Social investment and a new social contract key to a stronger Social Europe

Posted on Monday, 6 March 2023

The High-Level Group on the Future of Social Protection and of the Welfare State in the EU has published its report ‘The Future of Social Protection and of the Welfare State in the EU’. The report analyses the expected impacts of key megatrends on the social protection and on the welfare state and makes a series of recommendations designed to ensure an inclusive, fair and robust welfare states, one that is resilient, offers protection across the lifecycle and is able to respond to the challenges and needs facing the EU and member states. Social Justice Ireland welcomes the focus of the report on the need for a new and strengthened social contract, and in particular the recommendation that there should be a ‘golden rule’ applied to public finances at EU level allowing borrowing for social investment and investment in social infrastructures.

The Report – main findings

The report identifies and examines a number of what it terms ‘global megatrends’ which are shaping our economies and societies from a life-cycle perspective and their impacts on the labour market, social protection and social investment. The global megatrends identified in the report are:

demographic changes, including increased longevity and lower fertility;
a changing world of work including under-employment, non-standard forms of employment, low quality jobs and in-work poverty;
the impacts of digitalisation and technological change on labour markets and social protection systems including net employment growth in the long-term, a high share of precarious work in the platform economy and the opportunities for increased efficiency of some social services including health care services;
climate change and the green transition and the risk of aggravating already existing inequalities. Reducing labour shortages in key occupations, supporting transitions for workers employed in sectors at risk and minimising energy poverty are identified as key issues.

The report puts forward a list of 21 recommendations to modernise and reinforce the welfare state including:

Protect and support families with children: for instance, childcare for all children under 3 should be free or affordable. Also, people should have access to adequate financial support and early childhood education and care services to make it easier for them to start a family. For vulnerable families, these services should be free.
Equal opportunities for education and training: welfare states should guarantee equal opportunities for young people from low-income families so they can continue education and training after compulsory school, for instance with scholarships.
Access to social protection for all: irrespective of the contract or form of work, everyone should have access, and contribute, to social protection. Also, social protection should be adequate and accessible throughout people’s lives.
Quality of work: Member States and social partners should support job quality including decent and secure income, autonomy, physical and mental health, opportunities for career development and work-life balance.
Lifelong learning: all people should have opportunities to improve their skills or learn new ones. This will enhance their chances to find a job, or change jobs, against the background of the green and digital transitions. It will also support them in taking up completely new occupations, for instance in new sectors.
Protecting income and jobs: learning from the Great Recession and the COVID-19 crisis, job retention schemes should be accessible for all.
Longer careers, adequate pensions and long-term care: social partners and Member States should seek to promote longer careers in good health, notably via flexible working-time arrangement, adjusted workplaces, and training.
Better financing of the welfare state: to respond to the rising needs and challenges, Member States need to find new sources to sustainably finance social protection and welfare, for instance through broadening the tax basis and readjusting the revenue mix (expanding progressive taxation on income, consumption, capital, and wealth as well as carbon and energy).
A golden rule of public finances: the future EU fiscal governance needs to secure social protection and especially social investments needs, and to allow borrowing to invest in social infrastructures.
Stepping up EU capacity to secure social protection: the EU should consider legislative initiatives to fulfil all principles of the European Pillar of Social Rights, ensure consistent enforcement across the Union, and limit unfair competition on social protection standards.

Social Investment

While the report highlights the decisive contribution of the welfare state to overcoming the ‘Great Recession’ and the economic and social effects of the Covid-19 pandemic in the EU, it also finds that despite some improved fiscal flexibility towards social investment in the EU, existing EU economic governance rules affect the Member States’ room for manoeuvre in financing social investment and social protection.

There is widespread agreement on the value of social investment for sustaining the inclusive welfare state in the EU, in terms of employment and productivity, prevention of social risks, activation, and inclusion and emancipation. But there is an important caveat, particularly in relation to Member States facing severe financial difficulties. Efforts to obtain the long-term benefits of social investment constantly come up against short-term pressure for fiscal consolidation. And although the returns to social investment are substantial, both in economic and social terms, so can be the immediate costs. One of the lessons of the Great Recession in hindsight is that fiscal consolidation driven by EU fiscal rules deepened recessions in Greece, Italy, Spain and Portugal, triggering downward spirals of low growth, higher unemployment, larger deficits and more public sector debt.

The report calls for a golden rule to be applied to social expenditure, allowing borrowing for social investment. It also calls for a new system for monitoring public finances in the EU to support productive social investment. To this end Social Justice Ireland supports calls for a social imbalances procedure to be embedded into the European Semester as a counterbalance to the macro-economic imbalances procedure – this would help to ensure that economic and fiscal rules do not have a negative impact on social investment. The report calls on the European Commission to exempt social investment from the new Stability and Growth Pact rules, which would both allow and stimulate Member States pursue ambitious social investment strategies and accelerate productive reforms. It would also spur social innovation by helping vulnerable economies to achieve more inclusive growth.

A starting point should be to exempt social investment from the new Stability and Growth Pact rules, which would both allow and stimulate Member States pursue ambitious social investment strategies and accelerate productive reforms. It would also spur social innovation by helping vulnerable economies to achieve more inclusive growth.

Beyond the golden rule, social investment and social expenditure in an era of rising needs requires new sources of finance. The report finds that funding for future welfare provision should be less dependent on taxing income from work and more should come from taxes on capital, wealth, inheritance, consumption, and carbon emissions, based on the principle that the broadest shoulders should carry the heaviest burden and in line with the national context. This requires taxes to be more progressive and for the tax and contributions base to be broadened. There should also be a strong political impetus to contain tax evasion and avoidance, to eliminate harmful tax competition and social dumping.

Enhancing the social contract for a stronger Social Europe

Across the EU, there is a growing consensus that a well-designed and robust welfare state, taking redistribution seriously, is an economically productive asset in a knowledge-based economy and an ageing society. The modern welfare state is based on a social citizenship contract with policies that minimise social risks and mitigate economic hardship for everyone as a matter of social right. The Great Recession and the COVID-19 pandemic have underscored the central importance of an inclusive and fair welfare state.

External shocks and internal economic and social change both require continuous updating of welfare provision, giving it the tools to uphold the social contract.

A new concept of social justice and a new social contract going beyond fair compensation, is called for in the light of global megatrends of demographic changes, a changing world of work, the impacts of digitalisation and technological change and climate change and the green transition.

The welfare state of today is more than just about redistributing resources and mitigating poverty. A well designed welfare state can absorb asymmetric economic shocks, provide insurance against new social risks, and ensure people receive high-quality social services through all the stages of their lives. A new and enhanced welfare state will be a crucial element of a new social contract for a stronger social Europe.

Social Justice Ireland view

The strength of the social contract is in its ability to improve the quality of life and wellbeing of all citizens and communities. At EU level, an enhanced and strengthened social contract based on the European Social Model is required. The enhanced social contract must be based on investment in a sustainable future, in our social and human capital. If Europe is serious about a addressing the challenges global megatrends present, decarbonising the economy and preparing for digital and technological transformation then the European Social Model must be strengthened by a new social contract that treats our environment, society and economy equally.