The end of the welfare state - Outside View by Asad Dossani

Helping You Build Wealth With Honest Research
Since 1996. Try Now

  • MyStocks


Login Failure
(Please do not use this option on a public machine)
  Sign Up | Forgot Password?  

The end of the welfare state
Apr 5, 2011

Today, many European countries are facing difficult decisions as a result of their high debt and deficit levels. The US is in a similar situation, as deficits persist and debt levels climb. The cause of these problems is fairly simple: living beyond ones means. Government spending is much higher than taxes, and this difference is funded with debt.

One of the major differences between Western countries and Asian countries is the welfare state. It is also one of the main reasons the former face high debt levels, while the latter not so much. It could also be a reason why Asias growth is set to outpace Western growth over the next decade.

Most European countries offer their citizens free healthcare. Other benefits include subsidized housing, generous state pensions, financial support for low-income groups, and a host of other measures. The US system is less generous, but nonetheless, much of their debt is a result of healthcare subsidies to retired citizens, and low-income groups. As Western countries facing ageing populations, healthcare costs have only one way to go.

The generous government support is funded through fairly high taxation levels. Marginal tax rates for middle class earners can be well in excess of 50%, once all taxes are taken into account. Still, these high taxes do not seem to be enough to fund all social programs. Over the next decade, taxes will have to rise, or government spending must fall.

Which is more likely to occur, tax rises or spending cuts? Well, it will certainly be a combination of both, but it will be mostly spending cuts, and a rollback of the welfare state. Why is this? First, from a political perspective, it is easier to cut spending than it is to raise taxes. Second, if taxes go up too much, it will hurt investment and growth over the long term. Spending cuts wont have as bad an effect.

A consequence of this is that economic growth in Western countries is likely to be low in the next few years. Government spending is a component of GDP, so cuts in spending directly reduce GDP. Government spending cuts also tend to hit the poorer parts of society the hardest (as lower income groups benefit most from government spending to begin with), so we may expect income inequality to rise.

While the welfare state may be on the way out, it does not mean that economic prosperity must go with it. Cutting spending and reducing debt are as important as putting in the right economic policies to support growth and investment in the future.

Disclosure: I do not hold the currency/commodity discussed in this report.

Asad is an Economics Graduate from The London School of Economics who has also been a part of the currency derivatives team of Deutsche Bank in London. Currently pursuing his PhD at the University of California San Diego where he's researching on Algorithmic Trading Strategies, Asad will be your direct line for answers to all the questions you might have on short-term investing. A part of the Equitymaster Team since 2010, Asad has been sharing his knowledge on short term trading strategies with our valued readers, like you, through our various services. In fact, at the last count, his weekly newsletter, Profit Hunter, was being delivered to more than 100,000 smart traders across the world!


The views mentioned above are of the author only. Data and charts, if used, in the article have been sourced from available information and have not been authenticated by any statutory authority. The author and Equitymaster do not claim it to be accurate nor accept any responsibility for the same. The views constitute only the opinions and do not constitute any guidelines or recommendation on any course of action to be followed by the reader. Please read the detailed Terms of Use of the web site.

Equitymaster requests your view! Post a comment on "The end of the welfare state". Click here!


More Views on News

Sorry! There are no related views on news for this company/sector.

Most Popular

These 5 Penny Stocks are Held by Rakesh Jhunjhunwala. Worth a Look? (Views On News)

Jan 18, 2022

Rakesh Jhunjhunwala is holding these penny stocks in his portfolio for several years now.

Tech Mahindra's CTC Acquisition: Too Expensive? (Views On News)

Jan 18, 2022

Tech Mahindra's acquisition of European IT-company fails to excite investors.

5 Hidden Tata Group Companies to Add to Your Watchlist (Views On News)

Jan 18, 2022

Here's all you need to know about these five Tata group stocks that aren't as popular as the others.

Insiders are Buying into these 6 Stocks Aggressively. More Details here... (Views On News)

Jan 19, 2022

While promoter holding is an important parameter, it should not be the sole reason for buying a stock.

Top Indian Drone Companies to Watch Out for in 2022 (Views On News)

Jan 21, 2022

Several companies are adopting drone technology for regular business operations.


Become A Smarter Investor
In Just 5 Minutes

Multibagger Stock Guide 2022
Get our special report Multibagger Stocks Guide (2022 Edition) Now!
We will never sell or rent your email id.
Please read our Terms