Who will pay for Operation Protective Edge?

Dr. Werner Puschra
Dr. Werner Puschra

Dr. Werner Puschra argues it is a false notion that welfare states limit the private sector.

Israel has made great advances since its independence in promoting the wellbeing of its people. But in recent years the situation has changed and despite high economic growth rates, social expenditure has gone down and is threatening the social fabric of the Israeli society. Coping with the economic costs of the Operation Protective Edge, the situation can even become worse. Already, the war has hit people and the economy heavily.

There is a strong need, even and especially in this situation where security has become top priority, for a thorough debate about social development and the implementation of more inclusive economic policies. The political debate about the welfare state and inclusiveness very often focuses only on the financial issues and most of all about: what does it cost the government? According to this view, reducing taxes and government spending will improve efficiency, limit wasteful expenditure and enhance incentives for investment, entrepreneurship and hard work, leading to faster economic growth. But this view is predicated on the false notion that the growth of government limits the growth of the private sector. Empirical results do not support this notion. Countries with higher taxes and government expenditure have grown just as rapidly as those with smaller government and the big difference between those two groups of countries is that in those countries with bigger government growth benefitted the middle class and the poor more.

As a result of a functioning and inclusive welfare state, people feel more at home and secure in those countries. This is shown in the annual prosperity index published by Forbes. The people feel happiest in countries like Norway and Switzerland, which have high tax rates, but very well functioning welfare systems. Last year, the US dropped three places in the index, as did Israel.

A welfare state provides for social services and social protection, which are an integral part of the wellbeing of people. Social welfare systems have been most effective in protecting people from poverty and keeping inequality in check. They also serve as an inbuilt automatic stabilizer in times of economic crises, avoiding that crises like the global financial one threaten whole economies.

Maintaining a welfare system also helps to make the economic system a fair system. Equality of opportunity does not exist in an economic system with high degree of inequality. For example, access to better education and health services, or access to loans for a startup all that depends on the income and wealth status of people in a society and puts limits to opportunity and fairness.

Last but not least, workers have a claim to a fair share of what they helped to produce. In recent years, the share of workers incomes vis-à-vis entrepreneurial incomes has decreased substantially in many countries and has undermined the legitimacy of the economic system. A welfare state is nothing less than a public insurance against risks, which people need to help them overcome temporary declines of their productive capacities, resulting from unemployment, sickness, accidents and other factors.

Given the present situation after the war, all policy measures to be adopted need to take the social and economic implications into consideration in order to promote social peace together with security.

The author is the Director of the Friedrich-Ebert-Stiftung Israel Office. Friedrich-Ebert-Stiftung is a private non-profit German organization, which works to achieve the fundamental values of democracy, social justice, and peaceful international understanding. Friedrich-Ebert-Stiftung is holding a conference this week together with the Macro Center for Political Economics on the State Budget after Operation Protective Edge and closing socioeconomic gaps.

Published by Globes [online], Israel business news - www.globes-online.com - on September 2, 2014

© Copyright of Globes Publisher Itonut (1983) Ltd. 2014

Dr. Werner Puschra
Dr. Werner Puschra
Twitter Facebook Linkedin RSS Newsletters גלובס Israel Business Conference 2018