The level and extent of public services are politically decided. It may therefore seem that the answer is political control; that is, politicians have to be tough and avoid accommodating demands to expand the level and quality of public services. It is an open question whether this is a tenable solution, even disregarding the question of whether such policy makers would ever be elected. Strict control will imply an increasing gap between the level and quality of services desired and those provided, and the public sector will soon be considered “old” and of “deficient standards”. This will violate the ambition of the welfare state to provide services meeting the requirements of most, and it is likely to induce those
1960 65 70 75 80 85 90 95 55 60 65 70 75 80 85 % 55 60 65 70 75 80 85 % 2000 Men Women Figure 5.5
Labour force participation rates, Finland 1963–2004
Source: OECD.
Politicians fi nd it hard to square the circle: keeping welfare spending in check while meeting the aspirations of voters
able to pay to seek private solutions and many citizens to ask what they get in return for the taxes they pay. This may undermine the support for the welfare state.
One reason why the service dilemma arises is that the kind of services to be provided as well as their volume and quality are a matter of political decision making. There is no “natural” constraint on the desires and demands that citizens will formulate concerning their need for services – as these are offered free of charge (or at heavily subsidized prices) to the users. Introducing user payments is one means of providing policy makers with a tool to control and curtail demand. User payments are not a new thing in Finland; they already exist for child care and parts of old-age and health care. (However, user fees financed only 7.5 per cent of the social expenditure of local authorities in 2006 and this share has been on a declining trend.) There is scope for considering the possibilities of using this instrument more effectively or consistently. Nevertheless, user payments cannot be a major mode of financing if the ability to pay is not to become a main criterion determining eligibility.
There is the key issue of deciding which activities are to be included in the “public welfare package”, and which are to be left to individuals to cater for by themselves. One way of addressing the service challenge is to focus public provision on some core activities and ensure that they meet high requirements, and then leave other activities out of the package. That would mean that the public sector does less but ensures that the quality and avail- ability of the core services meet the requirements of most people, leaving other matters for private solutions. This route will require strong political leadership.
Finally, the difficulties of increasing productivity for certain human-intensive types of services do not apply to all services. There are important cases of a lack of efficiency due to the way service provision is organized. There is significant scope for enhancing efficiency by improving incentives and organizational solutions. We will come back to this in chapter 8.
User fees for public services may have to play a bigger role
The key issue is to de- fi ne the core activities of the welfare state
Raising productivity in the provision of public services is essential
Welfare services: rising costs and increasing demand
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ENDNOTES
1 As an example, public expenditure on health and old-age care in Finland increased annually
in the period 1993–2004 by 1.9 per cent on average. It has been estimated that 0.8 per cent was due to changes in the structure of the population (age and sex), while 1.1 per cent refl ected en- hanced quality. For the period 2000–2004 the corresponding fi gures were 3.5 per cent and 0.8 per cent, implying that the main part was not due to the change in the structure of the population but due to other factors. On this see Hujanen et al. (2006).
2 In its “cost-pressure” scenario the OECD assumes that expenditure, for a given demography,
increases by 1 per cent more than income (which corresponds to the trend in the past two dec- ades). In its “cost-containment” scenario it is assumed that policy can gradually eliminate this “ex- tra” growth.
3 Increased growth could improve the public balance much more if it were assumed that
other public transfers are given in nominal terms or are permanently indexed to consumer prices only (as is formally the case for, say, the fl at rate basic pensions). However, historical experience suggests that transfers are increased by discretionary political decisions in a way which roughly corresponds to the outcome which would emerge with formal indexation to the development of wages. As suggested above, this may in the end hold also for the earnings pension system, but in the simulation it was assumed that the agreed (20/80) pension indexation formula is used per- manently. Another element contributing to the reduced defi cit is the fact that accrued pension rights in Finland are indexed with an (80/20) formula: 80 per cent based on wage developments, 20 per cent based on consumer prices. The simulations were done with the general equilibrium model (“FOG”) maintained at ETLA.
4 It is a familiar result of the theory of taxation that the effi ciency costs caused by taxes are a
non-linear (approximately quadratic) function of the tax wedge.