Economic Policies
#1Key Findings
A mix of stable, sustainable economic policies gives Denmark the top ranking in the SGI 2022 in this area. Its score on this measure has improved by 0.2 points since 2014.
The pandemic and the associated containment policies triggered an unprecedented decline in economic activity. However, growth recovered swiftly after restrictions were lifted, aided by recovery programs. Sound public finances made it possible to act quickly without sustainability fears.
The country’s “flexicurity” model continues to support a high degree of labor-market mobility, with training and assistance provided to the unemployed. However, the unexpectedly quick recovery has led to a resumption of concern over labor shortages. Policymakers are considering easing rules on labor immigration from non-EU countries.
The tax burden is high, with income and VAT taxes dominant. Environmental taxes are increasingly in use. The government has run budget surpluses outside the context of the pandemic emergency, and overall debt levels are low by EU standards. Strong IT skills in the labor force have made the economy competitive, but R&D investment has declined.
The pandemic and the associated containment policies triggered an unprecedented decline in economic activity. However, growth recovered swiftly after restrictions were lifted, aided by recovery programs. Sound public finances made it possible to act quickly without sustainability fears.
The country’s “flexicurity” model continues to support a high degree of labor-market mobility, with training and assistance provided to the unemployed. However, the unexpectedly quick recovery has led to a resumption of concern over labor shortages. Policymakers are considering easing rules on labor immigration from non-EU countries.
The tax burden is high, with income and VAT taxes dominant. Environmental taxes are increasingly in use. The government has run budget surpluses outside the context of the pandemic emergency, and overall debt levels are low by EU standards. Strong IT skills in the labor force have made the economy competitive, but R&D investment has declined.
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How successful has economic policy been in providing a reliable economic framework and in fostering international competitiveness?
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9
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.
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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.
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3
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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.
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1
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.
The pandemic and the containment policies imposed triggered an unprecedented decline in economic activity that has recovered swiftly as restrictions have been lifted. Compared to many other similar countries, Denmark has been suffered less in terms of the pandemic’s health and economic consequences. Economic policy during the pandemic – which includes the specific emergency measures and more traditional policies – have thus largely been successful in ensuring a quick recovery. It should be noted that Denmark entered the pandemic without any major economic imbalances, and sound public finances made it possible to act swiftly without raising concerns about the sustainability of public finances. By mid-2021, economic activity reached its pre-pandemic level, and the focus is now on a shortage of labor and a risk of overheating. The economic debate is increasingly focused on measures to increase labor supply.
Citations:
Andersen, T.M., S. Holden, and S. Honkapohja, Economic developments and policies during the Covid-19 crisis – Nordic experiences Nordic Economic Policy Review, 2022.
Danish Economic Councils, The Danish Economy, Various issues. Latest issue: Autumn 2021.
Citations:
Andersen, T.M., S. Holden, and S. Honkapohja, Economic developments and policies during the Covid-19 crisis – Nordic experiences Nordic Economic Policy Review, 2022.
Danish Economic Councils, The Danish Economy, Various issues. Latest issue: Autumn 2021.
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How effectively does labor market policy address unemployment?
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Successful strategies ensure unemployment is not a serious threat.
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7
6
Labor market policies have been more or less successful.
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4
3
4
3
Strategies against unemployment have shown little or no significant success.
2
1
1
Labor market policies have been unsuccessful and rather effected a rise in unemployment.
The Danish “flexicurity” labor model, which refers to the fact that Danish employers can easily respond to broader economic dynamics by hiring and firing employees as needed while the country’s social safety net, active labor market policies that incentivize active job searches, and the provision of training to help workers find employment help keep people in the labor market. Unemployment is low and structural barriers, including qualifications, are the main barrier to further reductions in unemployment. Concern about labor shortages has increased due to the fast and somewhat unexpected recovery of the Danish economy after the lifting of COVID-19 restrictions.
This has prompted a political discussion about lifting some of the restrictions on labor movement for individuals from outside the EU. Social democratic Prime Minister Mette Frederiksen has recently signaled a willingness to propose legislation designed to remove barriers to attracting labor from non-EU countries. There is also a policy discussion about whether the level of unemployment benefits for college graduates should be reduced to that received by incumbent workers, in order to incentivize job search activitiy.
Since the minimum wage is relatively high, it is difficult for individuals with limited qualifications to find stable jobs. The question of whether the economic incentives to work are sufficiently strong – “does it pay to work?” – remains a contested issue. Social assistance and tax reforms have been implemented in an effort to increase the benefits of employment, although the focus more recently has shifted toward the impact these reforms have on inequality. A commission has been appointed to consider so-called 2nd generation reforms that would increase employment without increasing inequality.
Citations:
Andersen, T. The Danish labor market, 2000–2020. IZA World of Labor 2021: 404 doi: 10.15185/izawol.404.v3Danish Economic Councils, The Danish Economy, Various issues. Latest issue: Autumn 2021.
Reformkommissionen, 2021, Erkendt, forsøgt løst, uløst, København.
This has prompted a political discussion about lifting some of the restrictions on labor movement for individuals from outside the EU. Social democratic Prime Minister Mette Frederiksen has recently signaled a willingness to propose legislation designed to remove barriers to attracting labor from non-EU countries. There is also a policy discussion about whether the level of unemployment benefits for college graduates should be reduced to that received by incumbent workers, in order to incentivize job search activitiy.
Since the minimum wage is relatively high, it is difficult for individuals with limited qualifications to find stable jobs. The question of whether the economic incentives to work are sufficiently strong – “does it pay to work?” – remains a contested issue. Social assistance and tax reforms have been implemented in an effort to increase the benefits of employment, although the focus more recently has shifted toward the impact these reforms have on inequality. A commission has been appointed to consider so-called 2nd generation reforms that would increase employment without increasing inequality.
Citations:
Andersen, T. The Danish labor market, 2000–2020. IZA World of Labor 2021: 404 doi: 10.15185/izawol.404.v3Danish Economic Councils, The Danish Economy, Various issues. Latest issue: Autumn 2021.
Reformkommissionen, 2021, Erkendt, forsøgt løst, uløst, København.
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How effective is a country’s tax policy in realizing goals of revenue generation, equity, growth promotion and ecological sustainability?
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Taxation policy fully achieves the objectives.
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Taxation policy largely achieves the objectives.
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Taxation policy partially achieves the objectives.
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Taxation policy does not achieve the objectives at all.
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. An important issue in policy design is tax competition. This has led to the reduction of some excise taxes in order 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.
Environmental taxes have also been increasingly used, and the current debate is on a “green” tax reform that includes a CO2 tax intended to support environmental objectives. There are economic arguments in favor of a uniform CO2 tax, but that conflicts with other objectives in relation to employment and keeping specific sectors from having to carry too large of a burden.
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.
Ekspergruppen for en grøn skattereform, 2022, Grøn skattereform - første delrapport, København.
Danish Economic Councils, The Danish Economy, Various issues. Latest issue: Autumn 2021.
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. An important issue in policy design is tax competition. This has led to the reduction of some excise taxes in order 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.
Environmental taxes have also been increasingly used, and the current debate is on a “green” tax reform that includes a CO2 tax intended to support environmental objectives. There are economic arguments in favor of a uniform CO2 tax, but that conflicts with other objectives in relation to employment and keeping specific sectors from having to carry too large of a burden.
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.
Ekspergruppen for en grøn skattereform, 2022, Grøn skattereform - første delrapport, København.
Danish Economic Councils, The Danish Economy, Various issues. Latest issue: Autumn 2021.
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To what extent does budgetary policy realize the goal of fiscal sustainability?
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Budgetary policy is fiscally sustainable.
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Budgetary policy achieves most standards of fiscal sustainability.
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Budgetary policy achieves some standards of fiscal sustainability.
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Budgetary policy is fiscally unsustainable.
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 been satisfying these norms, with exceptions for the emergencies allowed as a consequence of the pandemic. 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 several 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 regarding disability pensions, social assistance and grants for higher education studies. Critical for these assessments is the continued political support for increasing the retirement age in concert with longevity, as is stipulated by the so-called indexation formula.
Citations:
Danish Economic Councils, The Danish Economy, Various issues. Latest issue: Autumn 2021 report.
Ministry of Finance, Økonomisk Redegørelse, August 2021
Fiscal policy has been satisfying these norms, with exceptions for the emergencies allowed as a consequence of the pandemic. 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 several 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 regarding disability pensions, social assistance and grants for higher education studies. Critical for these assessments is the continued political support for increasing the retirement age in concert with longevity, as is stipulated by the so-called indexation formula.
Citations:
Danish Economic Councils, The Danish Economy, Various issues. Latest issue: Autumn 2021 report.
Ministry of Finance, Økonomisk Redegørelse, August 2021
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To what extent does research and innovation policy support technological innovations that foster the creation and introduction of new products?
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Research and innovation policy effectively supports innovations that foster the creation of new products and enhance productivity.
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Research and innovation policy largely supports innovations that foster the creation of new products and enhance productivity.
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Research and innovation policy partly supports innovations that foster the creation of new products and enhance productivity.
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Research and innovation policy has largely failed to support innovations that foster the creation of new products and enhance productivity.
Among OECD countries, Denmark has the fourth highest ratio of public R&D spending to GDP and the seventh highest submission rate of patent applications. The target of 3% of GDP investment in R&D remains the same.
The World Economic Forum ranked Denmark third (out of 141 countries) in terms of competitiveness on its 2021 Global Competitiveness Report. Denmark stands out in terms of modern skills, a robust labor market and widespread ICT adoption, but has reduced its investment in R&D. The report also noted that relaxing the country’s barriers to hiring foreign labor could help improve its labor market efficiency.
Noting the country’s strong and widespread IT skills among its labor force, the 2020 report named Denmark as one of the most prepared countries with regard to digital transformation. The government’s digital policies have also enhanced productivity by minimizing transaction costs in relation to the public sector and by creating markets for digital solutions more broadly.
Citations:
World Economic Forum, The Global Competitivenes Report 2020. (accessed 13 December
2020). https://www3.weforum.org/docs/WEF_TheGlobalCompetitivenessReport2020.pdf
World Economic Forum, The Global Competitivenes Report 2021. (accessed 20February 2022).https://www.imd.org/centers/world-competitiveness-center/rankings/world-competitiveness/
The World Economic Forum ranked Denmark third (out of 141 countries) in terms of competitiveness on its 2021 Global Competitiveness Report. Denmark stands out in terms of modern skills, a robust labor market and widespread ICT adoption, but has reduced its investment in R&D. The report also noted that relaxing the country’s barriers to hiring foreign labor could help improve its labor market efficiency.
Noting the country’s strong and widespread IT skills among its labor force, the 2020 report named Denmark as one of the most prepared countries with regard to digital transformation. The government’s digital policies have also enhanced productivity by minimizing transaction costs in relation to the public sector and by creating markets for digital solutions more broadly.
Citations:
World Economic Forum, The Global Competitivenes Report 2020. (accessed 13 December
2020). https://www3.weforum.org/docs/WEF_TheGlobalCompetitivenessReport2020.pdf
World Economic Forum, The Global Competitivenes Report 2021. (accessed 20February 2022).https://www.imd.org/centers/world-competitiveness-center/rankings/world-competitiveness/
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To what extent does the government actively contribute to the effective regulation and supervision of the international financial architecture?
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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.
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The government contributes to improving the regulation and supervision of financial markets. In some cases, it demonstrates initiative and responsibility in such endeavors.
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The government rarely contributes to improving the regulation and supervision of financial markets. It seldom demonstrates initiative or responsibility in such endeavors.
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The government does not contribute to improving the regulation and supervision of financial markets.
Regulation of the financial sector is continuously 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.
It remains an open question as to 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 because of an aggressive interpretation of tax rules and the whitewashing of money by major Danish banks such as Nordea and Danske Bank.
Citations:
Kraka Finanskrisekommission, 2014, Den danske finanskrise – kan det ske igen?; København.
Folketingets EU-oplysning, Bankunion. https://www.eu.dk/da/fakta-omeu/politikker/oekonomiskpolitik/banker.
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).
It remains an open question as to 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 because of an aggressive interpretation of tax rules and the whitewashing of money by major Danish banks such as Nordea and Danske Bank.
Citations:
Kraka Finanskrisekommission, 2014, Den danske finanskrise – kan det ske igen?; København.
Folketingets EU-oplysning, Bankunion. https://www.eu.dk/da/fakta-omeu/politikker/oekonomiskpolitik/banker.
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).