A regular feature of public debate: Belgium is living beyond its means. Or, more precisely, the Belgian government spends too much, and it is primarily social security that comes under scrutiny. But is it true that Belgium spends more on social policy than comparable countries? In a new study by Think Tank Minerva, we examine social spending in Belgium and in twenty other high-income countries.
Different countries can organize their social policy in very different ways, and a proper comparison of spending levels in those countries must take that into account. The lists that regularly appear, ranking countries by the size of their public social spending, lists in which Belgium consistently ranks high, tell us less than we would like.
A first difficulty is that different countries treat social benefits very differently for tax purposes. While one country may exempt (in whole or in part) social incomes from direct taxes, another country may subject such income to income taxes: in this case, part of the social spending immediately returns to the treasury. In country A, the gross spending pattern for social benefits may be higher than in country B, precisely to compensate for the fact that these social incomes in country A are partially ‘taxed away’; or conversely, country B may statistically keep its social spending lower by exempting such benefits from taxes. Therefore, we should not (only) look at gross public social spending but (also) at net public spending.
Denmark and Australia represent two exemplary extremes here. In Australia, where the level of (gross) public social spending is significantly lower than in Denmark, social incomes are almost completely exempt from taxes: the difference between gross public social spending and net public social spending is only 0.1% of GDP. In Denmark, on the other hand, with its high level of social spending, a full four percentage points of public social spending flow immediately back to the treasury in the form of direct taxes owed. When we take into account this difference in the fiscal treatment of social incomes, the gap between the Danish and Australian spending levels in terms of GDP halves from eight to four percentage points.
A second difficulty: a government can also pursue social objectives by granting tax benefits. This includes, for example, tax credits based on the number of dependent children or tax benefits for businesses or households that use part of their resources to take out health insurance or make contributions to a pension fund. In countries with relatively low direct public social spending, such as the United States, Canada, the Netherlands, or Australia, the fiscal cost of this type of tax benefits reaches 2.5% to even 3.5% of GDP. In the Nordic countries, however, these tax benefits are hardly known.
A third problem is that the government can not only encourage private players (with tax benefits) but also obligate them to allocate resources for social purposes, without the government collecting, managing, or paying out those resources directly or indirectly. In this case, we can no longer speak of public social spending but rather mandatory private social spending imposed by the government.
The importance of this cannot be overstated. In Switzerland, these private social expenditures account for nearly a tenth of GDP, while in the Netherlands and the United States, they amount to six percent, and in Australia, four percent. These countries make a significant leap in an international ranking of social spending when we include mandatory private social expenditures alongside public social spending, while Belgium drops to fifth place. The total of public and mandatory private social expenditures provides a much more comprehensive picture of the level of social spending in a country than when we limit ourselves, as most rankings do, to gross public direct social spending.
The fourth difficulty: we can and should further supplement this picture with voluntary private social expenditures. To what extent do these non-compulsory social expenditures fill the gaps left by the absence of sufficient public or mandatory private social expenditures? It is worth noting that access to these voluntary private social programs depends to a large extent on the financial capabilities of individual households. Those whose available family budgets do not allow them to join a private insurance system, for example, cannot subsequently claim the benefits that come from joining these systems.
Again, the scale of this form of private social spending should not be underestimated. Both the United Kingdom and the Netherlands cost more than five percent of GDP, while in the United States and Canada, it exceeds six percent. The international ranking of the size of social expenditures is significantly reshuffled when we also take these expenditures into account.
Only looking at gross direct public social expenditures can be very misleading when we want to answer the question of whether a country spends more or less in pursuit of social objectives compared to others. This measure does not take into account a) the impact of the different fiscal treatment of social incomes in different countries; b) the size of tax benefits granted for private social expenditures; c) the private social expenditures imposed by the government; and d) voluntary private social expenditures.
The total size of additional social expenditures (the fiscal cost of granted social tax benefits and private social expenditures) can vary significantly, and it is precisely the countries with the lowest direct public social expenditures where these additional social expenditures carry much more weight. In the United Kingdom, Australia, and Canada, additional social expenditures account for a quarter to a third of total social spending; in Switzerland, the United States, and the Netherlands, forty to fifty percent of the cost of social policy is borne by these additional, whether mandatory or not, systems.