www.madariaga.org How to Tackle Rising Inequalities in Europe? Madariaga Report – 14 June 2012 After decades of unequal growth, the European response to the crisis – focused only on budgetary discipline and enhancing competitiveness – is likely to increase inequalities even more. Is it possible to get out of the paradigm of a trade-off between competitiveness and social justice? How can the EU make itself relevant and what kind of social dimension should be added to the economic governance architecture? What role should be played by tax redistribution and which role by structural policies of social inclusion? A Citizen’s Controversy with Ana Llena-Nozal, Economist, OECD. Wojtek Kalinowski, Director, Veblen Institute for Economic Reform. Moderated by: Pierre Defraigne Executive Director, Madariaga – College of Europe Foundation. Reporter : Chiara Galluccio 14, Avenue de la Joyeuse Entrée B-1040, Brussels, Belgium Tel: +32 2 209 62 10 E-mail: [email protected] Ana Llena-Nozal started by explaining the main findings of the OECD’s Report ‘Divided We Stand: Why Inequality Keeps Rising’1, which analyses how inequalities among the working-age population have developed over the long-term up to the recent “Great Recession”. Firstly, even if the 2008 crisis might have a huge impact on income inequality, inequality raised in 17 out of 24 OECD Member States despite employment growth in the two decades up until the recession. The increase hit both traditionally high income-inequality countries such as the US, and low income-inequality ones, such as Scandinavian countries. Inequalities rose mainly due to the sharp increase in the top 10% of best paid workers, while the 10% of lowest paid worker incomes stagnated. This phenomenon was particularly acute in the English speaking countries. According to the data, the impact of income taxes and the benefits system on income inequalities reduces the latter by about one quarter. But the effectiveness of this redistribution mechanism has weakened over time – indeed, from a 50% reduction over the period from the mid-1980s to the mid-2000s, it only contributes presently to a 20% reduction of income inequalities. Indeed, while the overall redistribution has increased, this was not enough to offset growing market-income inequality. This is explained by the fact that changes in overall redistribution were 1 For more information, see: www.oecd.org/document/10/0,3746,en_2649_33933_49147 827_1_1_1_1,00.html 1 mainly driven by benefits, and those became more redistributive during the 1990s but less effective since spending shifted from benefits targeted at low-income working people towards ‘inactive’ benefits (early retirement, disability, etc.). Secondly, Llena-Nozal analysed the potential impact of the crisis and the consequent austerity measures on inequalities. Incomes at the top of the matrix will suffer due to a decline in both stock prices and interest rates. Moreover, because of the increasing unemployment rates, there might be a growing gap between the incomes of the unemployed labour force and working households. In this regard, there might be household coping strategies – such as young people returning to live with their parents, or women increasing their working hours. The report shows that the distributional impact depends on the tax-benefit policy mix. More specifically, tax and social contribution changes affect higher incomes more, while changes to benefits and pensions hit those on low incomes. Austerity measures have different consequenc es. For instance, while the impact of progressive pay cuts on the public sector affected more households at the top of the distribution matrix, the increased value added tax (VAT) affects the lowest segment of the income matrix disproportionately. “...both redistribution and inclusive employment policies are crucial and complementary.” | Madariaga Report – How to Tackle Rising Inequalities in Europe? (14 Jun 2012) It should be noted that even if the economic crisis and the austerity measures have led, in some cases, to lower household income levels, inequalities have increased little in several countries because of the injection of stimulus packages in initial years. However, previous recessions have increased inequality because of the employment divide between the rich and poor, and further tax-benefit changes could increase the cost of austerity to low-income groups. To conclude, Llena-Nozal outlined the suitable policies that should be put in place in order to effectively reduce inequalities and promote economic recovery, underlining that both redistribution and inclusive employment policies are crucial and complementary. These measures focus on tax and benefit reforms, employment measures and education policies. Regarding tax and benefit reforms she underlined the relevance of government transfers in safeguarding low-income households. Furthermore, income support needs to be properly targeted and designed in order to prevent losses among low-income earners during the period of 2 fiscal consolidation. Llena-Nozal explained that the guarantee to equal access to high-quality public services should be implemented, and the increased “tax capacity” among top-income households should be taken into account – which does not automatically mean an increase in marginal personal income tax rates – particularly with regard to the improvement of tax compliance, the elimination of tax deductions and tax reassessment on all forms of property and wealth. Concerning employment, more jobs can clearly lead to sustainable cuts in inequality, provided that employment gains occur in jobs that offer career prospects. Labour market reforms should be aimed at addressing segmentation, which implies tackling inequalities between standard and non-standard employment, and access to 2 employment should be facilitated for underrepresented groups (youth, young mothers, elderly, migrants, etc). Finally, education policies are vital to addressing inequalities in a sustainable and lasting way. These measures should focus on investing in human capital and promoting upskilling of the workforce; investing from early childhood through formal education and work in order to ensure equality of opportunity for children from disadvantaged backgrounds; better job-related training and education for the lowskilled through incentive measures; and equal access to formal education over the working life. *** Wojtek Kalinowski initially specified that even if he agrees with Ana Llena-Nozal’s factual analysis, and with most of her final recommendations, issues such as the financial difficulties of investing in education in the current austerity framework, as well as the trade-off between taxation and private consumption, still remain open. Reconciling these objectives gets more difficult as we proceed to concrete policy recommendations. One key entering point into the debate about inequalities concerns social mobility, which is at the heart of the “economy of trust” in our societies. Data show that social mobility indicators, meaning the probability that children will have a different life pattern (professionally, socially, etc.) compared to their parents, is much higher in Scandinavian countries compared to continental Europe and still much higher than in the US. But the Scandinavian model should not be idealised. Indeed, there are alarming changes in terms of growing inequalities even in these | Madariaga Report – How to Tackle Rising Inequalities in Europe? (14 Jun 2012) societies. Furthermore, the present positive figures in terms of social mobility are the result of policies put in place in the 1970s, and the current policy evolution in Northern countries suggests a shift towards less social mobility in the future. It is thus essential to use a relative scale of comparison in order to avoid a distorted comparison among countries. The historical evolution of the welfare state model is very instructive too, remarked Kalinowski, particularly concerning income distribution, the organisational patterns aimed at providing public goods and social services, the rationale behind the taxation system and labour market regulation. Kalinowski then analysed the sustainability issue, which has been addressed exclusively through the technological dimension technology is too often considered as the only suitable tool to solve the sustainability issues -, whereas, in his opinion, technological progress will not achieve our sustainability objectives such as low-emission economy, etc. We need a deeper social transformation of our societies, our ways of life and our culture, and this shift needs in turn more equality-oriented policies. As argued by Tim Jackson in his book Prosperity Without Growth: Economics for a Finite Planet, material growth cannot be decoupled from monetary growth, especially if we look at it from the point of view of the global economy. This idea should seriously be taken into consideration since, historically, inequalities have been justified by “trickle-down” economics which has been and still is a very powerful narrative. “Trickle-down” economics is based on the assumption that letting rich people getting richer – which implies highincome tax cuts – would generate wealth that would somehow trickle-down the ladder to the rest of society. Facts testify that this narrative does not coincide with the economic reality. Indeed, after 3 the financial crisis, the link between rising 3 inequalities, financial instability and economic crisis appeared blatant. “Trickle-down” economics was supported in the early 1960s by political neoconservative thinkers in the US, who relied on a vision of unlimited growth and on a promise of accumulation of material well-being. It should be noted, Kalinowski stated, that this belief in growth was shared by thinkers on both the Left and the Right and was considered as the precondition for social well-being and political stability. The main challenge today is to put the economy on a more sustainable pattern. Factually there are physical limits to growth regardless of the ideological debate “for or against growth”. Alternative scenarios to the ‘infinite growth’ myth lie in new lifestyles. The most unsustainable lifestyles are founded at the (very) top and the very bottom of the income matrix, and that is the reason why the sustainable agenda needs more equal societies. Clearly this implies more sacrifices and the crucial question is how these sacrifices will be shared within societies. It should be noted that there is no blueprint for the sustainable agenda and solutions will follow different patterns according to specific features and circumstances of any given country. Concerning the labour market, Kalinowski remarked that different kinds of reforms were started some 20-30 years ago; they all aimed at inclusiveness and full employment, but today we witness the outcome, which is the exact opposite. Indeed, the labour market is currently characterised by a strong polarisation with high-quality jobs and career patterns on the one side, and low-skilled and precarious jobs and permanent exclusion the other. Moreover, this polarisation has led to the ‘diploma inflation’ phenomena in many countries – such as France –, which is fuelled by fierce competition among potential workers. | Madariaga Report – How to Tackle Rising Inequalities in Europe? (14 Jun 2012) “Alternative scenarios to the ‘infinite growth’ myth lie in new lifestyles.” Measures to address this problem have been put in place, such as social investment in human capital – which is clearly vital to upgrade workers skills as well as to develop their aptitude to adapt to labour market evolutions. But, as a matter of fact, labour market policies failed to achieve these objectives because of the neoliberal dogma based on infinite growth through the supply side. This model is obviously unsustainable because of physical limits to growth and demographic pressure. Kalinowski concluded by insisting on the fact that to effectively address rising inequalities, lifestyles must change in our societies. This implies, for instance, work sharing programs and rebalancing work and leisure in order to successfully achieve the transition from “job societies” – characterised by labour market polarisation and consumerist behaviour during spare time – to “work societies”– where leisure time would be spent, among other things, on socially productive activities which would strengthen human cooperative interaction and solidarity. *** ve to enhance unemployed worker skills through training workshops has been blocked by a government which has threatened local authorities to cut their social benefit spending. Another participant asked about the causes of the crisis by highlighting that the public deficit is a consequence rather than a cause, and it was then stated that tackling growing inequalities is an effective tool to address the public deficit issue. Another participant criticised the OECD analysis of income distribution since it is biased by the fact that the highest 1% of income is not submitted to taxation. Ana Llena-Nozal firstly remarked that there is a lack of long-term historical data concerning the evolution of inequalities and major economic crises across different countries. In most OECD countries overall inequalities have increased over the past 15 years, but the top-income share has deeply decreased since the beginning of the 21st century, and particularly after the Great Depression. Concerning the causes of the crisis, evidence so far is mixed and the debate is still ongoing. In the US, for example, the sharp increase in inequalities encouraged households in the lowest segment of the income distribution scale to borrow beyond their means. But this logic does not necessarily apply to other OECD countries. Previously the debate focused on what extent the crisis has fuelled inequalities, but the debate is now actually reversing to ask what extent growing inequalities may cause an economic crisis. DISCUSSION 4 4 During the discussion the audience raised the issue of the historical evolution of economic recessions and inequalities. A participant underlined the existing clash between institutional solutions (tax and welfare) and creative initiatives; he illustrated this clash with the ‘Manchester episode’, where a local initiati- Regarding the link between inequalities and public deficits, she underlined the fact that the two issues are not antagonist and can be addressed simultaneously. The reason why many countries are focused on reducing their deficits relates to the evidence presented by prominent economists that favour the consolidation of public finances as a precondition for economic revival. But recent | Madariaga Report – How to Tackle Rising Inequalities in Europe? (14 Jun 2012) studies, from the IMF and the International Labour Organisation for instance, argue that exclusively concentrating on deficit and public debt reduction may slow down economic recovery because of the lack of investment and job creation, and the consequent revenue decrease which in turn increases the deficit. Indeed, the sustainability issue means a critical trade-off between investing in the future and creating more and better jobs on the one hand, and the deficit spending policies which generate huge indebtedness for the future generations on the other hand. Wojtek Kalinowski first recalled that fighting inequalities does not exclusively mean pulling people out of poverty, but also encouraging the effective promotion of equal opportunities to access education and work. 4 He then illustrated effective policies aimed at decreasing inequalities with the concrete example of Sweden. Indeed, in the 1960e and 1970s massive governmental investments – which essentially covered the entire population of children in Sweden – have been dedicated to childcare and have allowed Sweden to tackle educational inequalities. Regarding the sustainability agenda, a track could be to complement national monetary policies with local initiatives aimed at social inclusiveness. During the second round of questions the audience raised the issue of inequalities and primary needs (food, housing); the role of the territorial dimension in reducing social inequalities; and the link between economic growth, rising inequalities and democracy – since, factually, active political participation is inversely proportional to income shares. Finally a participant raised the demographic dimension, underlining that intergenerational inequalities are rising too. Indeed, poor young people – who contribute to decreasing birth rates in our socie- 5 ties – oppose increasing elder retired. This demographic imbalance creates a vicious circle that weakens economic recovery and strengthens intergenerational tensions. Llena-Nozal specified that while in the majority of OECD countries governments are concerned about growing inequalities, and that they are working on solutions to address this issue, the so called BRIC countries have to face other concerns. Indeed, the BRIC countries are focusing on economic growth as the main instrument to address poverty and to promote economic and social development. Regarding inequalities and primary needs, she highlighted the fact that poverty is a very different issue compared to inequality. In several countries outside the OECD, and particularly in Latin America and in Asia, governments have put in place policies to address poverty without taking into account the inequality dimension. The result has been an increasing amount of people have escaped poverty – that is to say that these people were able to meet their basic needs, which corresponds essentially to being able to eat properly – but simultaneously, inequality increases in these countries. An exception is Brazil, where efforts have successfully been made to address inequalities, but it is important to underline that the Brazilian government firstly focused on poverty reduction and secondly has been able to tackle inequalities. Llena-Nozal also insisted on the fact that to tackle skills mismatches, evident in many OECD country labour markets, reform of education systems as well as promoting vocational training are urgently needed. With regard to the inequality dimension beyond the simple income disparity among the richest and poorest, Llena-Nozal explained that the gender wage gap has historically decreased; particularly | Madariaga Report – How to Tackle Rising Inequalities in Europe? (14 Jun 2012) during the 1960s and 1970s when education improved for women. But this gap is still a reality today and it is not just about wage differences, but also and especially about employment rate differences between men and women. Concerning the intergenerational solidarity, benefit distribution shows that most of the expenditures are indeed devoted to financing pensions rather than to households and children. This is a major question in terms of intergenerational inequalities, particularly because some OECD countries have reformed their pension systems – through, for instance, increasing the retirement age and not necessarily by diminishing benefits for retired people – but, simultaneously, the austerity measures have touched more families and children rather than retired workers. Kalinowski focused on sustainable ways of living and underlined that emerging economies – such as China – are facing significant negative consequences in terms of pollution and environmental degradation because they are adopting the lifestyles of advanced countries. Europe should be a pioneer in inventing a sustainable and enjoyable new way of life. In this regard, new forms of wealth and happiness measurements are being proposed; they should be encouraged because the sole GDP is not a suitable indicator anymore, since it neither takes into account the environment dimension nor the personal fulfilment dimension. *** ________________________________________ OTHER REPORTS Une zone euro forte pour un euro fort? Madariaga Report, 14 October 2011 How can the eurozone definitively preserve its 17 economies from speculation on their sovereign debt? How can it get out of debt and return to growth by betting on a more equitable distribution, rather than on a social and fiscal race to the bottom among its Member States? What are the necessary and feasible institutional changes to provide the eurozone with a real political underpinning? A Citizen's Controversy with Philippe Maystadt, President of the European Investment Bank (EIB), and Christian Saint-Etienne, Chair Professor of Industrial Economics at the Conservatoire national des Arts et Métiers, Paris. ________________________________________ He also insisted on the fact that local authorities play a major role in actively tackling inequalities by promoting innovative social policies and by providing essential public social services, but there is no ‘one size fits all solution’ so each local reality should elaborate its own pattern. 5 Finally, concerning intergenerational tensions, he suggested new forms of time organisation such as ‘work sharing’ or social activities that would benefit both the volunteers and the recipients. 6 | Madariaga Report – How to Tackle Rising Inequalities in Europe? (14 Jun 2012) www.madariaga.org CITIZEN'S CONTROVERSIES The Citizen's Controversies* series of lunchtime debates seek to address one of Europe’s most vital tasks: rekindling the citizen’s interest in EU matters. Much has been said about the ‘democratic deficit’, which is now felt to seriously hamper EU progress. This deficit, however, does not stem from undemocratic EU institutions, but from a lack of citizen participation in EU democratic life. Less an institutional deficit, therefore, than a citizenship deficit. The Citizen's Controversies strive to encourage citizens’ ownership of the pan-European political debate by securing fair and contrasting views on fundamental EU issues. Each debate confronts different points of view on a given topic to point out options and trade-offs and highlight the political stakes present in each necessary compromise. The objective, in sum, is to enhance the perception of a ‘European common good’, which is more than the sum of national interests. * The Citizen's Controversies are held under the Chatham House Rule. A report is then published after agreement with the speakers. SUPPORT US The Madariaga - College of Europe Foundation is a young and independent think-tank committed to free thinking on the European Union. The Foundation is only partially supported for its event organisation and research. In order to sustain the vital work of the Foundation into the future we rely on assistance in the form of donations and project collaboration. If you would like to make a contribution to the work of the Foundation there are a number of possible options: ABOUT US The Madariaga – College of Europe Foundation is dedicated to promoting original thinking on the role of the European Union in an era of global change, engaging citizens and international partners in a creative debate on the issues that shape Europe’s future. Through research and action, the Foundation pursues a three-fold mission of challenging the citizen, empowering Europe, and preventing conflict. Created in 1998 by former students of the College of Europe, the Foundation bears the name of the College of Europe founder: Spanish writer, historian, diplomat and philosopher Salvador de Madariaga (1886-1978). MCF continues to work in close cooperation with the College, which provides it with valuable access to a pool of academic expertise and a vast network of professors and alumni. Presided over by the former EU High Representative for the Common Foreign and Security Policy, Javier Solana, the MCF’s Administrative Council includes distinguished personalities from a variety of backgrounds, reflecting its privileged relationship with key European and transatlantic stakeholders. The Foundation’s Administrative Council includes as members the President, the VicePresident Jean-Luc Dehaene, the Rector of the College of Europe, high-level representatives of the European Commission and European Parliament, leaders of major European and American foundations, as well as several business partners. The Administrative Council appoints the members of the Executive Committee as well as the Executive Director, in charge of the daily management of the Foundation The views expressed in this paper are the speakers' own, and do not necessarily reflect those of the Madariaga – College of Europe Foundation or any other institutions with which the speakers are associated. To Donate One can make a financial donation to the Foundation by contacting Magali Auquier at [email protected] or phoning on +32 (0) 2 209 62 11. All donors will be acknowledged, thanked and listed in our Annual Report on the website unless they prefer to remain anonymous. 14, Avenue de la Joyeuse Entrée B-1040, Brussels Belgium Tel: +32 2 209 62 10 Fax: +32 2 209 62 11 Email: [email protected] www.madariaga.org Subscribe to our mailing list: Follow the Foundation on: [email protected]