The state started first as a social group that provided protection from external and internal threats, by organizing an army and establishing a universal legal code. At the same some kind of state administration was also set up, in order to exert the will of authorities and also create enough income through taxes.
However, with the passing of time, these state functions gradually widened. It included provision of goods and services to the public at large, such as education (both primary and secondary, but in many cases also tertiary), healthcare insurance, state pensions and programs of income redistributions. The modern welfare state present today is not only an active actor in all these areas, but the predominant or even the only one. These new roles were taken on by the state mostly during the XX century, with the current technological and social constraints and opportunities. However, the situation has significantly changed since then, and some data show us that we can expect that the pace of social and economic changes will accelerate further over the upcoming decades. The state would need to change its focus and the way it functions, and evolve further, in order to fulfill best its roles and responsibilities.
In countries with developed markets, private pensions are dominant, while state plans are dominant in countries with a lower level of market development. Although somewhat unique, the case of Chile shows that the introduction of mandatory private pensions can be a success. With the sophistication of markets, and their globalization, there is little, if any, reasons for state involvement in this area. Globalized private equity funds can make higher yields than slow-growing economies can make their economies grow. This means that private pensions could be much higher than public ones, with the same amount of resources invested. Of course, there are arguments for states to supplement income in the old age with the minimum social pension (which are financed through general taxes and are paid out to any person above a certain age threshold), but income above this minimum should up to the individuals themselves.
Rapid technological changes and high growing costs due to inefficient healthcare system make a considerable argument in favour of at least some private sector involvement in the provision of healthcare services. This is especially visible in the case of countries where private health sector has evolved in recent decades, catering to the needs that the public healthcare sector is unable to care for. Public payment for private sector care providers can be a solution for some of these problems, as well as public healthcare accounts such as those in Hong Kong or Singapore.
Private sector (both profit and nonprofit) stakeholders should be more involved in the provision of education services. This should be especially important for secondary schools and universities. These stakeholders would provide more connections to the real world outside of classrooms, and would use the rapid technological changes that can completely change the education as we know it. Since the main beneficiary of the secondary and tertiary education is the individual in question, these costs should not be borne by the state. This would also ensure that people pursuing education would do so in order to gain useful knowledge that brings high dividends. However, in order to promote social mobility, public programs such as scholarships targeted at the talented individuals coming from the low-income background, or guaranteed loans for the less privileged. On the other hand, since these arguments are less clear in the case of primary education, they should still be organized and financed by the state. However, even in this area the per capita financing formula can include private education stakeholders in order to increase quality and lower inefficiencies.
Just 30% is enough
There are no connections between the level of public spending in a country and the level of Human Development Index (HDI): there are many countries such as the US, Taiwan, Japan, Korea, Australia and Ireland that very low levels of public spending but a high HDI. Also, some countries had to implement budget cuts due to fiscal constraints in the recent decades, such as Finland, the Netherlands, Belgium etc. for a substantial amount, and yet their HDI has not decreased.
Therefore, these measures should not have negative effects on the population well-being. It will actually provide them with more after-tax resources that they can use for pursuing their individual goals. Also, the high level of public spending lowers the level of economic growth – providing less incentive for private initiative and over-reliance on state programs. Vito Tanzi, the former chief economist at the IMF has, in its 2000 book Public Spending in the 20th Century, made estimation that only 30% of GDP is necessary for financing of all legitimate state functions. This is in line with state expenditures in Bulgaria, Romania or New Zealand, but higher than in Ireland or Korea, but well below most European countries.
Lower taxes would spur economic growth, as the Barro-Rahn curve suggests. This would have a positive effect on all – making the pie bigger for all.