WESTERN EUROPE: PRESSURES ON WELFARE SPENDING AND IMPLICATIONS FOR DEFENSE

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP84S00895R000200020005-2
• Release Decision: RIPPUB
• Original Classification: S
• Document Page Count: 18
• Document Creation Date: December 22, 2016
• Document Release Date: January 26, 2012
• Sequence Number: 5
• Publication Date: December 1, 1983
• Content Type: REPORT

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Directorate of Secret-
Intelligence
and Implications for Defense
Western Europe:
Pressures on Welfare Spending
An Intelligence Assessment
-SeffeA-
EUR 83-10278
December 1983
439
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Directorate of Secret
Intelligence 25X1
Western Europe:
Pressures on Welfare Spending
and Implications for Defense
This paper was prepared by
Office of European
Analysis. Comments and queries are welcome and
may be directed to the Chief, European Issues
Division, EURA
Secret
EUR 83-10278
December 1983
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Western Europe:
Pressures on Welfare Spending
and Implications for Defense
Key Judgments The West European welfare state is in crisis. Demands for state services
Information available and payments are rising rapidly while revenues are failing to keep up. In
as of 5 December 1983 France and Italy, Socialist-led governments are attempting at least to
was used in this report.
restrain the further growth of social welfare spending. Conservative and
Christian Democratic governments in the United Kingdom, West Germa-
ny, Belgium, the Netherlands, and Denmark are committed to trimming
welfare benefits and reducing the state's social and economic role. The
heavy welfare burden has already forced reductions of the modest increases
in military spending agreed by NATO, and most governments intend to
make further cuts in planned increases in defense spending.
Public pressures limit the ability of governments to cut back social welfare
programs, especially in the absence of even deeper cuts in defense. Recent
opinion surveys in the United Kingdom, France, West Germany, Italy,
Denmark, Belgium, and the Netherlands confirm the West Europeans'
strong support for social welfare programs and their skepticism about
military spending. While some prefer to see the fiscal policy dilemma
solved by government borrowing, most oppose higher taxes or cuts in social
welfare programs and prefer reductions in defense spending.
We expect governments to opt for a combination of these approaches.
Because social programs consume a large proportion of public budgets,
austerity limited to other areas would be unlikely to solve governments'
fiscal problems. Economically necessary welfare cutbacks, however, could
politically weaken northern Europe's fiscally conservative governments,
particularly in the face of high unemployment and sluggish economic
growth.
The need to trim welfare spending will prevent significant military
spending increases in most West European countries, in our judgment.
Because their publics consider defense costs the major cause of deficits,
governments will be unlikely to promote defense increases while cutting
back in other areas. Most West European governments are unlikely even to
approach NATO's target of 3-percent real military spending increases in
the next few years, and in some countries real military spending may
actually decrease. As a result, planned equipment modernization programs
are likely to be delayed or canceled, and overall military capabilities may
decline.
Secret
EUR 83-10278
December 1983
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Key Judgments iii
Public Opinion and the Welfare State
Paying for the Welfare State: Guns vs Butter 6
Prospects for Retrenchment 7
Political Implications of Austerity 8
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Table 1
Relative Costs to Governments
of Major Social Programs
Specific Benefits by Type, 1980 a
Belgium
Denmark
West
Germany
France
Italy
Nether-
lands
UK
Sickness b
22
27
30
26
23
29
22
Invalidity-disability
8
9
6
5
20
0
9
Employment injury-
occupational diseases
3
1
3
4
3
20
1
Old age
26
35
26
35
34
28
40
Survivors
12
1
15
7
10
5
2
Maternity
1
1
1
2
1
0
2
Family
12
10
8
13
7
9
11
Vocational guidance-mobility
2
1
3
0
0
0
0
Unemployment
10
12
4
7
2
6
9
Housing
NA
1
1
0
0
1
1
Miscellaneous
3
3
4
1
0
1
2
e The West European welfare state utilizes a mix of cash payments
and services in kind, supplemented by government decisions on tax
credits, price subsidies, and the behavior of state-owned enterprises.
West European governments administer wide-ranging health
services, housing, family allowances, old-age and disability pen-
sions, and unemployment benefits. Funding methods vary widely
among the countries and the specific programs, but inevitably
involve a major element of state subsidy.
b Columns may not add to 100 because of rounding.
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Western Europe:
Pressures on Welfare Spendin
and Implications for Defense
Pressures on the Welfare State
The West European welfare state has become far
more than a social safety net assuring basic needs.
Although the welfare state began by supplementing
emergency assistance to the destitute with social
insurance for industrial workers, it now also provides
wide-ranging benefits to the middle and upper classes.
Numerous universal health care programs; family
allowances; student grants; and old age, invalidism,
and sickness insurance schemes attempt to assure a
rough continuity of income for virtually all citizens.
ing, and housing (table 1).'
West European governments use a variety of instru-
ments to promote economic security and equality. The
broadest definition of the welfare state includes active
fiscal, monetary, and exchange rate policies aimed at
economic growth and full employment, as well as the
investment and hiring decisions of state-owned
firms-which play a major role in West European
economies. More narrowly, the welfare state com-
prises a wide range of cash payments and services in
kind provided by the government. Transfer payments,
financed either through earmarked taxes or general
revenues, assure income maintenance for periods of
unemployment caused by maternity, childhood, edu-
cation, old age, sickness, disability, and job loss.
Services in kind not available to all citizens on the free
market include education, health care, social counsel-
Social Policy Dilemmas. In recent years, the costs of
welfare programs have soared while state revenues
have grown only modestly. According to the European
Community (EC), social welfare expenditures con-
sumed an average of 27 percent of gross domestic
product in EC countries in 1981, compared with 19
percent in 1970 (see figure). An EC publication
' For a detailed breakdown of social benefits in each country, see
US Department of Health and Human Services, SSA Publication
No. 13-11805, Social Security Programs Throughout the World.
recently estimated that higher outlays for social bene-
fits accounted for about one-half of the total rise in
member governments' budgets between 1973 and
Since the oil crisis of 1973-74, slow economic growth,
high unemployment, and aging populations have si-
multaneously decreased the government's tax base
and required higher social spending:
? Slow economic growth is reducing the growth of
revenues from business and personal taxes as well as
employers' and employees' social security
contributions.
? High jobless rates mean both a fall in tax revenues
and soaring unemployment compensation costs.
? Aging populations require added expenditures both
for pensions and'for health. While the percentage of
the population over 65 is beginning to stabilize after
a sizable increase in the 1970s, those over 75-who
are the most likely to become ill-are increasing in
number in many West European countries. In addi-
tion, since the mid-1970s many West European
governments are encouraging early retirement in
order to create new jobs, which is requiring still
higher expenditures on pensions.
In some ways, the welfare state is as much the cause
as the victim of Western Europe's macroeconomic
difficulties. Recent academic studies point out that
large employers' taxes for unemployment, health, and
disability insurance create a "wage gap" between
workers' take-home salaries and their total cost to
firms. By making labor more expensive to employers,
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Necrei
General Government Spending as a Percentage of GDP
50
30 30 30
i
30 30
20 20
0 1970 75 80 0 1970 75 80
10 10
0 1970 75 80 0 1970 75 80
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the nonwage payments reduce the demand for labor
and encourage automation. They also reduce business
profits available for new investment (table 2). In
addition, by promoting the right to employment-in
some cases in the industry and location of the worker's
preference-governments have subsidized both capi-
tal and labor in low-productivity uses, thereby con-
tributing to slower growth.
We expect the strains on social welfare budgets to
continue throughout the 1980s even if, as expected,
moderate economic growth continues in Western Eu-
rope. According to private and official forecasts and
our own analysis, Western Europe's already high
unemployment rates are likely to increase still more in
the next several years, primarily because demographic
50
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Table 2
Western Europe: Nonwage Costs
as a Share of Direct Wages
West
Germany
42.1
56.1
68.3
70.6
72.6
France
59.0
69.1
76.6
77.8
83.8
Italy
77.7
97.5
87.6
84.4
86.1
UK
14.6
23.4
33.9
35.8
35.8
justifying ad hoc cuts as emergency measures to
contain runaway budget deficits, the governments of
West Germany, the United Kingdom, and Denmark
are questioning the principle of universal benefits.
Leaders of the fiscally conservative governments in
these countries contend that the state should provide a
social safety net for severe emergencies, but that it
should stop trying to guarantee full income mainte-
nance in all contingencies. Instead, they argue, indi-
viduals should assume greater responsibility for their
own well-being. Consequently, these governments are
introducing income tests and user fees for a variety of
Source: US Department of Labor, Bureau of Labor Statistics, April social services. 25X1
trends will add even more prospective workers to the
labor force than in the 1970s and because wage costs
almost certainly will not moderate sufficiently to
create enough new jobs. In addition, most economists
expect the recovery in Western Europe to be much
less robust than those following previous recessions,
which means that job creation will be slower and that
government tax revenues will increase less rapidly
than during past recoveries.' Furthermore, the costs of
health care and old-age pensions will grow as the
numbers of the elderly and retired persons increase.
Government Responses So Far. The soaring costs of
social welfare programs are forcing governments to
question the assumptions of universal protection and
continual growth of benefits that have underlain the
postwar welfare state. All of the West European
governments are trimming benefits in order at least to
slow the rise of social spending (table 3). Although
high unemployment and expanding retired popula-
tions will require continued increases in total outlays,
for the first time governments are systematically
attempting to reduce real transfers and services avail-
able to individuals.
Certain governments are also challenging basic
premises of the postwar welfare state. Although the
Socialist-led governments in France and Italy are
So far, northern Europe's fiscally conservative govern- 25X1
ments have been able to enact welfare cutbacks
despite resistance from opposition parties. Except in
Denmark, the governing coalitions enjoy solid parlia-
mentary majorities. Socialist opposition parties are
attempting to exploit public hostility to cutbacks but
have offered no clear alternatives for reducing budget
deficits. In addition, socialist and social democratic
parties in West Germany, Denmark, Belgium, and the
Netherlands still labor under public disenchantment
with their recent economic performance while in
power.
The French and Italian Socialist-led governments
face less organized political opposition to austerity. In
France, the opposition parties are attacking the recent
tax increases, but the Communists-who normally
would be the strongest foes of welfare cuts-are
restrained from being too vocal in their criticism by
their participation in the cabinet. In Italy, all five
coalition parties have endorsed austerity in principle,
but many of their deputies in Parliament are objecting
The broad public support for most social welfare
programs makes governments reluctant to go too far.
Most are also attempting to limit their budget deficits
by taking a more parsimonious approach to defense
spending despite the fact that it accounts for a far
smaller percentage of their countries' budgets. This
year, for example, only three European allies-the
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Table 3
National Austerity Programs
Governing parties Christian Democratic Union, Christian Social Union, Free Democratic Party
Last parliamentary election March 1983
Austerity program The Kohl government has intensified efforts to limit spending begun by its Social Democratic-Free
Democratic predecessor. In December 1982, Kohl announced cuts in family allowances, changed
student grants to loans, delayed pension increases by six months, reduced some subsidies to industry
and agriculture, and decreased the state share of unemployment insurance and pension contributions.
He now is pressing for cuts in unemployment benefits and a pay freeze for civil servants not covered by
collective bargaining.
Last presidential election May 1981
Austerity program The French austerity program has concentrated on increasing revenues but is also cutting some social
benefits. Shortly after assuming power, the Socialist-dominated government increased family allow-
ances and rent allowances for the poor, reduced the retirement age, shortened the statutory workweek,
and introduced a fifth week of paid vacation. By 1983, however, Mitterrand was forced to cut the gov-
ernment budget deficit in order to restrain domestic demand, fight inflation, and reduce France's
current account deficit. On 25 March, the government announced new taxes on income, gas, electricity,
telephones, gasoline, and alcohol. It also introduced a daily fee for stays in state-run hospitals. In
addition, Mitterrand has slowed the growth of transfer payments such as family allowances, income
support, and aid for the aged and the handicapped.
Last parliamentary election June 1983
Austerity program Prime Minister Thatcher has systematically attempted to reduce the state's overall economic role,
primarily by limiting total spending and public borrowing. Until now, social spending has not been the
prime target for budget cuts, in part because transfer payments have been needed to cushion the results
of recession. At present, however, the government is considering a variety of cuts in unemployment
compensation and other benefits.
Governing parties Socialists, Christian Democrats, Liberals, Republicans, Social Democrats
Last parliamentary election June 1983
Austerity program Italian efforts to reduce the burgeoning state deficit have concentrated on raising taxes, but the new
Socialist-led government is also committed to limiting social spending. Prime Minister Craxi is
proposing higher charges for health care, an increase in the retirement age, and measures to right
abuses of Italy's generous disability pension program. Prospects for implementing austerity, however,
remain uncertain.
Governing parties Flemish and Walloon Social Christians, Flemish and Walloon Liberals
Last parliamentary election November 1981 (government formed in December 1981)
Austerity program Prime Minister Martens' center-right government in Belgium instituted a "crisis" austerity program in
February 1982. It concentrated on cutting real wages in both the public and the private sectors in order
to hold down deficits in the budget and the current account. In addition, however, the government has
cut spending on social security and education. For 1984, the government is proposing cuts in expected
pension increases, hikes in employers' and employees' social security contributions, and reductions in
unemployment benefits.
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Table 3 (continued)
Governing parties Christian Democrats, Liberals
Last parliamentary election September 1982 (government formed in December 1982)
Austerity program Dutch efforts to cut budget deficits focus on expenditures rather than revenues, since taxes already de-
vour over 60 percent of the Netherlands' national income. In 1983, Prime Minister Lubbers' center-
right government froze social security benefits, trimmed several welfare programs, and reduced the
government share of pension contributions. In April, the government announced cuts in disability
pensions and in government subsidies to social programs as well as a 2-percent reduction in all social
benefits effective on 1 October.
Governing parties Conservatives, Center Democrats, Liberals, Christian People's Party
Last parliamentary elections September 1982
Austerity program Danish Prime Minister Schlueter's center-right coalition has introduced wide-ranging measures to cut
back welfare spending while avoiding higher taxes. In October 1982 it announced tighter criteria for
unemployment compensation and public assistance, reductions in government subsidies to nonprofit
housing, increased user contributions for numerous public services, and limitations on cost-of-living
adjustments in transfer payments and pensions. In September 1983, Schlueter secured Parliament's
approval for cuts in subsidies to local governments, which administer roads, hospitals, and schools.
United Kingdom, Luxembourg, and Norway-will
come close to meeting NATO's target of a 3-percent
real increase in military spending. The Netherlands
will probably raise real defense expenditures by about
2 percent, but in most of the other allied countries,
real military spending is likely to increase only mar-
ginally. In France, defense spending will not grow and
may actually decline in real terms in 1984 (table 4).
Public Opinion and the Welfare State
Although economic necessity has forced West Euro-
pean governments to begin trimming welfare benefits,
the extent of future cutbacks will depend in part on
public views of current spending levels and budgetary
choices as well as on the pace of economic recovery.
Polling data, while scattered and often fragmentary,
indicate widespread support for social programs and
skepticism about defense spending, but also some
Social welfare ranks high among West Europeans'
national priorities. In a 1982 EC sponsored poll which
asked what causes were sufficiently important to
inspire sacrifices, 40 percent named the struggle
against poverty-a cause that ranked behind only
peace and human rights. By contrast, only 23 percent
named national defense (table 5).
More generally, West European publics strongly sup-
port an active state role in the economy. Polls
throughout Western Europe show that large major-
ities hold government responsible for solving their
nations' most important problem, which is almost
always seen as economic. In numerous recent surveys,
pluralities-and, in most cases, overwhelming major-
ities-named unemployment as their countries' lead-
ing problem. Most other respondents mentioned the
economy in general or other specific economic prob-
lems such as inflation, foreign trade deficits, and
limited tolerance for austerity.
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Table 4
Real Growth in Defense Expenditures
Belgium
4.7
0.9
-3.3
-3.0
-0.4
Denmark
1.3
0.4
-0.3
-0.2
0.4
France
3.3
3.6
2.0
0
0
Italy
2.4
-0.5
3.2
1.1
0.8
Netherlands
1.1
3.3
1.8
2.0
2.0
UKd
-0.1
1.4
6.4
3.1
NA
West
Germany
2.6
3.2
-0.9
1.9
0.2
a Average.
b Estimate.
c Forecast.
d Fiscal year: April-March.
Large majorities of European publics oppose reduc-
tions in social spending. In most cases, even high-
income respondents and right-of-center voters tend to
reject welfare reductions:
? In a French poll published in July, 58 percent said
the health budget must cover health needs regard-
less of how national wealth changes.
? In a Dutch poll conducted in April, two-thirds of the
respondents opposed any reductions in social
benefits.
? In a British poll in July, two-thirds said that
spending on education, old-age pensions, and the
National Health Service is too low.
European publics distinguish sharply, however,
among the various types of social benefits. A 1980
study of public opinion on welfare policy that included
five West European countries noted virtually univer-
sal support for old-age pensions and state-run health
care. Both programs insure the entire population in
most of Western Europe; in addition, pensions-and,
in some countries, health services-are entitlements
financed by earmarked personal contributions. Public
attitudes are much more ambiguous, however, toward
programs that affect only a fraction of the population,
such as family allowances, unemployment compensa-
tion, and public assistance to the destitute.
In contrast, West Europeans are not supportive of
military spending. In a West German poll in 1980, for
instance, 44 percent said defense should be a prime
candidate for any economizing measures, while only
6 percent suggested cutting social benefits. A USIA
poll in April 1982 found pluralities opposed to defense
spending increases in France, West Germany, Italy,
and the Netherlands. A plurality of Britons favored
increases, probably in reaction to the Falklands con-
flict (table 6). In a July 1983 Gallup survey, however,
almost half of the Britons polled said defense spending
is too high, while only 12 percent said it is too low.
Paying for the Welfare State: Guns vs Butter. While
supporting social benefits, West Europeans are less
enamored of big government. According to various
recent polls in several countries, large majorities think
overall government spending is too high. Although
West European publics tend to blame the compara-
tively small defense budgets for government over-
spending and to support present social spending levels,
those who consider welfare spending too high outnum-
ber those who consider it too low.
High taxes are the prime source of discontent with
government. Current receipts of government, which
consumed less than 30 percent of GDP in the EC
countries in 1961, averaged over 44 percent in 1981-
the most recent year for which the Organization for
Economic Cooperation and Development (OECD) has
compiled statistics. According to numerous academic
studies, Western Europe's sharply progressive income
taxes are a major disincentive to additional personal
economic effort, while rapidly rising business taxes
are siphoning funds away from private investment.F_
Public attitudes toward state spending reflect the
composition as much as the level of taxation, accord-
ing to several academic studies. Polls show little
opposition to social security contributions and busi-
ness levies. More visible taxes that are not linked to
specific benefits, such as income and sales taxes,
generally provoke the greatest public discontent. The
studies note that Denmark, which relied much more
on income taxes and much less on social security
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Table 5
The Great Causes of Europeans, 1982 a
Belgium
Denmark West
France
Ireland
Italy
Luxem-
Nether-
UK
G
Germany
bourg
lands
reece
EC
Peace
65
61
57
77
45
76
79
68
58
85
67
Human rights
43
48
38
53
41
40
59
54
44
59
44
The struggle
against poverty
37
34
29
56
38
43
52
34
37
54
40
Freedom of the
individual
34
29
31
55
26
34
46
34
42
60
40
Protection of the
33
33
39
37
20
environment
National defense
13
18
17
28
11
23
28
9
28
44
23
My reli
ious faith
10
g
8
13
12
35
21
21
15
15
41
16
Sexual equality
14
22
17
16
9
12
40
19
14
34
16
Unification of
Europe
14
7
13
14
4
9
33
9
5
21
11
Revolution
3
3
3
3
1
3
3
3
2
7
3
None of these or
no answer
11
14
14
3
15
3
2
6
6
5
7
8 People were asked this question: "Which of these ideas or causes
are sufficiently worthwhile for you to do something about even if
this might involve some risk or sacrifice?"
contributions than did its EC partners, experienced
the first widespread tax revolt in Western Europe in
the early 1970s. Holland, whose taxes consume about
the same percentage of GDP but are more evenly
based, has witnessed no comparable phenomenon. E
Further tax increases are even more unpopular than
social spending cuts in most West European countries
for which polling data are available. Various 1983
surveys in Italy, France, West Germany, Belgium,
Denmark, and the Netherlands found that opposition
to tax hikes was even more widespread and intense
than opposition to welfare reductions. In most cases,
age, income level, gender, and party affiliation made
little difference in hostility toward higher taxes. In
British Gallup surveys conducted from 1979 through
1983, by contrast, about half of the respondents
favored increased social welfare programs even at the
cost of higher taxes-a sentiment reflecting, in our
view, widespread dissatisfaction with Prime Minister
Thatcher's economic policies. The British results may
also reflect the United Kingdom's high share of
business taxes and low share of social security contri-
butions as compared to EC averages.
Prospects for Retrenchment
Despite the political risks of cutting welfare, we
believe West European governments have no other
economic choice. To be sure, raising taxes and reduc-
ing nonwelfare spending can help to hold down budget
deficits. But social programs consume such a large
share of public budgets that austerity limited to other
areas would be unlikely to solve governments' finan-
cial problems. Nor is unrestrained big spending a
likely policy alternative, in our judgment. Although
deficit financing poses few immediate political risks to
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Table 6
Attitudes Toward Defense Spending,
April 1982
social spending. Even conservative governments are
unlikely to challenge basic structures of the welfare
state, since this would undermine support for more
UK
France
West Italy
Germany
Nether-
lands a
Increase
44
16
15
16
11
Decrease
16
24
26
46
36
Keep at pres- 36
ent level
55
43
34
35
governments, it threatens their overall economic
goals. Financing deficits by means of faster monetary
growth can fuel inflation, while borrowing in capital
markets can raise interest rates and thus hamper
economic growth.
Most West European governments will probably seek
to limit defense spending, public-sector wages, and
other nonwelfare budget items. For all the West
European governments, however, even canceling all
planned military spending increases would eliminate
only a small fraction of the deficit. Holding down civil
servants' salaries could result in greater savings but
provokes greater opposition, as shown by recent pub-
lic-sector strikes in the Netherlands and Belgium.
Some governments will probably try to raise new
revenues. The French, for example, have already
increased user charges for a variety of public services.
Taxes, however, are already so high in most West
European countries that substantial further increases
could impede economic growth and provoke stiff
political resistance.
We believe that West European governments will thus
be forced to continue trimming welfare benefits.
Because of growing numbers of pensioners and con-
tinuing high unemployment, cuts will probably be
insufficient to reverse the overall growth in welfare
budgets, but they should be able to slow the rise in
modest measures of austerity.
In making these cuts, most governments, in our view,
will emphasize the welfare state's function as a social
safety net and chip away at the practice of universal
coverage. West Germany, the United Kingdom, Den-
mark, Belgium, and the Netherlands will probably
tighten eligibility requirements for many social bene-
fits. These countries are also likely to limit cost-of-
living adjustments in income transfers and make
greater use of means tests for public assistance.
To be sure, slower-than-anticipated economic growth
would hold down tax revenues and force greater
welfare cutbacks than we foresee. In this case, govern-
ments may be forced to make deep cuts in parts of the
social safety net, such as family allowances, unem-
ployment compensation, and public assistance. These
programs are less popular among the general public
than are universal benefits such as health care and
old-age pensions, according to numerous polls and
academic studies.
Governments will probably be careful to present
welfare reductions as the least of several evils. By
portraying cuts as the alternative to highly unpopular
new taxes or still higher deficits, they may obtain at
least grudging majority acceptance of some austerity.
By stressing overall limits on welfare budgets rather
than specific cutbacks, governments can also appeal
to the large minorities who say social spending is too
high already. Given their emphasis on overall auster-
ity, most West European governments are unlikely to
risk a public furor by significantly increasing military
budgets at a time of welfare cutbacks.
Political Implications of Austerity. Governments
clearly face political risks in proposing welfare cut-
backs. With unemployment rates expected to remain
high for the remainder of the decade, publics will
probably be increasingly critical of governments' over-
all economic record. Modest economic growth may
help shore up governments' popularity and facilitate
acceptance of limited austerity. Ironically, however, a
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The Schlueter government in Denmark has shown
that a determined government can capitalize on pub-
lic tolerance for at least limited austerity. According
to numerous public opinion polls, Prime Minister
Schlueter's Conservative Party has almost doubled in
popularity during the past year-largely, to be sure,
at the expense of its coalition partners. A Gallup poll
of last July showed support for continuing the govern-
ment's austerity program by a margin of 55 to 33
percent, and most polls favor the ruling coalition in
January's election.
Schlueter's success is due in part to factors unique to
Denmark. The government's growing foreign debt
recently led to a downgrading of its credit rating on
international money markets, which many Danes
viewed as a political embarrassment. More signifi-
cantly, a sizable backlash movement against the
welfare state has transformed the country's tradition-
al political alignments since the early 1970s. Aca-
demic studies point out that, while the movement
draws primarily upon resentment at high taxes, Den-
mark's total taxation as a share of GDP is about the
same as in countries such as the Netherlands and
Belgium, where no comparable backlash has taken
robust recovery could fuel public opposition to welfare
cuts by increasing tax revenues and fostering the
perception that retrenchment is no longer necessary.
Recent trade union and voter behavior does show
some tolerance for spending cuts, although it is not
clear whether this is a temporary phenomenon. Orga-
nized labor-usually an ardent foe of government
austerity-has been remarkably quiescent in the face
of the social spending cuts of the last few years.
Unions in most West European countries have fre-
quently denounced austerity, but strike action has
been minimal:
? The major exception was widespread public-service
strikes in Belgium and the Netherlands this au-
tumn, which protested salary reductions rather than
cutbacks in social welfare.
place. Denmark's taxes, however, are highly visible,
consisting primarily of income and wealth taxes and
including a very small percentage of bent-linked
social contributions. Moreover, Denmark's income
taxes rose rapidly in the early 1970s, which fueled
support for the antitax Progress Party and increased
antiwelfare state sentiment in the established parties.
Schlueter's success, however, also stems from his
approach to containing welfare. Schlueter has been
careful not to confront the public with a clear
trade-off between defense and social programs. In-
stead, he has cut planned increases in Denmark's real
military spending as part of his overall budget-
reducing efforts. In addition, he has tried to spread
the burden of welfare cuts by proposing much higher
health care charges only for the highest income fifth
of the population and by imposing special taxes on
the rich. The government has also promised not to
reduce the real value of old-age pensions and has
concentrated cuts on less sensitive programs such as
unemployment compensation and family allowances.
? West German unions have demonstrated against
cutbacks in pensions and unemployment benefits,
but are prohibited by law from striking except in
connection with collective bargaining.
? In France, the head of the pro-Socialist union
confederation pointed to the need for austerity last
January, and pro-Communist unionists have been
constrained from protesting Mitterrand's policies
too vigorously by the Communist Party's participa-
tion in the government.
Unions may become more militant if an unexpectedly
strong economic upturn decreases unemployment, but
their overall decline in strength and influence none-
theless has somewhat weakened their bargaining posi-
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Recent elections in northern Europe also suggest that
voters are prepared to accept some retrenchment in
social programs, particularly when they are dissatis-
fied by the economic record of socialist-led govern-
ments. During the past 18 months, voters in the
United Kingdom, West Germany, Denmark, Bel-
gium, and the Netherlands have elected or reelected
administrations pledged to containing social welfare
spending. The Conservative and Christian Democratic
victories in northern Europe do not, of course, result
from a public clamor for welfare cuts, and austerity
could help erode support for governments if they fail
to deal effectively with inflation, unemployment, for-
eign trade deficits, and slow economic growth.
Impact on the United States. In our judgment, the
continuing need to trim social welfare spending will
prevent significant military spending increases in
most West European countries and could even lead to
selective cuts. Although defense expenditures account
for only a small proportion of West European public
budgets, most governments are sensitive to the linkage
between defense and social welfare spending in the
public mind. They will thus be loath to promote
defense increases while being parsimonious in other
areas. Even Prime Minister Thatcher, who enjoys a
solid parliamentary majority and does not need to call
elections before 1988, is facing growing difficulties in
maintaining planned increases in the military budget.
Most other West European governments, which have
had an uneven record of meeting NATO's goal of a 3-
percent real yearly increase in defense spending, are
unlikely even to approach that goal in the next several
years. If NATO continues to insist on the 3-percent
target, many governments may increasingly manipu-
late budget figures to feign compliance. They would
also be likely to seek to divert more weapons pur-
chases to domestic manufactures.
Smaller or greater welfare cuts than we foresee could
make the military budget outlook even bleaker. Fail-
ure to hold down deficits by restraining social pro-
grams would intensify budgetary pressures on all
nonwelfare items. Large welfare cuts, on the other
hand, would probably fuel popular hostility to existing
military spending and make even minor defense in-
creases politically unfeasible.
Slow growth in military spending will probably delay
or eliminate planned equipment modernization pro-
grams and may decrease the West European coun-
tries' overall military capabilities. Because of high
inflation in the defense sector and the growing sophis-
tication of modern weapons, even 3-percent yearly
increases in military budgets would probably be insuf-
ficient to maintain current forces and to fund planned
modernization programs. Continued stagnation in
West European military spending could force signifi-
cant cutbacks in military readiness, including person-
nel reductions, shortened training periods, stretchout
of weapons procurement, and cancellation of new
weapons purchases.
While welfare cutbacks in Western Europe will prob-
ably have little direct economic impact on the United
States, failure to restrain soaring welfare budgets
could add to pressures for protectionism. Social bene-
fits are financed in large part by employers' contribu-
tions, which add considerably to production costs and
reduce the competitiveness of West European prod-
ucts in world markets. If welfare-linked wage costs
continue to increase and are not offset by other
factors such as currency depreciations or gains in
productivity, West European firms may demand high-
er tariffs, quotas, and other nontariff barriers 'against
competing products from the United States and other
countries.
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