Denmark

   

Economic Policies

#3
Key Findings
A mix of stable, sustainable economic policies places Denmark in the top ranks internationally (rank 3) in this area. Its score on this measure has improved by 0.3 points since 2014.

Growth rates remain moderate but steady. Unemployment rates have returned to their pre-crisis lows. Productivity growth is low, but near the OECD average, and policy discussions have begun to focus on the dangers of economic overheating.

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. Budget balances are sustainable, with deficits and debt levels moderate. Financial-sector regulation has been tightened in accordance with post-crisis EU rules, with a systemic-risk council now monitoring financial institutions.

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
The economy has now fully recovered from the Great Recession, and actual output is currently slightly above capacity output (positive output gap). Employment has been growing and unemployment is close to the structural level, which is comparatively low.

Growth in GDP is projected to be above 2% for the coming years, and thus comparable to growth in many other OECD countries. Per capita income has grown more than in most other countries, not least due to terms of trade improvements. Productivity growth is low by historic comparison, but similar to the OECD average.

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. Challenges relate to ongoing technological change and globalization.

Public finances are meeting budget norms, although only by a small margin for the last few years. Fiscal policies are considered sustainable, as they are able to cope with an aging population. This is mainly due to the significant importance of mandated labor market pensions and recent reforms increasing statutory retirement ages.

Economic policy discussions are increasingly turning to the risk of overheating. Structural discussions focus on ensuring that the labor force has the right mix of qualifications as well as the problems of 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 met, there are political discussions about the appropriate balance between taxes and expenditures. On the expenditure side, there is much discussion about demographic change (aging) and increasing demand, not least on health care.

Immigration remains a contested issue, and various measures have been taken both to reduce the inflow and to reduce the welfare entitlements of migrants. The UK’s Brexit decision is one of the elements creating a certain degree of uncertainty for the Danish economy.

Citations:
Danish Economic Councils, The Danish Economy, Various issues. Latest issue: Autumn 2018.

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

#8

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
8
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. While the Danish labor market was severely hit by the financial crisis, the key feature of the flexicurity models remain intact and unemployment is back to the low level reported before the financial crisis. 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 been changed frequently in light of political discussion, experience and research results. The active labor market policy is a key element of the Danish labor market model and absorbs many resources, as a result it is continuously debated. Following recommendations from the Kock Group, a recent reform offers 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. Active labor market policies have become less rigid, but it is debatable to what extent these policies are sufficiently used.

A controversial issue is whether the economic incentive to work is sufficiently strong: “does it pay to work?” Reforms of both the social assistance scheme and the tax system have been implemented to increase gains from work, and further initiatives are being discussed.

Citations:
Danish Economic Councils, The Danish Economy, Various issues. Latest issue: Autumn report 2018,

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

#5

To what extent does taxation policy realize goals of equity, competitiveness and the generation of sufficient public revenues?

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 burden above 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, to a great extent, been financed 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 by the previous government and, which, among other things, has implied a freeze of property taxes (the taxation of the user value of owner-occupied housing based on the current value of the house). This tax freeze was a contributing factor to the house price boom prior to the financial crisis. In 2017, a “house-tax” reform was approved, but its implementation has been postponed. The new tax system will be based on an assessment of property values and the statutory tax rate will be lowered. A number of transition rules are associated with the reform to ensure that no homeowner will experience an increase in tax on their property.

Further reductions in labor taxation were discussed, but political views differed regarding whether they should target low-income or high-income groups (lowering the top marginal tax rate). In the run-up to the upcoming parliamentary elections (which must take place before June 2019), it looks as if tax reductions have been put on the back burner to the chagrin of the Liberal Alliance party, which has been the leading advocate of tax reductions. The prime minister did not discuss taxes in his opening speech to the parliament on 2 October 2018.

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 2018.

Budgets

#4

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

10
 9

Budgetary policy is fiscally sustainable.
 8
 7
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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.

Fiscal policy has satisfied these norms, although in some cases it has come close, and maintained its budget due to ad hoc measures like forward lifting revenue from pension taxation. Both the current balance and the structural balance have been close to the limits. The actual budget deficit is projected to be less than 1.4% and the structural budget deficit to slightly below the norm of 0.5% in 2018. Satisfying the budget norms has been a binding constraint in economic policy for several years.

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 5 to 3 years), and various other reforms of disability pensions, social assistance and study grants.

In short, when compared to other OECD countries, public finances in Denmark are in relatively good shape. However, it should be noted that an assessment of fiscal sustainability considers whether it is possible to maintain current welfare arrangements, but does not include room for improvements in, for example, the standards and qualities of welfare services (e.g., health care). Hence, some pressure on public finances can be expected.

Citations:
Danish Economic Councils, The Danish Economy, Various issues. Latest issue: Autumn 2018 report.

Økonomi og Indenrigsministeriet,, Økonomisk Redegørelse, August 2017.http://www.oim.dk/media/18744/oekonomisk-redegoerelse-august-2017.pdf. (Accessed 4 December 2017)

Prime Minister Lars Løkke Rasmussen’s Opening Address to the Folketing on 3 October 20017.http://www.stm.dk/_p_14597.html (accessed 5 November 2017).

Research, Innovation and Infrastructure

#9

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
7
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 investments is 3% of GDP. This figure was actually reached in 2009, with 1.02% public and 2.1% private research investments. Since Danish businesses are less innovative than foreign competitors, the Social Democratic-led government took various initiatives, including the creation of a Business Innovation Fund as well as a Globalization Fund.

The Liberal government that came to power in June 2015 set a target of 1% of GDP for publicly funded research. Though 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 relate to the government’s aim to strengthen productivity and increase competitiveness.

Citations:
World Economic Forum, The Global Competitivenes Report 2017-2018. http://www3.weforum.org/docs/GCR2017-2018/05FullReport/TheGlobalCompetitivenessReport2017%E2%80%932018.pdf (accessed 5 November 2017).

Produktivitetskommissionen: www.produktivitetskommissionen.dk

Global Financial System

#7

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 the 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 government’s view is that Denmark should join the banking union, but the leader of the Social Democrats, Mette Frederiksen, has suggested that a referendum on the issue should take place. The prime minister will only support a referendum if it is required by the constitution. According to a note from the Ministry of Justice from 30 April 2015, Denmark can join the banking union without a referendum.

It remains to be seen how the Danske Bank scandal, which involved the whitewashing of money in Estonia, will affect the Danish banking sector.

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).
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