FAES foundation has launched its strategic report on INEQUALITY FAES REPORT ON INEQUALITYTalking about inequality in Spain is talking about the performance of our welfare system

30/06/2015

Overall, Spain is in the intermediate positions of all inequality indicators, as wealth, consumption, income and poverty rates compared to the EU 15

The duality of the labour market, the performance of the education system and institutional quality are the main factors explaining inequality in Spain

Globalization and technological change are the two factors with the greatest impact on equality worldwide

‘Spain is one of the developed countries with a greater volume of social spending’, data that is maintained even after the economic crisis

The recession has tested the various models of the welfare state in Europe with mixed results

The welfare system in Spain does not have a problem of quantities; the problem is the redistributive effect of that spending

The Young, unemployed and families are excluded from the best results of the welfare system

It proposes to ‘open the debate on reforms of the welfare system’ to increase its levelling capacity and its capability to generate opportunities

The rising unemployment during the crisis explains the increase in inequality

The education system is relatively inefficient in its task of equalizing opportunities, as the socio-economic status of parents affects the acquired skills.

It would encourage ‘a reform of the tax system addressed to economic growth which results in increased revenue stability and sustainability of public expenditure’

The left uses inequality to perpetuate its usual policies, which are those that account for much of the phenomenon


 FAES Foundation has launched on Tuesday 30, its strategic report Inequality, Opportunities and the Welfare Society in Spain, which claims that talking about inequality in our country is talking about the performance of the welfare state. In this sense, FAES notes that the duality of the labour market, the performance of the education system, institutional quality and the impact of these three issues on the effectiveness of the welfare state are the main factors explaining inequality in Spain. However, it also states that, overall, Spain is in the intermediate positions of all indicators of inequality, as wealth, consumption, income and poverty rates compared to the EU 15 countries.

It also indicates that inequality in Spain ‘is not the result of the insufficient size of the public sector or the lack of social spending.’ In fact, it explains that ‘it is one of the developed countries with a highest volume of social spending, data that is maintained even after the economic crisis.’ In this regard, it proposes to ‘open the debate on reforms of the welfare system’ to increase its ‘levelling capacity and its capability to generate opportunities’ and ‘put an end to exclusion pockets of the young, unemployed and families.’

The paper also analyses the effect of globalization and new technologies on the phenomenon of inequality: ‘Globalization has given millions of people the opportunity to leave misery, the median wage has grown globally, and tens of millions of people join the new middle classes each year.’ However, the report also reflects that inequality has a different impact depending on the country, and in particular, in emerging countries and in more mature Western economies, and uniquely in Europe. It also notes that ‘while globalization has had a relatively weak impact on global inequality, technological innovation is having a greater weight’.
 

QUALITY AND EFFICIENCY

FAES proposes to increase ‘the paths of reform capable of improving the quality of education and the training of young people before the challenges of increased international competition, and rise the efficiency of education spending, increasing levels of intergenerational social mobility’ .It also calls for a second phase of the labour reform that allows greater flexibility ‘to manage to reduce as much as possible the duality of the labour market in Spain and, with it, the backlash to the economic cycle, the main source of rising inequality in Spain’. ‘We should opt for a comprehensive reform of our tax system oriented to economic growth, to increased tax bases and to a greater optimization and stability of revenues,’ continues the text, which also states that ‘a gradual change in the tax structure’ would help improve its efficiency. 

The document, headed by the Director of Economics and Public Policy of FAES Foundation, Miguel Marin and developed by renowned specialists, avoids simplistic interpretations to address the discussion of inequality in Spain from technical rigor and calm reflection. The launch of the report by the former Prime Minister and president of FAES Foundation, José María Aznar, has taken place during the Economics course of the 2015 FAES Campus. The authors of the report are the analyst Juan Carlos Rodriguez Perez; the President of the Committee on Finance and Public Administration in Congress, Gabriel Elorriaga; the professors of IE Business School, Fernando Fernández and Ignacio Muñoz-Alonso; the Professor at the University San Pablo CEU, Maria Blanco; URJC teachers, Ismael Sanz and Jorge Sainz and IESE Professor Emeritus, Juan José Toribio.

SPAIN: INTERMEDIATE POSITION

The report also highlights that Spain, as a whole, is at the intermediate positions of all indicators of inequality and poverty, compared with EU 15 countries and the OECD. It is, however, in income inequality where a greater impact after the economic crisis is felt. The performance of the welfare state in Spain has been much lower than in other countries, it says. In this sense, it explains that ‘the difference between Sweden and Spain before social cash transfers was 1.2 points, while after this, it extended to 8.3 points’ in the Gini index, the usual indicator for this kind of inequality.

Once the inequality arising from the inefficiency of the labour market and the education system and its effect on the welfare system was established, FAES argued that ‘while the positions from the political left – whether radical or not – are using inequality as an argument to perpetuate their traditional paradigms regarding the labour market or education policies’ when ‘it is precisely the persistence of these paradigms which explain much of the phenomenon of inequality in Spain’. In this regard, it states that this is due to the ‘major income losses experienced by the lower classes and not by a better position in absolute terms of the highest segments of income distribution.’

Labour Market Duality

The text also highlights that ‘there are very specific structural factors behind Spain's worse relative response in an attempt to offset the effects of the crisis.’ One of the reasons which follow from the analysis is that ‘in Spain, the most important factor of the distribution of income is employment and its remuneration’. Therefore, it stresses that low employment rates, rapid and uneven growth in unemployment, the duality of the labour market and wage adjustment ‘widen the gap between the more and the less fortunate.’

It also notes that ‘it should not be surprising that a labour market characterized by duality, which regularly expels temporary workers, usually from lower quality jobs, the loss of income is concentrated at the lower levels.’ Therefore, before the evidence of a better evolution of countries ‘with more flexible labour markets which do not generate the shocks produced by the labour market in Spain, FAES advises to ‘strengthen public policies in favour of a more efficient and less dual labour market ‘as it already recommended a year ago in its report Reflections on the labour market: continuing the reform .


Welfare System

The report further explains that ‘the Spanish welfare system presents results that could become regressive and, in any case, they significantly reduce the effectiveness of their redistributive goal.’ Hence, it notes that the young, unemployed and families are ‘excluded from the best results of the welfare system’ and stresses, however, that the ‘welfare system in Spain does not have a problem of quantities,’ because ‘it is among the developed countries with the highest volume of social spending, data that is maintained even through the worst moments of the recent economic crisis.’

According to FAES, the problem is that ‘the redistributive effect of that expenditure differs from one country to another.’ The document shows that in the period of the economic boom, cash transfers trimmed inequality up to 10.8 points in the Gini index in Denmark, 10.6 points in Ireland, 7.8 points in Sweden and 9.3 points in the UK; while in Spain this cut was only of 2.2 points.

Intergenerational Social Mobility

The document also states that ‘the educational system is relatively ineffective in its role of equalizing opportunities.’ In this regard, it states that ‘education can be a very useful tool that could lead to ‘build a more innovative, fair and meritocratic society’. However, it specifies, although levels of intergenerational social mobility in Spain ‘are among the average levels of reference developed countries,’ ‘the greater margin of improvement lies in intergenerational educational mobility.’

‘The chances of education success not only depend on effort and dedication’, the report states, which specifies that ‘the socio-economic and cultural level of the parents affects the acquired skills.’ In this regard, it states that education systems can contribute to ‘perpetuate income inequality, instead of exercising the functions of a social elevator’, adding that ‘despite these facts and low or medium scores on international tests, the educational debate in Spain is not focusing on quality and is still too focused on public education spending levels.’

Few, Low and Simple Taxes

Moreover, the report also points out that ‘the tax system is not aimed at efficiency and its revenue capacity is insufficient to fund certain levels of public spending and of the welfare system in a sustainable manner.’ Therefore, FAES calls again for a comprehensive reform of its tax system with few, low and simple taxes, as proposed in its report A tax reform for growth and employment two years ago.

The Foundation considers that ‘the idea of a tax penalty to the 'rich'’ seeking a fairer distribution of income is ‘outdated and disproved by evidence.’ On the contrary, it argues that seeking to solve the inefficiency of the tax system ‘by increasing the tax burden and the marginal rates on high incomes would deepen inequality and extend the unequal distribution of income’. ‘Such measures would only end by making those tax excesses fall on the middle classes, which would result in a lower economic growth, a lower collection and therefore a lower capability to finance the necessary public spending’ it states.

 

Complexity of the Problem

FAES’ report on inequality analyses all these issues from ‘the complexity of the problem without accepting simplistic explanations or biased speeches seeking social antagonism’ and in contrast to studies carried out by theorists like Piketty. In this sense, FAES states that ‘given the multiple measurement tools available, sources and consequences of inequality, it would be wise to escape univocal statements’.

Another important contribution of the document is to clarify the confusion that leads to consider the terms inequality and poverty as synonyms. ‘Poverty and inequality are different problems,’ so ‘the response and treatment in public policies need not be the same for both cases,’ the document explains, which also states that ‘the relevant thing, socially speaking, is not really inequality itself as the existence of unacceptable pockets of poverty’. In fact, it asserts that low levels of inequality can coexist with large pockets of poverty in the same country.

 

EQUALITY AND OPPORTUNITIES

After analysing all the variables, FAES report concludes with a series of guidelines for public policies. Among these, we can highlight proposals to rethink the welfare state to increase its levelling capacity and its capability to generate opportunities; continuing the reform of the labour market to substantially reduce duality and increase adaptability to changes in the economic cycle; carry out a reform of the education system to improve quality and provide greater intergenerational social mobility; and guide the tax system toward economic growth with a reform that will result in greater income stability and sustainability of public expenditure’.

The document also explains that ‘fiscal reform should go hand in hand with a reform of the financing system of regions to eliminate disparities in the access of Spanish people to essential public services and establish a funding thereof less dependent on the economic cycle’. Finally, it notes the need for ‘a comprehensive review of our institutional system to eliminate rent-seeking and corruption as a means of allocating opportunities, allowing to restore social trust and appropriate individual incentives.’