Excessive growth of social expenditure

Other Names:
Inflated cost of social security
Increasing health costs
Increasing welfare costs
Increasing cost of social security
High social cost
Excessive social spending for welfare programmes
Social debt
Spending for social welfare, health, pensions and education takes an increasingly larger share of major market economies' Gross Domestic Product. The burden of these expenditures contributes to budget deficits; unmanaged and uncontrolled, they may become unaffordable with disastrous consequences.

Social security is under attack from opposite camps. On the one hand it is accused of aggravating the world economic crisis by reducing saving, cutting investment, aggravating inflation, augmenting unemployment and undermining incentives to work; on the other hand, it is blamed for failing to solve the problems of poverty, for discriminating against women, for not treating equally those with similar needs and for distorting social priorities. While some press for a fundamental reorientation of social security policies, others argue that the whole system should be dismantled as it is no longer needed in societies which have reached there present state of affluence. There is no longer clear consensus favouring further developments.

Among the seven largest OECD countries between 1961 and 1980, social expenditures rose from 15% of GDP to 23%, and were projected to reach 25% by 1987. Despite an almost doubling of their costs, established programmes could be supported up to at least mid-1970 thanks to the strong economic growth and high level of employment. During the 1980s, after the oil crises, with the deterioration of economic performance and growing budgetary constraints, growth in GDP still kept pace with the growth in real expenditure on social protection in OECD countries, although some levels of service were trimmed. That total social expenditure represented on average some 27 percent of GDP in 1985 and in 1990; there was considerable variance between OECD countries, however. In 1985, social expenditures as a percentage of GDP were Belgium: 38.0; Netherlands: 36.1; Sweden: 33.5; and Germany: 31.5. Of the fifteen remaining countries, seven had expenditures above the 1981 average of 24%. The lowest, for comparison, were Greece: 12.8, Switzerland: 14.9, Japan: 17.5, Australia: 18.6, New Zealand: 19.6, USA: 21.0, and Canada: 21.7. On average, pensions accounted for two-fifths of expenditures, with health care and education accounting for one-fifth each. Unemployment payments represented only one-twentieth of these outlays.

In 1990 in Europe, social security payments as a percentage of GDP equalled 21% in France, 18% in Italy and 15% in Germany, as opposed to 12% in Japan and 11% in the USA. In 1993 many experts considered that unemployment would have to increase, or wages and social benefits would have to fall, before Europe could become productive enough to increase growth. European workers were considered to have become too expensive. In Germany, for example, social spending had risen from 26.5% of gross wages in 1970 to an expected 40% in 1994. In France in 1993, 44% of every franc collected in taxes was absorbed by social welfare programmes.

The generous level of social benefits in western Europe explains to a large extent the low competitiveness of European industries through its impact on production costs without a concomitant rise in labour productivity.
Problem Type:
C: Cross-sectoral problems
Date of last update
13.03.1997 – 00:00 CET