ECONOMICS:Badly designed benefits systems can create a double injustice, both for the taxpayer and welfare recipients, writes DAN O'BRIEN

LAST WEEK this column looked at how much money government spends; what it spends that money on; and how spending patterns have changed over the past decade. That article was a scene-setter for a series about the main items of public expenditure, all in the context of the Government’s comprehensive spending review which is due in September.

This week, the largest area of spending is examined: welfare. It accounts for almost 40 per cent of all public spending.

In 2010 €29 billion in entitlements and transfers (excluding bank bailout costs) was paid. That represented a three-fold increase on a decade earlier, the most rapid rise of any main spending area.

Views on the welfare state are often strongly felt and range widely, from all-welfare-is-bad to all-welfare-is-good positions. When reading about welfare issues I find myself trying to determine where the author is located between those two extremes on that broad spectrum. In case readers tend to do the same, it may be helpful to state in advance my own views/prejudices on the subject.

I am a strong believer in a European-style comprehensive welfare state. Well-designed and well-funded benefits systems are well worth the price paid in taxes: they alleviate misery, reduce insecurity and cushion the economy and society during inevitable troughs in the business cycle. With the exception of many developed countries’ pensions systems, there is nothing inherently unsustainable about the modern welfare state. The arguments of those who say that Europeans cannot afford a big safety net are not convincing. More often than not such views reflect visceral anti-welfarism and are weakly supported by evidence.

Such anti-welfare arguments are infrequently heard in Ireland, perhaps in part because of an innate decency which causes people to be supportive of the underdog. Alternatively, we may have a collective weakness that makes us want to be on the side of angels in public discourse. But whatever the reasons for the absence of welfare critiques, a downside is that there is less informed discussion than is needed.

Debate on welfare policy is necessary for at least three reasons. First, informed debate leads to better-informed policy. Second, without debate the chances of getting programme design and implementation wrong are higher. Third, because so much of almost everyone’s money is spent on welfare, open discussion is needed, not least to ensure that those who pay see where their money is going.

A foundational issue in the debate on the modern welfare state is whether entitlement programmes should be universal or targeted at those most in need. Internationally, the debate is essentially over, with both sides of the political centre in most countries agreeing that focusing payments on those who are in need is the future of welfare. In Ireland, the debate has never got going.

One reason for the abandonment of universalism is its tendency to end up as a means for governments to buy middle-class votes. The legacy of this tendency is that a large proportion of the welfare spend in most countries goes to the well-heeled. This makes little sense. Taxing the middle classes with one hand of government and giving the cash back to them with another is wasteful and inefficient.

A classic example of the failure of universalism in Ireland was the abolition of university fees in the 1990s. This was done under the guise of giving those on lower incomes greater access to third-level education. It failed abjectly to achieve that goal, but proved very successful in subsidising those who would have gone to college anyway – the middle classes. Another example of government taking with one hand and giving back with another is universal child benefit. Perhaps the single most blatant act of vote-buying in recent political history was the 129 per cent increase in child benefit spend in just two years to 2002 (an election year). Over the 2000-08 period, spending on child benefit increased almost five-fold. It was among the fastest growing areas of spending. It had become the second biggest welfare cost by 2008.

In fairness to the last government, it was prepared to reverse partially its earlier populism by cutting this crudely untargeted benefit by more than any other. In 2010, spending on it had been reduced by one-quarter on 2008.

Spending on the aged makes up by far the biggest chunk of total transfers, at €6.5 billion last year, up 157 per cent on 2000. With a further €2.2 billion spent on pensions for retired public sector workers, one in every eight euro spent by the State goes to the retired.

It is not unusual for pensions to account for such a large share of entitlement spending – the modern welfare state has its origins in giving people some respite and comfort at the end of a life of toil.

But given the sheer amount of money spent on pensions, and the fact that many rates of pension payments have not been reduced despite a sizeable decline in consumer prices and the lower likelihood of pensioners facing mortgage difficulties, the equity case for trimming is very strong.

Unemployment benefits have soared since the recession to become the second-biggest welfare cost, amounting to €4 billion last year. But even between 2000 and 2007 – a time of full employment – the bill doubled.

There is a very strong case for high unemployment benefits, but not in the way they are doled out in Ireland where the complicated business of integrating benefits with other aspects of labour market policy is in its infancy.

And it will take time to put right because the sort of figures needed to prevent perverse incentives and poverty traps are for the most part not even compiled. Instead, the benefits system has been patched together on the basis of hunch and political calculation, and all this despite the trauma of an unemployment crisis over decades and the golden opportunity to reform in the good times.

Rather than enhancing social justice, badly designed benefits systems can create a double injustice if they waste the money of those who pay and make those who receive payments dependent and unable to clamber out of a safety net into which they have fallen.

Government programmes of all kinds need evaluation and reform. If they are not meeting objectives, if they are producing unwanted or unintended consequence or if they are not good value for money, they should be tweaked, shaken up or scrapped altogether, depending on the extent of their failure.

That applies as much to welfare spending as to any other budget line. Doing so makes makes the welfare system better and fairer. Joan Burton, whose Department of Social Protection accounts for the lion’s share of transfers, and Ruairí Quinn in education, have both sounded serious about moving in that direction.