The Repoliticization of the Welfare State

Front matter

- © lan P. McManus

IAN P. MCMANUS

Copyright © 2022 by Ian P. McManus

Contents

List of Illustrations vii 1. The Realignment of Welfare State Politics 1 2. Crisis and the Politics of Social Spending 18 3. The European Union 48 4. Germany: Continental European Welfare State 68 5. United Kingdom: Liberal Welfare State 86 6. Sweden: Nordic Welfare State 103 7. Spain: Southern European Welfare State 120 8. Czech Republic: Eastern European Welfare State 141 9. Conclusion 169

Digital materials related to this title can be found on the Fulcrum platform via the following citable URL https://doi.org/10.3998/mpub.12140242

LIST OF ILLUSTRATIONS

Chapter 1

A profound shift has occurred in the politics of social spending across advanced capitalist economies. After a substantial period of cross-party consensus on welfare state spending, partisan politics is back. While the severity of the global financial crisis (GFC) called for strong social spending responses to limit the costs of the economic crisis for millions of individuals, there has been growing fiscal pressure for governments to reduce budgets and make deep cuts to the welfare state. These contrasting demands have resulted in intensified partisan divisions over proposals to expand or roll back social spending. Whereas conservative parties have embraced fiscal discipline and welfare state cuts after the crisis, left-leaning parties have turned away from austerity measures in favor of higher social spending. ‘These party positions represent a return of traditional left-right ideological beliefs over social spending and economic governance. This book grapples with the evolving nature of political conflict over social spending and the future of social and economic policymaking in Europe and beyond. Partisan conflicts over social spending have featured prominently in national politics and public discourse in many countries in recent years. For example, in the aftermath of the GFC, the Conservative Party in the United Kingdom (UK) has undertaken the largest cuts to the British welfare state since the end of World War II. This has led the Labour Party, under the leadership of Jeremy Corbyn, to shift further to the left and call for a limit to austerity, for social spending increases, and to a wider condemnation of neoliberal ideas and policies.

Social spending was a major point of contestation in Germany as the Social Democrats made the expansion of generous and universal welfare benefits a key demand as the party negotiated entering into another grand coalition with Angela Merkel’s conservative Christian Democratic Party. In 2017, Social Democratic prime minister Stefan Löfven cohosted a European Social Summit in Sweden, the first of its kind in twenty years, which aimed to promote social equality and greater investment in welfare states across the EU and saw the introduction of the European Social Pillar. The position of Sweden’s Social Democrats is in sharp contrast to the promarket welfare reforms and social spending cuts introduced by the previous center-right Moderate Party-led government. In Spain, the far-left Podemos party put forth an alternative proposal to the conservative PP party’s 2018 budget, which would increase social spending by €24.5 billion ($28 billion) to address issues such as unemployment and gender inequality. After the 2018 election in the Czech Republic, the populist ANO party formed a left-wing coalition government with Social Democrats which has promised to reverse many of the tax cuts and social spending reductions enacted by the conservative Civic Democratic Party. Partisan debates over social spending have, therefore, not only become highly salient in the modern politics of advanced capitalist economies but prevalent across different welfare state types.

This book seeks to answer the critical question: How did the global financial crisis alter the politics of social spending across advanced capitalist economies? In doing so, it will help to contextualize these contemporary political divisions over social spending and provide insight into the consequences of this conflict moving forward. As critical junctures, crises can create windows of opportunity' for significant changes in politics and policymaking. This book argues that the GFC acted as such a critical moment that established a new postcrisis dynamic where the partisan composition of government once again matters for social spending. In this new postcrisis environment, left-leaning governments are more likely to support higher levels of social spending, while their conservative counterparts are likely to prioritize fiscal discipline, which includes reduced welfare state and other public spending.

This analysis of the politics of crisis and the influence of partisan differences on social spending is critical not only to understanding government responses after the Great Recession, but also contemporary and future crises. These new political dynamics, for example, are relevant in the midst of the current COVID-19 crisis. Whereas governments are adopting stimulus measures and expanding social spending on programs, such as unemployment

1. A window of opportunity is a moment in time when there is potential for policy change. Policy entrepreneurs who recognize such moments may use them to take action and implement their desired policies (Kingdon 1995).

benefits, to address this public health and economic crisis, fiscal conservatives are raising public debt and deficit concerns, worried about the long-term costs of welfare interventions. This book will provide a framework to understand the politics of crisis and how the partisan composition of government influences social spending responses in the contemporary era.

The following chapters of this book will argue and empirically support the case that a new and lasting postcrisis dynamic has emerged in which political parties once again matter for social spending. At the heart of this repoliticization of the welfare state are contentious ideological disagreements over fiscal discipline, market regulation, redistribution, and the role of government. Surprisingly, partisan divisions over welfare spending have arisen even in countries less affected by economic downturn, such as Sweden and Germany. This indicates that partisan conflict over social spending was not simply an immediate reaction to the GFC but reflects deeper ideological differences which have re-emerged between parties on the left and right. This partisan discord is in contrast to the precrisis welfare consensus that emerged between parties and across countries.

The next section provides a brief history of social spending during two distinct phases of the GFC. It highlights changes in social spending over time and identifies the growing disparities between and within countries as governments struggle to balance national finances with the need for effective social protection. This will be followed by an analysis of the repoliticization of the welfare state after the GFC and the significance of this event as a moment of critical juncture.” The chapter will conclude by providing information about the remaining chapters of the book.

A Brief History of the Crisis

Before delving into the specific history of the Great Recession, two important points about the term crisis must be addressed. The first point has to do with the particular definition of crisis, which must be differentiated from how the term has been commonly described in the welfare state literature.

2. Critical junctures are conceptualized “as moments in which uncertainty as to the future of an institutional arrangement allows for political agency and choice to play a decisive causal role in setting an institution on a certain path of development, a path that then persists over a long period of time” (Capoccia 2015).

The second point has to do with identifying the time frame of the crisis so that clear parameters are set to understand what is meant by the precrisis and postcrisis periods. To begin with, it is important to clarify that the term crisis in the context of this book has a precise meaning. Within the literature, there are long-standing references to the multiple crises faced by modern welfare states, referring to shifting labor market and demographic challenges confronting social protection systems as well as the lack of funding for welfare expansion that has persisted since the 1970s. Crisis for the purposes of this book, however, refers specifically to the social and economic challenges that advanced welfare states have experienced as a consequence of the severe and rapid global economic downturn that began in 2008.

The collapse of global financial markets in 2008 triggered one of the worst economic crises in nearly a century, resulting in the loss of trillions of dollars in GDP and millions of jobs worldwide (Atkinson, Luttrell, and Rosenbloom 2013; Wall Street Journal 2012a; World Bank 2014). The severity of this crisis should not, therefore, be understated. Its effect on the politics of social and economic policymaking was unprecedented in the modern age. While the EU had seen steady growth in the decade preceding the GFC, GDP plummeted sharply across member states at the start of the crisis (see figure 1). Although the EU had seen some economic recovery after the initial financial crisis in 2008, the region had by 2012 entered into a double-dip recession (see figure 1). At the same time, the unemployment rate rose sharply across the region as firms and other private-sector actors began to reduce large portions of their labor force (see figure 2). The crisis, therefore, represented a serious cross-national threat to economic, political, and social stability. In response to rising unemployment and other growing social concerns, welfare spending increased markedly across the OECD starting in 2008. At the same time, real GDP on average shrank, resulting in growing debt and deficit problems for governments, which increased public expenditures to offset the negative social effects of the crisis and to stimulate economic growth. Across the OECD, social spending-to-GDP ratios grew considerably (see figure 3). Government social spending decision making, therefore, took place within a broader context of austerity and limited budgetary capacity as the crisis wore on. This laid the foundation for greater political conflict over the need to balance fiscal concerns with adequate social protection.

Second, this research defines the crisis as beginning in 2008 and continuing until 2013, although, as the country case studies in this book reveal,

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OL ool ozL oet % dap eə4 --- Burpuads ejos oqnd jeay —— (e198 14611) ddd Jo % e se Bulpuads jej20s Oqnd mm the impact of the GFC on the politics of social spending has persisted across welfare states up to the present day. While some countries witnessed an economic slowdown in 2007, it was not until 2008 that a worldwide economic crisis began. What started as a financial market crisis in 2008 rapidly became a far-reaching global economic crisis characterized by high unemployment and low domestic growth across countries. By 2010, it had turned into a sovereign debt crisis and a larger social crisis. The next section provides an overview of social and economic policymaking during these two distinct phases of the Great Recession.

The First Wave of the Crisis (2008-2010)

The collapse of international financial markets in 2008 led to rapid stimulus responses by national governments across advanced welfare states. Within the EU, member states pursued relatively coordinated countercyclical Keynesian stimulus responses in line with European Economic Recovery Plan guidelines put forth by the European Commission in 2008 (Leschke and Jepsen 2012). The goals of the commissions recovery plan were to restore consumer and business confidence, bail out struggling banks, stimulate investment in EU markets, support hard-hit industries, including construction and manufacturing, protect vulnerable groups, create jobs, and lower unemployment (European Commission 2008). While some experts categorized the stimulus measures adopted by governments as extremely modest given the scale of the crisis, by supporting collapsing financial markets and bolstering economic demand these policies have largely been credited with preventing a more serious and lasting global depression (IMF 2009).

From 2008 until 2010, the stimulus measures adopted by member states infused around 1 percent of GDP on average per year back into the EU economy (European Commission 2009a). But while nearly all governments implemented some form of stimulus response to the crisis, the size and content of their bailout packages varied considerably, reflecting different welfare state legacies, the size of automatic stabilizers, the severity of the crisis on domestic economies, and political partisan conflict over discretionary spending. Whereas some member states were able to weather the crisis fairly well, increasing debt and deficit levels limited the ability of other states to provide the level of social support needed to offset negative distributional costs (Watt and Nikolova 2009). For example, whereas Austria, Germany, Sweden, and Finland were able to adopt stimulus measures equivalent to around 3-4 percent of domestic GDP, other states, like Hungary, who were economically harder hit, were unable to increase public spending at all (European Commission 2009a). Differences in the size and content of stimulus responses led to significant disparities in social and economic outcomes across states.

During the first two years of the GFC, unemployment increased by 2.6 percent in the EU and GDP fell by around 5 percent, yet there was significant variation across member states (see figures 1 and 2). For example, while the German economy shrank by 6 percent of GDP, the unemployment rate was lower than it had been before the crisis. In large part, this was due to the comprehensive and well-funded welfare programs designed to protect jobs. By contrast, the Spanish economy contracted by only 4 percent of GDP but experienced an unemployment rate increase of 7.5 percent (Leschke and Jepsen 2012). The downturn was far worse in some parts of eastern Europe. For instance, Baltic states between 2008 and 2009 faced an average increase in unemployment of more than 10 percent and a GDP loss of up to 20 percent (Leschke and Jepsen 2012). This variation indicates that not only did the GFC impact states differently but that the capacity of governments to respond effectively to this economic downturn and provide social protection to their citizens varied considerably.

The Second Wave of the Crisis (2010-2013)

By 2010, it was clear that the GFC was having a destabilizing effect on government finances in the EU, with public debts and deficits rising to unsustainable levels (Theodoropoulou and Watt 2011). Stimulus measures, while helping to offset the initial effects of the crisis, left state coffers drained at the same time that growth and revenue streams were declining in several countries, such as Spain, Ireland, Greece, and Portugal. These problems came to a head in 2010 as a loss of confidence had grown over the Greek economy and the government's ability to pay its debts. This loss of faith in Greece marked the beginning of a larger sovereign debt crisis throughout the EU and a turning point in the GFC. This second phase of the crisis was characterized by a turn away from stimulus and the implementation of austerity measures across several states in an attempt to reduce public spending and increase revenues. Whereas in 2008 and 2009 governments implemented measures to stimulate domestic markets and increase social spending, by 2010, many countries began to make budgetary cuts and structural reforms to encourage growth and reduce public expenditures.

Social spending became the target of drastic cuts in many countries, as welfare states came under severe financial strain. Although many EU member states began to reduce social spending after 2010, as was the case with stimulus measures, the degree of austerity varied widely across countries. In other words, there was considerable divergence in government capacity to balance the need for fiscal discipline while maintaining adequate levels of social protection. Cuts in social spending as a percentage of GDP were the greatest in eastern and southern European welfare states, which were already worse off in terms of economic growth, unemployment rates, and social protection levels. By contrast, social spending cuts were considerably lower in wealthier western and northern Europe welfare states. According to the European Commission's Stability and Growth Programmes report, public budgets between 2010 and 2014 were cut by 15-20 percent across most eastern European states, while similar government spending cuts were less than 10 percent in western and northern European countries, including Belgium, Denmark, Finland, Germany, and Sweden (Theodoropoulou and Watt 2011). In some states most hard hit by the crisis, public spending reductions were significantly higher. For instance, spending cuts in Ireland between 2010 and 2014 amounted to around 40 percent of GDP (Leschke and Jepsen 2012). The pressure to reduce public spending and implement welfare cuts was particularly strong in countries that received bailout funds from the EU and IME These states included Greece, Hungary, Ireland, Latvia, Portugal, and Romania.

In sum, beginning in 2010, many countries turned away from stimulus and instead introduced fiscal austerity measures aimed at addressing rising debt and deficit problems. The austerity measures adopted by EU member states, however, were uneven, with some countries making much more drastic cuts to social spending than others. Those countries that were most hard-hit by the crisis were typically the least able to respond effectively with countercyclical measures and instead implemented deep social spending cuts. This was problematic as these cuts may have prolonged the effects of the crisis in these countries and had a destabilizing effect on domestic and international markets.

The Realignment of Welfare State Politics 11 Divergence Between States and Within Countries

The GFC had a profound effect across welfare states. During the first phase of the crisis, social spending rose on average across the EU. There was, however, significant variation in these stimulus measures, with welfare states in western and northern Europe offering higher levels of spending than their counterparts in southern and eastern Europe. Wealthy states, including Austria, Finland, Germany, Sweden, and the UK, for example, each spent at least 2 percent of their GDP on active labor market policies and household benefits (European Commission 2009a). By comparison, eastern European states, including Bulgaria, Cyprus, Hungary, Lithuania, and Romania, each spent less than 0.1 percent of their GDP on these policies (European Commission 2009a). Given the importance that social spending played in reducing the negative effects of the crisis, differences in government responses contributed to an uneven recovery and rising inequality between EU countries.

In addition to cross-national variation in social spending responses to the GFC, some countries experienced rising inequality and declining social solidarity. Social benefits in continental, southern, and eastern Europe welfare states, for instance, tend to favor full-time employees with standard work contracts, leaving part-time workers and other labor market outsiders more vulnerable after the crisis. In fact, outsider groups were disproportionally affected at the start of the GFC, such as younger workers, who faced a sharp rise in unemployment. Austerity measures, which are largely regressive, have further intensified these inequalities. Such widening inequality was more pronounced in countries already struggling the most as they are under intense pressure to cut social spending at the same time that they are faced with rising levels of unemployment and poverty. This dynamic is problematic, as social spending cuts are positively correlated with the risk of poverty and social exclusion (see figure 4).

It is important to note that while the wealth of a welfare state has been an important factor in defining its capacity to respond to the GFC, it is the political composition of government that has been the driving force behind social spending. For instance, there has been substantial variation in postcrisis social spending, even among countries with similar welfare states and economies, that reflects partisan divisions. Governments led by right-leaning parties have tended to favor fiscal discipline and welfare cuts, while

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Austria (AT), Belgium (BE), Bulgaria (BG), Cyprus (CY), Czech Republic (CZ), Denmark (DK), Estonia (EE), Finland (FI), France (FR), Germany (DE), Greece (GR), Hungary (HU), Ireland (IE), Italy (IT), Latvia (LV), Lithuania (LT), Luxembourg (LU), Malta (MT), Netherlands (NL), Poland (PL), Romania (RO), Slovakia (SK), Slovenia (SI), Spain (ES), Sweden (SE), United Kingdom (Uk).

Figure 4. Risk of Poverty or Social Exclusion (2009) and Planned Changes in Social Spending, 2010-14 (Percentages) Source: Leschke and Jepsen 2012 left-leaning parties have been less supportive of austerity and have instead stressed the need for higher social spending and greater state intervention. This was not true in the precrisis period and marks a radical shift in social spending dynamics.

In the aftermath of one of the worst economic crises since the Great Depression, the challenges facing welfare states are unprecedented as governments are confronted with the need to maintain responsible budgets while at the same time providing adequate social protection for their citizens. These challenges are compounded by new social risks, such as aging populations, changing labor markets, and rising inequality, which increases demand for social spending despite slow economic growth and high unemployment in many countries. This need to balance social protection against budgetary concerns has led to serious political divisions. Although fiscal concerns remained high, nearly all OECD countries adopted social spending stimulus at the start of the GFC (Armingeon 2012). As the crisis continued, however, national responses differed considerably. To understand why governments adopted such varied welfare responses, it is vital to identify how the GFC has changed the politics of social spending.

Although social spending in the decades preceding the GFC was largely depoliticized, with a widespread neoliberal welfare consensus in place across countries and political parties, this book argues that the crisis resulted in a realignment of welfare state politics and policymaking. As a result of this critical juncture, the partisan composition of national governments has once again become highly influential in determining whether countries expand or cut social spending. Intense political debates and partisan conflict have increased as ideological divisions have grown between parties on the left and right over austerity and the role of the welfare state.

There are several reasons why this realignment of welfare state politics has taken place. First, the GFC powerfully challenged neoliberal ideas and policies, which had been widely adopted across states before the crisis (Glyn 2001; Mishra 1999; Roberts 2013). Indeed, many perceived neoliberal economic policies, such as financial market deregulation, as a main cause of the Great Recession. At the same time, neoliberal-inspired welfare state reforms, which resulted in reduced social spending, benefit cuts, and eligibility restrictions, left many citizens less protected against the negative consequences of the crisis. By undermining the neoliberal welfare consensus that had existed between left and right-leaning parties, the crisis created a window of opportunity for ideological divisions over social spending to reemerge, thereby increasing the possibility for partisan conflict. Since the start of the GFC, we have seen such an ideological shift as parties on the left and right have turned toward traditional beliefs and policies. Left-wing parties, such as social democratic parties, have renewed their traditional support for the welfare state and have encouraged higher levels of social spending (Bremer 2018; McManus 2019). By contrast, center-right parties have largely embraced fiscal conservatism and lower social spending. This shift in welfare positions is evident in the party platforms and the policies adopted by left- and right-leaning governments. As the political agreement over welfare has weakened postcrisis, the ideological disposition of ruling parties has mattered more for social spending outcomes.

Second, along with acting as a catalyst for ideological change, the GFC created political incentives and opportunities that have reinforced partisan divisions over social spending. As social and economic concerns have become more salient among voters, parties on the left and right have sought to distance themselves from the policy positions of their political opponents on issues such as welfare. Left-wing parties have tended to favor more generous social spending after the crisis than their center-right rivals, as these policies are seen as beneficial to their core constituents made up of lower- and middle-class voters (Ahrend, Arnold, and Moeser 2011; Bremer 2018; Starke, Kaasch, and van Hooren 2014). Right-wing parties, on the other hand, have limited welfare spending to emphasize their commitment to fiscal conservatism and appeal to their middle- and upper-class core supporters. Mainstream political parties have also moved further to the left and right on policy issues, respectively, as voter support for radical left and right parties has increased (Hobolt and Tilley 2016).

In the EU, conservative parties were the clear electoral winners postcrisis, with nineteen of the twenty-seven EU member states led by center-right governments by 2012. This dominance of conservative parties has helped to reinforce a proausterity agenda in Europe both domestically and at the EU level. A coalition of member states led by center-right parties, including Germany, the Netherlands, Finland, and the UK, worked with EU institutions to develop crisis responses that emphasized budgetary responsibility and the necessity of promarket social and economic policies (De Grauwe 2011; EUCE 2013; Regan 2012). The influence of neoliberal preferences can be seen, for example, in the bailout conditions imposed on highly indebted peripheral member states, such as Greece, Ireland, and Italy. This proausterity agenda increased pressure to reduce social spending across welfare states. At the same time that conservative party leadership shaped the postcrisis austerity responses in Europe, center-left parties who had formerly embraced neoliberal welfare policies prior to the GFC have since grown in their opposition to such measures. Left-leaning parties across Europe after the crisis began to challenge conservative social spending cuts and renewed their support for traditional left-wing policies, calling for a stronger welfare state and more, rather than less, social spending.

To summarize, there has been a significant change in the politics of social spending since the onset of the GFC. Whereas partisan differences once held little effect over social spending, the political composition of governments has been a key driver of social spending across different welfare state types in the postcrisis era. This book will analyze this significant shift in welfare state politics that has characterized the past decade. In doing so, it will also provide insights into the politics of social spending in response to contemporary and future crises. The next chapter will examine theoretical arguments and provide empirical evidence for the postcrisis transformation of social spending politics in greater detail.

Chapters of the Book Chapter 2

Chapter 2 begins by examining theoretical explanations for the influence of political and institutional variables on social spending within the welfare state literature. It starts by analyzing theoretical arguments about the influence of EU membership and policies on the social spending of member states. It then explores the rich literature on the effects of political partisanship on social spending. This is followed by an analysis of how the historical and institutional characteristics of different welfare states influence social spending patterns and play an important role in structuring political conflict within states. The literature review concludes by analyzing how economic crises act as critical junctures that may alter existing social spending dynamics. Based on this literature review, the chapter outlines a theoretical framework for the book and presents clear hypotheses about the anticipated effects of the GFC on social spending across advanced welfare states.

The chapter then continues to provide a quantitative analysis of the effects of the GFC on the political dynamics that shape social spending in advanced welfare states. It uses panel data for twenty-eight OECD countries during the precrisis (1990-2007) and postcrisis (2008-2013) periods to test the extent to which EU and domestic variables affect social spending. The findings indicate notable differences in the influence of EU membership on social spending before and after the crisis. They also show the emergence of political partisan effects on social spending postcrisis. Additional analysis of party manifestos for fifty-nine national elections across twenty-seven EU member states from 2008 to 2017 confirms the emergence of left-right party divisions over social welfare since the start of the crisis. This finding is significant, as political partisan effects were absent in the decades preceding the crisis. These results suggest that a significant shift has taken place in the politics of social spending across advanced welfare states in the wake of the Great Recession.

Chapter 3

This chapter analyzes the expansion of EU authority over social and economic policy areas and its effects on member state social spending. It begins by examining how EU economic policies may have spillover effects on domestic social policies. It also explores how the EU has incorporated social objectives into its agenda. This overview reveals how complementarities and tensions between EU economic and social policies have affected member states. The chapter identifies the ideas that influenced EU policymaking before the crisis and how the GFC disrupted the predominant consensus. This analysis provides insight into the findings of EU-level effects from chapter 2. For instance, how and why the influence of EU membership and policies have been altered after the GFC. Finally, the chapter provides an in-depth analysis of the polarization and partisan conflict that has arisen postcrisis over EU social and economic policies. This conflict has taken place between member states and EU institutions and in the form of heated interstate disputes. This highlights the fact that ideologically infused partisan politics, which place advocates and opponents of austerity in contention with one another, have become significant in influencing EU social and economic policymaking postcrisis.

Chapters 4-8

Chapters 4 through 8 cover five in-depth case studies that provide detailed accounts of how the politics of social spending was altered after the GFC. These chapters analyze EU member states representative of different worlds of welfare state capitalism: Germany, the UK, Sweden, Spain, and the Czech Republic. By observing welfare state dynamics before and after the GFC, these chapters help to identify the causal mechanisms that influence social spending in each country. These case studies confirm that a profound shift has taken place in the postcrisis era in which political parties once again matter for social spending. This is in contrast to the preceding decades, where partisan effects on welfare spending were absent. These chapters also identify how different welfare state types have mediated political divisions. Although partisan effects were present in all countries postcrisis, the degree of polarization was affected by aspects of the welfare state, such as the size and generosity of automatic stabilizers.