Economy

Which OECD country is the highest social spender?

 

Before answering
this question, we need to define what the OECD counts as social expenditure.
It is mainly a combination of what we call
welfare spending (including pensions) and health spending, but it
also includes incapacity-related benefits, active labour market
programmes, as well as unemployment and housing benefits. What it is
not is just public social spending. In all OECD countries individuals
spend some of their own money (either directly or through their
employer) on social expenditure. In the UK, for example, private
social expenditure exceeded 6% of GDP in 2019 according to the OECD,
mainly in the form of pension contributions.

The answer to the question posed by the title, using this datacomes from the
diamonds in the chart below.

That France is top
is probably not a huge surprise , but that the United States is
second (just below France) might. The blue columns represent public
(state) social spending, and the US is indeed fairly low here, but
the US has the second highest private sector social spending among
OECD countries. France is at the top partly because it has a very
generous pension system (see
this
recent post), while the US is so high in part because it has a very
expensive (and inefficient) health system.

Given how many hits
of the keyboard are spent discussing public spending on health,
pensions and other items, combining public and private spending in
this way can be a useful corrective. What matters to most people is
how big their pension is, or the quality and accessibility healthcare
is, rather than the form in which they pay for it.

The OECD splits
private social expenditure into two types: mandatory and voluntary.

In countries where
private social spending is high, in both Switzerland and Iceland it
is largely mandatory, in Canada and the UK it is almost all
voluntary, while the Netherlands and the US it is mixed. The last two
involve mandatory health payments (Obamacare in the US). Mandatory
payments might give consumers some choice over providers, but
otherwise mandatory payments are similar to a tax. In the UK the
largest component of voluntary social expenditure involves private
pensions. Again this gives consumers more choice than any state
pension would, but for individuals the option of not buying is hardly
advisable, which means they do not have additional money to spend on
other things. The big advantage of a state pension over private
pensions is that the latter exposes individuals to interest rate risk
at the time their pensions need to be turned into an annuity.

So while the choice
between public, mandatory private and voluntary private provision is
important, the amount of social expenditure from whatever source is
at least as important. Of the G7 countries, which spent the least on
social expenditure in 2019? In the chart above it is the UK. This has
not always been the case, as the following chart shows [1].

Key: In 2010 from top France,US,UK,Germany,Italy,Japan,Canada

In 2010 the UK had
the third highest social spending in the G7, but the trend over the
following decade has been consistently downwards. Because our
Conservative government has been obsessed with cutting taxes and
squeezing the state, without much attempt at reducing the scope of
what the state provides in the UK, we end up having less spent in
many areas (including social expenditure) than most people want. [2]

This is a crucial
fact to bear in mind the next time someone moans about how much the
state spends on health, pensions or some other item of welfare
spending. It is a point I try to emphasise whenever I discuss public
spending on health or pensions, or aggregate public spending figures.
An emphasis on total social spending is also crucial when looking at
data on tax.

According to OECD
figures for 2020
for the G7, the country with the
highest total tax as a share of GDP is France at 45%, followed by
Italy at 43%. Germany is significantly lower at 38%, and then Canada
and Japan lower still at 34% and 33% respectively. The UK is at 32%,
while the US is lowest at 26%. The UK is a low tax country, with only
the US lower among the G7. But as the figures above show, these
differences reflect the form of financing of social spending at least
as much as the total amount of social spending. Those who suggest
that low taxes in the US mean that people there have more money to
spend are being disingenuous, because US citizens need to pay, either
directly or indirectly, for social goods that are provided free in
other countries.

For this reason much
of the public debate about the size of the state misses key issues.
What should be central to this debate is how types of spending,
including social spending, are financed rather than the amount that
is spent. For example, is it better for the state to provide most
pensions (as in France) or is it better for individuals to pay for
their own pension schemes? Is a health service privately funded via
insurance companies (either voluntarily or through mandated payments)
less efficient than something like the NHS. How much tax people pay
will follow from that discussion, yet tax is all too often how such
discussions start.

[1] Data for 2019
in four of the G7 countries are not shown here, perhaps because data
in the previous chart is partially estimated.

[2] Those who can
afford it can try and make up the difference by, for example, buying
private medical insurance, but the quality of private sector health
care in terms of medical outcomes is highly dependent on the NHS.


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