Welfare Needs More than Lip Service

Weakened by the last world war, terrified by the spread of socialism in eastern Europe and shaken by the upsurge of working-class anger, several western European countries initiated a spate of welfare measures post-World War II. Welfarism was anathema to capitalism and yet welfarism was embraced because these countries were facing an existential crisis.

In subsequent years, however, their hostility to welfare state measures manifested openly and the states tried to roll them back; because of the resistance of the workers, however, they did not have much success with even a person like Margaret Thatcher failing to dismantle the National Health Service in Britain. Capitalism, ironically, derived a degree of legitimacy from the welfare state, claiming that far from being predatory, it was indeed a system that guaranteed people’s welfare.

The maintenance of a welfare state meant a substantially higher tax-GDP ratio. In a descending order of tax-GDP ratio for the year 2020, 29 of the top 30 countries are from western and eastern Europe. The only non-European country is Cuba, which again is under Communist rule but whose welfare state measures are admired all over the world.

Communist governments adopting welfare state measures and raising the resources required through high levels of taxation, even after the collapse of communism, should not come as a surprise; what is striking however is that West European Social Democracy too has maintained a high tax-GDP ratio to finance its welfare state provisions.

France tops the list with a tax-GDP ratio of 46.2 per cent, followed by Denmark (46.0), Belgium (44.6), Sweden (44.0), Finland (43.3), Italy (42.4) and Austria (41.8). Maintenance of a welfare state clearly requires heavy taxation, that is, heavy interference by the State in the pattern of income distribution that is spontaneously generated by the market.

None of these European countries has recorded GDP growth rates as impressive as those of the high-growth economies of today; their rates of GDP growth have fallen to even lower levels in the period after the collapse of the housing bubble in 2008. India, by contrast, has abysmal welfare state measures, and, not surprisingly, a taxGDP ratio (18.08 per cent) that is towards the lower end of the scale.

Three conclusions follow from these findings. First, the so-called “trickle-down” effect of GDP growth is completely bogus. The outcome of unfettered capitalism can never succeed spontaneously in raising the welfare of the masses. This is because capitalism can never function without a reserve army of labour, one of whose main functions is to keep down wages even as labour productivity keeps increasing, so that the share of surplus in social output increases, leading to larger consumption by the capitalists and their “hangers on”.

In other words, the toiling masses and the workers do not automatically get the benefits of economic growth under capitalism. True, if they organise themselves, they can fight for and even obtain better living conditions; but in such a case they would also force the State to increase the tax-GDP ratio with which to provide them with a higher social wage. The crucial determinant in other words is their capacity to fight effectively, not the rate of economic growth whose benefits are supposed to “trickle down”.

Equally bogus is the belief that despite low levels of taxation, a high growth rate of GDP will automatically put so many resources into the government’s hands that it will be able to spend adequate amounts for raising the welfare of the working people. This is a completely misplaced belief: transition to a welfare state never occurs by stealth or by small accretions of supposedly benevolent measures; it occurs as a breakthrough, of which the mobilisation of the requisite resources through a substantial rise in the tax-GDP ratio is a reflection.

The second conclusion is the following. Not only does GDP growth not lead to a welfare state per se, but in fact, fetishising GDP growth becomes a means of preventing any transition towards a welfare state, of creating a false narrative that the working people would become actually better off by allowing transfers of resources to capitalists so that they can undertake larger investment and thereby usher in larger GDP growth.

The latter position is pejoratively called “populism” and debunked as being wasteful and short-sighted because it entails the distribution of so-called “freebies”. This fetishisation of GDP growth is used as the argument for keeping the tax-GDP ratio low, for any increase in it, which would typically require taxing the capitalists, will allegedly destroy their “enterprise”.

The reasoning here of course is analytically wrong: capitalists do not invest more just because they have larger resources at their disposal; their investment decisions are governed by the expected growth of the market and hence do not increase simply because they are given larger resources through transfers.

But even this analytically-erroneous argument is used to discredit any demand for a welfare state and subvert any move towards it. What the experience of the welfare states around the world shows however is that the tax-GDP ratio has got to be increased greatly for achieving such a state, involving substantially increased taxation of the capitalists and ignoring the argument about its damaging growth prospects.

The third conclusion relates to the dialectics of exclusion. As resource transfers are made from the government budget towards the capitalists to stimulate GDP growth, and as the relative magnitude of transfers increases with the onset of recession and stagnation that typically constitutes the denouement for neoliberal capitalism, fewer resources are left even for the paltry welfare expenditure that was being made earlier from the budget.

This results in privatisation of education, health, and other essential services, which leads to the further exclusion of working people from all these services. Since the transfers made to the capitalists do not cause any increase in investment or even produce much immediate increase in their consumption, the reduction in welfare expenditure that matches such transfers, has the effect of reducing overall aggregate demand.

This has the effect of lowering the GDP growth rate so that the effort to raise the growth rate in this manner has paradoxically the very opposite effect, but this becomes an excuse for further increases in transfers to the capitalists which has the further effect of reducing the growth rate. With the reduction in welfare spending as a consequence, we move further away from any prospects of a welfare state rather than moving towards it.

We in India are currently in the midst of such a dialectic. Such is the pressure on fiscal resources both because of the low tax-GDP ratio and the increasing scale of transfers to capitalists under the misguided idea of promoting investment and GDP growth, that the central government is even winding down the Mahatma Gandhi National Rural Employment Guarantee Scheme which had earlier served as a lifeline for the rural poor.

The claim that giving larger transfers to capitalists leads to higher investment and hence growth; and two, the claim that higher GDP growth itself leads to greater welfare for the people even if the tax-GDP ratio is small, are both erroneous. The experience all over the world shows that building a welfare state requires a huge increase in fiscal effort.