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A war is currently being playing out behind closed doors in parliament at Christiansborg. The weapons are not bombs and bullets, but numbers and calculations. The outcome can be crucial for the future of universities.
They are all fighting over a kind of calculator.
More specifically, the Ministry of Finance’s calculator – the calculation models used by civil servants to assess the impact of political reforms on government finances.
Fighting on the one side – in a very advantageous economical and political position – is the government and its civil servants. Fighting on the other side is an almost united opposition.
“When it comes to public investment in research and education, according to the model you might as well stuff the money into the sewer, or burn them.”
Pelle Dragsted, finance spokesman of the Red/Green Alliance
The opposition criticizes the calculator. They believe that the models are set up so that calculations favour cuts and tax cuts rather than investments in, say, education, research, childcare or infrastructure.
The problem is that officials include the so-called dynamic effects on tax cuts, but not on public spending and investment. Dynamic effects are the changing behaviour of citizens caused by economic interventions. If you lower taxes, economists believe it will make more people work more so they pay more in taxes. It has no consequence, howeverm if you cut back on education or SU study grants.
“When it comes to public investment in research and education, according to the model you might as well stuff the money into the sewer or burn them. In fact, with the current calculation model it would have a net positive effect on the economy, for example, in a 2025 plan to close down the country’s universities and spend the money on tax cuts instead. This is grotesque,” says Pelle Dragsted, finance spokesman of the Red/Green Alliance.
He has sent the Minister of Finance a flurry of questions, like what will happen if the SU study grant is reduced. He has also asked about the consequences of the government’s so-called re-prioritization contribution, which cuts two per cent off university education funding annually from 2016 to 2021. The University of Copenhagen stands to lose DKK 930 million.
“The response was, that it would not have any negative consequences for the economy,” says Pelle Dragsted.
Before the summer break, a joint opposition supported a proposal from the Socialist People’s Party (SF), calling on Finance Minister Kristian Jensen (V) to investigate the dynamic effects of welfare investments in, for example, education, care and infrastructure. The opposition also wants to have the effects recognized in the ministry’s economic forecasts in the future on an equal footing with tax cuts.
A designation that means the behavioural changes caused by an economic intervention like a change in taxes or transfer income.
In Denmark, however, there is no tradition of incorporating the dynamic effects of changes in public consumption or investment, in education, or in health and childcare costs.
According to Jacob Mark, the Socialist People’s Party’s (SF) education and research spokesman, they cannot force the minister to start an investigation. But the SF spokesman would like to have funds allocated for it when the distribution of the research reserve is negotiated. He considers the war of the numbers to be the most important political issue right now.
“It’s wrong to completely deny that there are dynamic effects. We acknowledge in SF that there is an effect from lowering taxes, but this will also come about through investing in education or research,” says Jacob Mark, adding:
“It’s a political choice that the model is the way it is. If we can change it, it will be harder to defend cuts to research and education, which would have a huge impact on educational institutions that are under such economic pressure that they are forced to cut core services,” he says.
Josephine Fock, financial spokesman for the Alternative Party, is also ready for a showdown with what she calls “the bias that exists in favour of tax cuts.”
“The problem arises when politicians use economists’ calculations, as if they were an objective truth, because they are not. The government in power will always use the numbers that fit its strategy, so the economists are actually being exploited politically,” she says.
Josephine Fock points out that in January 2017, the parliament’s own economists – as economist consultants – questioned some of the results from the Ministry of Finance model: Had the ministry been somewhat optimistic in assessing how many people will get work by capping the unemployment benefits period and lowering income tax?
In a 2016 report on dynamic effects and marginal taxes, the consultants also concluded that “the Ministry of Finance bases its method on an older empirical study from 2001, where there is significant uncertainty over the causal effect of changes in marginal tax on the supply of working hours.”
“The calculation models promote a specific political agenda and determine which political arguments are reasonable and which are considered irresponsible.”
Niels Fuglsang, a PhD fellow at Copenhagen Business School with support from the centre-left think tank Cevea, is examining how the Ministry of Finance’s model works. What is deciding how the calculation works? Where does it originate? How have the models changed over time? And is it possible at all to distinguish economics from politics?
So far, he has found that it is especially within the last 15 years, “that the ministry has seriously boosted the calculating model in favour of tax cuts.”
However, in 2006 and in 2014, dynamic effects were introduced for education attainment levels. Higher educated people have higher employment and higher productivity. But as they also spend more time studying, the effect is almost zero on labour supply, the civil servants conclude. They acknowledge that higher education increases productivity, but this only affects GDP – the total value of Denmark’s production of goods and services – in the long term.
According to the calculation model, it is therefore irrelevant how much money politicians invest in education.
“So yes, it’s true that the model says that you can cut the universities’ budget down to half without having any negative consequences for the economy” says Niels Fuglsang and continues:
“The calculation models promote a specific political agenda and determine which political arguments are reasonable and which are considered irresponsible. It is neither innocent, nor neutral, and it creates a playing field for economic policy where the left side of parliament always starts at a disadvantage.”
The chairman of the Economic Council, which consists of four independent economists that analyse the Danish economy, are not satisfied with the ministry’s calculations either.
In a statement on 28 June they wrote that “politicians should have the best possible basis for decision-making on the layout of the tax system and the public sector. And it can be done better than today.”
The four economists warn about the risk of “unbalanced decision-making.”
“We have pointed out that, as just like the taxation of income, then public spending and investment can have an effect on productivity and on the willingness to offer labour. It is a fundamental flaw that we do not have sufficient knowledge about the effects of public spending and investments, and resources should be used to explore this,” says Lars Gårn Hansen, member of the chairmanship of the Economic Council and Professor at the Department of Food and Resource Economics at the University of Copenhagen.
But what if the calculator at the Ministry of Finance worked like the critics wanted it to and took into account the dynamic effects of education? What would the display show?
The Economic Council of the Labour Movement (AE) provides its own estimate. The council has examined the dynamic effects of public spending, including investment in education, and their conclusion is clear.
“Education increases employment and gives higher productivity and in this way increases in prosperity, and the same goes for research,” says Lars Andersen, Director of AE.
The AE economists have compared the level of education with income through the course of a working life and have deducted the public costs of the education.
The calculus shows that Danes with a higher education contribute DKK 17-26 million to society through the course of their lives. Skilled workers contribute DKK 14.3 million and unskilled with DKK 8.5 million on average.
“The problem is that education makes us more prosperous in the longer term, but it does not deliver immediate money to the treasury. However, if politicians cut costs, it looks nice on the budget now, and this leads to a bias,” says Lars Andersen, adding:
“If there really were no gains from public spending, then Denmark and the other Scandinavian countries with high taxes would be poor. The fact is, however, that we are among the richest countries in the world. This is because Danish tax revenues are used on a large scale for productive investments in things like infrastructure, childcare and education that affect people’s opportunities and their incentive to work.”
The ministry, on the other hand, concludes in a 2014 financial account that investment in education weakens public finances in the short term due to the cost of education institutions, the SU study grants, and because students work less while they follow study programmes. Over a longer time frame, the investment pays off, as students graduate and work more and paying more in taxes.
The Ministry of Finance acknowledges that there are beneficial effects of higher education, but that the gains in terms of higher productivity and employment are more long term.
“Investments in higher education levels primarily strengthen economic prosperity (measured in GDP) and cannot therefore be expected to improve public finances,” it says in the statement.
...we have the world's second largest public sector. The way the Ministry of Finance does its calculations, has not prevented this.
On the other side of the ideological front line, AE’s analysis has not led to panic. Otto Brøns-Petersen, head of analysis at the Danish centre-right think tank CEPOS believes that you should only count dynamic effects that you know have an effect in one specific direction.
“We do not know if the effect of education investment is positive or negative. The return is largely in terms of personal finances, and as a society we risk being over-invested in education in the sense of a return on the money invested,” he says.
Otto Brøns-Petersen believes that it is a misunderstanding to argue that the models are a political choice.
“It is the central administration’s best professional estimate of the economic effects resulting from the decisions that politicians have to make. Using models ensures consistency and that the economist professionals can assess the professional quality. The government is required to provide reasonable information to the parliament in, say, bills. It would twist things around completely if parliament instead instructed the government to count in a certain way. This would be a big professional and democratic problem in my view,” he says.
Liberal Alliance finance spokesman Joachim B. Olsen does not mind investigating the dynamic effects of public spending – but he expects a completely different outcome than the opposition:
“I expect the effect to be negative in Denmark and that the money is better spent by lowering taxes since we have the world’s second largest public sector. The way the Ministry of Finance does its calculations has not prevented this,” he says.
Joachim B. Olsen agrees that research and education probably has a positive impact on the prosperity of society, but he believes that the benefits from further investment will be limited.
“It is by no means certain that an additional billion to universities will lead to increased prosperity. It depends on how the money is spent. If they go to administration, it is certainly not the case, and we know that tax cuts have an effect. My theory is that the money is currently not being used in a way that benefits employment and productivity,” he says.
He adds that, historically, education costs have only increased.
Finance minister Kristian Jensen stated to news site Berlingske in July that you should leave the calculation models to the professionals, and that people should avoid turning accounting methods into politics.
“We have empirical results from the taxation field on how dynamic effects take place, but we have no empirical data on the effect of public spending. To the extent that there is empirical evidence, I think we should take it into account,” he said to Berlingske.
He would not promise to put money aside on the budget for a study of it.
The opposition however, won the first skirmish in the war of numbers when the government, the Danish People’s Party, the Social Democrats, the Social Liberals and the Socialist People’s Party agreed on 31st October to allocate the 2018 research reserve. A total of DKK 12 million was earmarked for “research that could shed light on the socio-economic and behavioural effects of public welfare investments, including early action, prevention, better education and occupational health and safety efforts.”