Economic Sustainability
#1Key Findings
Denmark is the SGI 2024’s top performer (rank 1) in the category of economic sustainability.
A national circular economy plan is in place, but most elements are voluntary. A Climate Law mandates that the country meet ambitious emissions-reductions goals. However, experts say the country is unlikely to meet the 2025 interim targets, especially due to the lack of a plan for carbon reductions in the agricultural sector.
The labor market is adaptive, with very low unemployment rates and typically short unemployment spells. The “flexicurity” model includes flexible hiring and firing rules, a generous social safety net, and active labor market policies. The social safety net covers the unemployed through voluntary unemployment insurance or social assistance.
Tax revenue as a share of GDP is high, but recent reforms have broadened the tax base and lowered marginal rates, except for the very rich. The structure adequately finances the public sector despite the extensive welfare state. The tax system is highly redistributive, and subsidies and deductibles are used to internalize both positive and negative externalities.
A national circular economy plan is in place, but most elements are voluntary. A Climate Law mandates that the country meet ambitious emissions-reductions goals. However, experts say the country is unlikely to meet the 2025 interim targets, especially due to the lack of a plan for carbon reductions in the agricultural sector.
The labor market is adaptive, with very low unemployment rates and typically short unemployment spells. The “flexicurity” model includes flexible hiring and firing rules, a generous social safety net, and active labor market policies. The social safety net covers the unemployed through voluntary unemployment insurance or social assistance.
Tax revenue as a share of GDP is high, but recent reforms have broadened the tax base and lowered marginal rates, except for the very rich. The structure adequately finances the public sector despite the extensive welfare state. The tax system is highly redistributive, and subsidies and deductibles are used to internalize both positive and negative externalities.
Graph View
Graph View
How committed is the government to driving the transition toward a circular economy?
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9
9
The government is clearly committed to transitioning to a circular economy.
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7
6
The government is largely committed to transitioning to a circular economy.
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3
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3
The government is somewhat committed to transitioning to a circular economy.
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1
1
The government is not at all committed to transitioning to a circular economy.
The Danish government has an ambitious plan to reduce emissions by 70% from 1990 levels by 2030, as codified in the Climate Law. According to the European Commission, Denmark is a leader in the circular economy in the category of eco-innovation, but the country is relatively weak with regard to changing societal behaviors.
Danish governments have increasingly focused on circular economy initiatives. In 2021, the government published a national plan aiming at the development of a more circular economy (Handlingsplan for cirkulær økonomi). While the plan primarily outlines visions and aims for transforming the Danish economy, some political agreements have been reached. The European Commission notes that most plans are voluntary and suggests that this approach might be insufficient to meet the targets set in the 2021 strategy (European Commission 2022).
The plan has resulted in two political agreements with broad support in the Danish parliament. The first plan concerns waste. According to the plan, 80% of all plastic is to be removed from waste that is burned by 2030 (Political Agreement for Waste Sector). The second plan makes producers of goods economically responsible for their packaging when it is turned into waste. This law is a consequence of EU-initiated regulations and therefore cannot be attributed solely to the Danish government.
Plans are currently being negotiated for the transportation sector and agriculture, but the country has yet to pass a plan that sets clear targets for these sectors.
Citations:
Climate law:
https://www.retsinformation.dk/eli/lta/2021/2580
European Commission. 2022. “European Innovation Scoreboard 2023 Country Profile Denmark.” https://ec.europa.eu/assets/rtd/eis/2023/ec_rtd_eis-country-profile-dk.pdf
Plan for Circular Economy in Demark
https://edit.mst.dk/media/s0rpgnej/handlingsplan-for-cirkulaer-oekonomi.pdf
Political Agreement for greening of waste sector:
https://edit.mst.dk/media/ouwjnpp5/aftaletekst-ofoelgning-paa-aftale-om-klimaplan-for-en-groen-affaldssektor.pdf
Political Agreement on producer responsibility on packaging:
https://edit.mst.dk/media/rwddqwbv/aftale-om-udvidet-producentansvar-for-emballage-og-engangsprodukter.pdf
Danish governments have increasingly focused on circular economy initiatives. In 2021, the government published a national plan aiming at the development of a more circular economy (Handlingsplan for cirkulær økonomi). While the plan primarily outlines visions and aims for transforming the Danish economy, some political agreements have been reached. The European Commission notes that most plans are voluntary and suggests that this approach might be insufficient to meet the targets set in the 2021 strategy (European Commission 2022).
The plan has resulted in two political agreements with broad support in the Danish parliament. The first plan concerns waste. According to the plan, 80% of all plastic is to be removed from waste that is burned by 2030 (Political Agreement for Waste Sector). The second plan makes producers of goods economically responsible for their packaging when it is turned into waste. This law is a consequence of EU-initiated regulations and therefore cannot be attributed solely to the Danish government.
Plans are currently being negotiated for the transportation sector and agriculture, but the country has yet to pass a plan that sets clear targets for these sectors.
Citations:
Climate law:
https://www.retsinformation.dk/eli/lta/2021/2580
European Commission. 2022. “European Innovation Scoreboard 2023 Country Profile Denmark.” https://ec.europa.eu/assets/rtd/eis/2023/ec_rtd_eis-country-profile-dk.pdf
Plan for Circular Economy in Demark
https://edit.mst.dk/media/s0rpgnej/handlingsplan-for-cirkulaer-oekonomi.pdf
Political Agreement for greening of waste sector:
https://edit.mst.dk/media/ouwjnpp5/aftaletekst-ofoelgning-paa-aftale-om-klimaplan-for-en-groen-affaldssektor.pdf
Political Agreement on producer responsibility on packaging:
https://edit.mst.dk/media/rwddqwbv/aftale-om-udvidet-producentansvar-for-emballage-og-engangsprodukter.pdf
Graph View
How committed is the government to updating and protecting critical infrastructure?
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The government is clearly committed to updating basic technical infrastructure.
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The government is largely committed to updating basic technical infrastructure.
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The government is somewhat committed to updating basic technical infrastructure.
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1
The government is not at all committed to updating basic technical infrastructure.
The changed geopolitical situation, including the explosion of Nord stream II just outside Danish territory, has further increased attention to the topic of critical infrastructure in Denmark.
Denmark has a highly digitized public sector and a citizenry that, on average, is very IT literate. Danes interact with all public bureaucracy through a national identification system called MitID. Consequently, Denmark is vulnerable to potential cyberattacks. Furthermore, given the high levels of political and interpersonal trust in Denmark, the state is somewhat vulnerable to cyberattacks due to insufficiently tight security.
In 2021 the Danish government published a comprehensive plan to enhance cybersecurity (Cybersecurity plan 2021). The plan sets standards for security levels in ministries as well as security standards for contracts between state actors and private companies. Additionally, the plan requires all public entities to adhere to a specified set of technical standards. The plan indicated that 46% of the IT infrastructure in the state was inadequately protected (Cybersecurity plan p. 20). Furthermore, the plan showed that more than 65% of IT systems used by the state did not meet the technical minimum standards expected.
The plan proposes 34 measures for implementation. The most important measures are the establishment of a central unit to oversee the implementation of cybersecurity measures and the creation of a body to continuously monitor the development of cybercrime in order to develop counterstrategies. These two functions will be placed in the Danish Agency for Digital Government (Digitaliseringsstyrelsen) and the Danish Security and Intelligence Service (PET), the internal security police. The plan was scheduled to be updated in 2024, following an evaluation of the current status.
The Center for Cyber Security (CFCS) serves as the national IT security authority. The Center advises Danish public authorities and private companies that support functions vital to society on preventing, countering and protecting against cyberattacks.
Citations:
Cyber security plan:
https://digst.dk/media/27024/digst_ncis_2022-2024_uk.pdf
Denmark has a highly digitized public sector and a citizenry that, on average, is very IT literate. Danes interact with all public bureaucracy through a national identification system called MitID. Consequently, Denmark is vulnerable to potential cyberattacks. Furthermore, given the high levels of political and interpersonal trust in Denmark, the state is somewhat vulnerable to cyberattacks due to insufficiently tight security.
In 2021 the Danish government published a comprehensive plan to enhance cybersecurity (Cybersecurity plan 2021). The plan sets standards for security levels in ministries as well as security standards for contracts between state actors and private companies. Additionally, the plan requires all public entities to adhere to a specified set of technical standards. The plan indicated that 46% of the IT infrastructure in the state was inadequately protected (Cybersecurity plan p. 20). Furthermore, the plan showed that more than 65% of IT systems used by the state did not meet the technical minimum standards expected.
The plan proposes 34 measures for implementation. The most important measures are the establishment of a central unit to oversee the implementation of cybersecurity measures and the creation of a body to continuously monitor the development of cybercrime in order to develop counterstrategies. These two functions will be placed in the Danish Agency for Digital Government (Digitaliseringsstyrelsen) and the Danish Security and Intelligence Service (PET), the internal security police. The plan was scheduled to be updated in 2024, following an evaluation of the current status.
The Center for Cyber Security (CFCS) serves as the national IT security authority. The Center advises Danish public authorities and private companies that support functions vital to society on preventing, countering and protecting against cyberattacks.
Citations:
Cyber security plan:
https://digst.dk/media/27024/digst_ncis_2022-2024_uk.pdf
Graph View
How committed is the government to fully decarbonizing the energy system by 2050?
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The government is clearly committed to transitioning to a decarbonized energy system.
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The government is largely committed to transitioning to a decarbonized energy system.
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The government is somewhat committed to transitioning to a decarbonized energy system.
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1
1
The government is not at all committed to transitioning to a decarbonized energy system.
In 2020, the Danish government passed a Climate Law that set a target in which Denmark is to cut emissions by 70% relative to the 1990 level by 2025, and attain climate neutrality by 2050. The law requires the minister of environment to review the plan every five years and propose a new target to be reached in the coming five years. The new plan cannot be less ambitious than the preceding one, according to the law. Additionally, the law stipulates that: “The achievement of Denmark’s climate goals must be as cost-effective as possible, taking into account both the long-term green transition, sustainable business development and Danish competitiveness, healthy public finances and employment, and that Danish business life must be developed and not wound down.”
The Danish energy sector is moving toward decarbonization. The Agency for Energy monitors energy production and consumption in Denmark and publishes monthly and yearly reports. According to the agency, Denmark is among the world leaders in using and implementing decarbonization technologies.
As part of the Climate Law, an independent climate council has been set up to monitor policy and provide recommendations to the government. The council consists of climate experts and has its own secretariat. The council produces a yearly report that reviews various climate initiatives and assesses the progress made. The report is required to be sector-specific and offer recommendations to policymakers.
The Climate Council finds it unlikely that the target for reductions by 2025 can be achieved. The most recent report suggests two main obstacles to meeting the targets set out in the Climate Law. The first is the absence of a plan for carbon and climate reductions in the agricultural sector. According to the Climate Council, agricultural production should be subject to a climate tax. The Climate Council also argues that such a tax might conflict with the terms of the law, and notes considerable risks that the targets will not be met if the tax is not introduced. Additionally, the Climate Council expresses concern that the text on industrial production is insufficient due to changes in the overall taxation of companies.
Finally, it should be noted that the consequences of failing to meet the targets set in the Climate Law are unclear, as is the responsibility for such failures.
The government has faced criticism for not taking sufficient action to meet the targets outlined in the Climate Law. In 2022, a broad political compromise was reached to introduce a CO2 tax for all firms, excluding those in the agricultural sector. This tax – differentiated based on whether companies are within the EU Emissions Trading System or not – will take effect in 2030. An expert committee is currently analyzing the feasibility of a CO2 tax for the agricultural sector.
Citations:
Climate law:
https://www.retsinformation.dk/eli/lta/2020/965
Climate Council report 2023:
https://klimaraadet.dk/da/rapport/statusrapport-2023
The Danish energy sector is moving toward decarbonization. The Agency for Energy monitors energy production and consumption in Denmark and publishes monthly and yearly reports. According to the agency, Denmark is among the world leaders in using and implementing decarbonization technologies.
As part of the Climate Law, an independent climate council has been set up to monitor policy and provide recommendations to the government. The council consists of climate experts and has its own secretariat. The council produces a yearly report that reviews various climate initiatives and assesses the progress made. The report is required to be sector-specific and offer recommendations to policymakers.
The Climate Council finds it unlikely that the target for reductions by 2025 can be achieved. The most recent report suggests two main obstacles to meeting the targets set out in the Climate Law. The first is the absence of a plan for carbon and climate reductions in the agricultural sector. According to the Climate Council, agricultural production should be subject to a climate tax. The Climate Council also argues that such a tax might conflict with the terms of the law, and notes considerable risks that the targets will not be met if the tax is not introduced. Additionally, the Climate Council expresses concern that the text on industrial production is insufficient due to changes in the overall taxation of companies.
Finally, it should be noted that the consequences of failing to meet the targets set in the Climate Law are unclear, as is the responsibility for such failures.
The government has faced criticism for not taking sufficient action to meet the targets outlined in the Climate Law. In 2022, a broad political compromise was reached to introduce a CO2 tax for all firms, excluding those in the agricultural sector. This tax – differentiated based on whether companies are within the EU Emissions Trading System or not – will take effect in 2030. An expert committee is currently analyzing the feasibility of a CO2 tax for the agricultural sector.
Citations:
Climate law:
https://www.retsinformation.dk/eli/lta/2020/965
Climate Council report 2023:
https://klimaraadet.dk/da/rapport/statusrapport-2023
Graph View
To what extent do existing labor market institutions support or hinder the transition to an adaptive labor market?
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Labor market institutions are fully aligned with the goal of an adaptable labor market.
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7
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Labor market institutions are largely aligned with the goal of an adaptable labor market.
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3
Labor market institutions are only somewhat aligned with the goal of an adaptable labor market.
2
1
1
Labor market institutions are not at all aligned with the goal of an adaptable labor market.
The Danish labor market has proven to be adaptive. Unemployment rates, including long-term unemployment, have consistently been among the lowest in the EU. Unemployment spells are generally short, and the levels of job inflows and outflows are typically high.
These features are generally attributed to the so-called flexicurity model, which comprises flexible hiring and firing rules for employers, a generous social safety net, and active labor market policies focused on returning the unemployed to work. There has been a long list of reforms over the years adapting the system to developments in the labor market (Andersen (2023)). The unemployment benefit cannot exceed 90% of the previous wage and is capped, making the compensation rate higher for low-income groups than for high-income groups. The average compensation rate is about 60% for a skilled average worker during the first three months of unemployment, after which it declines (Ministry of Employment 2021). Unemployment insurance is voluntary and tied to insurance contributions. Those who are not insured must resort to social assistance.
The Danish labor market offers extensive opportunities for acquiring job-relevant education. It is required that the unemployed actively apply for jobs or participate in educational programs. Failure to meet these requirements results in a sanction (Kreiner and Svarer 2022). Educational activities are typically determined through negotiations among labor unions, employer associations and the state in tripartite agreements. The most recent of these agreements emphasizes the need to develop skills related to the green transition and increasing IT demands.
Projections indicate that the labor force will remain roughly constant over the next couple of decades, raising concerns about a labor shortage, particularly within the public sector due to increasing needs from an aging population. Meanwhile, there is ongoing debate about how the labor market will be impacted by AI and robotics. Mismatch problems between demand and supply – in terms of both quantity and quality (qualifications) – are likely to develop.
The government has proposed various initiatives intended to influence educational choices, including IT skills, and to facilitate reeducation for sector shifts. The recent tripartite agreement also notes that university education will become available to students without a conventional educational background, such as a high school diploma (Trepartsaftale 2023). Additionally, following a cross-party reform compromise passed in 2023, 10% of master’s degree programs at Danish universities will be restructured from two years to one year and three months (i.e., 120 to 75 ECTS). Furthermore, the reform incorporated a more direct focus on labor market demands by introducing new part-time master’s programs that expect students to combine employment and studies.
Labor immigration has been a contested issue in Denmark, but views have recently changed. Migrant workers have contributed significantly to the increase in employment in recent years. Initiatives have been launched to recruit workers from outside the EU for so-called welfare professions and in crafts. There is a concern that the country may be facing a labor shortage.
Citations:
Andersen, T.M. 2023. “The Danish Labor Market 2000-2022.” IZA World of Labor 2023:404. https://wol.iza.org/articles/the-danish-labor-market/long
Kreiner, Claus Thustrup and Michael Svarer. 2022. “Danish Flexicurity.” Journal of Economic Perspectives 36 (4): 81–102.
Ministry of Employment. 2021. Balancer i dagpengesystemet. København.
Trepartaftale. 2023. Trepartsaftale om langsigtede investeringer i voksen-, efter- og videreuddannelse, September 2023 https://www.uvm.dk/aktuelt/nyheder/uvm/2023/sep/230912-ny-trepartsaftale-langsigtede-investeringer-i-voksen-efter-og-videreuddannelse
These features are generally attributed to the so-called flexicurity model, which comprises flexible hiring and firing rules for employers, a generous social safety net, and active labor market policies focused on returning the unemployed to work. There has been a long list of reforms over the years adapting the system to developments in the labor market (Andersen (2023)). The unemployment benefit cannot exceed 90% of the previous wage and is capped, making the compensation rate higher for low-income groups than for high-income groups. The average compensation rate is about 60% for a skilled average worker during the first three months of unemployment, after which it declines (Ministry of Employment 2021). Unemployment insurance is voluntary and tied to insurance contributions. Those who are not insured must resort to social assistance.
The Danish labor market offers extensive opportunities for acquiring job-relevant education. It is required that the unemployed actively apply for jobs or participate in educational programs. Failure to meet these requirements results in a sanction (Kreiner and Svarer 2022). Educational activities are typically determined through negotiations among labor unions, employer associations and the state in tripartite agreements. The most recent of these agreements emphasizes the need to develop skills related to the green transition and increasing IT demands.
Projections indicate that the labor force will remain roughly constant over the next couple of decades, raising concerns about a labor shortage, particularly within the public sector due to increasing needs from an aging population. Meanwhile, there is ongoing debate about how the labor market will be impacted by AI and robotics. Mismatch problems between demand and supply – in terms of both quantity and quality (qualifications) – are likely to develop.
The government has proposed various initiatives intended to influence educational choices, including IT skills, and to facilitate reeducation for sector shifts. The recent tripartite agreement also notes that university education will become available to students without a conventional educational background, such as a high school diploma (Trepartsaftale 2023). Additionally, following a cross-party reform compromise passed in 2023, 10% of master’s degree programs at Danish universities will be restructured from two years to one year and three months (i.e., 120 to 75 ECTS). Furthermore, the reform incorporated a more direct focus on labor market demands by introducing new part-time master’s programs that expect students to combine employment and studies.
Labor immigration has been a contested issue in Denmark, but views have recently changed. Migrant workers have contributed significantly to the increase in employment in recent years. Initiatives have been launched to recruit workers from outside the EU for so-called welfare professions and in crafts. There is a concern that the country may be facing a labor shortage.
Citations:
Andersen, T.M. 2023. “The Danish Labor Market 2000-2022.” IZA World of Labor 2023:404. https://wol.iza.org/articles/the-danish-labor-market/long
Kreiner, Claus Thustrup and Michael Svarer. 2022. “Danish Flexicurity.” Journal of Economic Perspectives 36 (4): 81–102.
Ministry of Employment. 2021. Balancer i dagpengesystemet. København.
Trepartaftale. 2023. Trepartsaftale om langsigtede investeringer i voksen-, efter- og videreuddannelse, September 2023 https://www.uvm.dk/aktuelt/nyheder/uvm/2023/sep/230912-ny-trepartsaftale-langsigtede-investeringer-i-voksen-efter-og-videreuddannelse
To what extent do existing labor market institutions support or hinder the transition to an inclusive labor market?
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9
9
Labor market institutions are fully aligned with the goal of an inclusive labor market.
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7
6
Labor market institutions are largely aligned with the goal of an inclusive labor market.
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3
Labor market institutions are only somewhat aligned with the goal of an inclusive labor market.
2
1
1
Labor market institutions are not at all aligned with the goal of an inclusive labor market.
There is currently near-full employment in Denmark, and employment levels exceed those before the pandemic. The Ministry of Employment finds that more individuals who have previously experienced long-term unemployment are today able to find jobs. Consequently, groups that have traditionally had difficulties securing stable employment now have better chances of finding a job. A key driver behind the increase in employment is higher employment rates among those aged 60 – 65 and immigrant workers.
The issue of young individuals not being in employment or education remains a significant challenge. Despite policy initiatives aimed at addressing the problem, more than 6% of youth between 15 and 24 years old are neither in education nor employment.
Employment rates among immigrants have also increased. The Economic Council of the Labor Movement (2023) estimates that the labor market participation rate among omen with a non-Western background is now 7.4 percentage points higher than prior to the pandemic. The independent Economic Council also agrees that the Danish labor market is close to being at full capacity. The council has warned that the pressure on the labor market could have inflationary effects (Economic Council 2023). While labor market attachments have increased significantly in recent years, a gap of approximately 20 percentage points remains between ethnic Danes and immigrants with a non-Western background. This gap is partly explained by different levels of education between the two groups, but it might also be due to discrimination (Economic Council of the Labor Movement 2023).
Citations:
Economic Council. 2023. “Dansk Økonomi, efterår 2023.” https://dors.dk/vismandsrapporter/dansk-oekonomi-efteraar-2023
The Economic Council of the Labor Movement. 2023. https://www.ae.dk/the-economic-council-of-the-labour-movement
The issue of young individuals not being in employment or education remains a significant challenge. Despite policy initiatives aimed at addressing the problem, more than 6% of youth between 15 and 24 years old are neither in education nor employment.
Employment rates among immigrants have also increased. The Economic Council of the Labor Movement (2023) estimates that the labor market participation rate among omen with a non-Western background is now 7.4 percentage points higher than prior to the pandemic. The independent Economic Council also agrees that the Danish labor market is close to being at full capacity. The council has warned that the pressure on the labor market could have inflationary effects (Economic Council 2023). While labor market attachments have increased significantly in recent years, a gap of approximately 20 percentage points remains between ethnic Danes and immigrants with a non-Western background. This gap is partly explained by different levels of education between the two groups, but it might also be due to discrimination (Economic Council of the Labor Movement 2023).
Citations:
Economic Council. 2023. “Dansk Økonomi, efterår 2023.” https://dors.dk/vismandsrapporter/dansk-oekonomi-efteraar-2023
The Economic Council of the Labor Movement. 2023. https://www.ae.dk/the-economic-council-of-the-labour-movement
To what extent do existing labor market institutions support or hinder the mitigation of labor market risks?
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Labor market institutions are fully aligned with the goal of protecting individuals against labor market risks.
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6
Labor market institutions are largely aligned with the goal of protecting individuals against labor market risks.
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3
Labor market institutions are only somewhat aligned with the goal of protecting individuals against labor market risks.
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1
1
Labor market institutions are not at all aligned with the goal of protecting individuals against labor market risks.
The social safety net is relatively tight in Denmark, and the unemployed are either covered by unemployment insurance (voluntary) or social assistance. Kreiner and Svarer (2022) estimate that the net replacement rate is 83% at the lower level of the income distribution for the first three months. After the first two years of unemployment, the net income compensation rate drops to 57% for the lower parts of the income distribution.
Workers in nonstandard jobs may be more exposed, as they are seldom members of an unemployment insurance fund, are not protected against layoff to the same extent as workers covered by collective agreements and often do not contribute to pension schemes.
Citations:
Kreiner, Claus Thustrup and Michael Svarer. 2022. “Danish Flexicurity: Rights and Duties.” Journal of Economic Perspectives 36 (4): 81-102.
DOI: 10.1257/jep.36.4.81
Workers in nonstandard jobs may be more exposed, as they are seldom members of an unemployment insurance fund, are not protected against layoff to the same extent as workers covered by collective agreements and often do not contribute to pension schemes.
Citations:
Kreiner, Claus Thustrup and Michael Svarer. 2022. “Danish Flexicurity: Rights and Duties.” Journal of Economic Perspectives 36 (4): 81-102.
DOI: 10.1257/jep.36.4.81
Graph View
To what extent do existing tax institutions and procedures support or hinder adequate tax revenue flows?
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The tax system is fully aligned with the goals of ensuring adequate tax revenues.
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The tax system is largely aligned with the goals of ensuring adequate tax revenues.
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The tax system is only somewhat aligned with the goals of ensuring adequate tax revenues.
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1
1
The tax system is not at all aligned with the goals of ensuring adequate tax revenues.
It is a consequence of an extended welfare state that total tax revenue as a share of GDP is high. However, a series of tax reforms over the years have aimed to reduce tax distortions by broadening the tax base and lowering marginal tax rates. Recent initiatives include earned-income taxes and favorable taxation – and subsidies – for individuals who postpone retirement. A recent reform aimed at strengthening work incentives also includes a higher marginal tax rate for the very rich.
While the administration of the tax system in general is very efficient and IT-based, operating smoothly and automatically for most households, there have been recent cases of malfunctioning systems and tax evasion. These issues have raised questions about the system’s efficiency and adequacy. In particular, a new property tax system has been controversial, especially regarding the valuation of property, which constitutes the basis of the tax.
The overall tax structure is decided by the state. While a component of income taxation is municipal, the degree of freedom for municipalities in setting the tax rate is restricted by a municipal “tax stop.” This effectively implies that one municipality can only raise its tax rate if another municipality reduces its tax rate. Municipalities have some leverage over the land tax (grundskyld).
The overall structure is adequate for financing the public sector even given the demands of an aging population.
Citations:
Ministry of Finance. 2023. Aftale mellem regeringen og Danmarksdemokraterne, Det Konservative Folkeparti, Radikale Venstre og Nye Borgerlige om: Reform af personskat. https://fm.dk/media/27385/aftale-om-reform-af-personskat.pdf
Ministry of Taxation. 2023. “Faktaark 10: Ændringer i beløbsgrænser of satser.” https://skm.dk/media/xpxn1uqs/faktaark-10-aendringer-i-satser-og-beloebsgraenser.pdf
Ministry of Industry, Business and Financial Affairs. 2022. https://em.dk/aktuelt/udgivelser-og-aftaler/2022/jan/-aftale-om-staerke-og-innovative-virksomheder
While the administration of the tax system in general is very efficient and IT-based, operating smoothly and automatically for most households, there have been recent cases of malfunctioning systems and tax evasion. These issues have raised questions about the system’s efficiency and adequacy. In particular, a new property tax system has been controversial, especially regarding the valuation of property, which constitutes the basis of the tax.
The overall tax structure is decided by the state. While a component of income taxation is municipal, the degree of freedom for municipalities in setting the tax rate is restricted by a municipal “tax stop.” This effectively implies that one municipality can only raise its tax rate if another municipality reduces its tax rate. Municipalities have some leverage over the land tax (grundskyld).
The overall structure is adequate for financing the public sector even given the demands of an aging population.
Citations:
Ministry of Finance. 2023. Aftale mellem regeringen og Danmarksdemokraterne, Det Konservative Folkeparti, Radikale Venstre og Nye Borgerlige om: Reform af personskat. https://fm.dk/media/27385/aftale-om-reform-af-personskat.pdf
Ministry of Taxation. 2023. “Faktaark 10: Ændringer i beløbsgrænser of satser.” https://skm.dk/media/xpxn1uqs/faktaark-10-aendringer-i-satser-og-beloebsgraenser.pdf
Ministry of Industry, Business and Financial Affairs. 2022. https://em.dk/aktuelt/udgivelser-og-aftaler/2022/jan/-aftale-om-staerke-og-innovative-virksomheder
To what extent do existing tax institutions and procedures consider equity aspects?
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The tax system is fully aligned with the goal of ensuring equity.
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7
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The tax system is largely aligned with the goal of ensuring equity.
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4
3
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3
The tax system is only somewhat aligned with the goal of ensuring equity.
2
1
1
The tax system is not at all aligned with the goal of ensuring equity.
Denmark is among the most equal countries in the world, due to its highly redistributive and progressive tax system. In 2022, the Gini coefficient was estimated by Statistics Denmark to be 30. Although the Gini coefficient has been slightly increasing over the past 15 years, it remains low in international comparisons. Relative poverty rates are also low in Denmark. According to Statistics Denmark, 3.7% of the population has a net income below 50% of the median income (Statistics Denmark 2023).
The Economic Council of the Labor Movement argues that inequality will increase slightly as a consequence of the 2023 tax reform. However, it also contends that this tax reform is the most balanced in terms of equity in the past 20 years (Economic Council of the Labor Movement 2023).
Citations:
The Economic Council of the Labor Movement. 2023. “Regeringens skatteudspil øger uligheden trods forsøg på balance.” https://www.ae.dk/analyse/2023-11-regeringens-skatteudspil-oeger-uligheden-trods-forsoeg-paa-balance
Statistics Denmark. 2022. “Income inequality 2022.” https://www.dst.dk/da/Statistik/emner/arbejde-og-indkomst/indkomst-og-loen/indkomstulighed
The Economic Council of the Labor Movement argues that inequality will increase slightly as a consequence of the 2023 tax reform. However, it also contends that this tax reform is the most balanced in terms of equity in the past 20 years (Economic Council of the Labor Movement 2023).
Citations:
The Economic Council of the Labor Movement. 2023. “Regeringens skatteudspil øger uligheden trods forsøg på balance.” https://www.ae.dk/analyse/2023-11-regeringens-skatteudspil-oeger-uligheden-trods-forsoeg-paa-balance
Statistics Denmark. 2022. “Income inequality 2022.” https://www.dst.dk/da/Statistik/emner/arbejde-og-indkomst/indkomst-og-loen/indkomstulighed
To what extent do existing tax institutions and procedures minimize compliance and collection costs?
10
9
9
The tax system is fully aligned with the goal of minimizing compliance and collection costs.
8
7
6
7
6
The tax system is largely aligned with the goal of minimizing compliance and collection costs.
5
4
3
4
3
The tax system is only somewhat aligned with the goal of minimizing compliance and collection costs.
2
1
1
The tax system is not at all aligned with the goal of minimizing compliance and collection costs.
For the average person, the tax system is straightforward, requiring minimal individual action. Various controls ensure the accuracy of tax records, relying largely on the automatic registration of most economic flows.
However, the tax system is complex, making it difficult for individuals to understand all its rules and regulations. This raises both a democratic issue regarding citizens’ ability to comprehend the system and concerns related to behavioral responses to incentives that are imperfectly understood. Despite recent difficulties with tax collection and the system’s complex nature, it still maintains a high degree of legitimacy.
Taxation of companies is also complex, and employer organizations representing Danish companies and industry have consistently argued that the tax code should be simplified (Danish Industry 2023). While the costs of developing new IT systems to collect debt and to collect new housing taxes have been somewhat unsuccessful, the Danish tax system is generally perceived as effective.
Citations:
Danish Industry. 2023. “60+ skridt mod et simplere skattesystem.” https://www.danskindustri.dk/globalassets/billedarkiv/kampagnesites/simpel-skat/skattekatalog/simplificering-af-skattesytemet-2022–1-nov.pdf?v=240120
However, the tax system is complex, making it difficult for individuals to understand all its rules and regulations. This raises both a democratic issue regarding citizens’ ability to comprehend the system and concerns related to behavioral responses to incentives that are imperfectly understood. Despite recent difficulties with tax collection and the system’s complex nature, it still maintains a high degree of legitimacy.
Taxation of companies is also complex, and employer organizations representing Danish companies and industry have consistently argued that the tax code should be simplified (Danish Industry 2023). While the costs of developing new IT systems to collect debt and to collect new housing taxes have been somewhat unsuccessful, the Danish tax system is generally perceived as effective.
Citations:
Danish Industry. 2023. “60+ skridt mod et simplere skattesystem.” https://www.danskindustri.dk/globalassets/billedarkiv/kampagnesites/simpel-skat/skattekatalog/simplificering-af-skattesytemet-2022–1-nov.pdf?v=240120
To what extent do existing tax institutions and procedures internalize negative and positive externalities?
10
9
9
The tax system is fully aligned with the goal of internalizing externalities.
8
7
6
7
6
The tax system is largely aligned with the goal of internalizing externalities.
5
4
3
4
3
The tax system is only somewhat aligned with the goal of internalizing externalities.
2
1
1
The tax system is not at all aligned with the goal of internalizing externalities.
Subsidies and deductibles are used to internalize both positive and negative externalities. One example of the former is the large deductible offered to firms innovating technologies to become more energy efficient. An example of the latter is the deductible offered for transportation to and from work. This transportation deductible aims to maintain population levels in low-density areas, but works against the sustainability targets set in the 2020 Climate Law.
Regarding environmental and climate issues, there is room for improvement with regard to internalizing externalities. The CO2 tax is a step in that direction, but it has not been fully implemented yet.
The Danish tax system has been criticized for being too complex and for offering too many deductions. This complexity can result in offsetting deductions, which means that policy goals are not met.
Regarding environmental and climate issues, there is room for improvement with regard to internalizing externalities. The CO2 tax is a step in that direction, but it has not been fully implemented yet.
The Danish tax system has been criticized for being too complex and for offering too many deductions. This complexity can result in offsetting deductions, which means that policy goals are not met.
Graph View
To what extent do existing budgetary institutions and procedures support or hinder sustainable budgeting?
10
9
9
Budgetary institutions and policies are fully aligned with the goals of sustainable budgeting.
8
7
6
7
6
Budgetary institutions and policies are largely aligned with the goals of sustainable budgeting.
5
4
3
4
3
Budgetary institutions and policies are only somewhat aligned with the goals of sustainable budgeting.
2
1
1
Budgetary institutions and policies are not at all aligned with the goals of sustainable budgeting.
For some years, economic policy has focused on long-term issues arising from an aging population. Governments have regularly published long-term plans, typically with a 10-year horizon, to assess the sustainability of public finances. As a result, a number of reforms – particularly focused on increasing employment rates and postponing retirement – have fulfilled criteria for fiscal sustainability (Ministry of Finance 2023, Economic Council 2023). However, the budget profile implies that a sequence of years with surpluses will follow due to the phasing in of higher retirement ages, which means it will take some time to catch up with increases in longevity. Governments have ensured their own fiscal flexibility, allowing freedom to act in case of crises. This was evident during the COVID-19 crisis, when a number of initiatives were taken that contributed to making the drop in activity only temporary.
The long-term focus in fiscal policy was formalized in the budgetary law passed in 2012 and took effect as of 2014. The law was a response to earlier developments and complied with the European Union’s fiscal pact. Originally, the law stipulated that the structural deficit could not exceed 0.5% of GDP. This has recently been changed to 1% of GDP, which is still in accordance with EU rules, since the country’s overall debt level is low. The law covers spending at the state, regional and municipal levels (Budgetloven 2012). In times of crisis, such as during the recent pandemic, exceptions are made so that exceptional spending can be allowed if “exceptional circumstances”’ are present. This right is granted in §§2.5 and 2.6.
The law has three main parts. The first part stipulates that the minister of finance sets caps on spending for the state and negotiates spending caps for the regions and municipalities with representatives from these entities. If these spending caps are exceeded, the Ministry of Finance withholds transfers to the regions and municipalities. The sanction mechanism works such that 40% of the excess spending must be covered by all municipalities and regions jointly, while the remaining 60% is paid by the transgressing municipalities and regions.
Finally, the Economic Council was assigned a formal role as an independent watchdog, which it has effectively carried out since its establishment in 1962. The council publishes two reports each year, and in the autumn report, it assesses whether government spending is within the spending caps and if such spending is leading to medium- and long-term debt beyond the accepted level. Furthermore, the council must assess the extent to which the spending can be justified under the “exceptional circumstances” measure mentioned above. If the council finds that the government is engaging in debt-producing spending beyond the agreed target, or if it proposes that fiscal policy should be tightened, the minister of finance must explain to the council why the recommendation is not being followed.
In a recent evaluation, the Ministry of Finance found that the law has been effective in securing financial discipline compared to the period from 1993 to 2010 (Ministry of Finance 2022).
The budgetary process is relatively open. Denmark has mostly been governed by minority coalition governments, meaning economic policies, including the budget, are the outcome of broad compromises involving multiple parties. This consensus tradition supports consistency in policies, as leading political parties tend to alternate between being part of the government and the opposition. However, it also makes it difficult for voters to assess who is responsible for specific policies (Hobolt et al. 2013).
The regions are responsible for healthcare and regional development. They have few budgetary freedoms since their overall budget is determined by the state. Hence, the regions’ main activity is administering the healthcare system.
The municipalities are responsible for key welfare areas such as childcare, education and old-age care. The municipal tax is not sufficient to finance these activities. Funding from the state is provided (bloktilskud), and an equalization arrangement reallocates funds from richer to poorer municipalities.
While the Budget Law sets clear targets for the evolution of spending and debt in the medium and long term, it does not provide any direction regarding sustainable development goals. These goals are perceived to be a political discussion that political parties need to formulate.
Citations:
Andersen, T.M., J. Bentzen, S. E. Hougaard Jensen, V. Smith, and N. Westergaard-Nielsen. 2021. The Danish Economy in a Global Perspective. Copenhagen: DJØF Publishing.
Budgetloven. 2012. https://www.retsinformation.dk/eli/lta/2012/547
Hobolt, Sara B., James Tilley, and Susan Banducci. 2013. “Clarity of Responsibility: How Government Cohesion Conditions Performance Voting.” European Journal of Political Research 52 (2): 164-187.
Ministry of Finance. 2022. “Erfaringer med Budgetloven 2014-2022.” https://fm.dk/udgivelser/2022/april/erfaringer-med-budgetlov-2014-2020/
The long-term focus in fiscal policy was formalized in the budgetary law passed in 2012 and took effect as of 2014. The law was a response to earlier developments and complied with the European Union’s fiscal pact. Originally, the law stipulated that the structural deficit could not exceed 0.5% of GDP. This has recently been changed to 1% of GDP, which is still in accordance with EU rules, since the country’s overall debt level is low. The law covers spending at the state, regional and municipal levels (Budgetloven 2012). In times of crisis, such as during the recent pandemic, exceptions are made so that exceptional spending can be allowed if “exceptional circumstances”’ are present. This right is granted in §§2.5 and 2.6.
The law has three main parts. The first part stipulates that the minister of finance sets caps on spending for the state and negotiates spending caps for the regions and municipalities with representatives from these entities. If these spending caps are exceeded, the Ministry of Finance withholds transfers to the regions and municipalities. The sanction mechanism works such that 40% of the excess spending must be covered by all municipalities and regions jointly, while the remaining 60% is paid by the transgressing municipalities and regions.
Finally, the Economic Council was assigned a formal role as an independent watchdog, which it has effectively carried out since its establishment in 1962. The council publishes two reports each year, and in the autumn report, it assesses whether government spending is within the spending caps and if such spending is leading to medium- and long-term debt beyond the accepted level. Furthermore, the council must assess the extent to which the spending can be justified under the “exceptional circumstances” measure mentioned above. If the council finds that the government is engaging in debt-producing spending beyond the agreed target, or if it proposes that fiscal policy should be tightened, the minister of finance must explain to the council why the recommendation is not being followed.
In a recent evaluation, the Ministry of Finance found that the law has been effective in securing financial discipline compared to the period from 1993 to 2010 (Ministry of Finance 2022).
The budgetary process is relatively open. Denmark has mostly been governed by minority coalition governments, meaning economic policies, including the budget, are the outcome of broad compromises involving multiple parties. This consensus tradition supports consistency in policies, as leading political parties tend to alternate between being part of the government and the opposition. However, it also makes it difficult for voters to assess who is responsible for specific policies (Hobolt et al. 2013).
The regions are responsible for healthcare and regional development. They have few budgetary freedoms since their overall budget is determined by the state. Hence, the regions’ main activity is administering the healthcare system.
The municipalities are responsible for key welfare areas such as childcare, education and old-age care. The municipal tax is not sufficient to finance these activities. Funding from the state is provided (bloktilskud), and an equalization arrangement reallocates funds from richer to poorer municipalities.
While the Budget Law sets clear targets for the evolution of spending and debt in the medium and long term, it does not provide any direction regarding sustainable development goals. These goals are perceived to be a political discussion that political parties need to formulate.
Citations:
Andersen, T.M., J. Bentzen, S. E. Hougaard Jensen, V. Smith, and N. Westergaard-Nielsen. 2021. The Danish Economy in a Global Perspective. Copenhagen: DJØF Publishing.
Budgetloven. 2012. https://www.retsinformation.dk/eli/lta/2012/547
Hobolt, Sara B., James Tilley, and Susan Banducci. 2013. “Clarity of Responsibility: How Government Cohesion Conditions Performance Voting.” European Journal of Political Research 52 (2): 164-187.
Ministry of Finance. 2022. “Erfaringer med Budgetloven 2014-2022.” https://fm.dk/udgivelser/2022/april/erfaringer-med-budgetlov-2014-2020/
Graph View
How committed is the government to utilizing research and innovation as drivers for the transition to a sustainable economy and society?
10
9
9
The government is clearly committed to utilizing research and innovation as drivers for the transition to a sustainable economy and society.
8
7
6
7
6
The government is largely committed to utilizing research and innovation as drivers for the transition toward a sustainable economy and society.
5
4
3
4
3
The government is somewhat committed to utilizing research and innovation as drivers for the transition toward a sustainable economy and society.
2
1
1
The government is not at all committed to utilizing research and innovation as drivers for the transition toward a sustainable economy and society.
In 2020 the Danish government published a national strategy concerning green research and innovation (Ministry of Higher Education and Science 2020). The strategy aims to help Denmark meet the goals set in the Climate Law, mentioned above. It identifies four “missions” intended to assist Denmark in reaching its climate targets.
First, more research and innovation are needed to develop technologies that can capture CO2. Second, more research and innovation are required to develop green fuel and power-to-X technologies. Third, the strategy emphasizes the need for research in climate-friendly food production and agriculture. Finally, more research is necessary in the area of recycling.
To enhance research and innovation on climate issues, the government has increased funding for a special research fund named Research for Green Transition (Forskning i grøn omstilling). This initiative is provided with approximately DKK 100 million in yearly funding. To further promote cooperation between universities and private companies, the government has allocated funds to “grand solutions” programs. These programs target research aligned with the four missions outlined in the strategy. This initiative is furnished with DKK 1 billion in funding (Innovation Fund 2023).
Finally, the 2020 strategy introduced Denmark’s Green Future Fund, which allocates DKK 25 billion for research and innovation aimed at enhancing the creation of green markets, particularly in middle-income and developing countries (Denmark’s Green Future Fund).
Despite the aforementioned initiatives, the strategy for research and innovation to support the transition to a sustainable economy and society is largely driven from the bottom up, with research institutes and companies expected to take the lead in this area.
Citations:
Denmark’s Green Future fund. (https://dgff.dk/)
Innovation fund 2023. (https://innovationsfonden.dk/da/p/innomissions)
Ministry of Higher Education and Science. 2020. “Fremtidens grønne løsninger – Strategi for investeringer i grøn forskning, teknologi og innovation.” https://ufm.dk/publikationer/2020/fremtidens-gronne-losninger-strategi-for-investeringer-i-gron-forskning-teknologi-og-innovation/fremtidens-gronne-losninger-strategi-for-investeringer-i-gron-forskning-teknologi-og-innovation
First, more research and innovation are needed to develop technologies that can capture CO2. Second, more research and innovation are required to develop green fuel and power-to-X technologies. Third, the strategy emphasizes the need for research in climate-friendly food production and agriculture. Finally, more research is necessary in the area of recycling.
To enhance research and innovation on climate issues, the government has increased funding for a special research fund named Research for Green Transition (Forskning i grøn omstilling). This initiative is provided with approximately DKK 100 million in yearly funding. To further promote cooperation between universities and private companies, the government has allocated funds to “grand solutions” programs. These programs target research aligned with the four missions outlined in the strategy. This initiative is furnished with DKK 1 billion in funding (Innovation Fund 2023).
Finally, the 2020 strategy introduced Denmark’s Green Future Fund, which allocates DKK 25 billion for research and innovation aimed at enhancing the creation of green markets, particularly in middle-income and developing countries (Denmark’s Green Future Fund).
Despite the aforementioned initiatives, the strategy for research and innovation to support the transition to a sustainable economy and society is largely driven from the bottom up, with research institutes and companies expected to take the lead in this area.
Citations:
Denmark’s Green Future fund. (https://dgff.dk/)
Innovation fund 2023. (https://innovationsfonden.dk/da/p/innomissions)
Ministry of Higher Education and Science. 2020. “Fremtidens grønne løsninger – Strategi for investeringer i grøn forskning, teknologi og innovation.” https://ufm.dk/publikationer/2020/fremtidens-gronne-losninger-strategi-for-investeringer-i-gron-forskning-teknologi-og-innovation/fremtidens-gronne-losninger-strategi-for-investeringer-i-gron-forskning-teknologi-og-innovation
Graph View
How committed and credible is the government in its activities to guide the effective regulation and supervision of the international financial architecture?
10
9
9
The government is clearly committed to ensuring the stability of the global financial system.
8
7
6
7
6
The government is largely committed to ensuring the stability of the global financial system.
5
4
3
4
3
The government is somewhat committed to ensuring the stability of the global financial system.
2
1
1
The government is not at all committed to ensuring the stability of the global financial system.
Denmark is tightly integrated into global financial markets. Monetary policy aims to support the Danish exchange rate peg, which enjoys high credibility and broad political backing. Regulation of the financial sector is continuously updated in accordance with EU rules so as to increase resilience and reduce the risk of public bailouts of financial institutions. Systemically important financial institutions must meet specific requirements.
In the aftermath of the financial crises in 2007 – 2008, the Danish government established the System Risk Assessment Council in 2012. The council monitors risks to the Danish financial system stemming from national and global policies and developments. It also assesses the effects of international regulations and their impact on the Danish financial system.
The council can issue an observation indicating it has detected a development that could become a systemic risk. It can also issue a warning if it finds clear signs of systemic risk. The recipient of such a warning must respond by explaining what actions will be taken. Finally, the council can issue a firm recommendation that action must be taken. If the recipient of a recommendation does not follow the advice, an explanation must be provided as to why not.
The council has 10 members, including the permanent secretaries of all economic ministries, the director of the national bank, three independent members and an independent secretariat.
The question of Denmark’s participation in the European banking union remains open. If it does participate, the larger (systemic) financial institutions will fall under the European Central Bank’s supervision.
The previous government believed Denmark should join the banking union, but the leader of the Social Democrats, Mette Frederiksen, proposed a referendum on the issue. This promise has been reaffirmed by the new government led by Frederiksen. While Denmark is not today part of the banking union, the Danish currency is pegged to the euro.
The credibility of national financial institutions has deteriorated due to an aggressive interpretation of tax rules and the whitewashing of money by major Danish banks such as Nordea and Danske Bank.
Citations:
Det systemiske risikoråd 2023. https://risikoraad.dk/om-raadet
In the aftermath of the financial crises in 2007 – 2008, the Danish government established the System Risk Assessment Council in 2012. The council monitors risks to the Danish financial system stemming from national and global policies and developments. It also assesses the effects of international regulations and their impact on the Danish financial system.
The council can issue an observation indicating it has detected a development that could become a systemic risk. It can also issue a warning if it finds clear signs of systemic risk. The recipient of such a warning must respond by explaining what actions will be taken. Finally, the council can issue a firm recommendation that action must be taken. If the recipient of a recommendation does not follow the advice, an explanation must be provided as to why not.
The council has 10 members, including the permanent secretaries of all economic ministries, the director of the national bank, three independent members and an independent secretariat.
The question of Denmark’s participation in the European banking union remains open. If it does participate, the larger (systemic) financial institutions will fall under the European Central Bank’s supervision.
The previous government believed Denmark should join the banking union, but the leader of the Social Democrats, Mette Frederiksen, proposed a referendum on the issue. This promise has been reaffirmed by the new government led by Frederiksen. While Denmark is not today part of the banking union, the Danish currency is pegged to the euro.
The credibility of national financial institutions has deteriorated due to an aggressive interpretation of tax rules and the whitewashing of money by major Danish banks such as Nordea and Danske Bank.
Citations:
Det systemiske risikoråd 2023. https://risikoraad.dk/om-raadet