When governments spend the funds they have collected, this shows in the national accounts. When they choose not to collect revenue but to use some special relief or exemption, these decisions and their impact nearly always remain invisible and so unaccountable. Fiscal welfare is the social spending part of this ‘hidden’ world of tax reliefs and related subsidies (Greve, 1994; Howard, 1997). It reduces the revenue that we are told is needed to sustain the welfare state and reduce poverty.
The term ‘fiscal welfare’ was first used by Richard Titmuss in his essay, ‘The social division of welfare: Some reflections on the search for equity’, where he demonstrated that the welfare state was not the only way in which resources could be redistributed (Titmuss, 1958, first presented in 1955, reprinted with some omissions in Alcock et al, 2001). Including reliefs for taxes and National Insurance (NI), fiscal welfare allocates resources alongside public welfare, as Titmuss called the welfare state, and occupational welfare that fiscal welfare often supports and encourages (Sinfield, 1978).
‘Simultaneously enlarging and consolidating the area of social inequality’ (Titmuss, 1958, p 55), the social division of welfare has the effect of ‘reinforcing sectoral advantage, nurturing privilege and contributing to exclusion and marginalisation’ with ‘the demoralising effect of cumulative social rejection’ (Titmuss, 1958, quoted in Alcock et al, 2001, p 145).
At a time when public spending is subject to greater cuts and controls, with a particular impact on lower-income groups, the visibility and accountability of fiscal welfare becomes all the more important since the distribution of benefits through tax and related reliefs contributes to maintaining, if not widening, inequality. Even the International Monetary Fund (IMF) now recognises the importance of tackling inequality: progressive taxes can help, and they need not inhibit growth (IMF, 2017).
The ways in which tax systems and tax havens can be exploited have been made more visible through the Panama and Paradise Papers (ICIJ, 2017). While fiscal welfare is no more immune to such treatment than other reliefs (as Titmuss showed in 1962, Appendix E), the analysis in this chapter concentrates on its uses for the purposes set out by governments.
This chapter focuses on fiscal welfare in pensions after indicating the main elements of fiscal social spending.