This report, ‘The Welfare State Myth‘ from the Institute of Economic Affairs, May 2025, argues that there is no direct connection between higher welfare spending and higher welfare outcomes.
It concludes that high welfare quality can be achieved with lower tax burdens, and that successful low‑tax countries are better positioned to handle future challenges such as ageing populations.
Summary
Definition & Importance of Welfare: Welfare encompasses healthcare, education, support for vulnerable groups, and labour market inclusion—valued because societies want to care for the young, sick, poor, and elderly.
Shift in Welfare Models: Historically, Nordic high‑tax welfare states were seen as superior, but recent analysis shows low‑tax countries now outperform them on many welfare quality measures.
Theory of Crowding Out: High taxes can waste resources, reduce efficiency, and crowd out essential welfare tasks, market services, savings, insurance, and family roles.
Comparative Outcomes: Statistical measures (life expectancy, healthcare errors, PISA scores, labour market data) reveal that countries like Switzerland, Japan, and South Korea (low‑tax) rank highest, while Sweden (high‑tax) has slipped to mid‑range.
Sectoral Findings: Low‑tax countries often lead in health (longer life expectancy, avoidable mortality), education (better PISA results, stronger incentives), and employment (lower unemployment, fewer poverty traps). High‑tax countries perform slightly better on social exclusion but not consistently.
Main Conclusion: High welfare quality can be achieved with lower tax burdens; successful low‑tax countries are better positioned to handle future challenges such as ageing populations.