Manual in socioeconomic impact assessments

Transcription

1 Manual in socioeconomic impact assessments Update of the manual from 1999 August 2017

2 WHY MAKE A MANUAL IN SOCIOECONOMIC ANALYSES The resources available to society are scarce Different public initiatives compete for the available resources Political prioritization between different public initiatives should take place on a well-founded basis A reasonable prioritizing implies that the consequences of the various actions have been carefully analyzed (quantitatively or qualitatively) and well documented, and that the assessments are based on comparable assumptions The main purpose of making socioeconomic analyzes is to clarify the impact of public initiatives before making a decision to initiate an action or a number of actions. 2

3 MANUAL IN SOCIOECONOMIC IMPACT ASSESSMENTS 3

4 HAS BEEN LONG UNDER WAY The latest version of the Manual in Socioeconomic Impact Assessments is from This revised version includes new results from theoretical the literature, new evaluations of empirical estimates and inspiration from similar manuals in other countries. The manual has benefitted from comments from a group of academic experts and practitioners in other ministries. 4

5 MANUAL IN SOCIOECONOMIC IMPACT ASSESSMENTS The purpose of Manual in Socioeconomic Impact Assessments is to create a consistent basis for socioeconomic analyzes and assessments of different initiatives Enable comparison of the consequences of alternative actions before making a decision Contains a set of guidelines, standards and calculation principles that should generally be applied to socioeconomic assessments conducted by different branches of government. The manual is application-oriented, rather than an introduction to the theoretical basis for socioeconomic impact assessments The socioeconomic analyzes should always be a key element in the decision-making basis and should serve as a tool to prioritize between different cost proposals. 5

6 MAIN CHANGES COMPARED TO THE MANUAL FROM Declining rate of discount with increased time horizon 2. Increased value of statistical life 3. Marginal cost of public funds 4. User payments 6

7 1. DECLINING RATE OF DISCOUNT RATE WITH INCREASED TIME HORIZON Recent literature recommends that the discount rate should declining with increased time horizon: Uncertainty about future macroeconomic developments implies lower discount rates in the long term. (Gollier and Weitzman (2010), Weitzman (2010), etc.). A declining risk premium is applied as well. This follows the recommendations by the Norwegian Expert Committee (NOU 2012:16 Samfunnsøkonomiske analyser). Example: The effect of a declining discount rate - Revenue flow of DKK 100 for 100 years with respectively a discounting with falling interest rates and discounting by a constant of 4 percent. The present value increases with 7 percent. 7

8 1. THE RECOMMENDED DISCOUNT RATE Year 0-35 Year After year 70 The real discount rate 4 % 3 % 2 % - Risk-free real interest rate 3 % 2,5 % 2 % - Risk premium 1 % 0,5 % 0 % The risk-free real interest rate: determined in accordance with the real interest rate assumptions in the Ministry of Finance's medium-term projections: Ensures consistency between macroeconomic planning and socioeconomic assessments of concrete actions. Risk premium: reflects systematic risk (non-diversifiable): Difference between the average risk-adjusted return on equity investments and the risk-free government bond yield, adjusted for taxation, transaction costs and bankruptcy risk. 8

9 2. THE VALUE OF STATISTICAL LIFE The value of statistical life(vsl) is a calculation of the population's willingness to pay for achieving a marginal reduction in the risk of dying. Previously the recommended value was 18 mil. DKK (2016-priser) Based on older European studies. Indication on, that the Danish value is too low 9 Other countries' VSL value converted to Danish values Mio. DKK (2016-priser) Sweden 21 United Kingdom 24 Norway 18 Belgium 20 France 33 The Netherlands 24 Germany 16 Austria 29

10 2. RECOMMENDED VALUE OF STATISTICAL LIFE DMØR's valuation study from Economics and Environment 2016: Finds a value of 31 million. Kr. (2016 prices) Average of three Danish valuation studies (incl. DMØR's own study) The study has been conducted on Danish data, which ensures a reflection of the Danish population's willingness to pay in the valuation. Made in accordance with internationally recognized methods. The value of statistical life is adjusted to 32 million DKK (2017 prices) following the recommendation of the Environmental Economics Council 10

11 3. MARGINAL COST OF PUBLIC FUNDS Public investment projects are typically financed by distortionary taxes Household and business decisions on consumption, labor supply, savings and investment, etc. is influenced by both tax policy and expenditure policy initiatives. Changes in household and business decisions typically effects public finances. To calculate this cost, the marginal cost of public funds (MCPF) is used, representing the distortive effects on labor supply, etc., (and thereby public finances) of tax financing. In the 1999 manual MCPF was estimated at 1.2, as the average efficiency cost of tax financing was estimated at 20 percent. The calculation from 1999 was based on the standard method (Stiglitz and Dasgupta (1971) and Atkinson and Sterns (1974)). 11

12 3. MARGINAL COST OF PUBLIC FUNDS The standard method has been criticized for being theoretically inconsistent (see Christiansen (1981), Kaplow (1996, 2004) and Kreiner and Verdelin (2012)). The tax financing of a public project does not affect the labor supply if the funding is composed such that the distribution profile of the financing scheme corresponds to the distribution of project benefits (benefit principle). With the alternative method, the fiscal externality of changes to individual behavior on the expenditure side are offset by opposing effects on the revenue side. Additional costs and financing are distribution neutral, and therefore also labor supply neutral. Thus MCPF=1. 12

13 3. RECOMMENDED MARGINAL COST OF PUBLIC FUNDS The marginal cost of public funds is revised from the previous 1.2 to 1.1. This is due to: The standard method would imply a new MCPF around 1,16 The method ignores the possibility that behavioral effects of public goods can counteract the behavioral effects of tax financing Conversely, it is not considered possible in all situations to create a 1:1 correlation between the individual's changed tax payment and the individual's marginal willingness to pay for the extra public benefit The alternative method emphasize that there are negative effects of higher taxes not linked to labor supply (eg. tax evasion). 13

14 4. USER PAYMENTS Typically, user fees for public goods are higher than marginal cost (for distributional reasons) when evaluating infrastructure projects funded with user fees, the effect of the specific proposal for user fees on, e.g., traffic volume, should be recognized in the calculation of the benefits, as well as the administrative costs of charging the fees must be recognized as a cost. And when user fees are higher than marginal cost, pricing affects labor supply of the users. This is included in the project evaluation when the effect of user fees on traffic volume is recognized as well as the positive impact of the project on labor supply Therefore MCPF is recommended not to be included 14

15 15 THANK YOU FOR YOUR ATTENTION

16 16 APPENDIX

17 Tilbagediskonteret værdi The effect of lower falling discount rate - example revenue stream of 100 DKK for 100 years. The present value is increased by 7 per cent. 100 NT RATE Diskontering med faldende rente. Diskontering med 4 pct År 17