Welfare systems and their complexity

Abstract

In different periods, economists and policy-makers have focused their attention on various aspects of fiscal policies, such as the accumulation of public debt and the impact of taxes on growth, the impact of fiscal policies on aggregate demand and the ability to reduce the severity of recessions, as well as the effect that they might have on the incentives of economic operators and on economic efficiency. This paper considers another aspect, which has attracted relatively little attention so far - namely the impact that they may have on the complexity of government operations. The approach proposed in the article would elevate simplicity, on both the spending and the revenue side, to a major criterion that should drive economic policy. The benchmark cases of relatively simple policies are universal healthcare and education programs in Scandinavian and some other European countries. The representative examples of relatively complex arrangement provide numerous means-tested social programs such as the Medicaid in the USA. Tax expenditures are another case of relatively complex policies. Programs like these inevitably become more expensive with the passing of time. Problems of horizontal and vertical equity increase, and they may give rise to growing antagonism to the programs. To deal with these problems, new rules are often created, making the programs progressively more complex. The need for and the importance of simplicity has been largely ignored by economists and by most governments. It deserves a far more prominent place among the criteria that should guide the choice of policies.