revisions were index-linked, but in 1994 the index revision was not made. In 1995 the basic allowance decreased for the first time from 1 958 to 1 908 . To understand the changes in income transfer schemes some taxa- tion modifications need to be highlighted. Overall, taxation has changed since the reform of 1991. Some major deductions (sickness costs, child costs) have been abolished, and sickness insurance contri- butions have been raised. In 1994 part of the responsibility for financ- ing the unemployment insurance and earnings-related pension scheme was transferred from employers to employees. In 1993 the employees contributed 3 percent of their earnings to the pension scheme and 0.2 percent to the unemployment scheme, but in 1994 the unemploy- ment contribution rose to 1.87 percent of gross income. In 1995 the pension contribution rose to 4 percent. The changes made in both taxation and the social security system show that the first years of the slump (1991 and 1992) saw relatively few reforms. As the recession continued and proved deeper than expected, further reform proposals came in 1993, and 1994 continued the trend in savings measures. Despite the change of government in 1995, the cutbacks continued: all previous measures were kept in place 56 Adaptation in social policy and in addition the Social Democrat -led government enacted more savings in the beginning of 1995. The Social-democrats had accused the previous Centre Party -led government of failure to deal with unemployment, which at that time was around 15 percent. The new government adopted the same goal of reducing public sector indebtness, but with a different set of tools. Boosting domestic markets rather than export-led growth became the central aim. The government started by presenting a savings package of 20 billion for 1996 and plans for additional savings between 1997 and 1999. But the budget framework still proved too small, and by February 1996 the government had agreed an additional 1.6 billion of savings for the year. The cuts continued in the budget of 1997 and amounted to 6 billion . Calculations from the suggest that as a result of these savings between 1991 and 1996, social expenditure was 8.6 percent lower than it would have been without them. (Kosunen 1997: 29–39.) Despite these cuts, however, state spending increased rapidly from 1990 and the budget savings from 1992 on were only able to slow down the expenditure increment. Despite the similar timing of the economic crisis, one could argue that economic problems reached Swedish politicians with a considerably longer delay (1999). While there were important cutbacks in social policy during the Bildt government, they began in earnest only after the change of government in 1994 (and Wennemo 1998). and Wennemo (1998) have presented an assessment of the cutbacks in social security in . Since 1993 the share of all social security programmes as percentage of GDP has been reduced. This is partly due to the recovery of the economy (which has increased GDP), but according to and Wennemo (1998) all benefits have also been subject to cuts.