How are social policies in the EU responding to the financial crisis?
II. Policy responses to the Financial Crisis
For most EU Member States the prime response is through the existing social protection systems. In Member States where these are well established and where there is a comprehensive safety net there are support systems responding to the growing numbers without work. The increases in social expenditures are themselves a countercyclical force in addition to the extra policy responses introduced or announced. Some of these extra policy responses are described in the box below.
In Belgium, the plan adopted in December concentrates on supporting enterprises and employees, on strengthening the purchasing power of households and on investing in growth and sustainability.
In Bulgaria, a wide range of measures include investment in public social infrastructure, measures to support employment, to strengthen social protection and better support people’s income.
In Germany, the package of measures focuses on safeguarding both jobs and businesses’
capacity to invest. The measures will markedly increase public investments in future oriented sectors with educational infrastructure at the forefront, but also in the social and health services and hospital infrastructure. The package will ensure the supply of credit to healthy, competitive companies, support the qualifications of the workforce and financial relief of households including an adequate income support for the most vulnerable.
In Spain, all measures planned or taken in response to the crisis have been integrated in
"Plan E", providing financial and budgetary support to the business sector and families alike, support to employment and modernising the economy. Recently adopted measures aimed at reducing current public expenditure by €1500Mio in 2009 will not affect social benefits spending.
In France, the “Plan de relance” adopted in December 2008 focussed on financial support to businesses and on public investment. It also includes a one-off payment ("solidarité
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active") to low-income households. Additional measures adopted on 18 February concerned the improvement of unemployment insurance for the young unemployed and in case of temporary adjustment of working hours. They also included income support for the lower middle class (tax rebates, support to low-income families with children, and personal services vouchers for dependant elderly and for households with children.
In Luxembourg, a package of new measures covers income support measures to
individuals and families, and measures to support employment especially in the vulnerable sectors of the economy. Moreover, the social dimension is an integral part of the steel plan 'Lux 2010', finalised in December 2008.
In Austria, the first recovery plan of October 08 focused on supporting SMEs. The second recovery plan adopted in December 08 foresees public investments in infrastructures, support to energy saving renovations by private households, regional programs for employment, investments in R&D and provision of free child care services.
Poland adopted a comprehensive plan for 2009-2010 covering financial stability, economic development, and protection of vulnerable groups. It also set up a "Social Solidarity Fund".
In Portugal, the Government supplemented measures already taken in 2008 with a new package: the "Investment and Employment Initiative (IEI)" which foresees investments in infrastructures in the fields of education, energy efficiency, modern information and communication technology; special support to economic activity, exports and SMEs, and measures to protect employment and strengthen social protection.
In the UK, a National Economic Council was set up in October 2008 to give coherence and add momentum to the work of all Government departments in support of individuals, families and businesses. New measures include: 1) Increased support for working age mortgage holders, 2) a “Find Your Way Back To Work” initiative, 3) a “Real Help”
campaign, detailing the help available across Government in response to the downturn.
2.1 Labour Market responses Most countries are relying on existing labour market policies to ensure those out of work actively seek work and are supported in doing so. Some countries are introducing special measures designed to support employment and reduce job losses. The countries doing so are summarized in the box below
In Belgium, the economic recovery plan foresees measures in the field of tax and finances, social affairs, employment and energy. In parallel, the inter-professional agreement 2009-2010 was agreed between the social partners. It foresees measures aiming at
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supporting the purchasing power of people in paid employment, and that of benefit recipients, lowering the occupational costs of companies, supporting time-credit.
The German plan provides a good example of such combination of measures: the public training programme (WeGebAU), originally aimed at low-skilled and older employees, has now been extended to cover all workers in current need of training; job placement agencies will receive an additional 6,000 headcount for intensive coaching of those made redundant; the period of receipt of short-work allowance has been extended to 18 months until 31st December 2009; in case of short-time work in 2009 and 2010, 50 % (or 100 % if the period is used for qualification) of social security contributions paid by employers will be returned to them. Reduced contribution to the unemployment insurance (2.8%
instead of 3% in 2009 and 2010), and to the health insurance (by 0.6 pp) will lift the burden on labour costs and stimulate both labour demand and supply. In addition, the budget available for education and training will be increased.
Spain has established two specific State Funds to foster local investment and stimulate economy and employment, as well as measures for specific sectors, including automotive industry (€ 11.000Mio). Non labour costs have also been reduced, by lowering employers’
contribution for the recruitment of unemployed workers with family responsibilities (non fixed-term contracts); improvements of the Public Employment Service, and the active involvement of private employment agencies are also under consideration in the social dialogue process. Moreover, the Spanish Special Plan of Measures for Guidance, Vocational Training and Job Placement aims at reinforcing support provided to the unemployed in the search for a new employment, through new additional 1500 orientation workers, and facilitating support in promotion of geographical mobility.
The Portuguese IEI plan already referred to above encompasses measures in support of SMEs, e.g. mechanism to permit the advance payment of EU funds granted to businesses, creation of PME Investe credit lines fostering corporate investment, reduced corporate income tax brackets. It also includes measures targeting employment such as a qualification programme, supporting young people in accessing employment, supporting labour market re-entry.
In Slovenia, the Parliament is discussing a number of Government proposals to stimulate the economy such as decreasing the corporate income tax, and increasing tax rebate for independent entrepreneurs. The Government also approved supporting short-time work, and intends to promote social entrepreneurship, and self-employment for workers made redundant.
In Finland, a Government stimulus package is designed to promote employment, by investing in public works, lowering social insurance contribution, increasing opportunities
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for vocational training, and investing in R&D.
In the UK, an extra £1.3 billion is being invested in Job Centre Plus and other services over the next two years as a response to the increase in the number of people claiming benefits, so as to not only maintain, but increase, the support offered. £158m will come from ESF to help people who lose their jobs. The extra cash will help unemployed people and those facing redundancy retrain and develop their skills so they can quickly move back into sustainable employment. The extra funding will help the Learning and Skill Council, with local colleges and training providers, to work closely with JobCentre Plus.
A key consideration in assessing the impact of the crisis on social policies is the age structure of the workforce. In all countries the workforce is much older than in the recession of the 1980s when the main concern was the large cohort of young people entering the labour market.
Heralding the start of the ageing of the population and the growth in the number of pensioners all countries have an unusually large cohort of older workers. In general older workers have a lower probability of becoming unemployed but once unemployed the risk of long term unemployment is far higher than for younger workers.
2.2 Maintaining Income Many countries have implemented measures to increase the income of people affected by the crisis either through one off payments or extensions in periods of eligibility or through higher benefit levels or minimum wages.
2.3 Housing, Over-indebtedness and Pensions The financial crisis has hade a big impact on housing I many countries. A long period of rapidly rising house prices engendered a willingness to give mortgages close to and even above 100% of the purchase price of the house. A belief in a never ending house price rise lulled lenders and borrowers in a false belief that house values would soon mean mortgages were less than the price of the house. Many countries are seeing house prices fall as people lose their jobs. Many Governments have introduced schemes to reduce repossessions where mortgage defaults are likely.
In countries with larger pre-funded schemes in their pension systems authorities are seeking ways to help pension funds recover from the sharp deterioration in their ability to meet their long term liabilities resulting from the radical fall in the book value of their investments. In Denmark, regulators and the insurance and pension industry have agreed to temporary changes in the standards by which the solvency of funds is calculated to avoid that funds lock in their losses by being forced to sell assets in the presently depressed markets. Thereby they have avoided both destabilisation of the mortgage market and substantial losses for pension savers.
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III. Sustainability
There will always be concerns about the fiscal sustainability of public social expenditure.
The automatic rises in social expenditure driven by the financial crisis will put heavy demands on fiscal policy and even more so given the other fiscal pressures that have emerged from policies to support banks and other financial institutions. The rest of this paper looks first at the longer-term projections of age related social expenditure produced by the EU’s Ageing Working Group1. These projections were carried out without reference to the current crisis and its impact on social expenditure. Long term sustainability then involves a judgement about whether the short term increases are just that : cyclical and reversible: the start of a long term structural upward shift in social expenditure. This question is considered using the OECD’s analysis of social expenditure trends over the last 25 years together with their recent report on growing inequalities in OECD countries.
Long term Trends in Age Related Social Expenditure: These projections have been produced on a set of assumptions about the effects of ageing on social expenditure covering pensions, health care, long-term care, education and unemployment. There is great variability across the 27 Member States in the projected in creases. The total projected increases are shown in the figure below.
Figure 1. The Cost of Ageing, EU27, (Change in percentage points)
1 http://ec.europa.eu/economy_finance/publications/publication13782_en.pdf
The total effect of ageing on social expenditure is summarised on the chart below and is driven by
Population ageing effect, which is a measure of change in dependency ratio (number of people aged 65 and more to the working age population),
Employment effect, which depends on the change in the share of population of working age relative to the number of employed,
Coverage effect of pensions, which captures changes in the number of pensioners relative to the population aged 65 and more, This includes any reductions in early retirement assumed to follow from extrapolating higher employment rates for older workers and a reduction in structural unemployment
Benefit effect, which reflects changes in the average pension relative to income.
Figure 2. Factors contributing to changes in pension expenditure (% of GDP)
There has been considerable attention paid both in the EU and in most other countries round the world to the ageing of the world’s population. The Population pyramids that used to be familiar are being replaced by population columns. Longer life expectancy and low fertility are shaping populations where the size of cohorts of older people are similar to those of the working population. The figure 3 below shows this.
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Figure 3. The population in the EU27 grows older
Earlier work in the EU on the fiscal implications of ageing was one important force leading to substantial pension reforms designed to make future pension expenditure fiscally sustainable.
The projections just published are the first post pension reform projections to systematically show how important pension reform has been. A key has been the reduction in many Member States in the generosity of pension benefits. Figure 4 below shows how extensive this has been in many countries. In the EU 10 countries – those joining the EU most recently apart from Romania and Bulgaria the reductions in generosity will reduce age related social expenditure by 4 percentage points over the projection period. In the EU15 countries the effect is smaller – nearly 3 percentage points – but it is still one of the most important factors reducing age related expenditure in the future.
Figure 4. Substantial reductions in the benefit ratio in several Member States (% change)...
The other factors that determine the projections of age related expenditure are in one way or another related to assumptions about the labour market. The projections assume that countries with high levels of structural unemployment will reduce these towards lower NAIRU levels and the gain in employment will last throughout the projection period. Countries with low levels of long term unemployment but much higher numbers on incapacity benefits are not assumed to achieve reductions in these rates and corresponding higher employment rates. Associated with the assumed reductions in structural unemployment, higher employment levels and higher female employment the projections also assume the recent improvement in the employment rates of older workers is structural. One associated effect of these assumptions is that early retirement schemes that have been available in the past are assumed no longer to be available and this reduces the number of people eligible for pensions as does the many pension reforms that will raise the age of retirement especially for women. The combined effect of these assumptions [see figure 5 for an illustration of the total effect]makes a substantial contribution to reducing the impact of ageing on the projected growth in social expenditure.
Figure 5. Employment rates rise due to reforms and cohort effects