Financing Social Welfare: the Attraction of Broad Bases

The idea that a drop in social welfare contributions being offset by an increase in VAT could favour employment and competitiveness is a subject of important controversies. This not does suggest that such a kind of measures could not be neutral. In the long run, on an unchanged budgetary basis, lowering contributions should have positive effects of promoting employment, albeit modestly. In the short run, while the policy improves competitiveness, it undermines household purchasing power. Furthermore, calculations made at a detailed sector level reveal that this switch does not benefit all sectors uniformly. Indeed, in top of the range activities that form the heart of European specialisation, the increase in competitiveness is quite limited. The trade-off is therefore the following: either to promote demand for unskilled labour over the long term or boost the competitiveness of those sectors exposed over the short term. This is a particular instance of the usual observation according to which efficiency considerations are not independent from distributive purposes.