sou · GWB3105EN · 2009-01-01 00:00:00 — 7.2.1Weak historical link between the cost of welfare service and demography The demand for tax-financed services is often limited to certain age groups. There are also clear gender patterns. In the estimates in the scenarios, total consumption expenditure and the volume of various activities are therefore based on the number of people in different age groups. However, cost trends have historically looked different. Costs have increased more than the population growth warrants Looking back, it is worth noting that the link between the growth in costs and the purely demographically warranted welfare service requirements has been weak. To some extent the increased expenditure on social services, health care and treatment reflects a deliberate policy aimed at raising the level of ambition in these areas. That was particularly true in the 1960s and 1970s. However, even since the 1980s the cost of publicly financed welfare has risen considerably more than population changes can account for. The cost of welfare services for children and the elderly, financed by municipalities and county councils, increased by 42 per cent in fixed prices between 1980 and 2005.212 This is more than the population growth in these groups. The additional activities, which cannot be explained by changes in demography, have averaged 1 per cent a year or 27 per cent over the entire period.213 But the volume of the additional activities has varied over time (figure 7.3). During the 1980s, the volume of additional activities was relatively large, close to 2 per cent a year, and during the 1990s, it was largely non-existent. Between 2000 and 2005, the local government sectors costs have increased 0.9 per cent more than warranted by demographic demands. Moreover, developments have differed considerably from one activity to another. In some cases, the number of services provided has increased, while in other cases the number has remained 212Swedish Association of [2008b]. 213The effect of wage changes has been eliminated, meaning that the cost increase cannot be attributed to increases in wage costs. The Long-Term Survey 2008 , but the cost of providing them has risen. The quality of the services has also changed to an unknown extent. Figure 7.3 Total local government sector costs and costs attributable to population trends 1980–2005 Average annual percentage change Note: The bar showing demographically determined costs illustrates how the costs would have looked for the local government sector if they had followed the population trends for various age groups and the various age groups need of local government services. Source: Authorities and Regions [2008b]. In the local government sector, welfare services have had priority over other activities, not least during the tough economic times of the 1990s. It is clear from table 7.2 that tax-financed activities such as culture, leisure activities, streets and roads have had to take a back seat. The Long-Term Survey 2008 Renewing the Local government sector costs 1980–2005 Average annual percentage change Note: In prices. Source: Authorities and Regions [2008b]. All in all, resources for the production of welfare services by the local government sector have thus progressed at about the same pace as private consumption in the last quarter of a century. The estimates presented in the base scenario, based on an unchanged level of ambition for the welfare services, are therefore quite modest in historical terms. The demand for welfare services increases with higher standards of living Trends since the 1980s indicate that there will probably be an unsatisfied demand for welfare services in the developments described in the base scenario. Given that the services are supplied free of cost or for a low fee, health care and social services will probably never have access to resources large enough to be able to pursue all the activities that are in demand. In other words, there will always be a need to set priorities. The issue is whether it will be plausible to maintain current standards between now and 2030. The volume and quality of welfare services expected will probably increase when the general standard of living rises. Experience also shows that richer countries devote a larger share of resources to health care and social services. For example, there is a relatively strong connection between health care costs as a percentage of GDP and GDP per inhabitant in various countries.214 One of the big challenges looming in the future is how to develop the welfare services in order to meet the increased 214 [2008e]. The Long-Term Survey 2008 demand.215 There are already indications now that the demand for welfare services exceeds the publicly financed supply. This is reflec- ted, for example, in unpaid work by relatives that supplements publicly financed care. However, the extent of the excess demand is difficult to assess. According to figures from , relatives look after close to two thirds of elder care and this percentage has also increased.216 work of this type may in turn have a negative impact on the labour supply, at least in those cases in which the relatives who provide the care are still of working age. Markets that in various ways supplement the public supply have sprung up outside the public welfare systems. One example is the growth of private health care insurance that offers more rapid access to health care than the public systems can offer. Health care insurance is growing more rapidly than any other type of insurance. About 300 000 people currently have private health care insurance.217 In future, the increased demand for welfare services will also try to find possible avenues within the prevailing public system or outside it. Depending on the path taken, there may be different distribution effects and there is also a risk that the trust and legitimacy given the public systems will be affected in the long term. 7.2.2Little opportunity for productivity improvements The increasing cost of some public activities in the long term compared with the cost of other goods and services is usually attributed to the Baumol effect.218 The cost increases are due to the difficulty increasing productivity in activities that are labour intensive. and better welfare services – like many other services – most often require more staff. In other activities, production can generally grow without needing to increase the number of staff to the same extent. If public employees wages 215See also Government 2008/09:1, chapter 8 for an illustration of the scenario in which the volume of public consumption grows more than the rate of growth warranted by demographic trends. 216The [2004]. 217Health care insurance reimburses costs for care and other treatment, surgery and hospital care, after care, health advice, etc. This differs from sickness insurance which provides compensation for loss of income. 218The effect is named after the economist who first described it; see Baumol, W. J. [1967]. The Long-Term Survey 2008 grow at the same pace as those of employees in the private sector, the cost of the public activity will rise relatively more. Even though there is likely some possibility of improving productivity in public activities, it is difficult to ignore that in many cases, welfare services are labour intensive and direct contact between the recipient and the service provider is essential. This applies particularly to childcare and elder care. The number of hours worked in welfare services has also increased somewhat in recent decades. This includes hours worked by both those employed in the public sector and those employed in the private sector, where the latter constitute a growing share.219 The base scenario in the Long-Term Survey is based on zero industry specific productivity growth in the public sector. Fact box 7.1 describes the background to this assumption in more detail. Fact box 7.1 Measuring productivity growth in the public sector The assumption that productivity growth in the public sector is zero may be regarded as an oversimplification. The assumption is based on the method that was used until recently in the National Accounts for estimating production in the public sector. As production by public authorities is to a large extent supplied to users without cost or at much reduced prices, production cannot be valued in terms of market price as is the case in the rest of the economy. The principle applied previously was that the total value of production is equal to the sum of the costs of production, mostly wage costs (the cost method). Since labour productivity is estimated with the help of the ratio of the value added and the number of hours worked, this method of calculation results in unchanged productivity.1 In the National Accounts, work is under way to improve measurement methods for some of the individually consumed and publicly produced services. Underlying this work is the effort in the EU to harmonise the calculations in the system of integrated economic accounts in order to achieve more comparable GDP measures. Production in fixed prices of health and care, education, childcare and elder care is now calculated based on performance instead of cost (the volume measurement method). This means in principle that labour productivity can also be calculated. The new method has only been used in the past few years.2 Statistics shows in a report how the introduction of the volume measurement affected volume growth and thus labour productivity growth.3 The changes compared with the cost method are shown in Table 7.3. The effect on GDP growth of using the volume method instead of the cost method is marginal. The estimates are still uncertain. However, applying the method opens up the possibility in future of capturing productivity growth in public activities in a better way. 219 Authorities and Regions [2008b]. The Long-Term Survey 2008 Public sector productivity 2002–2006 (in percentage points) Productivity, using the Source: Statistics [2008a]. 1 See Brorström, B., and others [2006] for a detailed discussion of productivity and efficiency in local 2 For health and care, the start year is 2003 and for other activities, 2002. Statistics [2008a]. Important to grasp the opportunities to improve productivity Even though major productivity improvements are limited owing to the often labour intensive nature of welfare services, should nevertheless take advantage of what opportunities there are to improve productivity. welfare can then be achieved with the same resources. Substantial cost differences between munici- palities and county councils indicate that more efficient production is possible.220 The differences persist even after differences in the population structure, etc. have been taken into account. One study with the task of assessing the potential for efficiency improvements in the activities of county councils gives a rough estimate of this potential of at least billion over 10 years.221 The Authorities and Regions222 also points out in a report that health care results have increased more than costs in the last three years, which means that productivity 220Swedish Association of [2007]. 221Ministry Publication Series Ds 2005:7. 222Swedish Association of [2008a]. The Long-Term Survey 2008 At the same time, the picture is fragmented. In the health care area, the trend has been more towards increased costs as more illnesses have become treatable. While technological develop- ments in other sectors often save costs, in health care they have been aimed more at improving quality, which, in turn, has meant cost increases.223 This has resulted in the need for stricter priorities as to what there is room for in the provision of tax-financed care. and changes in the forms of governance and organisation are some factors that may increase productivity in the public sector. The Long-Term Survey 2003/04,224summarised a number of studies that looked at the effects of private production and exposure to competition in different areas of the welfare services. The costs of the activities seem to have been cut some- what without seeming to have lowered the quality. In contrast, there is a risk that exposure to competition may increase general administrative costs and lead to oversupply, which in turn increases costs. One conclusion is that competition in itself leads to higher productivity and the possibility of lower prices rather than whether the activity is performed by public or private actors. There are deficiencies in the current system of market opening that urgently need to be remedied, particularly given that market opening will probably increase in a number of areas.225 In order for the greater freedom of choice and market opening to lead to better quality, those consuming the service need to have a good basis for their choice. The freedom of choice model (or client choice model) 226poses important requirements on access to good information on the various providers and their services.227 It also requires good oversight. Various forms of open comparisons have been available 223Lundin, D. [2002]. 225In the (Freedom of Choice Inquiry)(SOU 2008:15), the conditions for increasing the opportunities for freedom of choice systems in both elder care and care for the disabled in health care have been examined. 226The model is applicable when opening up markets for services aimed at individuals, such as child care, education, treatment and elder care. An alternative model for opening up markets for publicly financed activities is the contract model in which activities run by public actors are purchased under the provisions in the Public Procurement Act (SFS 2007:1091). 227A report by the for looks at what actors should be responsible for various types of information and in what forms the information should be provided. Among its proposals is a comprehensive effort to improve the information on the quality of various activities. for [2007]. The Long-Term Survey 2008 for schools for several years now228 and some have also been started for elder care.229 In health and care, much of the informa- tion that already exists needs to be made available to those using the services. Work still remains to be done before there are readily available and clear inter-comparisons that make it easier for the public to make an informed choice. A well-functioning competition pre- supposes inter-comparisons.230 Productivity improvements probably do not lead primarily to cost reductions but to more, and possibly also better, services that can be offered for a given amount of resources. It is difficult to estimate how large the possible productivity improvements are, but it is important to use what possibilities there are. Increased recruitment needs may push up wages and costs Future recruitment needs in the public sector may make produc- tivity increases difficult and push up costs at the same time. Table 7.4 shows that employment needs to increase substantially in the public sector compared with the private sector from now until 2030 for an expansion matching the population trend to be possible. Since the average age of the staff in many activities is currently relatively high, recruitment needs will be greater than the increase in employment. If recruitment needs are met with inexperienced people, productivity is more likely to decline, at least in the transitional period. The cost trend in the base scenario is based on personnel costs (public sector wages) that increase at the same pace as wages in the private sector. Recruitment needs may cause wages to rise more than the average wage trend and thus costs would increase more than in the base scenario. 228The for Educations online information system on results and quality () contains student, staff and cost statistics, marks and test results. 229On web site there is the Äldreguiden (Guide for the Elderly) which compares the quality of health care and social services for the elderly at . 230See also , K-H. [2008] for an analysis of what parts of care may lend themselves to market opening. The Long-Term Survey 2008 Table 7.4 Employment increase in the private and the public sectors 2005–2030 under the base scenario Source: calculations. The regional outlook may be very different. In many regions, parti- cularly those that are sparsely populated, recruitment will probably be much more difficult. The estimates in this Survey do not take into account regional imbalances of this kind. In an appendix to the preceding Long-Term Survey, there was an analysis of future regional development.231 The Survey at that time noted that the shortage of people with a higher education in health care and pedagogy may be substantial in small and peripherally located labour market regions. 7.2.3The health of the population affects cost trends Cost trends in the public sector are also dependent on the health of the population, particularly the effect of ageing on the need for health care and social services. However, what changes can be expected in peoples health in the years ahead is an open question. There are several hypotheses of the affect of a higher average life expectancy on the length of time the elderly will need treatment. According to the hypothesis on postponed illness, the health care needs come later when average life expectancy increases since it is mostly in the final stage of life that people have the greatest need of health care. According to this hypothesis, higher average life expectancy does not lead to increased need of health care. The hypothesis of compromised illness means a shorter period of poor health, which means that the number of years of good health increase more than average life expectancy increases. A third hypothesis assumes that poor health increases concurrently with the 231 Appendix 3 to the Long-Term Survey 2003/04 (SOU 2004:34). The Long-Term Survey 2008 increase in average life expectancy. This is due to more and more older people surviving illnesses, after which they are weaker and more susceptible to new illnesses. Health care needs would thus increase relatively more.232 Depending on which hypothesis proves to be correct, the care and social services needs, and thus the costs, will develop in a different way in the coming years. Within the framework of Statistic Survey of Living Conditions (), a number of indicators of the health of the population are estimated based on interviews.233 It is clear from the Statistics survey that ill health is rising with increased life expect- ancy, but at the same time the trend among the oldest has been to better health over a longer period. elderly report, however, that they suffer from long-term illnesses and severe health problems. All in all, health in the 1990s, according to current indicators, has improved more for older than for younger people, particularly people aged 20 to 30.234 What the long-term consequences will be for health care needs and for work capacity when these younger people reach an advanced age is difficult to judge. In a study, the consumption of care has been simulated going forward to 2040 based on the assumption that the future elderly will be in worse health than the elderly today.235 If the cost per hospital day increases in line with the historical pattern, the cost of care is expected to increase by as much as 270 per cent according to these estimates. To sum up, the discussion in this section shows that there are reasons to believe that the cost of welfare services will increase substantially in the years ahead, even though it is difficult to judge by how much. 7.3Internationalisation affects the welfare sector Up to this point, the Survey has discussed the welfare sector as though changes in the world around it did not affect it, but internationalisation can in various ways affect the welfare sector 232Statistics [2006b]. 233Even though the interview data in surveys are based on named illnesses, there is some scope for subjective assessments. 234Statistics [2006b]. 235Klevmarken, A. & , B. [2008]. The Long-Term Survey 2008 and its scale. On the one hand, internationalisation makes certain tax bases more mobile, thus affecting the possibilities of financing public welfare. On the other hand, the international exchange of welfare services may lead to lower prices, just as it does for goods, which could moderate public sector financing problems. This section shows that internationalisation thus far does not seem to have reduced the scale of the welfare sector. It also shows that both Swedish foreign trade and the scale of direct investment (i.e. the of companies in other countries) in welfare services are small. An appendix to the Survey notes that there should be considerable opportunity for direct investments in the area of welfare services, but these are difficult to bring to fruition within the framework of the current system where the activity is often publicly provided.236 7.3.1The enduring basis of the welfare sector The issue of tax bases mobility has been analysed in detail in previous Long-Term Surveys. They have noted that international- isation limits the chances of raising the tax ratio to finance the increase in demand for welfare services. A question that immedia- tely suggests itself is whether internationalisation threatens the Swedish tax base. The remiss of the Tax Base Inquiry237 was to investigate whether some taxes would need to be cut as a consequence of internationalisation. The Inquiry concluded that it was in principle possible to maintain the current tax level but that some changes would also need to be made. recently, a report to the has studied the effects of increased internationalisation on the scale of the welfare state and the impact on tax revenue and structure.238 One of the conclusions in the report is that the increased institutional competition, which, under the definition in the report, includes tax regulations, does not appear to have reduced the welfare state (table 7.5). Tax rates have been cut in several areas but tax revenues have not fallen in these countries. 236Appendix 4 to the Long-Term Survey 2008 (SOU 2007:95). 238Karlsson, N. (ed.) [2008]. The Long-Term Survey 2008 Table 7.5 Expenditure on welfare as a percentage of GDP 1960–2003 Note: The OECDs database contains data for social purposes, which include payments from the social insurance systems, some public consumption and also tax relief when it has a social aim. Source: , N. (ed.) [2008]. There does not appear to have been any tax race to the bottom between the Member States in the EU as a result of the economic integration.239 However, there are examples of the convergence of individual taxes, for example, corporate taxes both for the EU 15 and the EU 25.240 One reason why the welfare states financing still appears to be relatively secure is that the tax on labour, the largest tax base in , is a tax on a relatively immobile factor. The percentage of the population that emigrates has certainly increased in recent decades, but emigration has been considerably higher in earlier times. This does not mean, however, that it would be simple to raise the tax on labour to finance welfare. A higher tax on labour results in reduced incentives to work.241 And as already mentioned, efforts instead should be directed at trying to raise the number of hours worked in the economy. 7.3.2New opportunities for increasing international exchange and more international trade in services in general have increased the opportunities for Swedish people to study and seek health care in other countries. This section provides a picture of the extent of exchanges with the rest of the world in the area of welfare services 239Hansson, Å. [2004]. 240Ekholm, K. and others [2007]. 241See inter alia , A. and others [2006] for a review of how the labour supply is affected by economic incentives. The Long-Term Survey 2008