Immigration to Denmark from non-Western countries will still result in a net transfer from the public purse in 2050 – if immigration and integration remain unchanged
It is expected that in 2014, non-Western immigrants and second generation immigrants will require a net outlay of EUR 2.2 billion from public funds. That is to say, the total amount paid out to immigrants in the form of individual and public state services and transfer incomes will be EUR 2.2 billion higher than the total sum they will pay into the public purse in the form of taxes and fees. Nor will immigration from non-Western countries generate a net income for the state in the foreseeable future, if trends in immigration and integration continue as they are today. In 2050 non-Western immigration will still generate a net deficit, although this will have fallen to EUR 0.8 billion.
These findings emerge from calculations by the Rockwool Foundation Research Unit carried out in collaboration with the DREAM (Danish Rational Economic Agents Model) Group. Despite a clear improvement in integration over the past 15-20 years and a strong shift in the pattern of immigration towards immigration for work and study purposes, there is still no prospect of non-Western immigration generating a surplus for public finances. Even in 35 years time, non-Western immigration will still be making no net contribution to solving the problems of financing the Danish welfare state – problems which will exist as result of an ageing population, with fewer people of working age. On the contrary, immigration from non-Western countries will exacerbate the financial problems facing the welfare state, unless integration is further improved.
In contrast, the signs are that Western immigration to Denmark will make an even larger contribution to financing welfare in the future than is the case today, with such immigration currently providing a net surplus of EUR 0.5 billion to the state. By 2050 this surplus will have increased to EUR 1.2 billion if immigration and integration remain unchanged. Taken together, immigration from Western and non-Western countries can thus be expected to make a modest net contribution of EUR 0.4 billion in 2050.
Second generation non-Western immigrants are expected to be net contributors in 2050
Net transfers from the public sector to people from non-Western backgrounds are distributed very differently to first-generation and second generation immigrants. In the analysis first-generation includes all immigrants born abroad, as opposed to second generation immigrants that are born in Denmark.
Today, net spending on second generation immigrants totals EUR 1.7 billion, while spending on first-generation immigrants, who have a low level of employment, totals EUR 0.5 billion. Second generation immigrants tend to be better integrated, but at present they are young and often in education. If we look forward in time by half a generation to 2050, the first generation of immigrants will have begun to leave the labour market, and the net annual deficit for them will have climbed to EUR 1.6 billion. In contrast, the second generation immigrants will have reached adulthood and become active on the labour market. Their present deficit in relation to public finances will have been transformed into a surplus of EUR 0.8 billion, so that together, the first and second generations of immigrants will produce a deficit of EUR 0.8 billion.
The present situation indicates that neither Danes nor second generation non-Western immigrants to Denmark will generate a financial surplus over the course of a lifetime. Danes are expected to cost the state on average EUR 695 per year from cradle to grave, while second generation non-Western immigrants are expected to cost EUR 1,070 each per year. Finally, second generation Western immigrants are expected to more or less break even in their relationship to the Danish public finances; they will generate a small lifetime surplus of EUR 50 per year. However, they also constitute a smaller group.
It should be noted that a country’s economic policy can certainly be sustainable in the long run, even if every new-born member of the population is expected to generate a deficit in the course of his or her lifetime. This is the case for Denmark at present, with the problem of financial sustainability being almost non-existent at a level equivalent to under 0.5 per mille of GDP.
Average vs. marginal costs
The calculations presented above are based on average costs – all public expenditures, including the costs of fixed public goods – are included. This is a proper approach when calculating the fiscal sustainability and analysing whether an average person form a given group will make a net positive or negative contribution to the public finances. However, when the level of immigration is under discussion, it is in fact the question of marginal changes to expenditure that should be considered. Such marginal (i.e. additional) costs are those that are relevant for the political issue of whether to accept more or less immigration in the future as compared to maintaining the current policy. These marginal costs related to immigration only take into account spending and income associated with individuals (unemployment benefit, visits to the doctor, tax, etc.) and not contributions to society’s fixed costs (armed forces, construction of roads and bridges, central administration, etc.). Calculations based on marginal costs are presented in the next article in this newsletter.