Which Country Spends the Most on Social Welfare?

As is often the case the answer depends on how you define and measure “social welfare spending.”

I recently came across this 2010 post by University of Arizona economist Price Fishback.

By the traditional measure of gross public welfare spending as a percentage of GDP in 2003, for example, the situation looked like this:

In 2003, Sweden spent 37 percent relative to GDP, Denmark 32 percent, Norway 28 percent, Finland 26 percent, and the U.S. lagged behind at 17 percent.

The picture looks slightly different after accounting for differences in national tax structure.

The Nordic countries collect income taxes on the cash payments made to social welfare recipients at rates that are four to five times the rates paid by American recipients. Then when the Nordic recipients go out to make purchases, they pay consumption tax rates on their purchases that are 4 to 5 times the rate paid by the poor in America. Furthermore, the U.S. government offers a series of tax breaks to promote social welfare that are not found in the Nordic countries. After adjusting for the differences in taxation to get net public social spending relative to GDP, Sweden’s figure falls by 8 percentage points to 29 percent, Denmark falls to 24 percent, Norway to 23 percent and Finland to 20 percent. The U.S. figure rises to 19 percent.

With further adjustments for non-governmental welfare spending and a conversion to per capita numbers, the United States jumps to the first position.

By this metric, the U.S. then leads the way at $7,800, followed by Sweden at $6,700, Norway at $6,300, Denmark at $5,800, and Finland at $4,900.

This isn’t the whole story, however, because healthcare spending in the US is much higher than the Nordic countries.

If we cut all U.S. health care costs by one-third, the U.S. figure falls to $6,700, equal with Sweden.

Some of the differences in social welfare spending structures are evident in income distribution:

The differences in the systems have implications for different parts of the income distribution. In all of the countries, taxes and transfer payments lead to a substantial increase in the equality of income after taxes and transfers are incorporated. Comparisons of incomes after taxes and transfers show that Americans at the 10th percentile of the American income distribution (9 percent have less, 90 percent have more) fare about the same as Nordic people at the 10thpercentile of their distribution. Americans have more opportunity to reach higher incomes because Americans in the upper half of the distribution have much higher incomes than Nordic people in the upper half of their income distributions. On the other hand, households below the 10th percentile in America fare much worse on average than the lowest group in the Nordic countries. Despite a large array of poverty programs, people in the U.S. are falling through holes in the safety net. We know that a substantial number of people eligible for a wide range of benefits in the U.S. don’t receive them, either because they don’t apply or the U.S. delivery of services is not that good.

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