13. Towards a Socially Just Green Transition: The Role of Welfare States and Public Finances
© 2022 Chapter Authors, CC BY-NC 4.0 https://doi.org/10.11647/OBP.0328.13
Introduction
Finding a balance between the objectives of economic growth, environmental sustainability and social fairness has been one of the key priorities of the EU agenda of the last years. While the link between economic growth and social and ecological objectives has historically received much attention, a focus on the socio-environmental nexus is far more recent (Mandelli 2021). On the one hand, social logics may determine environmental damage (Laurent 2015) and the welfare state entails an “ecological footprint” (Matthies 2017). On the other hand, environmental protection is critical to long-term social welfare, and ecological degradation implies significant social costs (Sabato et al. 2021). Along with this thinking, some scholars have recently attempted to identify the possible functions that the welfare state could perform to accompany the green transition. Based on this recent literature, we identify two main functions:1
- Activating: Welfare states actively support the green transition, by providing workers with the right skills and competences needed for the new jobs that are created. The focus is on activating policies such as education and training, re-skilling, and active labour market policies.
- Buffering: Welfare states put in place traditional social protection policies which compensate for the social costs (e.g. unemployment, inequalities) of the green transition.
These functions are not mutually exclusive, but they can coexist. Welfare states can indeed at the same time actively support the green transition by upskilling and reskilling workers and protecting those negatively affected by the transition. Conversely, they can pursue one of the above-mentioned functions or none of them. An important distinction to be made here concerns the logic under which the welfare intervention is carried. Two different logics can underpin eco-social policies:
- The compensatory logic, i.e. social policy objectives and tools are linked to environmental objectives and tools only by the extent to which the latter produce negative externalities. A compensatory logic can be applied both to the first and second functions. As an example, workers dismissed in brown sectors can both be compensated for the income loss and re-trained, re-skilled and accompanied in their search for a new occupation.
- The integrated logic, i.e. social policies and goals are designed together with ecological objectives and goals. Welfare policies do not only compensate for the social costs of the green transition, but they are also conceived as a necessary pre-condition to facilitate the ecological transition.
An integrated approach to social and environmental policies seems to be the most suitable solution to achieve green and social outcomes. A recent work by Zimmermann and Graziano (2020), for instance, shows that among European countries the best performers in environmental protection are the ones (notably the Nordic countries) with a high performing welfare state, both in terms of buffers and in terms of activating policies. In September 2015, the United Nations (UN) adopted the ‘2030 Agenda for Sustainable Development’, which explicitly promoted the three dimensions of sustainable development: social, environmental and economic, and supported a balanced approach to achieve them simultaneously.
As mentioned above, the European Union has placed itself in the driving seat of the green transition and has since 2019 put in place a new reference framework for a socio-ecological transformation. While national welfare states are still meant to play a key role in making the green transition socially fair, it should be recognised that the shift towards such an approach was largely led by the EU. Against this background, the purpose of this chapter is twofold. As a first step, we illustrate the existing EU reference framework for a socio-ecological transition, zooming in on two of the most recent initiatives: the European Green Deal (EGD) and the Recovery and Resilience Facility (RRF). The aim is to briefly identify the approach followed to link environmental, economic, and social concerns, the function to be performed by welfare states, and the logic of interaction between social and environmental policies. As a second step, since the EU financial support to pay for the cost of the eco-social transition is not sufficient, we advance and compare two concrete proposals that can help national governments in building an activating welfare state, devoted to supporting a socially inclusive transition: a social golden rule and the amortisation of public investment.
13.1 The EU Initiatives to Address the Socio-Ecological Transition
The EGD adopted in December 2019 addresses the economic-ecological nexus by promoting the transition towards an economic model decoupled from its ecological footprint, and explicitly tackles socio-ecological challenges, in particular those that pertain to the social implications of environmental issues and policies. In so doing, the EGD calls for a “socially just” transition that aims to leave “no one behind”. The EGD indeed specifies that “the most vulnerable are the most exposed to the harmful effects of climate change and environmental degradation” (European Commission 2019) and that “citizens, depending on their social and geographic circumstances, will be affected in different ways” (ibid.). In particular, the identified socio-ecological challenges are divided by the EGD into issues affecting vulnerable energy consumers or people at risk of energy poverty and those impacting the labour market, with a focus on sectors and territories which would face “the greatest challenges” (European Commission 2019). Overall, the underlying logic of the socio-ecological dimension of the European Green Deal is compensatory of the social costs triggered by the green transition.
Such logic is reflected in the key policy instruments for delivering the EGD, namely the Just Transition Mechanism (JTM) and the Just Transition Fund (JTF), that were launched as part of the Sustainable Europe Investment Plan. The purpose of the JTM consists in addressing the socio-economic impact of decarbonisation by spurring virtuous social investment policies and setting the conditions for the promotion of public and private funding. Within the JTM, the Just Transition Fund was established to reduce regional disparities, improve economic diversification, upskill and reskill workers, and increase assistance and active inclusion of jobseekers. All in all, the policies seek to meet the needs of two main targets: 1) vulnerable energy consumers and people at risk of energy poverty;2 and 2) redundant workers employed in greenhouse gas-intensive sectors and their communities (e.g., JTM, JTF).
If the EGD promotes a compensatory logic where social policies intervene ex-post to buffer the cost and accompany life-course transition (with a focus on vulnerable groups and affected sectors), the socio-ecological dimension of the RRF marks a further step forward towards an integrated understanding of eco-social policies. The social dimension of the post-pandemic recovery is given a particular prominence in the RRF, which explicitly aims at “contributing to the upward economic and social convergence, restoring and promoting sustainable growth and the integration of the economies of the Union, fostering high quality employment creation” (RRF Regulation, Art. 4). Stronger activating and inclusive welfare states are explicitly acknowledged as a pre-condition for a socially sustainable green transition. In defining their responses to the crisis, the member states should “factor in”, across green policy areas, the need to ensure a just and socially fair transition. A clear call to adopt measures ensuring equal opportunities, inclusive education, fair working conditions and adequate social protection, in light of the European Pillar of Social Rights, was made by EU institutions and is explicitly linked to the green transition. Contrary to the JTF, which is targeted to support the social consequences of the green transition, the RRF explicitly recognises the need to address interlinkages between environmental and social policies and aims to promote a “balanced recovery” in the EU. This translates into combining green growth with the promotion of a just transition based on a guarantee of high social standards. As stressed by Sabato et al. (2021) “in a just transition perspective, the recovery and resilience plans will be crucial to ensure workers’ protection, representing a sort of buffer in the green transition” (ibid., p. 46).
13.2 How to Tackle the Persisting Social Infrastructural Gap in the EU
In a report published in 2018 by the High-Level Task Force on Investing in Social Infrastructure in Europe, the need for social infrastructure investment to cope with the challenges of the twin green and digital transitions, an ageing population and globalisation, has been estimated for EU countries to be around €142 billion per year, and around €1.5 trillion over the period 2018 to 2030 in the sole areas of healthcare, education, and housing (Fransen et al. 2018). Preliminary evidence from the plans submitted so far shows that the total social envelope amounts to around €150 billion, i.e., about 30% of the total RRF, to be spent over five years, between 2021 and 2026, so on average €30 billion per year.
Even though the comparison is a bit forced, we might say that the entire RRF envelope, hence EU common funds, covers only one year of the social public infrastructure investments gap. This crude comparison suggests that the individual member states will have to take care of the remaining gap. This raises the question about how member states, and their public finances, can cope with the need for public investment to support and strengthen their welfare systems to face the challenges of the twin transition. One proposal that has been discussed to address such a significant investment gap is the introduction of a qualified treatment for public social investment under a revisited fiscal framework (see among others Corti et al. 2022).
In practice, one possible option is the inclusion of a golden rule in the EU fiscal framework. The general argument for a golden rule is that governments should be allowed to incur debt if it creates new capital and hence produces value (in principle not only economic) for future generations. Indeed, public investment increases the public and/or social capital stock, thereby creating growth to the benefit of future generations, that contribute to financing those investments via the debt service (Truger 2016). Reuter (2020) reinforces Truger’s argument by showing that debt-financed productive expenditure can improve fiscal sustainability in the medium to long term if it increases potential growth, since exempted investment expenditure can generate additional assets that counteract debt increases. In the specific EU context, this would imply exempting certain investment expenditures from the calculation of the SGP-relevant variables. A second argument used in favour of a golden rule is that it could help to avoid underinvestment in times of crisis. In this respect, evidence shows that public investments tend to be pro-cyclical in bad times, thereby amplifying downturns under weak economic conditions (Morozumi and Veiga 2016; Afonso and Furceri 2010; Chu et al. 2018). There is, indeed, quite strong evidence that public investments have been the main victim of the fiscal consolidation efforts during the euro area debt crisis (Barbiero and Darvas 2014; EFB 2019). A third reason to endorse a golden rule is that, if focused on specific classes of public investment, it would be more effective in mobilising resources (Pekanov and Schratzenstaller 2020).
Recently, Darvas and Wolff (2021) proposed to introduce a Green Golden Rule, i.e. a rule that excludes a specific measure (or class) of capital expenditure from the computation of certain fiscal requirements (be it the expenditure benchmark or the budget deficit), to cope with the needs of the green transition and meet the EU’s ambitious emissions reduction targets.3 Following the same rationale, various scholars and policymakers have long been advocating for the introduction of a European social golden rule (see Zuleeg and Schneider 2015; Hemerijck et al. 2020). Yet even though the proposal for a qualified treatment for social investment under the EU fiscal framework has been circulating in the debate for a longer period, it was never operationalised. As we illustrated elsewhere (Corti et al. 2022), the reason is at least threefold.
First, current statistics are quite poor. As admitted by the members of the High-Level Task Force, the quality of—and access to—data on public investments is insufficient to carry out systematic comparative analyses and identify country-specific social needs. Second, to justify a qualified treatment, one should be able to measure returns of social investments. Yet, only a few empirical studies have systematically analysed the social returns of public social spending with findings somewhat contradictory (see for instance Hemerijck et al. 2016; Bakker and Van Vliet 2019). By contrast, the literature largely focuses on the potential impact of public social spending on GDP growth (economic outcome), de facto ignoring the potential social outcomes (see for instance Gemmell et al. 2016; Dissou et al. 2016; Barbiero and Cournède 2013; Fournier 2016; Fournier and Johansson 2016). Even in this case, however, findings are contradictory, with educational and healthcare expenditure indicated as the only “productive spending”. Finally, as observed by Vesper (2007), for any investment to be eligible for qualified treatment, an exact definition of the relevant expenditure should be given. While sensible, this is not straightforward. Most literature focusing on the impact of social expenditure on GDP uses expenditure at the aggregate level. Yet, when we break down social expenditure by type of spending (capital and current), we observe that only a minor part of education expenditure is devoted to what is traditionally understood as public investment (infrastructure and R&D activities), while the largest part comprises current costs (staff salaries, contracted and purchased services, and other resources such as fuel, electricity, telecommunications and travel expenses).
With these caveats in mind, in the next section we provide a first operationalisation attempt of a European social golden rule. To this end, we apply—in an exploratory fashion—this operationalisation only on two types of social expenditure, i.e. education and healthcare. The choice is justified based on two criteria. First, existing literature on economic returns (i.e. GDP) of social spending converge on the idea that these spending voices are ‘productive’, therefore we might expect more consensus on a special treatment for this kind of spending. Second, contrary to other social protection spending, like pension, unemployment benefits and even housing, education and healthcare have both a component of current spending, and one of capital expenditure (investment stricto sensu). This allows us to measure the different implications of the selection of one specific type of expenditure.
13.3 A European Golden Rule for Social Investment
Different variants of the golden rule have been put forth (Feigl and Truger 2015; Darvas and Anderson 2020; Bogaert 2016; Giavazzi et al. 2021). All of these variants agree that such an exemption should be applied only to net public investment. The distinction between net and gross is indeed key to operationalise a qualified treatment. Net investment is the total amount of resources that the government spends on capital assets minus the cost of depreciation of the existing assets. The practical importance of the difference between net and gross investments is shown in the table below, which compares social public investment trends in France, Germany, Italy and Spain between 2016 and 2019. Gross investments in education and healthcare have been more or less stable in all four countries at around 0.3% and 0.4% of GDP, with only the exception of France at around 0.6% of GDP. Net investment was positive in Germany and France but negative in Spain and Italy over the entire period, which means both countries invested less than the minimum requested to maintain the existing stock of capital.
2015 |
2016 |
2017 |
2018 |
2019 |
||
DE |
Gross social investment (% GDP) |
0.3 |
0.3 |
0.3 |
0.3 |
0.4 |
Net social investment (% GDP) |
0.01 |
0.02 |
0.04 |
0.06 |
0.11 |
|
IT |
Gross social investment (% GDP) |
0.4 |
0.3 |
0.3 |
0.3 |
0.3 |
Net social investment (% GDP) |
-0.02 |
-0.07 |
-0.06 |
-0.07 |
-0.05 |
|
FR |
Gross social investment (% GDP) |
0.7 |
0.6 |
0.6 |
0.6 |
0.6 |
Net social investment (% GDP) |
0.05 |
0.01 |
0.02 |
0.03 |
0.07 |
|
ES |
Gross social investment (% GDP) |
0.3 |
0.3 |
0.3 |
0.3 |
0.3 |
Net social investment (% GDP) |
-0.06 |
-0.08 |
-0.04 |
-0.01 |
0.01 |
The application of a social golden rule on healthcare and educational spending thus changes quite significantly if we consider gross or net spending. In the first scenario, public expenditure in education and health gross fixed capital formation is exempted from government fiscal targets. In this case, the largest relative gain in all years would be France, with a 0.6 to 0.7 percentage point (pp) decrease in budget deficit. The possible gain for other economies would have been around a 0.3 pp drop in budget deficit in both Italy and Spain, and a 0.3 pp increase in budget surplus in Germany for most of the years. The second scenario assumes a golden rule applied to net public social investment, namely exempting only actual additions made to pre-existing capital stock. The corresponding outcomes are shown to be small, up to only a 0.1 pp increase in budget loss in Italy and Spain, and a 0.1 pp improvement in budget balance in Germany and France. Interestingly, if a net social golden rule was in place in the case of Spain and Italy, this would have been an incentive to spend more to improve their budget balance. describes the hypothetical impact on the calculation of the budget balance that would have been achieved by applying the golden rule to social (healthcare and education) investment, under the two alternative scenarios illustrated above. It is important to point out that the calculations do not take into account the potential increase in investment that could have been driven if the fiscal rule was already in place.
In the first scenario, public expenditure in education and health gross fixed capital formation is exempted from government fiscal targets. In this case, the largest relative gain in all years would be France, with a 0.6 to 0.7 percentage point (pp) decrease in budget deficit. The possible gain for other economies would have been around a 0.3 pp drop in budget deficit in both Italy and Spain, and a 0.3 pp increase in budget surplus in Germany for most of the years. The second scenario assumes a golden rule applied to net public social investment, namely exempting only actual additions made to pre-existing capital stock. The corresponding outcomes are shown to be small, up to only a 0.1 pp increase in budget loss in Italy and Spain, and a 0.1 pp improvement in budget balance in Germany and France. Interestingly, if a net social golden rule was in place in the case of Spain and Italy, this would have been an incentive to spend more to improve their budget balance.
2015 |
2016 |
2017 |
2018 |
2019 |
||
DE |
BB (% GDP) |
1.0 |
1.2 |
1.3 |
1.9 |
1.5 |
Option 1 |
1.3 |
1.5 |
1.6 |
2.2 |
1.9 |
|
Option 2 |
1.01 |
1.22 |
1.34 |
1.96 |
1.61 |
|
IT |
BB (% GDP) |
-2.6 |
-2.4 |
-2.4 |
-2.2 |
-1.5 |
Option 1 |
-2.2 |
-2.1 |
-2.1 |
-1.9 |
-1.2 |
|
Option 2 |
-2.62 |
-2.47 |
-2.46 |
-2.27 |
-1.55 |
|
FR |
BB (% GDP) |
-3.6 |
-3.6 |
-3.0 |
-2.3 |
-3.1 |
Option 1 |
-2.9 |
-3.0 |
-2.4 |
-1.7 |
-2.5 |
|
Option 2 |
-3.55 |
-3.59 |
-2.98 |
-2.27 |
-3.03 |
|
ES |
BB (% GDP) |
-5.2 |
-4.3 |
-3.0 |
-2.5 |
-2.9 |
Option 1 |
-4.9 |
-4.0 |
-2.7 |
-2.2 |
-2.6 |
|
Option 2 |
-5.26 |
-4.38 |
-3.04 |
-2.51 |
-2.89 |
As observed above, the introduction of a qualified treatment for social investment in healthcare and education would imply a minimum deviation from the historical values of member states’ budget balances if we consider only net investments, i.e., only new additional investments. Even in the case of applying the golden rule to gross investments, the amounts involved would not be significantly high. Yet, the idea of an exemption of net gross fixed capital formation is to incentivise countries to invest in order to maintain the existing stock of capital and possibly increase it, so as to fill the infrastructural gap reported above. In terms of legal feasibility, elsewhere we discuss three main options (Corti et al. 2022). There, we recommend—in the short term—an extension of the discretionary approach used by the Commission in the interpretation of the SGP flexibilities to allow for an exemption of social investments, potentially linked to the RRF. In the long term, we envisage a Treaty on the Functioning of the European Union (TFEU) change through the introduction of an investment clause. Even in this case, however, we recommend that such a qualified treatment should not be applied automatically, but should be accompanied by an adequate assessment from the Commission of the proposed measure’s outcomes vis-à-vis the country-specific normative framework.
13.4 Amortisation of Public Investments
Another way to operationalise a special treatment of public investment would be to adapt public sector accounting and amortise the monetary cost of an investment over its useful life. Amortisation can take many forms. In practice, most often it is linear, implying that each year a constant proportion of the capital good is amortised. Under this approach, it is the annual amount of amortisation that would be counted as expenditure in the calculation of the fiscal aggregates relevant to the fiscal rules. There would thus be a difference between the cash deficit and the ‘economic’ one, which would contain only the amortised amount.
Amortisation is different from a golden rule based on net investment, according to which the value of the investment, in the example above for the railway, minus the depreciation of the existing stock of public capital, is exempted from the calculation of the relevant budget indicator and imputed all at once. With the amortisation there is no exemption from the rules. It is the calculation of the budget balance reported in the national accounts that is affected. Yet, for both approaches the calculation of the depreciation of capital investment is central.
Like the calculation of the net investment, adopting the amortisation approach requires careful analysis of the spending that governments classify as investment to isolate the part that creates new long-lived assets.5 A key issue in this context is to distinguish between maintenance and the construction of entirely new infrastructure, and whether to extend the amortisation approach to pure maintenance spending and repairs. The distinction between the two may create an incentive to favour the building of new infrastructure over maintenance, although it is generally recognised that proper maintenance yields very high returns.
Contrary to the golden rule, the introduction of an amortisation for eligible public investment would not require a change in the current fiscal framework, but a revision of the national public financial management (PFM) systems. Currently, EU member states’ PFM systems rely on cash-based, single-entry bookkeeping, which means government revenues and expenditures are recorded in a cash book by putting most of the emphasis on levels of public debt and cash balance (Núñez-Ferrer and Musmeci 2019). This is different to an accrual-based double-entry accounting system, like the one used by New Zealand. Under this approach, a transaction value is reported both on the credit and the debit accounts, ensuring equivalence between the amounts recorded. Such a reporting approach is traditionally suggested in order to better assess the sustainability of public debts (see Núñez-Ferrer and Musmeci 2019) but it would also allow the amortisation of investment expenses incurred by the government.
As illustrated in Corti et al. (2022), a baseline approach could free between 0.3% and 0.6% of GDP (compared to a single year reporting, however, the remaining value of the investment will appear in a future budget) for social investment. If applied to other categories of investments as well, as should be the case given that the change would imply a different reporting principle in public accounts, the impact would be much larger. Importantly, the change in principle should not deteriorate the quality of public finances. On the contrary, it may even improve it. A key requirement for the change to work is a full transparency of public accounts and high governance standards.
13.5 Conclusions
The interlinkages between the objectives of economic growth, environmental sustainability and social fairness have often been addressed in pairs. Notably, the literature has focused on the interaction between economic growth objectives and either green or social ones, while the focus on the socio-environmental nexus is far more recent. In this respect, the EU has played a key role not only in linking for the first time the three economic, green and social objectives together, but also explicitly addressing the connection between the environmental objectives and the need to maintain high social standards. The EGD, and even more strongly the RRF, were somehow pivotal to shifting political attention, as well as academic interest, to social and environmental objectives, alongside economic growth. Yet, with the EGD the EU initially framed the eco-social nexus following a compensatory logic, whereby social policies intervene to cushion the social consequences of the green transition on the most vulnerable citizens. By contrast, with the Recovery and Resilience Facility, a more comprehensive and integrated understanding of the interlinkages between social and green objectives seems to emerge.
To support the green transition building resilient, activating and inclusive welfare states alongside the post-pandemic recovery, the RRF provides financial support to the EU member states. Such support, however, is not enough to close either the green or the social investment gap by 2030. National governments need many more resources to support their welfare states and infrastructure gaps. This issue brings back the longstanding question of national public investment and how to make sure that they are stable over time and EU fiscal rules are not an impediment. The latter point is particularly important at the present juncture, given the current debate about the reform of the EU fiscal framework. While the political debate has often focused on how to support countries’ budgetary efforts in the achievement of green objectives, proposals on how to fill the social infrastructure investment gap far less developed.
In this chapter, we explore the option of introducing a European golden rule to support social investment and illustrate a possible application on healthcare and education investments. The results suggest that such a rule would not only be desirable but also technically and legally feasible. If applied to net investments, it might also function as a disincentive for member states to cut down on social public investment during economic downturns.
In addition, and with a view to a more generalised approach, we consider the possibility of introducing the amortisation of public investment into governments’ balance sheets, by revising the national public financial management systems. Following the principle applied to private investment, and giving governments the possibility to amortise investments over several years, instead of budgeting the full amount in one year, could generate a non-negligible fiscal space. It should be stressed that such an approach would not entail direct changes to EU fiscal rules (although they would be affected indirectly), but it would require a change in public accounting rules, as has already been done in other countries.
To conclude, the response to the COVID-19 pandemic and recent developments in energy markets are pushing for an acceleration of the green transition in Europe. The European Commission has taken the lead in setting the framework of the transition: it should be socially just. In this context, the European welfare states have resurfaced, playing a crucial role as guarantors of newly recognised public goods such as public health, social security, poverty relief, and education. Yet, to make the green transition socially just, it is not enough that social policies are deployed to compensate for the externalities of the green transition. An integrated approach, combining activating welfare states with clear environmental objective, is needed. Making sure that all member states are (fiscally) equipped to put in place resilient activating welfare states is thus a pre-condition for any post-pandemic strategy that aims to bring together economic growth, environmental sustainability, and social fairness.
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1 Here we take inspiration from Sabato et al. (2021). The authors, however, identify two further functions of the welfare state in the green transition: 1) Welfare states as a benchmark for the green transition; and 2) Welfare states as consensus-builders or conflict-management tools of the green transition.
2 Two examples of these policies include the 2016 proposal for a Clean Energy for All package and the 2020 Communication “A Renovation Wave for Europe”.
3 Based on the Commission Impact Assessment on ‘Stepping up Europe’s 2030 climate ambition. Investing in a climate-neutral future for the benefit of our people’ (European Commission 2020), to achieve the 55% reduction target in GHG emission compared to the 1990s level by 2030, the average annual green public investment need amounts to €145.7 billion between 2021 and 2030 and €166.2 billion between 2031 and 2050.
4 To calculate net investments, i.e. measuring capital consumption of public sector capital stock, we estimated the average lifespan of educational buildings to be around forty years, with a need for at least one major repair or renovation. The useful life of other educational facilities or equipment is expected to be between five and ten years. By contrast, the average useful service life of each investment category in healthcare amounts to twenty-three years in infrastructure, seventeen years in fixed machinery and equipment, and thirteen years in organisational structure. We applied such depreciation rates starting from 1995 and assumed that the depreciation of the investment asset spreads out equally over its lifetime, in a so-called ‘straight-line’ depreciation.
5 Intangible assets are more difficult to amortise because it is harder to determine their useful economic life, yet accounting standards exist.