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Introduction
The scholarship on state building has devoted substantial attention to the role of taxation in constructing state institutions and capacities. It has also emphasised the crucial role of taxation in driving state-society relations (e.g. Levi, Reference Levi1989; Martin et al., Reference Martin, Mehrotra and Prasad2009; Tilly, Reference Tilly, Skocpol, Evans and Rueschemeyer1985). Yet this literature on taxation says relatively little about the role of payroll contributions in state-building. Payroll contributions are a dedicated tax instrument that targets money explicitly for the payment of social benefits and in many countries collects more revenues than income taxes. In this paper, we argue that students of state-building should pay direct attention to payroll contributions as a fiscal tool. More specifically, we explain: 1) why payroll contributions have become a state-building tool across different types of states (unitary versus federal); 2) how the nature of the external and internal political pressures facing governments can shape state-building efforts as they relate to the development of social insurance contributions over time; and 3) why/how the role of payroll contributions for state-building has a particular significance for our understanding of social policy.
To do this, we study the role of social insurance as a revenue raising institution and explore the fiscal relationship between social insurance and state building in Israel and Canada – two ‘most dissimilar cases’ that nonetheless feature strikingly similar patterns with regard to this relationship. As our findings show, social insurance programmes and their payroll contributions were introduced, designed and utilised in both cases at least in part to advance fiscal and economic policy capacity and thereby promote state-building. Although payroll contributions are a dedicated tax instrument that substantially limits government's fiscal flexibility, we find that it is precisely this limiting nature that explains why they can be such a valuable state-building tool, particularly when other types of tax instruments are unavailable or too costly politically. By creating a sense of credible commitment and establishing an explicit link between payment and social benefits, political actors were able to legitimise the generation of revenues, build institutional infrastructure for tax collection, and create capital reserves for investing in the economy. Our comparison between Israel and Canada suggests that the nature and the timing of the pressures that shape the relationship between state-building and payroll contributions can vary greatly from country to country and over time, depending on the institutional and international context. Finally, we show how this reality has particular significance for our understanding of social policy. This is the case because it can shed light on the motives and mechanisms driving the introduction and design of social programmes and can account for specific features of social programmes, including their characteristics and the timing of their adoption.
The paper is divided into five main sections. The first section discusses state building and its relationship to the fiscal side of social policy, with a particular emphasis on social insurance. The much shorter second section offers methodological considerations about process tracing and case selection. The third section discusses the link between social insurance, payroll taxation, and state building in Israel both before and after the official creation of the state of Israel in 1948. The fourth section explores similar issues in relationship to the development of Canada's two largest social insurance programmes: Unemployment Insurance (UI; currently known as Employment Insurance [EI]) and the Canada/Québec Pension Plan (C/QPP). The final section is a short comparative discussion about the two cases as informed by our analytical framework.
Credible commitments and social insurance as a fiscal state-building tool
State-building can be defined ‘as the process of increasing the administrative, fiscal and institutional capacity of governments to interact constructively with their societies and to pursue public goals more effectively’ (Bräutigam, Reference Bräutigam, Brautigam, Fjeldstad and Moore2008: 2). State-building is related to, and can take place simultaneously with, nation-building, which refers to the historical and political construction of ‘imagined communities’ (Anderson, Reference Anderson1991), where ‘citizens feel a sufficient amount of commonality of interests, goals and preferences so that they do not wish to separate from each other’ (Alesina and Reich, Reference Alesina and Reich2013: 3). Students of the relationship between nation-building and social policy focus on how social benefits and services may increase the sense of shared citizenship in a particular country or region, in the case of stateless nations (e.g. Banting, Reference Banting, Obinger, Leibfried and Castles2005, Béland and Lecours, Reference Béland and Lecours2008). In this paper, we take a different approach and we look at the relationship between state-building and social policy and focus on how social insurance contributions can be used for developing the state's fiscal and economic capacity, which is crucial for the provision of social benefits and the development of national solidarity, but can also be fundamental to the achievement of other public policy goals, such as industrialisation, job creation and economic development in general (Koreh and Béland, Reference Koreh and Béland2017a).
As an historical process, modern state-building is closely related to fiscal extraction (as taxation and credit), without which the state could not finance its policies. The centrality of fiscal extraction to state-building is at the core of Charles Tilly's (Reference Tilly, Skocpol, Evans and Rueschemeyer1985) seminal paper, ‘War making and state making as organized crime’. In his study of the emergence of the modern state in Europe, Tilly identifies fiscal extraction as one of the central tasks that agents of the state must carry out as part of the state-building process (Tilly, Reference Tilly, Skocpol, Evans and Rueschemeyer1985: 181). In the case of larger states like France, this quest for fiscal extraction was typically related to military expansion, which historian Frederic Lane described as ‘the business of selling protection. . . whether people want it or not’ (Tilly, Reference Tilly, Skocpol, Evans and Rueschemeyer1985: 175).
Fiscal extraction, however, can involve high administrative and political costs, particularly if it is based on tax enforcement. The more monitoring and sanctioning that has to be undertaken, the costlier fiscal coercion becomes (Levi, Reference Levi1989). Consequently, rulers engage in bargaining processes and even offer goods in return for increased revenues and tax compliance. In North and Weingast's (Reference North and Weingast1989) account of the Glorious Revolution, for example, the rich agreed to provide revenues in return for receiving property and political rights. Seminal studies on taxation and modern state building have highlighted the central role of this process in driving modern state building.
At the broadest level, public goods such as property rights and extended political representation have been shown to be connected to states’ existential quest for revenues and their imperative to bargain and exchange with social groups to achieve tax compliance. These exchange dynamics, which involve returns and credible commitments on the part of the state and levies on specific groups of taxpayers, are often referred to as the ‘fiscal contract’ (Levi, Reference Levi1989; Timmons, Reference Timmons2005). Recently, some have argued that this logic also applies to the sphere of social policy. For example, Jeffrey Timmons (Reference Timmons2010) has shown that the prevalence of social services and benefits is connected to the distribution of the tax burden between high and low-income earners. States that rely on their low and middle-income earners (as reflected in the degree of tax regressivity) provide more social benefits than states that rely on their high-income earners. The latter benefit their high-income earners in part through the protection of property rights. Using Levi's concept of credible commitments, Timmons further argues that the content of the fiscal contract and the ‘partner’ with whom it is made depends on the interaction between partisan identity (left/right), partisan strength, and partisan turnover. These three factors reflect the degree to which left or right-wing parties can credibly commit to their constituencies, and also the degree to which they are able to tax them (Timmons, Reference Timmons2010). Accordingly, extensive social benefits and services are most evident in countries with a long history of leftist political parties with low partisan turnover that tax lower income groups intensely.
While these studies provide an insightful correlation between regressive taxation and social spending and identify the partisan structures that produce them, they focus on general taxation and ignore the fact that social programmes are often financed through earmarked taxes. This is particularly the case with social insurance programmes that are financed through contributions that, in many states, collect more revenues than income taxes. Overlooking the specifics of social insurance is problematic because, if contributions are earmarked to specific social programmes, how can they be connected to fiscal state-building in general?
The relative lack of attention to social insurance contributions within the state-building literature is an unfortunate blind spot because it obscures much of the vital and understudied influence of social policy on the fiscal development of the modern state. The goal of this paper is to both illustrate and account for this influence and, more generally, to explore the relationship between social insurance, payroll contributions, and state-building across different types of states located in distinct international contexts. Our theoretical starting point is that there is a hidden dimension to the fiscal contract around social insurance. While the earmarked feature of social insurance contributions substantially limits the government's fiscal flexibility, it does not eliminate it completely. The public finance literature has long pointed to the fact that, even though payroll contributions are earmarked for specific schemes, they often create capital surpluses that are then invested in state bonds, economic enterprises, or financial markets (Cichon et al., Reference Cichon, Scholz, Van De Meerendonk, Hagemejer and Bertranou2004; Musgrave and Musgrave, Reference Musgrave and Musgrave1973). This, in turn, further supports various fiscal and economic ends, such as financing government debt, increasing industrial investments and investing in state-building projects (Estevez-Abe, Reference Estevez-Abe, Ebbinghaus and Manow2001; Park, Reference Park2011). In other words, while dedicated taxation forces governments to return the revenues (at least at some point) to their original destination (the financing of social programmes), it does not prevent them from being used for different policy tasks beyond the allocation of social benefits and services in the meantime.
This, however, raises the question of why policy makers would choose to use a tax instrument that ties them to such costly commitments. What our empirical analysis shows is that in some cases regular taxes are not an option and in others they are politically too costly. Furthermore, it is precisely the limiting nature of this tax instrument that can support and legitimise the generation of revenues for state-building. By creating an explicit link between social benefits and payroll contributions, states can generate a sense of credible commitment among their constituencies. This link constitutes a dedicated form of revenue raising that creates perceived ‘earned rights’ that future governments would struggle to dismantle because of the sense of entitlement these policies create over time (Pierson, Reference Pierson1994). Paradoxically, this reality and the added legitimacy it provides to payroll contributions turn social insurance into a valuable instrument of fiscal extraction that is effective in mobilising the financial resources necessary for state-building at large, beyond the financing of social benefits.
Methodology
Our paper focuses on the fiscal component of the state-building and social policy nexus by studying how and why social insurance contributions have been used beyond the financing of social benefits to feed other aspects of state-building and policy development. This comparative and historical analysis is grounded in a ‘most dissimilar cases’ approach (Crepaz, 2016: 46) that seeks to find potential commonalities across distinct institutional and political settings. This approach allows us 1) to assess whether a common mechanism is at work (i.e. using payroll contributions to enhance state-building) in very dissimilar countries; and 2) to stress cross-country differences in the context and objectives of fiscal state-building as it relates to social insurance. The two countries we selected are both geographically and politically distinct: Israel is a small unitary republic that faces constant security threats while Canada is a large and peaceful, multinational federal polity. If we find a strong relationship between payroll contributions and state-building beyond the financing of social insurance benefits in these most dissimilar countries, then it would clearly back our claim about the analytical relevance of our approach. This is especially true because, as far as Israel is concerned, we focus on the pre-independence period (at which point Canada had already existed for more than fifty years). Thus, the timing of the development of social insurance in both cases is also dissimilar: pre-independence in Israel, and post-independence in Canada. These temporal differences further intensify the most dissimilar design of our comparative analysis.
As a recent article published in the Journal of Social Policy suggests (Benish et al., Reference Benish, Haber and Eliahou2017), comparing Israel with other advanced industrial countries is legitimate and can offer much insight. In our case, this comparison is interesting not only because it shows commonalities between Israel and Canada, but also because it points to central cross-country differences in the nature of the internal and external pressures that shape fiscal and social insurance policy change at different points in time.
The objective of the following empirical analysis is to illustrate and account for the potential fiscal role of social insurance in state-building and the differences between the two cases concerning the nature of the state-building pressures experienced. We explore the relationship between state-building and social insurance contributions over time using evidence from existing academic and public sources, while simultaneously adopting a process tracing approach that studies the interaction between various institutional and political patterns in each case (on process tracing, see Bennett and Checkel, Reference Bennett and Checkel2014). Our analysis zeroes in on two main programmes in each country to make the comparison more focused.
Israel
While state-building has common features across countries (i.e. increasing the administrative, fiscal and institutional capacity of governments to interact constructively with their societies), the context in which it occurs, as well as the particular objectives at hand, may vary greatly between countries and over time. In Canada, state-building in the period under study has mostly revolved around competition between the provinces and the federal state over fiscal resources, political authority and societal legitimacy. In Israel, state-building was about building a new Jewish state in the historic homeland. Consequently, one of the major state-building challenges in the pre-state era was to bring in and absorb Jewish immigrants, almost all of whom were living outside of Palestine's territorial borders at the time. As such, state-building in Israel revolved around 1) constructing the institutional and economic infrastructure necessary to attract the Jewish population into Palestine; and 2) providing the material conditions for their integration.
In the absence of sovereignty, state-building efforts were pursued by a non-sovereign political system under the rule of the British mandate. Furthermore, as this state-building project became increasingly contested both by the Arab population within Palestine and by neighbouring Arab states, state-building efforts were pursued in a context of continued external security threats. It is within this geopolitical context that we examine the link between social programmes, payroll contributions and state-building in Israel.
The Jewish community in Palestine introduced a relatively extensive system of social programmes in the pre-state period. Various studies show that, in addition to providing social protection, this system fulfilled various nation-building roles. Through their allocative functions (providing services and benefits), it supported the integration of Jewish immigrants and their mobilisation to perform state and nation-building tasks such as settlement construction and military defence (Rosenhek, Reference Rosenhek2003; Shalev, Reference Shalev1992). These social programmes also served as state-building tools because they enhanced the fiscal capacity necessary for the emergence of the state itself (Koreh and Béland, Reference Koreh and Béland2017b). Before 1948, when the Jewish community lacked sovereignty, social programmes such as health insurance provided the legitimacy needed to levy fees and the capacity to enforce payment compliance. It also allowed nationalist political parties to accumulate the revenues and information required to establish the administrative infrastructure essential for state-building. In this section, we explore two programmes that fulfilled an additional and crucial role for state building, i.e. the accumulation of capital for investing in the economy. Before elaborating on either the provident or unemployment funds, we discuss the revenue challenge inherent to state-building during that period.
State-building and the challenge of revenues
Enhancing capital accumulation and building fiscal capacity through social programmes should be understood in light of the revenue imperatives of state-building in the pre-state period. Between 1917 and 1948, the British Mandate for Palestine governed the two national communities: the Jewish and the Arab. As a foreign ruler, the government's tax raising abilities and motivations were limited and, at around 12 per cent of the GNP, most funds were used to cover security and administrative expenditures (Morag, Reference Morag1967). The government was relatively small, granted extensive autonomy to the two national communities to manage their own internal affairs and played only a minor role in financing social services for the local populations (Morag, Reference Morag1967; Shvarts, Reference Shvarts2002).
Without sovereignty or the formal ability to tax, the Jewish community in Palestine and its public services were highly dependent on Jewish fundraising abroad. The problem, however, was that taxes tend to increase in tandem with population and economic growth, whereas donations do not. Thus, fundraising levels as a ratio of the Jewish population declined substantially over time (Gross and Metzer, Reference Gross and Metzer1977). The political leadership, which was increasingly dominated by the Zionist labour movement, had to develop alternative strategies to enhance its fiscal position and accumulate the capital necessary to invest in state-building.
To this end, a financial apparatus aimed at building domestic fiscal capacity was created. Financial institutions such as the Workers’ Bank and credit associations like Nir Ltd and Bizur Ltd were established (Nathan et al., Reference Nathan, Gass and Creamer1946). Our study suggests that social programmes that had accumulative potential, like the provident funds and the unemployment fund, were founded as part of this broader financial apparatus. Together, these institutions tapped into the financial resources of the members of the General Federation of Labour (Histadrut) and channelled their money into the labour economy, creating capital that could be invested in industrial enterprises, agricultural settlements and housing companies (Nathan et al., Reference Nathan, Gass and Creamer1946).
Furthermore, by providing the initial securities, these financial institutions could attract additional capital resources from domestic and international sources outside the labour sector and bring them under the influence of Zionist labour leadership (Kanevski, Reference Kanevski1942). This not only enhanced the scope of available capital but strengthened the autonomy of internal leadership vis-a-vis domestic and international demands.
Provident funds and capital accumulation
Provident funds were an early version of old-age pensions. They were introduced and then expanded during the 1930s and 1940s as part of collective wage agreements the Histadrut negotiated and were funded jointly by employers and employees. Given the young age structure of the population, the revenues created in these funds were substantially larger than expenditures. An analysis of the Audit Union for Provident Funds and Pensions report reveals that the capital accumulated in these funds was seen as a major component of total national savings and as a crucial means for developing the Jewish economy (Audit Union, 1948). In 1946, for example, 74 per cent of the provident funds’ income was accumulated, while less than 10 per cent was allocated to retired members. These funds were used to finance construction projects, transportation and housing, as well as the development of the Histadrut's economic enterprises (Audit Union, 1948).
Contemporary federation reports reveal that enhancing both state-building and economic development was a central motivation underlying social programmes in general – and programmes with accumulative potential, in particular. The centrality of this principle is apparent in the guidelines for investments that E. Hofein, then chief director of the Anglo Palestinian Bank, formulated. In the Audit Union report, Hofein explained that provident funds’ investment policies prioritize national considerations like economic development rather than individual considerations regarding profit (Audit Union, 1948: 9).
Comparing the prevalence of provident funds in the pre-state period with their prevalence after statehood suggests that their accumulative potential is also related to the ability to provide tax/contribution payers with a credible commitment. The Audit Union report shows that employees in the pre-state era were reluctant to participate in such programmes as they did not guarantee returns, let alone real returns. The report states that Histadrut representatives were often confronted by worker apathy and even active opposition (Audit Union, 1948: 5). After 1948, as state capacity increased, it was able to provide workers with a more credible commitment. A pricing index was introduced and government backing assured future returns. Consequently, the number of insured grew dramatically, as did the scope of capital accumulated (Gal and Bargal, Reference Gal and Bargal2002).
Gal and Bargal (Reference Gal and Bargal2002) show that, after statehood, the development of the Israeli pension system, and the particular shape it took, were strongly connected with Histadrut's interest in maintaining and enhancing the influx of capital for its own economic enterprises. These two scholars have pointed to a puzzling Israeli phenomenon: whereby right-wing parties supported the proposal for a universal, income-related state pension, while the very powerful labour movement rejected it – opting instead to consolidate occupational pensions under the responsibility and control of the federation of labour, and not the state. Consequently, a two-layer system was created: a state system offering universal, yet low and flat, benefits for the entire population, and an occupational system under Histadrut's control that offered income-related pensions to members only (Gal and Bargal, Reference Gal and Bargal2002).
The Israeli labour movement's puzzling position can be understood when financial interests in the pension system are considered. As described above, in the pre-state period, the federation of labour not only represented workers but built itself up as a significant conglomerate of economic enterprises, agricultural farms and financial institutions all directed toward state-building. Guaranteeing the influx of capital from what had been the provident funds became even more important after statehood, as Zionist donations were now given to the state and not to the federation (Gal and Bargal, Reference Gal and Bargal2002). In preventing the establishment of a universal income-related pension system, the Histadrut could protect its financial interests in the pension system. The government's consent to this two-tier pension system was founded not only on the strong political ties between the incumbent labour party and its federation of labour, but also on satisfying the government's fiscal interests. The universal first tier pension scheme collected payroll contributions that not only covered the costs of old age benefits, but also provided a significant source of additional revenue that was invested in state bonds, facilitating government investment in state-building projects (Doron, Reference Doron1975; Morag, Reference Morag1967). As for the second tier, a financial agreement between the government and the Histadrut ensured that two-thirds of the pension capital accumulated in these funds would be invested in equal shares in state bonds and in the Histadrut's economic enterprises (Grinberg, Reference Grinberg1991). To sum up, the design and features of the Israeli pension system after statehood were strongly influenced by the capital needs of state-building and the agencies that embodied them. From this perspective, it is clear that social insurance, which legitimised the creation of payroll contributions to generate credible social policy commitments, participated directly in state-building, including its ever-crucial fiscal side.
The unemployment fund, capital accumulation and state-building
Established in 1932, the Histadrut's unemployment fund (Keren-Hoser-Avoda) was primarily designed to enhance work opportunities for federation members. The capital accumulated in the fund's reserve was seen as a means to invest in economic projects that could create new jobs (Kanevski, Reference Kanevski1942: 76). This was done through the establishment of a credit company for public works (Bizur) that invested the programme's capital in the federation's various economic enterprises, including public construction, housing, and industrial firms, thereby turning it into an integral part of the Histadrut's financial apparatus (Kanevski, Reference Kanevski1942: 74). While the fund was primarily designed as a way to enhance employment, the fund devoted significant resources also to direct assistance to the unemployed during the period of large-scale unemployment (1936–1940) (Gal, Reference Gal1997). The fund's accumulated reserves were also used to attract further investments and thus enabled projects on a much larger financial scale. This demonstrates how domestic fiscal capacity can become a means of attracting further capital and also gaining control over it. This is different from ‘pure’ donations, which keep the receiving side in a relatively dependent state, often subject to the control and interest of donors. As a fund aimed at creating work, the unemployment fund demonstrates the blurry boundaries between economic growth and social protection, as well as their complementary functions. It also illustrates how the recruitment of capital for economic investment and state-building can be justified and legitimised in the name of social protection.
After 1948, the government considered introducing an unemployment insurance programme that would provide income-related benefits to the unemployed. However, and in contrast with old age pensions, this unemployment insurance programme was removed from the National Social Insurance Bill. There was a fiscal rationale to this decision. In contrast to the state's old-age insurance programme, which was expected to yield substantial revenue surpluses, the unemployment insurance was seen as a fiscal burden, as unemployment levels at the time were high (Gal, Reference Gal1996). The government's fiscal interests also motivated the eventual introduction of unemployment insurance in the 1970s. Towards the end of the 1960s, in the context of the Six-Day War and the war of attrition that followed, Israel's security expenditures rose dramatically. The treasury initiated unemployment insurance as a way to finance these rising costs through increased social insurance contributions. As Israel's economy at the time enjoyed full employment, increased contributions created significant surpluses that were invested in government bonds and thus helped fund security costs (National Insurance Institute, 1970). This decision was related to structural and political constraints that made other fiscal alternatives seem unfeasible or too politically costly (Koreh, Reference Koreh2017). At the time, the introduction of unemployment insurance and other social benefits was used as means to legitimise the radical increase in contribution levels. Once again, credible commitments embedded in the logic of social insurance legitimised fiscal extraction as part of a broader state-building project.
Canada
Considering the federal nature of the state, the limited institutional role of labour unions, and the relative absence of external threats, the politics of social programmes in Canada is shaped in large part by competitive state-building between the federal government and the provinces (Banting, Reference Banting, Leibfried and Pierson1995). Unlike Israel, where social insurance schemes appeared before the formal establishment of the state in 1948, federal social insurance programmes in Canada only emerged in the middle of the twentieth century decades after the creation of the country in 1867. Yet these programmes played a direct role in the federal government's state-building efforts, efforts that were contested by some provinces such as Québec (Béland and Lecours, Reference Béland and Lecours2008).
Unemployment Insurance/Employment Insurance
The case of UI is particularly striking in terms of competitive state-building. In 1935, in the context of the Great Depression's high unemployment rates, the Conservative government of Prime Minister R. B. Bennett passed federal unemployment insurance legislation. The Judicial Committee of the Privy Council declared it unconstitutional two years later as ‘both “employment” and “insurance” fell under provincial powers’ (Courchene and Allen, Reference Courchene and Allan2009: 21). This decision forced Ottawa to enter into discussions with the provinces, which first led to the enactment of a constitutional amendment that ‘added “unemployment insurance”. . .to the list of exclusive federal powers’ and then to William Lyon Mackenzie King's Liberal Government's adoption of the Unemployment Insurance Act of 1940 (Courchene and Allen, Reference Courchene and Allan2009: 21).
During the Second World War, the federal government expanded its fiscal capacity considerably, in part through tax rental agreements with the provinces that allowed the federal government to temporarily occupy the provinces’ traditional fiscal space for the sake of the war effort (Courchene, Reference Courchene1984). Through the logic of credible commitment, according to which social benefits derive from new fiscal efforts on the part of Canadian employers and workers, UI contributed to a direct and permanent expansion of the federal government's fiscal capacity, with initial payroll contributions of 1.8 per cent for ‘both employees and employers, with the government contributing an amount equal to 20 per cent of total premiums and covering administrative costs’ (Courchene and Allen, Reference Courchene and Allan2009: 21). Coverage, which was initially limited to only 42 per cent of the workforce (Lin, Reference Lin1998: 42), was ‘nearly universal’ by 1971, the year when the government decided that employers would pay 1.4 times more than employees in payroll contributions (Courchene and Allen, Reference Courchene and Allan2009: 21–22). This increase in coverage contributed to the fiscal expansion of the programme over time. As part of a post-war expansion process fed in part by federal bureaucratic agencies shepherding the UI programme, benefits also became more generous over time (Pal, Reference Pal1988). Starting in 1977, UI offered regionally-tailored benefits and eligibility criteria under the Variable Entrance Requirement (VER). UI contribution rates, however, remained uniform across the country and, by 1992, they generated as much as 14 per cent of federal revenues, up from 6 per cent in 1980 (Department of Finance, 1994). It is clear that, over the years, UI contributed to state-building by increasing both the fiscal capacity and social policy involvement of the central government within Canada's fragmented and contentious federal system (Banting, Reference Banting, Obinger, Leibfried and Castles2005).
In the 1990s, the deterioration of Canada’s economic situation justified regular but gradual cuts to UI benefits (Campeau, Reference Campeau2005). The federal government's 1990 decision to stop contributing to the financing of UI benefits was a turning point. This decision meant that UI would be funded exclusively through payroll contributions. This institutional change took place in a context of large federal deficits that also pushed the federal government to use payroll contributions to finance activation measures and parental benefits that are not unemployment benefits in the strict sense of the term. At the same time, the federal government tightened eligibility criteria, which ‘pushed hundreds of thousands of jobless out of the UI system’ (Campeau, Reference Campeau2005: 152). These reductions in benefits constituted a unilateral and controversial revision of the social insurance contract between the state and contributing workers and was in line with the broader politics of retrenchment that also led to a reduction in social assistance transfers to the provinces (Bashevkin, Reference Bashevkin2000). Simultaneously, the push for cost-control measures and punitive forms of activation was driven by broader fiscal considerations and growing pressures from the Department of Finance to reduce ‘UI spending as part of its deficit-reduction strategy’ (Hale, Reference Hale1998: 435).
Renamed Employment Insurance in 1996, from a state-building perspective, the programme more than ever before became a central tool of federal fiscal policy beyond the simple allocation of social benefits. Over time, large surpluses were created in the programme's trust fund amidst declining coverage rates related to austerity measures that tightened eligibility criteria. These surpluses proved meaningful for federal deficit reduction because, in 1986, ‘the system's accountability was taken over by the state, with premiums treated as receipts and benefits as expenditures’ (Campeau, Reference Campeau2005: 160; see also, Lewis, Reference Lewis2003: 8). After income taxes, the programme became the second largest source of federal revenues, making it a key state-building tool. It is clear that, over the years, this programme contributed to state-building by increasing the fiscal capacity of the central government within Canada's fragmented and contentious federal system (Banting, Reference Banting, Obinger, Leibfried and Castles2005). This situation explains why it became a central target of austerity efforts in the 1990s, as lower benefits meant larger UI/EI surpluses, which helped improve the federal government's overall fiscal outlook. For instance, the EI trust fund registered a cumulative surplus of approximately $6.5 billion CDN in 1997, a figure that climbed to above $12 billion in 1998 (Campeau, Reference Campeau2005: 160). In this context, federal officials saw the EI trust fund as a source of revenue that could help improve the general fiscal situation of the federal government, even admitting that federal deficits would look significantly higher in the absence of EI surpluses (Campeau, Reference Campeau2005: 160).
It is clear that the status of the EI trust fund was key to the federal government's fiscal situation. As a result, beyond the allocation of social benefits, the programme became a general tool of deficit reduction in the 1990s, something that pro-labour academics and politicians criticised as a fiscal hijacking of unemployment benefits (Campeau, Reference Campeau2005). The debate on the broader fiscal use of the EI trust fund remained on the agenda long after the advent of large federal surpluses in the late 1990s, as successive federal governments drew on EI surpluses to improve the fiscal standing of the federal treasury (Béland and Myles, Reference Béland and Myles2012; McGregor, Reference McGregor2015).
Canada/Quebec Pension Plan
The creation of the C/QPP in the mid-1960s demonstrates the broader use of payroll contributions for competitive state-building and the fulfilment of tasks not directly related to the payment of social benefits and services in a context of welfare state expansion. The C/QPP story also points to the fact that the use of payroll contributions beyond the financing of social benefits and services can serve as a state-building tool at the sub-national level. Taking control of payroll contributions attached to particular social programmes can allow sub-national governments to increase their fiscal capacity and finance local economic development (Béland and Koreh, Reference Béland and Koreh2017).
In the mid-1960s, pension reform became a major issue in Canada largely because the modest Old Age Security (OAS) universal pension enacted in 1950 seemed unable to provide sufficient economic security to retirees. In this context, the idea of an earnings-related old age insurance on the top of OAS became a priority for the Lester B. Pearson Liberal minority government that took office in April 1963 (Babich and Béland, Reference Babich and Béland2009; K. Bryden, Reference Bryden1974; P.E. Bryden, Reference Bryden1998; Jacobs, Reference Jacobs2011; Simeon, Reference Simeon2006). Under pressure at the federal level from the left wing New Democratic Party (NDP), and due to a previous agreement with the provinces that had led to the creation of OAS, the Pearson government negotiated with the provinces to create a federal earnings-related pension programme. From this perspective, the situation in Canada in the mid-1960s was not so different from the early 1940s when Ottawa had to secure the province's agreement to enter into the field of unemployment insurance. At the same time, intergovernmental relations in the mid-1960s were more complicated than in the early 1940s because Canada was not involved in a major war that legitimised policy centralisation. In fact, in the mid-1960s, the then Conservative government of the most populous province, Ontario, did not see eye to eye with Ottawa on pension reform. Rather than a federal earnings-related pension programme, Ontario promoted the expansion of private pensions as an alternative to the creation of a public old-age insurance programme (Christensen, Reference Christensen2016: 87). More importantly for this paper, Québec was in the midst of the so-called Quiet Revolution associated with massive provincial state-building efforts that clashed with the centralising tendencies of the Canadian federal system and led to provincial push back in which social policy initiatives proved essential (Béland and Lecours, Reference Béland and Lecours2008). This type of clash between levels of government simply does not exist in a unitary state like Israel.
Considering the nature of competitive state-building in Canada, it is not surprising that Québec played a central role in debates leading to the enactment of what became the Canada Pension Plan (CPP) (K. Bryden, Reference Bryden1974; Simeon, Reference Simeon2006). In addition to successfully pushing for higher benefits and other provisions, the Liberal Québec government of Premier Jean Lesage promoted the idea of creating a Québec Pension Plan (QPP) to exist alongside the CPP, which would only cover workers in the other nine provinces.
There was a fiscal rationale for the creation of QPP related directly to the provincial state-building at the centre of the Quiet Revolution. More specifically, the Québec government wanted to use the surpluses accumulated in the QPP trust fund to help finance the future Caisse de dépôt et placement du Québec (CDPQ), a public investment fund meant to stimulate French-Canadian economic development in the province (on this public investment fund, see Brooks and Tanguay, Reference Brooks and Tanguay1985; Rouzier, Reference Rouzier2008). Because the idea of creating this provincial investment board and the debate about the creation of the CPP occurred simultaneously, they merged in the minds of Lesage and his advisors, who clearly saw the fiscal resources to be extracted from old-age insurance contributions as a potential tool for provincial state-building through the financing of the CDPQ, a key instrument of economic nationalism (Thompson, Reference Thompson1984). In other words, a powerful fiscal and state-building imperative (i.e. the need to use payroll contributions as a tool of capital accumulation and economic development) drove the creation of the QPP (Béland and Koreh, Reference Béland and Koreh2017). Yet this state-building effort meshed with the logic of credible commitment, as fiscal extraction was explicitly tied to the provision of social benefits.
Created in 1966, the CPP and QPP were nearly identical to one another. The main difference was the way trust fund surpluses were used: the QPP acted as a direct tool of provincial economic investment, while the CPP was a source of borrowing for the nine other provinces. In the mid-1990s, however, a reform led to the creation of the Canada Pension Plan Investment Board (CPPIB, 2016), which invests surpluses in the name of greater returns rather than economic development. This is in contrast to Québec, where economic development has remained a key objective of the CDPQ, which continues to invest QPP and other pension fund surpluses (Jacobs, Reference Jacobs2011; Little, Reference Little2008; Weaver, Reference Weaver2003). The CPPIB and the CDPQ remain the two largest pension funds in Canada, with respective gross investment assets of $319 and $291 billion CDN in 2015 (Bédard-Pagé et al., Reference Bédard-Pagé, Demers, Tuer and Tremblay2016: 34).Footnote 1
Discussion
Although social insurance is based on a credible commitment to provide benefits in exchange for payroll contributions, the money extracted from workers and employers can be used to promote broader state-building goals beyond the allocation of social benefits themselves. Turning to two ‘most dissimilar cases,’ we have shown how the fiscal side of social insurance can play a direct role in broader state-building efforts that transcend the allocation of the social benefits that justified the creation of payroll contributions as a form of dedicated taxation in the first place.
The advantage of comparing countries as different as Israel and Canada is that it allows us to show how payroll contributions can play broad fiscal state-building roles across distinct historical moments and institutional settings. In the case of Israel, we see that payroll contributions began to play a central state-building role before the actual creation of the country. In contrast, the case of Canada demonstrates how social insurance can become a tool of fiscal state-building in an existing yet fragmented federal country.
Our comparative analysis reveals a key difference between the two countries: the nature of the pressures leading to state-building through payroll contributions are not the same in Israel and Canada. On one hand, in Israel, state-building takes place in a unitary state, where internal competition is not the key state-building challenge. Instead, the challenge that justifies additional fiscal extraction has evolved over time. Before independence, the main challenge related to the need to absorb and integrate Jewish immigrants within a non-sovereign entity. Immediately after independence, tensions between the older pre-state and newer post-state entities constituted the main challenge. Finally, in the 1970s, the necessity to protect the country against military threats became the main challenge that made additional fiscal extraction imperative. On the other hand, in federal Canada, the main challenge was internal pressure that primarily took the form of competitive state-building between two levels of government struggling to control fiscal resources, including payroll contributions. The contrast between these two cases points to the fact that the analysis of state-building in social policy research must pay close attention to the nature of 1) the states under consideration (unitary versus federal) and, more generally 2) the specific challenges facing state-building over time within each country.
Despite key differences between Israel and Canada in terms of political institutions and state-building challenges, payroll contributions were created and legitimised in both countries as a means to finance social benefits. Simultaneously, these contributions became tools of fiscal state-building beyond their explicit social policy role. As we have shown, though they represent credible commitments on the part of the state, social insurance programmes have the potential to become a broader source of fiscal state-building. This is the case because payroll contributions, legitimized as a dedicated form of taxation, can do more than just provide social benefits and contribute to the performance of broader economic and financial missions. The two cases suggest the level of credibility of social programmes can vary depending on the institutional context. Furthermore, this level of credibility influences compliance and the accumulative potential of social insurance. As seen in the Israeli pension case, as long as the programme could not guarantee real future returns, employees were reluctant to participate. Enrolment levels and, with them, the capital accumulation potential of the programme, only increased significantly after the introduction of institutional features that improved the programme's credibility.
The Canadian employment insurance case also points to the dynamic and contested nature of the fiscal contract around social insurance, particularly as it relates to unilateral state decisions. While social insurance provides a valuable instrument for extracting necessary revenues for state-building, it also poses substantial fiscal limitations on the state, particularly because it limits the state's ability to control social expenditures. Social insurance programmes and the fiscal contract underlying them have shown impressive resilience over the years, as the Canadian unemployment insurance case demonstrates; nevertheless, they are not immune to change. Over time, when economic circumstances change, and particularly when the state's focus shifts from assuring fiscal extraction to controlling expenditures, its position towards social insurance can shift too. Understanding the underpinnings of the fiscal contract is useful for understanding pressures to reform social insurance programmes.
At a more general level, this comparative research supports the argument that the concept of the fiscal contract associated with general taxation also applies to social policy and, especially, social insurance. Drawing on Timmons (Reference Timmons2005), this study suggests that the state's existential revenue raising imperative is essential to the formation of the modern state because it has driven not only the allocation of civil and political rights, but also social rights. Yet, in contrast to Timmons (Reference Timmons2005), we used process tracing rather than statistical analysis, which allowed us to offer an account of how the fiscal contract is concretely embedded within the policy process. Future research on the fiscal side of social policy should explore the multifaceted role of payroll financing in state-building as it relates to the political legitimacy stemming from credible commitments associated with modern social insurance programmes and the fiscal contract at their centre. At the same time, future research should take into account the varieties of state types (unitary versus federal) and of state-building challenges that exist across countries, which this comparative analysis of Israel and Canada suggests shape the fiscal politics of payroll contributions.
Acknowledgements
A previous version of this paper was presented at the 2017 annual conference of the Research Committee 19 (Poverty, Social Welfare and Social Policy) of the International Sociological Association (University of North Carolina, Chapel Hill). The authors thank the conference participants, Rachel Hatcher, John Myles and the anonymous reviewers for their comments and suggestions. Daniel Béland acknowledges support from the Canada Research Chairs Program.
