Denmark

   

Economic Policies

#1
Key Findings
A mix of stable, sustainable economic policies gives Denmark the top ranking in the SGI 2020 in this area. Its score on this measure has improved by 0.3 points since 2014.

Growth rates are slowing, but remain healthy. Unemployment rates are low, with structural barriers such as skills shortages constituting the main barrier to further reductions. Moderate growth forecasts have reduced concern about labor shortages.

The country’s “flexicurity” model continues to support a high degree of labor-market mobility, with training and assistance provided to the unemployed. Wages have proven flexible and adaptable. The high minimum wage can make it difficult for individuals with low-level qualifications to find stable jobs.

The tax burden is high, with income and VAT taxes dominant. Marginal income-tax rates have decreased in recent years, as have corporate taxes. The government is running a budget surplus, and overall debt levels low by EU standards. Financial-institution credibility has deteriorated due to aggressive interpretation of tax rules and involvement in a money-laundering scandal in Estonia.

Economy

#5

How successful has economic policy been in providing a reliable economic framework and in fostering international competitiveness?

10
 9

Economic policy fully succeeds in providing a coherent set-up of different institutional spheres and regimes, thus stabilizing the economic environment. It largely contributes to the objectives of fostering a country’s competitive capabilities and attractiveness as an economic location.
 8
 7
 6


Economic policy largely provides a reliable economic environment and supports the objectives of fostering a country’s competitive capabilities and attractiveness as an economic location.
 5
 4
 3


Economic policy somewhat contributes to providing a reliable economic environment and helps to a certain degree in fostering a country’s competitive capabilities and attractiveness as an economic location.
 2
 1

Economic policy mainly acts in discretionary ways essentially destabilizing the economic environment. There is little coordination in the set-up of economic policy institutions. Economic policy generally fails in fostering a country’s competitive capabilities and attractiveness as an economic location.
Economic Policy
9
Output is currently slightly above capacity output (positive output gap). Employment has been growing, especially for the elderly, and unemployment is close to the structural level, which is comparatively low. Per capita income has increased more than in most other countries, not least due to improvements in the terms of trade. Productivity growth is low by historic comparison, but similar to the OECD average. Growth in GDP is projected to slow down a little over the coming years from about 2%. The growth forecast for 2020 is about 1.25%, comparable to growth in many other OECD countries.

The public budget is in surplus, reflecting the favorable business cycle situation, and the structural balance is close to zero. Public debt is (EMU debt) is about 35% of GDP, which is low in comparison to most EU member states. Fiscal policies are sustainable despite an aging population due to mandated labor market pensions and recent reforms to increase statutory retirement ages.

The Danish labor market is characterized by rather high levels of turnover and flexibility. Remaining unemployment is mainly structural and concentrated on specific groups, mainly low-skilled workers (among whom immigrants are overrepresented). The social safety net and labor market policies have recently been reformed to strengthen work incentives. Structural discussions have focused on ensuring that the labor force comprises an appropriate mix of qualifications and improving the position of immigrants in the labor market. Efforts to improve productivity raise questions concerning education, research, industrial and tax policies.

While the conditions for fiscal sustainability are being met, political discussions about the appropriate balance between tax revenue and expenditure continue. On the expenditure side, there is widespread discussion about demographic change (e.g., population aging) and increasing demand for social services, not least on healthcare. The new Social Democratic government, which came to power at the end of June 2019, is planning to increase spending on welfare and education in 2020. A major policy question concerns the setting of ambitious environmental goals, the financing of the measures needed to reach these goals and the broad consequences of these measures for the economy.

Geopolitical developments, including the United Kingdom’s Brexit decision, are a source of uncertainty for the future development of the Danish economy.

Citations:
Danish Economic Councils, The Danish Economy, Various issues. Latest issue: Autumn 2019.

The Danish Government, “Together for the Future: Government Platform, June 2015.” http://stm.dk/multimedia/TOGETHER_FOR_THE_FUTURE.pd

“Ny 2025-plan: Med disse fem greb vil regeringen få danskerne til at arbejde mere,” https://www.b.dk/politiko/ny-2025-plan-med-disse-fem-greb-vil-regeringen-faa-danskerne-til-at-arbejde-mere (accessed 22 Octiber 2017).

Labor Markets

#2

How effectively does labor market policy address unemployment?

10
 9

Successful strategies ensure unemployment is not a serious threat.
 8
 7
 6


Labor market policies have been more or less successful.
 5
 4
 3


Strategies against unemployment have shown little or no significant success.
 2
 1

Labor market policies have been unsuccessful and rather effected a rise in unemployment.
Labor Market Policy
9
The Danish labor model has become known as “flexicurity,” referring to the fact that it is not costly to fire employees and that the social welfare state will provide income support and active labor market policies incentivizing an active job search and if needed, providing training to help workers find employment. Unemployment is low and structural barriers, including qualifications, are the main barrier to further reductions in unemployment. Concern about labor shortages has weakened somewhat in the light of moderate economic growth forecasts for the Danish economy. Wage formation has proven rather flexible and adaptable to the economic situation. The main challenge in the Danish labor market remains among groups with limited qualifications. Since minimum wages are relatively high, it is difficult for individuals with limited qualifications to find stable jobs.

The specifics of Denmark’s labor market policy have changed frequently in light of political discussion, experience and research results. This applies in particular to active labor market policies, an essential part of the flexicurity model, but also to how resources are distributed. Following recommendations from the Kock Group, recent reforms offer less rigid participation rules for programs aimed at better matching the characteristics of the individual with the needs of the labor market. The social assistance scheme has changed to ensure that young people (below the age of 30) attain a labor market relevant education rather than receiving passive support. Additional work incentives for other groups on social assistance include both a cap on total transfers and an employment requirement to maintain support. The role and effectiveness of job centers are also discussed.

The question of whether the economic incentives to work are sufficiently strong – “does it pay to work?” – remains a contested issue. Reforms of both the social assistance scheme and the tax system have been implemented to increase gains from work, although more recent focus has moved toward the implications of these reforms for inequality.

Citations:
Danish Economic Councils, The Danish Economy, Various issues. Latest issue: Autumn report 2019,

Ministry of Economic Affairs, Economic Survey – August 2016. https://uk.fm.dk/publications/2016/economic-survey-august-2016. (Accessed 22 October 2016).

Andersen, T.M., 2017, The Danish labor market, 2000-2016, IZA World of Labor, 2017:404.

Taxes

#4

How effective is a country’s tax policy in realizing goals of revenue generation, equity, growth promotion and ecological sustainability?

10
 9

Taxation policy fully achieves the objectives.
 8
 7
 6


Taxation policy largely achieves the objectives.
 5
 4
 3


Taxation policy partially achieves the objectives.
 2
 1

Taxation policy does not achieve the objectives at all.
Tax Policy
8
The extensive welfare state is funded through a tax share equivalent to about 50% of GDP. This is among the highest within the OECD, although it should be kept in mind that unlike many other countries, all transfers in Denmark are considered taxable income. The tax structure differs from most countries in that direct income and indirect (VAT) taxation serve as the predominant taxes, while social security contributions play a modest role.

Large and small tax reforms have been implemented over the years following an international trend of broadening tax bases and reducing marginal tax rates (implying less progression). Decreasing income tax rates have largely been offset by broadening the tax base, especially by reducing the taxable value of negative capital income (the majority of house owners have negative capital income because of mortgage interest payments). In 2004, an earned income tax was introduced to strengthen work incentives. Environmental taxes have also been increasingly used.

An important issue in policy design is tax competition. This has led to reduction of some excise taxes to reduce “border” trade. Corporate tax rates have also been reduced from 50% in 1986 to 22% at present, although the tax base has been broadened.

A recurrent issue in tax debates has been the role of the so-called tax freeze introduced in 2001, which, among other things, included a freeze on property taxes (the taxation of the user value of owner-occupied housing based on the current value of the house). This tax freeze contributed to a house price boom prior to the financial crisis. In 2017, a “house-tax” reform was approved, but its implementation has been postponed until 2024. The new tax system is based on a new assessment system for property values and the statutory tax rate will be lowered. A number of transition rules are associated with the reform to ensure that incumbent homeowners do not experience an increase in tax on their property.

Further reductions in labor taxation are often discussed, but political views differed regarding whether they should target low-income or high-income groups (lowering the top marginal tax rate). The current parliamentary situation makes it less likely that the income tax system will be reformed.

Citations:
Andersen, T.M., J. Bentzen, S.E. Hougaard Jensen, V. Smith, and N. Westergaard-Nielsen og, The Danish Economy – In a global perspective, DJØF, 2017.

De Økonomiske Råd, Dansk Økonomi. Autumn 2019.

Budgets

#9

To what extent does budgetary policy realize the goal of fiscal sustainability?

10
 9

Budgetary policy is fiscally sustainable.
 8
 7
 6


Budgetary policy achieves most standards of fiscal sustainability.
 5
 4
 3


Budgetary policy achieves some standards of fiscal sustainability.
 2
 1

Budgetary policy is fiscally unsustainable.
Budgetary Policy
9
Budget policy is guided by fiscal norms: i) the actual budget deficit must not exceed 3% of GDP, ii) public debt must not exceed 60% of GDP and iii) the planned structural budget balance must not display a deficit greater than 0.5%. These norms are part of EU rules and Danish budget law.

Current fiscal policy is satisfying these norms. The government is running a budget surplus, while the structural budget balance is close to zero and debt is low at 35% of GDP. Compared to other EU member states, Denmark’s public finances are in good shape.

Analyses from both the Ministry of Finance and the Economic Council show that the criterion for fiscal sustainable public finances is satisfied. This is largely the result of a number of reforms aimed at increasing the labor supply and employment by increasing the retirement age (both early retirement and public pensions), reducing the early retirement period (from five to three years), and various other reforms of disability pensions, social assistance and study grants.

Citations:
Danish Economic Councils, The Danish Economy, Various issues. Latest issue: Autumn 2019 report.

Ministry of Finance, Økonomisk Redegørelse, August 2019

Research, Innovation and Infrastructure

#6

To what extent does research and innovation policy support technological innovations that foster the creation and introduction of new products?

10
 9

Research and innovation policy effectively supports innovations that foster the creation of new products and enhance productivity.
 8
 7
 6


Research and innovation policy largely supports innovations that foster the creation of new products and enhance productivity.
 5
 4
 3


Research and innovation policy partly supports innovations that foster the creation of new products and enhance productivity.
 2
 1

Research and innovation policy has largely failed to support innovations that foster the creation of new products and enhance productivity.
R&I Policy
8
Among OECD countries, Denmark has the fourth highest ratio of public R&D spending to GDP, and seventh highest submission rate of patent applications.

The target for R&D investment is 3% of GDP. This figure was actually reached in 2009, with the public sector investing 1.02% of GDP and the private sector investing 2.1%. Various initiatives have been introduced to boost R&D investments, with particular focus on the SME segment.

The Liberal government that came to power in June 2015 set a target of 1% of GDP for publicly funded research, but the government subsequently cut public spending on research and education. Spending was reduced in 2016, while further cuts were announced for 2017 to 2020. Public debate about these cuts has been vivid, particularly regarding how these cuts would impact on the government’s aim to strengthen productivity and increase competitiveness.

The World Economic Forum’s 2019 report on the world’s most competitive economies ranked Denmark 10 out of 141 economies. The report pointed to Denmark’s competitiveness in terms of modern skills, a robust labor market and widespread ICT adoption, but highlighted the reduced R&D investment. It further suggested that a relaxation on hiring foreign labor could contribute to making Denmark’s labor market more efficient.

The new Social Democratic government, which came to power in June 2019, has promised to spend DKK 1 billion on green research.

Citations:
World Economic Forum, The Global Competitivenes Report 2019. (accessed 30 November 2019).http://www3.weforum.org/docs/WEF_TheGlobalCompetitivenessReport2019.pdf

Produktivitetskommissionen, 2014: www.produktivitetskommissionen.dk

Global Financial System

#4

To what extent does the government actively contribute to the effective regulation and supervision of the international financial architecture?

10
 9

The government (pro-)actively promotes the regulation and supervision of financial markets. It demonstrates initiative and responsibility in such endeavors and often acts as an international agenda-setter.
 8
 7
 6


The government contributes to improving the regulation and supervision of financial markets. In some cases, it demonstrates initiative and responsibility in such endeavors.
 5
 4
 3


The government rarely contributes to improving the regulation and supervision of financial markets. It seldom demonstrates initiative or responsibility in such endeavors.
 2
 1

The government does not contribute to improving the regulation and supervision of financial markets.
Stabilizing Global Financial System
8
In recent years, regulation of the financial sector has been changed in accordance with EU rules and regulations to increase financial sector resilience, and reduce the risk exposure and likelihood of a public bail-out of financial institutions. Systemically important financial institutions are subject to specific requirements. The financial supervisory authority plays an important role and has been increasingly proactive. A systemic risk council monitors and surveys developments in the financial sector.

An open question is whether Denmark should participate in the European banking union in which case the larger (systemic) financial institutions will fall under the supervision of the European Central Bank (ECB). The previous government’s view was that Denmark should join the banking union, but the leader of the Social Democrats, Mette Frederiksen, suggested that a referendum on the issue should take place. A promise that has been reaffirmed by the new government led by Prime Minister Mette Frederiksen.

The credibility of financial institutions has deteriorated as a result of an aggressive interpretation of tax rules and the whitewashing of money (e.g., the Danske Bank scandal in Estonia).

Citations:
Danmarks Nationalbank, “Economic-policy cooperation in the EU,” http://www.nationalbanken.dk/DNUK/Euro.nsf/side/Economic-policy_cooperation_in_the_EU!OpenDocument (accessed 2 May 2013).

Kraka Finanskrisekommission, 2014, Den danske finanskrise – kan det ske igen?; København.

Rangvid, J. m.fl. 2013, Den finansielle krise i Danmark – årsager, konsekvenser og læring, report from government appointed commission.

“Løkke om bankunion: Vi skal skynde os langsomt.” http://www.dr.dk/nyheder/politik/loekke-om-bankunion-vi-skal-skynde-os-langsomt

“Pyha, Bankunionen er sparket til hjørne,” http://www.business.dk/finans/pyha-bankunionen-er-sparket-til-hjoerne (Accessed 23 October 2016).

“Regeringen genovervejer EU’s bankunion,” http://www.altinget.dk/artikel/regeringen-genovervejer-eus-bankunion (Accessed 5 November 2017).

Folketingets EU-oplysning, Bankunion. https://www.eu.dk/da/fakta-om-eu/politikker/oekonomisk-politik/banker (Accessed 11 October 2018).

“Løkke hælder til dansk ja til bankunionen – Socialdemokratiet kræver folkeafstemning,” http://nyheder.tv2.dk/politik/2018-11-04-lokke-haelder-til-dansk-ja-til-bankunionen-socialdemokratiet-kraever (Accessed 8 November 2018).

“Frederiksen lover folkeafstemning før dansk deltagelse i EU’s bankunion,” https://jyllands-posten.dk/politik/ECE11692741/frederiksen-lover-folkeafstemning-foer-dansk-deltagelse-i-eus-bankunion/ (Accessed 22 October 2019).
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