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Economic Disaster and Dismantling Danish Welfare State?

Economic Disaster and Dismantling Danish Welfare State?. St Restrup Conf. March 2, 2011 Jørgen Goul Andersen Dep. of Political Science, Aarhus University. Summary figure. Cumulative economic growth in Denmark 2008-2010 = minus 4.2 per cent

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Economic Disaster and Dismantling Danish Welfare State?

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  1. Economic Disaster and Dismantling Danish Welfare State? St Restrup Conf. March 2, 2011 Jørgen Goul Andersen Dep. of Political Science, Aarhus University

  2. Summary figure • Cumulative economic growth in Denmark 2008-2010 = minus 4.2 per cent • This has never happened in peace time at least since 1820 • Public budget balance from plus 5 – 5.5 per cent of GDP to about minus 5 per cent. Long-term structural deficit • Not the welfare state’s fault – but it could well be the victim of it

  3. Quarterlygrowth rates 2008-2010 Sudden and short interruption (South Korea) vs. prolonged

  4. EightYear Nordic comparison: Also a long-termDanish problem Green = Higherannualgrowth rate than Denmark Continental Norway: 2009: -1.3 2010: +2.2

  5. More indicatorsabout the origin of crisis Danish exports not so sensitive to the business cycle. Foodstuff + medicine

  6. More indicators about long-term development.Similar to Iceland. In smaller scale Economic policy / Bonanza Problem: • Deregulation of credit policy. Banking crisis Iceland small scale • Deregulation of credit policy for housing loans: So called potato cure 1986 in reverse. 1. free access. 2. flexible loans 3. interest only loans  housing bubble (+ credit collapse volcano; you ain’t seen nothing yet …) • Most indebted households in the world • Pro-cyclical fiscal (& monetary) policy Structural (policy) problems: • Danish industrial production ultimo 2010 was 12 per cent below 2000. Sweden was 10 per cent higher than in 2000 • Low productivity growth, high wage increases in Denmark. Competitiveness problem with China. But also with Germany, Sweden ... • Failure to elevate level of education • “Wrong” markets • Outsourcing of high-skilled jobs (with production + low competitiveness)

  7. Where has the economy goneworse? 192 nation comparison of cumulativegrowth 2008-2010 List of worse economies: Africa: Zimbabwe Asia: None (Possibly North Korea, but probably not) Norther America: None Latin America: None Carribean/Atlantic: Haiti, Bahamas, Barbados, Jamaica, Antigua & Barbuda, Grenada Oceania: Samoa Europe outside EU: Ukraine, Croatia (Armenia probably not) EU: Estonia, Latvia, Lithuania (yo-yo economies), Hungary, Greece, Italy, Ireland, Iceland = 18 nations of 192 with worse growth record

  8. Historical experience of crisis and welfare state in Denmark • 1974-1981. Finalised the building of the Nordic welfare model in Denmark. Alternative: Very tough income policies • 1982-1993. De facto Consolidated the welfare state. Alternative: Cost containment + reduced private consumption • 1993-2001. Second golden age of the welfare state • 2001-2008. Silver age of the welfare state. 1992-2009: more than 40 per cent increase in public consumption • Winning formula: Anti-immigration, pro-welfare, NPM reforms • But also much much tighter conditionality • And thorough administrative reform of ALMP • And (un-financed) tax relief (in 2004 + 2007 – counted as stimulation measure in government’s EU report 2009)

  9. Crisis measures(alongside old measureswith new impact) • Payment of SP pension savings (didn’twork) • Renovation subsidy (noeffect at ALL) • Both have remainedverypopular • Cost Containment: Zerogrowth of public consumption from the end of 2010 • Accepted by the voter majority • Reducedduration of UB to twoyears (followed by improved EPL in collective agreements)  Good-bye to flexicurity • Abolishearlyretirement (proposal). Lowest pension age=70 years from birthcohorts 1971 ff (as compared to 60 for birthcohortsuntil 1958) • Accepted by the voter majority (but not by all swing voters)

  10. Current political situation • Most suicidal government ever seen • Could see it as a democratic problem • Highest political distrust for years • But population majority accepts the crisis diagnosis of the government, accept most of the stories told, does not hold government (very) responsible • Increasing proportion believe Denmark will fare less well than others: 1 per cent in 2009; 7 per cent in 2011.

  11. Opposition is likely to win, but … • Not for policy reasons • Disaster is so big that austerity for several years is unavoidable • Some institutional changes appear irreversible • Very radical proposals have popped up. Rejected by the voters – but near-consensus that welfare cannot continue as we knew it

  12. Economy or Party Politics?Methods of assessment • We could take period by period and assess the changes under Social Democratic and Bourgeois governments, respectively • Or we could take responses to prosperity and recessions under Social Democratic and Bourgeois governments – since Bourgeois governments tend to be more “Social Democratic” during prosperity • Or we could take the major policy fields and examine when and how reforms were carried through

  13. 1. Different governments SD government 1975-1982 Basically finished the building of the Danish welfare state (services) Protected against social exclusion due to unemployment Bourgeois governments 1982-1993 Accused of being anti-welfare Strong retrenchment (by Danish standards) Abolished automatic indexation of wages. Freeze of UB+SA 1982-86 Slow growth in public consumption (6 per cent cumulatively) Privatization & higher user charges (largely given up) Considerable growth in transfers to households More universal welfare (child & student benefits, elderly care, social assistance) Indexation of social transfer payments by wage increases from 1990 Unintentionally – but in retrospect a consolidation of the welfare model (Because there was no majority for more radical policies)

  14. 1. Different governments cont’d SD government 1993-2001 Priority to fight against unemployment ALMP + gradually more conditionality Bourgeois government 2001-2008 Successfully presented itself as Social Dem. – even convinced social scientists Spent a lot on welfare services (1992-2010 about + 45 per cent cumulatively) Was it at all Bourgeois? Marketization of public sector + mixed econ. of welfare Dropped user charges Outsourcing (not very much) + competition between providers (much) Free consumer choice among users More conditionality of transfers Activation of tax + social protection Systemic retrenchment: Weakening unions (tax deduction, competition & free choice between unemployment insurance funds)

  15. 1. Different governments cont’d Bourgeois government 2009-2011 (gradual strategy shift from 2009-08) Economic disaster: Vice into virtue. Skipped problem denial. From concealing policy difference to emphasizing policy diff Hope for crisis consciousness as in the 1980s Very significant party political difference (even though policies will be extremely unpleasant regardless of government due to the profound erosion of competitiveness and growth)

  16. 2. Crisis and prosperity 1975-1982. Crisis. Social Dem. vehicle for social improvements. Almost unlimited UI duration, lenient control, early retirement. Crisis measures: Harsh incomes policy + More targeted welfare 1982-1993. Crisis. Bourgeois 1. reversed priorities competitiveness – employment 2. switch to supply side (perspective on) economics from 1989 (with no immediate policy impact as there was no parliamentary majority) Crisis measures: Cuts on maximum UB + public consumption + private consumption (1986ff) Accepted significant increase in unemployment

  17. 2. Crisis and prosperity cont’d) SD government 1993-2001 Prosperity ALMP + gradually more conditionality Prosperity was the driver of retrenchment + conditionality for the unemployed Conditionality not really “un-Social Democratic” Bourgeois government 2001-2008 Prosperity Highest public support for the welfare state ever recorded Was as Bourgeois as possible. (Danish People’s Party=working class) Modernization of public sector according to market ideals as far as possible But only provision, not financing Except tax subsidy for private health insurance Conditionality to a level where Social Democrats stepped back Tax relief (passive=freezing; active=unfinanced in the short run) 2004 tax relief targeted at gainfully employed. Otherwise equal. Systemic retrenchment: Weakening unions (tax deduction for UI, competition & free choice between unemployment insurance funds)

  18. 2. Crisis and prosperity cont’d) Bourgeois government 2009-2011 Crisis Since 2010 rather fundamental changes & proposals Cut duration of UB to two years = end of flexicurity Cut public expenditure to finance tax relief of 2004 / 2007 Tax reform (net redistribution 10 bill Dkk mainly from business to people with high incomes); neutral for ordinary wage earners Proposal to abandon early retirement allowance (no majority, designed for election) = Class struggle from above. Dramatic change Conclusions: 1) Political parties matter + 2) Regardless of economic situation, political parties matter

  19. 3. Policy change approach Welfare states do change quite dramatically • Labour market policy • Pension policy (privatization = equality) • New Public Management / Mixed econ. Welfare (provision more than financing) • Tax policy (some distributional impact) Continuity of direction of reforms most of the time Difference in measures & distributional impact & implications for citizenship

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