The following is the Executive summary of the OECD assessment and recommendations, taken from the Economic survey of Dennark, published on 19 February 2008.
The Danish economy has been performing well over the past decade and combines a relatively high level of GDP per capita with a narrow income distribution. Strong growth in recent years has brought the economy to its capacity constraints. A strong positive output gap has emerged; unemployment reached a 30 year low already by mid 2006, and it has fallen further since then. Avoiding overheating is an urgent challenge. Private-sector agreements from spring 2007 avoided unsustainable wage hikes, but local agreements now show some acceleration, and with yet higher demands in the public sector, a general wage spiral could be set in motion. Given these risks, fiscal policy should not add stimulus: priority initiatives should be offset by savings elsewhere; and excessive public-sector wage growth and continued spending slippages in municipalities and regional authorities should be avoided.
Over the past decade, an increasing share of GDP has been channelled towards public services like health, education and care for the elderly and children. But looking ahead, the room for additional spending in these areas is limited by demographic changes and early retirement. At present, more than half of those aged 60 64 leave the labour market through the voluntary early retirement scheme, and this five year scheme will be maintained even after 2019, when the general retirement age is gradually raised. Denmark faces a strategic choice: either promoting employment-oriented reforms or developing mechanisms for private funding for services that are publicly funded today. The first option is probably the best, as it goes hand-in-hand with the ambitious – but costly – priorities in Danish social and welfare policies. And effectively the government’s 2015 Strategy takes this direction by positing higher structural employment and no reduction in average hours worked in a context where demographics would imply a decline in both.
Ensuring that the sound fiscal position is sustained. The targets in the 2015 Strategy are sensible, but clearer mechanisms are needed to ensure they are met. In particular, adherence to the stipulated annual growth rates for public consumption is vital, as experience shows that it is very hard to reverse overruns.
Helping marginal groups to secure a foothold in the labour market. Strong demand as well as activation and benefit reforms have successfully brought down unemployment, but more than one in five working age adults still live from passive income benefits – substantially more than in other countries. Activation could be more cost effective and benefits could be adjusted to give participants clearer incentives to get the most out of activation.
Promoting labour supply and skill acquisition through tax reforms. With one of the highest tax-to-GDP ratios in the OECD, Denmark should constantly consider how to refine the tax structure to reduce distortions. Social security contributions, income and consumption taxes combined create a marginal tax wedge of over 70% for four out of ten full-time employed. Reducing the top tax would help stimulate labour supply and it would cost relatively little.
Sustaining generous public insurance for healthcare is feasible if clear priorities are set and efficiency continues to be raised. The introduction of activity-based funding, along with other innovations, has ensured that the strong growth in spending has been matched by increased treatment activity. Looking ahead, spending pressures call for adoption of cost-saving technologies and mechanisms to avoid overuse. Health and employment services could be more responsive to those health problems that are part of the complex processes leading a growing number of people to be outside employment.
The occupational pension system is a success, but capital taxation needs attention. The main problem is associated with taxation of capital income outside pension funds: in some cases effective tax rates on real returns approach or exceed 100% and the gap between interest deductibility and pension tax rates encourages tax planning.
The Policy Brief (pdf format) can be downloaded in English. It contains the OECD assessment and recommendations.The complete edition of the Economic survey of Denmark 2008 is available from:
For further information please contact the Denmark Desk at the OECD Economics Department at email@example.com. The OECD Secretariat's report was prepared by Jens Lundsgaard and David Turvey under the supervision of Stefano Scarpetta. Research assistance was provided by Lutécia Daniel.