This article 'The decline of state welfare' written by David Yaffe was published in FRFI 117 February/March 1994. It reflects the political and economic issues raised 17 years ago as the ruling class attempted to resolve the 1990s crisis of capitalism at the expense of the working class. Many of the issues concerning public expenditure, which are once again being raised in the midst of today's capitalist crisis, are discussed in this article. Most important is the conclusion that: 'the only foundation for a welfare state is a socialist one'.

FRFI 117 Feb/March 1994

The future of the ‘welfare state’ now dominates the political agenda. The government is conducting a ‘thorough review’ to determine the degree and extent of the cutbacks it can justify without harming its electoral base and increasing divisions within its own party. That this review is being led by Portillo, the leader of the most reactionary monetarist wing of the Tory party has already caused confusion and discord in the government.

The Labour Party, too, is conducting its own review of the ‘welfare state’. It set up a Commission of Social Justice under the Institute for Public Policy Research (IPPR) to discover ‘a vision of social and economic progress as coherent and compelling for the beginning of the 21st century as Beveridge’s was for the second half of the 20th’.1 Whatever they discover, if they are permitted to discover anything, will have to be circumscribed by the Labour Party’s overriding concern to win back the votes of higher paid worker’s and sections of the middle class who defected to the Tories at the last four elections. There will be, no doubt, a great deal of soul searching but definitely no ‘coherent or compelling vision’, which would call for much higher taxes on middle class voters. Already there has been talk of ending universal benefits and ‘targeting’ the poor by Labour Party ‘new realists’.

Various arguments have been put forward to explain the crisis of the ‘welfare state’.

(i) A ‘global industrial revolution’ is taking place and economic developments, are out of control of national governments.

(ii) A much greater percentage of the population past retirement age has placed burdens on state welfare which it cannot meet – the so called ‘demographic time-bomb’.

(iii) Family structure has dramatically changed; the majority of women now work and a large increase in lone-parent families, usually headed by the mother has placed much greater demands on state spending.

While all describe some of the real changes which have taken place since the end of the Second World War none of them begin to explain the real crisis of welfare which has confronted the major capitalist nations from the mid-1970s.

It is certainly the case that ‘welfare spending cannot keep pace with the effects of economic failure – mass unemployment, low pay and poverty’ (IPPR 1 p1). The issue is whether growing unemployment, low pay and poverty are endemic to capitalism or merely the results of economic mismanagement.

The Labour Party view in the IPPR pamphlets, while acknowledging the deep structural problems facing British capitalism, is that new policies and a new political consensus can be found to restructure British capitalism and sustain state welfare – that is the presumption behind the Commission.

The Marxist view is very different. It has been put very succinctly in a pamphlet by Ernie Trory:2 ‘There will be no true welfare state in this country until we end the system of exploitation for profit that leads only to overproduction, unemployment and war.’ Workers have to fight ‘every inch of the way ... for better welfare services’ but it should be seen as a part of the process by which the working class learns to organise politically to overthrow capitalism and build socialism. ‘There can be no such thing as a welfare state under capitalism. The welfare state is, in fact, the socialist state’ (T p19-21).

State welfare

Trory is correct to say that when we refer to the ‘welfare state’ under capitalism we are, in fact, talking of state welfare in the form of social services such as education, health, housing, and social security dispensed and administered by the state either centrally or through local authorities. It is essentially the system of ‘Social Insurance and Allied Services’ investigated by a committee headed by the Liberal William Beveridge (1942), incorporated in a Tory White Paper (1944) and brought into being by the government in power after the war, Labour (Trory p6). While these measures were forced on the capitalist system because of the political crisis after the war, it was the unique circumstances in the post-war period which allowed them to be sustained in Britain until the middle of the 1970s.

After the Second World War Britain was still a major industrial power with a strong manufacturing base. It was a major imperialist power with access to the protected markets of the British Empire and the flow of super-profits from its overseas investments. The world economy was relatively stable under the hegemony of US imperialism. The latter became the international banker for the rest of the capitalist world. Its loans and investments became the driving force behind the post-war boom.

Today the situation is very different. Britain’s manufacturing base has been devastated. There are now only 4.4 million employed in manufacturing compared with 8.8 million in 1965. US economic domination has ended. The world economy is becoming increasingly unstable. International rivalries are increasing, trade wars are becoming more likely as the world economic crisis forces the major capitalist blocs to fight each other over profitable markets and investment outlets throughout the world. The European Community itself faces pressures that could split it apart. This is the context in which Britain, a rapidly declining imperialist power, has to solve the crisis of its economy and state welfare.

State welfare is financed out of national insurance payments and general taxation. It was the price the capitalist class had to pay for social stability and the political integration of the working class in the post war period. Trory calls it a social wage, an addition to the money wage of workers. This is a little misleading as very little of this expenditure contributes to the value of labour power of productive workers.3 Nevertheless, however you regard it, it is, in the main, a deduction from the mass of profits in the hands of private capital arising from the exploitation of the working class. That is why the state tries to keep this expenditure down to the politically acceptable minimum. It will also try and devise taxation policies to reduce the net money wage of workers and redistribute wealth back to the capitalist class. Workers, on the other hand, will fight for real net wage increases to stop this happening.

The higher paid workers and the middle classes will, in the main, have much greater tax deductions from their gross wages than the lower paid. As a result there is some redistribution of net benefits to the poorer sections of the working class. This is confirmed by a recent study of the mid-1980s which shows that while most income groups receive almost equal gross benefits from state welfare, the bottom five income groups receive more than they contribute and the top four pay more than they receive with the sixth breaking even. On average three quarters of what the ‘welfare state’ does smoothes out income over a lifetime - a ‘savings bank’ effect - and one quarter is redistributed from better off workers to poorer ones.4

As long as sufficient profits are produced to return an adequate rate of profit on capital invested and to finance state welfare then the social democratic consensus of the post war years could be maintained. It was possible to guarantee the relatively privileged conditions of higher paid workers and the middle classes whilst sustaining adequate living standards for the mass of the working class. However as soon as the rate of profit began to fall – an inevitable consequence of the process of capital accumulation - then the consensus began to break apart. Unemployment and poverty started to grow. And at the very moment when increased state spending was needed, state spending was blamed for the crisis. The myths of Keynesianism were exposed. In the mid-1970s the Labour Party set monetary targets and cut state spending. It was to little avail. The low paid workers fought back and the ‘winter of discontent’ drove the higher paid skilled workers and the middle classes into the embrace of the Tory Party. These more privileged layers of the working class and middle classes put their own material interests before those of growing numbers of low paid workers and the poor. On four consecutive occasions they chose to vote for the party that made a virtue of slashing state spending and lowering taxes under the cover of ‘sound finances’.

The laws governing the development of the capitalist system of production, however, dramatically swept aside the ‘sound finances’ of the Tory monetarists, just as they had done with Keynesian demand management. It is ironic that today many previously well-paid workers who deserted to the Tories face higher taxes, lower living standards, the ever growing threat of unemployment and poverty with increasingly inadequate public services, while state spending and taxation are at a higher level than when the Tory Party was elected in 1979.

Capitalist Britain – 12 million in poverty

Beveridge made the assumption that governments would be committed to maintaining high employment – under 8.5 per cent unemployment in the 1942 Report, and no more than 3 per cent in his 1944 Report Full employment in a free society (p160) – with unemployment over six months a rare thing. Since 1981 the official unemployment rate for men has been above 8.5 per cent. The real rate has certainly been much higher. The communist member of Parliament Willie Gallacher said at the time of Beveridge’s Report that the proposed scheme would fall to pieces with mass unemployment (Trory p10). Gallacher was right.

At the time of the Beveridge Report less than 10 per cent of the population were over 65. In 1991 pensioners made up 16.5 per cent of the population, by 2041 they will make up 24 per cent. Do we face a so-called ‘demographic time-bomb’?

If the earnings link were restored – pensions rising with average earnings rather than the much lower prices – and taking into account the rise in the number of pensioners, the additional cost by 2030 to be found from taxation and/or national insurance would be about 2.3 per cent of GDP. This is no greater than the effect of the recession on welfare spending over the past three years (TFOW p78). The ‘demographic time-bomb’ argument is little more than a cover for capital’s real intent to impoverish those it has no further use for.

With pensions increasing only with prices since 1982 the state pension reached a peak of 46.5 per cent of average income in 1983. By 1992 it was lower than it had been in 1948. At present it is worth 15 per cent of average gross male earnings – the lowest since such figures have been calculated (since 1971) (TFOW pp51-2). This process is not sustainable. A social system which cannot guarantee a decent and secure old age to pensioners has outlived its social usefulness.

Capitalist Britain has 12 million people living in poverty – 22 per cent of the population. One-sixth of the population rely totally on income support, which is below the level regarded as ‘modest but adequate’ to live on (TFOW p46). Unemployment benefit and state pensions are lower in relation to general living standards than they were in 1948, while there has been a massive redistribution of income from the poor to the rich.

Under the cover of improving the efficiency of public services, corruption and fraud have become regular features of public life with the privatisation of state services and the introduction of competitive tendering. Large sums of taxpayer’s money are handed to those companies which can get in on the act. ‘The contracting-out of public services to private firms is likely to trigger an explosion of fraud and corruption’ warns the top accountants Peak Marwick. And the Commons Public Accounts Committee tells us that millions of pounds of public money have been lost in waste and fraud. There is not only a decline in the quality of public services but also in the conditions and wages of the workers providing the services as companies which win competitive bids make unprecedented profits.

Fifty years ago the communist Willie Gallacher said that the only foundation for a welfare state is a socialist one. ‘The right to exploit people for profit cannot be tolerated if there is to be social security’ (Trory p10). Fifty years of state welfare under capitalism have proved him right!

David Yaffe

1 The Justice Gap (IPPR 1) and Social Justice in a Changing World IPPR 1993.

2 Ernie Trory The Social Wage Crabtree Press 1992. Copies from 4 Portland Avenue, East Sussex, BN3 5NP (£2 + 40p p&p)

3 See Paul Bullock and David Yaffe ‘Inflation, the Crisis and the Post-War Boom’ in Revolutionary Communist 3/4 Larkin Publications 1975, reprinted 1979 on our website.

4 John Hills with the LSE Welfare State Programme The future of welfare A guide to the debate (TFOW) Joseph Rowntree Foundation November 1993.