A quick look on subsidizes on education in Denmark
It is a well known fact that education leads to higher expected income. Despite this fact not all people take an education which lead to an inefficent outcome from the society’s point of view. There are several possible explanations:
- Talent varies – not everbody are capable of taking a higher education.
- Liqudity constraints
- The quality of school they have acces to varies
This blog tries to understand why the danish government oversubsidizes education for tertiary educations.
The danish educational system is quite unique and some characteristics of subsidies on tertiary educations in Denmark are listed below (www.su.dk):
- You don’t have to pay any tuitions fee to enroll tertiary education.
- If you live with your parents you get 383 euro per month, which you don’t have to pay back.
- If you don’t live with your parents you get 771 euro per month, which you don’t have to pay back.
- Students enrolled in higher-education are entitled to a number of monthly grants prescribed to the education plus 12 months, if the students take 6 year to finish their university degree, which allows students to take less then 30 ects per semester on average.
- Furthermore students have access to favourable credit schemes (with a interest rate below 4 % per year)
In Denmark there are a high income tax which is a disincentive to invest in education because the progressive tax system eats some of the future income, and therefor the government subsidizes education in order to reach a more efficient outcome. The effect of the distorting taxes can be alleviated by subsidizing education.
The two dutch economists A. Lans Bovenberg and Bas Jacobs showed (with some elaborate math) that in order to reach the efficient outcome education should be subsidized with same rate as the marginal tax in the country
When the subsidy rate equals the marginal tax rate, the disincentive to invest in education cancels out. An empirical study showed that the danish marginal tax rate was 63,3 % and the danish subsidy rate on higher education was 97,3 % in 2000. (A Lans Bovenberg &Bas Jacobs,Redistribution and education subsidies are Siamese twins, Journal of public economics, 2005)
Furthermore you have to take in to account that the subsidies are not only grants but also production costs of higher education (professor salaries, rent and so on)
Most likely reasons for why the danish government chooses to oversubsidize education:
- Higher educations can have possible positive externalities, but these are difficult to establish emperically.
- Credit constraints: but the access to student loans alleviates this issue.
- Finally there is a redestributive issue; students belong to the low-income people when they are studying and the grants reduces this inequality in their years of studying.
The danish tax comission proposed in 2009 that master students shouldn’t receive any grants. Instead of the grant they should receive the same amount of money, but now it works as a loan that has to be payed back to the government after finishing their studies.
The advice sounds reasonable, when you look at the severe oversubsidizing of education – the money can be spend more efficiently elsewhere!
Andreas Mølgaard Laursen (November 2013)
 The students who acheive a higher-university degree leads to an increase of the inequality after end studies (because on average they earn more than the uneducated), but the students grants are given to all tertiary educations (which also includes nurses, policemen etc.) and the inequality effect seems questionable.