The role of global finance in the provisioning of social infrastructure and the welfare state

This paper aims to identify and investigate how financialisation has influenced the tax revenues in Europe by lowering tax rates and decreasing productive investments, which have changed the provision and the investment pattern in public social infrastructure. The paper first shows that the EU economies have increasingly been financialised according to some of the indicators of financialisation, specifically the share of FIRE (finance, insurance, and real estate) value added in GDP, FIRE’s share of employment in total employment, total debt in non-financial corporations, and capital account regulations. According to other indicators of financialisation such as property income received in non-financial firms’ value added, household indebtedness, and volume of stocks traded/GDP, the EU countries financialised until 2008; however, the financialisation trend slightly declined following the 2008 global economic crisis and the Eurozone crisis. The paper also shows that the growth of public education and healthcare expenditures in the EU declined through the 1990s and 2000s. The slowdown in the growth of public education and healthcare expenditures is noticeable, especially following the start of the Eurozone crisis. This paper discusses the role of financialisation in the making of the Eurozone crisis and shows that the Eurozone crisis led to austerity measures including significant cuts in public education and healthcare investment in the Southern European countries- Greece, Italy, Portugal, Spain, and Cyprus. To examine the causal relationship between financialisation and public social investment in the EU-28, the paper conducts an econometric analysis for 1991–2017. Specifically, the paper examines the impact of the value added in the FIRE sector/GDP, domestic credit to private sector/GDP, total debt in non-financial corporations/GDP, household debt/GDP, and property income (interest, rent, dividend) received by non-financial firms as a share of their value added to the real growth of public healthcare and education expenditures. The econometric analysis shows that financialisation reduced the growth of GDP, tax revenues as a share of GDP, and hence, the growth of tax revenues in the EU-28 countries. The decline in the growth of tax revenues also led to austerity measures and lowered growth of public expenditures in education and healthcare. Estimations based on different measures of financialisation find that a standard deviation increase in a measure of financialisation reduced the yearly growth in public healthcare expenditures between 0.56 and 1.19 percentage points. A standard deviation in a measure of financialisation pulled down the yearly growth in public education expenditures also between 0.56 and 1.19 percentage points. The negative impact of financialisation is larger on the growth in public primary and secondary school expenditures. Last, the paper discusses whether financialisation could create new schemes to replace the public social expenditures. For this purpose, the paper focuses on the role of student loans in higher education in the United Kingdom and private health insurance schemes in the Netherlands and Germany. Following the introduction of tuition fees supported by student loans, the enrolment rates in tertiary education in the UK have stagnated, while the student debt has been geometrically rising. The student debt/GDP in the UK increased from 0.67% in 2002/03 to 2.63% in 2011/12 and to 5.75% in 2017/18 following the higher education reforms. The paper also shows that private healthcare insurance schemes did not lead to a significant success in the Netherlands and Germany. In the Netherlands, the healthcare system is entirely based on private insurance schemes, and in Germany higher-income individuals can choose between public and private health insurance schemes. Although the per capita healthcare expenditures are significantly higher in the Netherlands than in the EU-15, life expectancy is lower than the EU-15 average. On the other hand, empirical evidence from Germany showed that the dual system generated an ‘adverse selection’ problem, since more healthy individuals were more likely to switch to the private insurance system (Panthöfer, 2016) and the less healthy were more likely to switch to the public (Grunow and Nuscheler, 2014). The ‘adverse selection’ problem left the public insurance system in Germany with relatively unhealthy individuals and increased costs.