Social protection expenditure and its financing in Europe A study of national policies Slavina Spasova and Terry Ward Benchmark EUROPEAN COMMISSION Directorate-General for Employment, Social Affairs and Inclusion Directorate C Social Affairs Unit C.2 Modernisation of social protection systems Contact: Giulia Pagliani E-mail: [email protected] European Commission B-1049 Brussels European Social Policy Network (ESPN) Social protection expenditure and its financing in Europe A study of national policies 2019 Slavina Spasova (OSE European Social Observatory) and Terry Ward (Applica) The authors would like to thank Bart Vanhercke for his contribution to the exposition of the role of social protection policies in the European context (see the Preface) as well as for his continuous intellectual support throughout the writing of the report. They also wish to thank Eric Marlier (ESPN project director) for his excellent comments, Erhan Özdemir of Applica for his help in processing the data, preparing tables and graphs and producing the estimates of financing by function from the ESSPROS data by scheme, Rachel Cowler for her editorial support, Chiara Belletti (research intern from the University of Milan) for her research assistance. Many thanks also to European Commission (DG EMPL) colleagues for their valuable feedback on the draft report. The European Social Policy Network (ESPN) was established in July 2014 on the initiative of the European Commission to provide high-quality and timely independent information, advice, analysis and expertise on social policy issues in the European Union and neighbouring countries. The ESPN brings together into a single network the work that used to be carried out by the European Network of Independent Experts on Social Inclusion, the Network for Analytical Support on the Socio-Economic Impact of Social Protection Reforms (ASISP) and the MISSOC (Mutual Information Systems on Social Protection) secretariat. The ESPN is managed by the Luxembourg Institute of Socio-Economic Research (LISER), APPLICA and the European Social Observatory (OSE). For more information on the ESPN, see: http:ec.europa.eusocialmain.jsp?catId=1135&langId=en Europe Direct is a service to help you find answers to your questions about the European Union. Freephone number (*): 00 800 6 7 8 9 10 11 (*) The information given is free, as are most calls (though some operators, phone boxes or hotels may charge you). LEGAL NOTICE This document has been prepared for the European Commission. However it reflects the views only of the authors, and the Commission cannot be held responsible for any use which may be made of the information contained therein. More information on the European Union is available on the Internet (http:www.europa.eu). ISBN 978-92-76-08768-7 Doi 10.2767/145960 © European Union, 2019 Reproduction is authorised provided the source is acknowledged. Quoting this report: Spasova S. and Ward T. (2019). Social protection expenditure and its financing in Europe, A study of national policies 2019, European Social Policy Network (ESPN), Brussels: European Commission. Social protection expenditure and its financing in Europe Synthesis Report CONTENTS OFFICIAL COUNTRY ABBREVIATIONS ...................................................................................................................................... 6 PREFACE.................................................................................................................................................................................................. 7 EXECUTIVE SUMMARY .................................................................................................................................................................. 11 INTRODUCTION ................................................................................................................................................................................ 16 1 CURRENT LEVELS AND CHANGES IN SOCIAL PROTECTION EXPENDITURE ............................................. 17 1.1 Variations in social protection expenditure between countries and since 2005 ...................... 17 1.2 Social expenditure in EU Candidate Countries and Potential Candidates ..................................... 37 2 SOCIAL PROTECTION FINANCING AND CHANGES IN THE SOURCES OF THIS OVER THE PERIOD 2005-2016 ........................................................................................................................................................................................ 39 2.1 The overall financing of social protection and changes over the period 2005-2016 ........... 39 2.2 Current mix and recent changes in the sources of social protection financing ........................ 41 2.3 Division of funding from social contributions by source ........................................................................ 47 2.4 The design of taxes and social contributions ............................................................................................... 52 2.5 EU Candidate Countries and Potential Candidates: overview of the financing of social protection ....................................................................................................................................................................................... 55 3 SOCIAL PROTECTION EXPENDITURE AND FINANCING BY FUNCTION ......................................................... 56 3.1 Division of social protection expenditure by function .............................................................................. 56 3.2 Breakdown of social protection financing by function ............................................................................ 81 3.3 Changes in the financing mix in EU Candidate countries and potential Candidates by function ........................................................................................................................................................................................ 112 4 STRENGTHS AND WEAKNESSES OF THE FINANCING MIX AND FUTURE SOURCES OF FINANCING: NATIONAL DEBATES ................................................................................................................................................................... 117 4.1 Adaptability to demographic and economic changes ........................................................................... 117 4.2 The risk of revenue evasion ................................................................................................................................. 119 4.3 Social redistribution .................................................................................................................................................. 120 4.4 Vulnerability to structural changes in the labour market ................................................................... 123 4.5 Labour market costs and work incentives for low-income earners .............................................. 124 4.6 Administrative costs ................................................................................................................................................. 125 4.7 Conclusion: strengths and weaknesses in the financing mix for social protection .............. 126 REFERENCES ................................................................................................................................................................................... 128 ANNEX 1: TABLE A.1 CHANGES IN THE ESSPROS PRICE INDEX FOR SOCIAL PROTECTION EXPENDITURE AND CHANGES IN THE GDP DEFLATOR, 2005-2016 ANNEX 2: ESSPROS TABLES ANNEX 3: PRESENTATION OF THE EUROPEAN SOCIAL POLICY NETWORK APRIL 2019 5 Synthesis Report Social protection expenditure and its financing in Europe OFFICIAL COUNTRY ABBREVIATIONS A. EU Countries EU countries prior to EU countries that joined in 2004, 2007 and 2013 2004, 2007 enlargements (EU-15) or 2013 BE Belgium 2004 Enlargement DK Denmark CZ Czechia DE Germany EE Estonia IE Ireland CY Cyprus EL Greece LV Latvia ES Spain LT Lithuania FR France HU Hungary IT Italy MT Malta LU Luxembourg PL Poland NL The Netherlands SI Slovenia AT Austria SK Slovakia PT Portugal FI Finland 2007 Enlargement SE Sweden BG Bulgaria UK United Kingdom RO Romania 2013 Enlargement HR Croatia In EU averages, countries are weighted by their population sizes. B. EU Candidate countries and potential candidate countries covered by the ESPN EU candidate countries and potential candidates AL Albania BA Bosnia and Herzegovina ME Montenegro MK North Macedonia RS Serbia TR Turkey XK* Kosovo1 * 1 *This designation is without prejudice to positions on status, and is in line with UNSCR 1244 and the ICJ Opinion on the Kosovo Declaration of Independence. 6 Social protection expenditure and its financing in Europe Synthesis Report PREFACE Comprehensive social protection systems are the cornerstones of European Union (EU) Member State protection is enshrined in the Treaty on the Functioning of the European Union (TFEU, Art. 9), which stipulates that ivities, the Union shall take into of human health Over the past few decades, structural pressures such as demographic ageing and changing patterns of work as well as the consequences of the Great Recession which struck European economies in 2008-2010 have challenged national social protection systems in their role of ensuring adequate support to all those in need. In this context, policy responses to these challenges have had a major effect on expenditure levels (mainly cost-containment policies) and the