How to ensure adequate funding for social policies and services at national level? The role of taxation and EU budgetary rules

Providing adequate funding for social policies and services is vital to effectively implement the European Pillar of Social Rights.

This is true for the EU level – and that’s why this week with the release of the first proposals on the next EU budget was so hectic for everyone here in Brussels – but it is even more valid for the national and local level.

Indeed, we mustn’t forget that while the proposed EU budget for the period 2021-2027 accounts to 1.11% of the EU27’s gross national income, with about 34.6% of these resources to be dedicated to cohesion and social inclusion, general government expenditure of EU Member States amounted to 45.8 % of EU gross domestic product in 2017, with 28.7% of this public money dedicated to social protection in 2014 (according to latest Eurostat data available).

If we want to fight inequality, poverty and social exclusion and promote social progress and sustainable development, mobilising enough resources at national and local level is fundamental.

This implies improving the collection and allocation of public resources at national level by reforming national taxation systems and providing the right incentives at EU level to enable a prioritisation of social investment in national budgets.

First of all, Member States have to have enough money to spend on key social programmes and policies.

After years of crisis in which austerity measures seriously put under strain welfare systems in many countries, there is an urgent need to provide additional resources to underfunded social protection systems and services to improve their quality, coverage, adequacy, accessibility and affordability. This would ensure that everyone in our society benefits from the economic recovery we see taking place across Europe.

Tackling far-reaching trends in global tax avoidance and evasion is a prerequisite to find enough resources for this increased investment. When presenting its 2016 package of measures on taxation, the European Commission provided evidence that estimates corporate tax avoidance at about €50-70 billion a year in the EU. These numbers alongside scandals such as LuxLeaks, Panama Papers and Paradise Papers give an idea of the billions of euros of extra resources that could be collected by public authorities and allocated to welfare systems and services.

Moving towards a greater role of contributions from taxes in funding social protection and services is also a necessity in light of transformative societal trends such as ageing and digitalisation. While today social protection is mostly funded through social contributions (although significant differences exist between Member States), this balance has to shift to ensure long-term sustainability of our welfare systems.

But taking concrete steps to make our taxation systems more progressive and transparent is also a matter of justice. Disadvantaged and vulnerable people who were the worst hit by the crisis and that have been the most affected by spending cuts to social policies and services have also been the ones that have contributed disproportionately to the system through taxation and social security contributions, following the increase of regressive forms of taxation such as value added tax (VAT).

Having enough money is not sufficient if you cannot spend it without infringing EU macroeconomic rules; and here is where the EU-level comes into play.

While there is increasing evidence of the positive economic and social returns of social investment, the current EU macroeconomic architecture prevents, in many instances, Member States from adequately funding investment in people. Spending on social, health, housing, and education services often means a breach of the stability and growth pact’s deficit rules, resulting in lower levels of investment.

Granting budgetary flexibility for these specific kinds of public expenditure in the short-term and using the opportunity provided by the upcoming reform of the euro area to review the existing rules in the medium-term is key to allow and incentivise Member States to pursue higher levels of public social investment.