Economic inequalities are intolerably high across Europe. How to narrow the gap? A new study suggests that it is time to think afresh about the redistributive effects of public services.
Anna Coote is Principal Fellow at NEF – the New Economics Foundation.
Public services are a strong vehicle for redistribution. According to Oxfam, they provide the poorest people with the equivalent of 76% of their post-tax income. Now a team of economists at London University’s Global Prosperity Institute is building the case for a collection of ‘free public services that enable every citizen to live a larger life by ensuring access to safety, opportunity and participation’.
Their broad objective, as co-author Jonathan Portes explains, is to extend public provision of services, so that all individuals can enjoy a sufficient standard of living at ‘significantly less direct financial cost’. They argue that the minimum package should reach well beyond education and health services, to provide transport, access to information, shelter and food ‘all of which are generally considered to be essential to full participation in a modern, developed economy.’
Their technical analysis considers the costs and distributional effects, finding that the services can be financed through fairly modest adjustments to the tax system; they will meet needs more directly for those on lowest incomes and will ‘always deliver greater value for the same expenditure as a cash distribution’. The reforms will also ‘deliver value across the economy, stimulating new activity and increasing the size of the “pie”.’
Portes and his co-authors Howard Reed and Adam Percy concede that their analysis is based on broad-brush assumptions and more work must be done to build the case. The proposal is best described as a thought experiment. But it is not just radical and provocative. It is absolutely pertinent to major policy dilemmas that currently beset every country in Europe.
Earlier this year, presenting its latest figures, the OECD set out reasons why we should worry about intractable and rising income and wealth inequalities. The higher the levels of economic inequality, the higher the social barriers between groups; the harder it gets for individuals to trust other people whom they see as having unfair advantages. Inequalities give rise to disagreements over how to share and finance public goods, and these can break social ties and weaken social cohesion. Broken trust, says the OECD, can lead to intolerance and discrimination. And there is growing concern across European countries and more globally over the links between economic inequality and political instability.
If governments fear political instability, they must address the burgeoning problem of inequality. Three main strategies are usually proposed: grow the economy, boost employment and provide income support. These are often linked, but they have failed to narrow the gap – either separately or together. The argument that a ‘rising tide lifts all boats’ is thoroughly discredited, not least by the OECD figures. Automation and stagnant earnings undermine the potential for employment to deliver decent living standards for all. Income support is neither sufficient for recipients nor popular with taxpayers and is increasingly seen to stigmatise the poor while scarcely denting income inequalities.
Partly because of these failings, the idea of a ‘universal basic income’ has caught the imagination of many, across the political spectrum. But, as I have argued elsewhere, this is a chimera: it is unachievable at any meaningful level in practical and political terms. It will do little to narrow the income gap. And it is hard to imagine how giving small amounts of money to all individuals will help to rebuild trust or social cohesion within or between social groups.
Public services hold out more promise. But they have had a bumpy ride in recent decades. Their standing in public esteem is paradoxical. Free health and education services are highly popular and fiercely defended. At the same time they are often criticised for insufficient reach or quality, while most governments shrink from raising taxes to improve them. Neo-liberal narratives about ‘scroungers’, ‘welfare dependency’ and the ‘nanny state’ have chipped away at the post-war consensus in favour of services that are available to all who need them, regardless of ability to pay. Austerity budgets have drastically reduced public funds. There is a trend towards targeting more services on the poorest and neediest, creating a shabby safety net out of the remnants of a universal welfare state.
As quality declines and inequalities widen, public services could be even more vulnerable to political attack. But, as Portes et al argue, the climate of opinion may now be shifting. In the UK’s general election in June this year, a surprising proportion of voters favoured abolishing student tuition fees and few showed much appetite for scrapping free school meals. A move towards more and better public services – rather than redistributing through targeted cash payments – ‘might be more in tune with the public mood than at any time in recent years.’
Suppose, then, that everyone had decent, affordable housing, secure access to food, free local public transport and a mobile phone with home internet and a TV licence – in addition to existing public services. For the UK, we are told, this would cost the equivalent of 2.3% of GDP. It could be revenue neutral if personal tax allowances were reduced to £4,300 per annum (down from the current level of £11,500). And the authors claim that the overall effect would be progressive, with the services representing a ‘social wage’ worth £126 a week to every individual who made use of all of them. There could also be positive knock-on effects, as transport and information services would enable more of those who are currently ‘left behind’ to seek out jobs.
The authors claim their proposals offer ‘an affordable path forward for modern economies struggling for balance’ between changing technologies and demographics, and the need to maintain cohesion and solidarity.
The most powerful aspects of the argument are probably not the cost calculations for particular services (which are in any case quite speculative) but the implied political potential of supporting and expanding the social wage.
First, the case is convincingly made that services are a more effective and efficient redistributive tool than cash transfers, including universal basic income.
Secondly, services embody the means to build solidarity, both because the social wage can narrow the gap between rich and poor, and because – more often than not – they bring people together. Services revolve around everyday relationships in people’s homes and neighbourhoods. More obviously than income support, they manifest the collective ideal: people pooling resources and helping each other to stay well and cope with risks they cannot manage alone.
Thirdly, fostering this collective approach can stimulate creative innovation– urgently needed – about how services are provided and who controls them. A public service can be universally accessible and either free or affordable for everyone who needs it, without being owned and controlled by the local or national state, or managed by professionals who see people as ‘problems’ to be solved by the application of expertise. It is possible to envisage a range of provider models, including co-operatives, mutuals and time banks, where services are co-produced by the people who use them, working with professionals on equal terms. This way, the role of the state is not to provide services, but to broker and facilitate relationships, to support new forms of ownership and control, to set standards, ensure equal access and distribute public funds.
It is this shift towards local control and democratisation that will help to turn the tide away from targeting and privatisation, to reclaim the collective ideal and to build public support for more and better universal public services.