Contents | Executive summary | How to obtain this publication | Additional info
The following OECD assessment and recommendations summarise chapter 1 of the Economic survey of Denmark published on 19 February 2008.
Contents
Living standards in Denmark are high and progress will continue with forward-looking reforms
The average Dane enjoys relatively high standards of living: GDP per capita is higher than in most other European countries, even though the gap vis-à-vis the United States remains at 15-20% where it has been for over three decades. A deep commitment to open trade and structural reforms in the markets for goods and services, combined with a cohesive approach to actively helping job seekers gain or regain employment, have contributed to a competitive business environment, low structural unemployment and sound public finances. Building on a consensus to sustain these good outcomes, a set of forward-looking reform agreements has been reached in recent years. The welfare agreement of 2006 – which was supported by an overwhelming majority in Parliament – will link retirement age to longevity. The globalisation strategy of 2006 implies a boost to R&D and higher education and, following tri-party negotiations, unions and employers are now incorporating the financing of life-long learning into the collective wage agreements. Moreover, a new local government structure was established in 2007 which, together with the recent quality reform and the action plan to reduce bureaucracy, will facilitate efforts to make public services more professional and efficient. By focusing on long-term issues the Danish economy will face, these reforms will allow for gradual adjustments rather than abrupt corrections. This approach and reform momentum should be continued as challenges remain in a number of policy areas. Employment rates are high, particularly for women, but average hours worked is low. Productivity growth halved in the late 1990s partly due to reallocation of resources across sectors and wider inclusion of marginal groups in the labour market. Progress in living standards has slowed, even when considering the parallel terms-of-trade gains.
The sound fiscal position should be sustained: the choice is between employment-oriented reforms or less public funding for services
With current strong fiscal revenues and recent reforms, Denmark is preparing for ageing better than most other OECD countries. As part of the 2006 welfare agreement, all age thresholds for voluntary early retirement and regular pension will move up by two years between 2019 and 2027. Thereafter, retirement age thresholds are to be raised in line with longevity, keeping average life expectancy in retirement at a constant 19½ years. Adherence to this indexation principle is vital as it forms the backbone of fiscal sustainability: without that, current standards in publicly funded services could not be maintained in the context of population ageing. However, even within the framework of the welfare agreement, it will be difficult to meet growing pressure to raise service standards in areas like healthcare simply through additional public spending. Indeed, voluntary early retirement (efterløn) will continue as a five-year scheme also after 2019, acting as a drag on the labour supply of older workers at a high cost to public finances. Thus, meeting growing demand for public services in the long-term will hinge on a mix of further employment enhancing reforms, higher efficiency in service provision and, residually, on adjustments to the balance between public and private roles with respect to funding.
Many adults live from passive income benefits
Monetary conditions are merely back to neutral …
The moderate inflationary pressures observed until recently probably also reflect the fact that inflation expectations have been firmly anchored at a level in line with the European Central Bank’s definition of price stability, thanks to the highly credible fixed exchange rate between the kroner and the euro. Meanwhile, interest rates have often been somewhat out of line with the levels suggested by the cyclical position of the Danish economy. In spite of the short-term interest rate increases during 2006 and early 2007, monetary conditions are likely to remain too expansionary for Denmark in the near future, leaving the necessary adjustments to fiscal and structural policies.
… and with a serious risk of overheating, additional demand stimulus from fiscal policy must be avoided
A soft landing would imply a gradual increase of unemployment towards structural levels with an easing of labour shortages. A less benign scenario would emerge if demand growth is not contained in the short run. In this context, it is unfortunate that fiscal policy is set to be eased in 2008 with clear increases in public consumption and tax cuts that are not financed in the short run. Additional demand stimulus will only add to inflationary pressure, leading to a loss of competitiveness and potentially undermining inflation expectations; a major hike in unemployment going well above structural levels could then follow. With house prices above what interest rates and other fundamental factors would justify, such a development could trigger a harsh correction with forced sales and strong house price falls, suppressing investment and adding to the direct effect of higher unemployment on consumption. In the worst case, this chain of events could lead to a prolonged recession. Tackling this risk is an urgent challenge. The government’s priority initiatives should be offset by savings elsewhere and other measures so that fiscal policy as a whole does not stimulate aggregate demand. It is vital to avoid excessive public-sector wage increases and overspending by municipal and regional authorities during the year.
How to obtain this publication
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:
- 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 eco.survey@oecd.org. 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.
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