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The following is the Executive Summary of the OECD assessment and recommendations, taken from the Economic Survey of Denmark 2006 published on 9 May 2006.
Contents
The Danish economy is performing very well, reaping the benefits of 25 years of well-managed economic reform. In 2005 growth picked up to 3%. Even though unemployment has declined to a historical low, inflation remains subdued and there are no signs yet of accelerating wages. The output gap has closed and growth is projected to stay above potential in the short term, with almost only the automatic fiscal stabilizers in place to slow a potentially overheating economy. Looking further ahead, a significant downward trend in labour supply is looming that will tend to reduce the potential growth rate. In the longer term, a declining workforce and ageing-related expenditure increases make the current public welfare system difficult to sustain. Although labour force participation is high, the number of hours worked is low, not least because of high marginal taxes. One area where reforms have not yet made enough progress is housing, which is overregulated and absorbs too many subsidies and tax expenditures.
Avoiding an overheating risk in the near future. The fixed exchange rate framework continues to serve Denmark well. However, in situations like the present one when the Danish economic cycle differs considerably from that in the euro area, other policy instruments need to show extra flexibility. Monetary conditions transmitted from the euro area via the fixed exchange rate regime will most likely remain too expansionary in the near future since the main drivers of the economy (investment, exports, consumption increases driven by rising housing wealth) continue to steam ahead. Measures are therefore needed to damp demand and boost supply. Fiscal policy must remain tight and structural reforms must go on. All sources for increasing labour supply should be tapped now - including reducing public employment by reaping efficiency gains from the municipality reform, cutting unemployment benefit duration and opening the labour market more effectively to job searchers from other parts of the EU.
Raising labour supply to secure fiscal sustainability. The tight labour market provides a fertile environment for reforms to boost labour supply. The government's proposals to increase the age thresholds for early retirement by three years and the age pension by two years for citizens younger than 50 years today followed by an indexation of the retirement age to life expectancy are commendable and a major step to secure the sustainability of public finances. However, it would be preferable to phase out the voluntary early retirement scheme altogether and much will depend on how indexation will be implemented. The number of disability pensioners is high and continued effort to keep more of those with some remaining work capacity in employment is warranted. Furthermore, an updated medium term fiscal strategy should include timed, targeted and fully financed tax cuts which are much needed to make work pay better.
Enhancing human capital and using it better. Skill formation is not sufficiently effective for a high income country and it is urgent to address the culture of delaying tertiary studies. The government's proposal to reduce study grants for those delaying the start of tertiary studies by more than two years is welcome. For the longer term, a system should be developed whereby tuition costs and grants are subject to repayment after graduation, with such repayments creditable against income taxes. That could reduce the incentives to work short hours or to leave the country after graduation. It could also make the tertiary education sector more dynamic.
Reducing subsidies and tax expenditures for housing and easing regulation for the rental market. Denmark is well endowed with housing and its vast support programmes are not very well targeted. Tax concessions for housing should be given up and used to create room for reducing other, more distorting taxes. Regulation of rents should be phased out and the supply of new housing should be made more flexible.
How to obtain this publication
The Policy Brief (pdf format) can be downloaded. It contains the OECD assessment and recommendations, but not all of the charts included on the above pages.
The complete edition of the Economic Survey of Denmark 2006 is available from:
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SourceOECD for subscribing institutions and many libraries
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OLISnet, under "Publication Locator", for government officials with accounts (subscribe)
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Additional information
For further information please contact the Denmark Desk at the OECD Economics Department at webmaster@oecd.org . The OECD Secretariat's report was prepared by Jens Lundsgaard, Felix Hüfner and Espen Erlandsen under the supervision of Andreas Wörgötter.
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