ECONOMIC POLICY CHALLENGES FOR DENMARK FROM AN INTERNATIONAL PERSPECTIVE

Ludger Schuknecht

OECD Deputy Secretary General

Danish Economic Society

Copenhagen

15 January, 2019

http://www.oecd.org/eco/surveys/economic-survey-denmark.htm

2019 OECD ECONOMIC SURVEY OF DENMARK

Key messages

Policy should take advantage of the good economic conditions

Hard decisions are required to further reduce financial vulnerabilities

Boosting productivity is the key challenge to sustain high living standards

The economy is growing after a long recovery

GDP per capita Thousand USD, constant prices, 2010 PPP

Note: Other Nordics is a simple average of Finland, Iceland, Norway and Sweden. Euro area is a weighted average (19 countries).

Source: OECD National Accounts database.

30

35

40

45

50

55

2000 2002 2004 2006 2008 2010 2012 2014 2016 2018

DNK Other Nordics Euro area USA

1.0

1.2

1.4

1.6

1.8

2.0

2.2

3

4

5

6

7

8

9

2005 2007 2009 2011 2013 2015 2017

%

Unemployment rate¹, left scale

Job vacancy rate, right scale

% of labour force

The labour market is tightening

0

5

10

15

20

25

30

35

40

45

50

2005 2007 2009 2011 2013 2015 2017

Manufacturing

Construction

Services

1. Statistical break in 2016Q1 and 2017Q1.

Source: OECD Short-Term Labour market Statistics; Statistics Denmark.

Unemployment and vacancies Labour shortages % of firms reporting labour shortages

-4

-3

-2

-1

0

1

2

2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

% of GDP

The government budget balance has gradually

improved

Note: Extraordinary tax revenues (including a pension restructuring) drive the surpluses in 2014 and 2017.

Source: OECD Economic Outlook 104 database.

General government budget balance

• Gradually tighten fiscal policy to reflect the economic upturn and build fiscal space for a future setback

• Increase flexibility in the provision of childcare services to further narrow gender gaps in the labour market

• Encourage parents to split parental leave more equally by reserving the share reserved for each parent

• Spread best integration practices across municipalities and strengthen co-ordination of services

• Improve the integration-training programme in collaboration with social partners and make it permanent

• Reform public sector collective bargaining towards broader and higher-level agreements, allowing more bargaining at the local level

• Implement the most cost-efficient greenhouse gas emission reductions first

Recommendations to sustain inclusive growth

and improve public sector efficiency

The financial sector is very large

Financial corporations Total financial assets by subsector, 2017

Note: Other financial institutions includes non-MMF investment funds. Based on unconsolidated data.

Source: OECD Financial Accounts.

0

250

500

750

1000

1250

1500

0

250

500

750

1000

1250

1500

TU

R

LTU

PO

L

SV

N

SV

K

ES

T

CZ

E

LVA

GR

C

HU

N

ISR

FIN

NO

R

AU

T

ITA

ES

P

PR

T

KO

R

DE

U

US

A

BE

L

SW

E

ISL

FR

A

CA

N

JPN

DN

K

CH

E

GB

R

NLD IR

L

LUX

% of GDP% of GDP

Monetary financial institutions Insurance and pension funds Other financial institutions

2,261 24,063

Household gross debt has decreased but is still

very high

0

50

100

150

200

250

300

350

2000 2002 2004 2006 2008 2010 2012 2014 20160

100

200

300

400

500

600

700

800

900

0

50

100

150

200

250

300

350

LVA

HU

NS

VN

PO

LC

ZE ITA

SV

KE

ST

DE

UA

UT

ISR

GR

CU

SA

FR

AJP

NB

EL

ES

PP

RT

FIN

GB

RIR

LC

AN

KO

RA

US

SW

EN

OR

NLD

DN

K

Household gross debt

Total net worth of households (right scale)

Household gross debt and net worth % of gross household disposable income

Source: OECD Economic Outlook database.

Over time Across countries

Taxation of household capital income favours

owner-occupied housing

Note: The marginal effective tax rate summarises the tax on investing one additional currency unit across different assets wi th

an expected holding period of five years (20 years for pension funds and housing). The tax rates are adjusted for country-specific

inflation over the period 2011-16.

Source: OECD (2018), Taxation of household savings.

Marginal effective tax rates across asset types Average-rate tax payer, 2016

-20

-10

0

10

20

30

40

50

60

70

-20

-10

0

10

20

30

40

50

60

70

Bankdeposits

Corporatebonds

Shares Privatepensions

Owneroccupiedproperty

%%

DNK OECD median country

• Reduce deductibility of interest expenses in personal

income taxation

• Deregulate the rental market and remove favourable

conditions for parents to buy-to-let flats to their children

• Review the pension and tax system and implement

reform to ease personal financial planning

• Improve prudential supervision and international

collaboration by joining the European Banking Union

• Increase scrutiny and implement more severe penalties

for money-laundering activities

Recommendations to strengthen resilience of

households and the financial sector

High digitalisation in firms has not (yet) boosted

productivity growth

Firms with high digital intensity 2017

Labour productivity growth Total economy, annualised growth, 2000-2017

0

10

20

30

40

50

60

70

LVA

ITA

GR

CP

OL

HU

NFR

AS

VK

CZ

EE

ST

SV

NIR

LLU

XE

UP

RT

AU

TE

SP

DE

ULT

US

WE

NO

RB

EL

FIN

NLD

DN

K

%

Source: European Commission, Digital Scoreboard 2017; OECD Productivity database.

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

LUX

NO

RB

EL

NLD

CH

EFR

AG

BR

CA

ND

NK

JPN

DE

UFI

NA

UT

OE

CD

AU

SS

WE

US

AIS

LIR

L

Productivity growth is lagging behind in services

Over time Annualised labour productivity growth

Across countries Annualised labour productivity growth, 2000-2015

Source: OECD Productivity database and OECD calculations based on OECD STAN database.

0

1

2

3

4

5

Business economy Manufacturing Private sectorservices

%

1990-2000 2000-2010 2010-2017

0

1

2

3

4

5

Private sectorservices

Less knowledge-intensive services

Knowledge-intensiveservices

%

DNK Other Nordics OECD USA

AUS

AUT

BEL

CAN

CHLCZE

DNK

EST

FIN

FRA

DEU

GRC

HUN

ISL

IRL

ISR ITA

JPN

KOR

LVA

LUXMEX

NLD

NZL

NOR

POL

PRT

SVK

SVNESP

SWE

CHE

TUR

GBR

USA

OECD

20

25

30

35

40

45

50

55

60

65

70

20

25

30

35

40

45

50

55

60

65

70

20 25 30 35 40 45 50 55 60 65 70

Ov erall PIT+CIT rate on dividend income, %, 2017

Top marginal tax rate on labour income, %, 2017

Top marginal tax rates on labour and capital

income are very high

Note: The top marginal tax rate includes personal income tax and employee social security contributions (All-in rate).

The overall personal and corporate income tax (PIT+CIT) rate on dividend income reports the overall tax rate on distributed profit,

Taking into account taxation prior to distribution and at the household level, showing the highest rate.

Source: OECD Tax database.

Business R&D is highly concentrated in

pharmaceuticals and biotechnology

Danish companies among the world top 1000 R&D investors

2017 world ranking in parenthesis

Note: Annual R&D spending at the corporate group level. Pharmaceuticals and biotechnology companies in red.

Source: EU R&D Scoreboard data.

0 250 500 750 1000 1250 1500 1750 2000

GN STORE NORD (950)

WILLIAM DEMANT (890)

GRUNDFOS (702)

FERRING PHARMACEUTICALS (654)

VESTAS WIND SYSTEMS (487)

NOVOZYMES (468)

LEO PHARMA (441)

DANFOSS (383)

H LUNDBECK (330)

DANSKE BANK (287)

NOVO NORDISK (68)

EUR million

Dependence on foreign workers has increased

substantially

Inflow of migrants with a work purpose

Source: Statistics Denmark.

0

5

10

15

20

25

0

5

10

15

20

25

1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

ThousandThousand

EU non-EU

Strengthen incentives through the tax system

• Reduce top marginal tax rates on labour and capital

income

• Withdraw reduced inheritance taxation of family-owned

businesses

• Implement an allowance for corporate equity (ACE)

• Broaden public support to business R&D through well-

designed R&D grants and tax credits for incremental

R&D expenses

Recommendations to boost productivity growth (1)

Refining the competition framework

• Provide greater power to competition authorities to impose administrative fines and structural remedies within constitutional constraints

• Develop clearer standards for exemptions from the Competition Act and involve competition authorities in their determination

Ensuring supply of the right skills

• Strengthen incentives by reducing student grants for tertiary education and relying more on students loans

• Assess whether current visa schemes for non-EU workers sufficiently address skill needs and consider simplifying entry procedures

Recommendations to boost productivity growth (2)

Disclaimers:

The statistical data for Israel are supplied by and under the responsibility of the relevant Israeli authorities. The use of such

data by the OECD is without prejudice to the status of the Golan Heights, East Jerusalem and Israeli settlements in the West

Bank under the terms of international law.

This document and any map included herein are without prejudice to the status of or sovereignty over any territory, to the

delimitation of international frontiers and boundaries and to the name of any territory, city or area.

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FISCAL FINANCIAL RISKS

Growth / demand

Public finances

Banks

Central banks

Shadow banking

Fiscal-Financial Risk Map

International Fiscal effects from asset price correction

Bank bailout costs Value of pension fund assets

Fiscal risks from asset price adjustment

(especially housing)

Table VIII.2 Asset price related

budget sensitivities, 1982-2005

Total

Belgium 0.75

Finland 0.62

France 0.33

Germany 0.57

Ireland 0.62

Italy 0.45

Netherlands 0.55

Spain 0.79

Weighted average 0.53

Euro area aggregate 0.28

Source: Richard Morris and Ludger Schuknecht, 2007

Total refers to the sum of the effect from a 10% stock and real

estate price change on the budget balance via direct taxes on

corporations/households, indirect taxes and transaction taxes.

The tax revenue from the pension yield tax is very

volatile

Annual tax revenue from pension yield tax

Note: The Danish authorities computes the structural tax revenue as:

the normal return (4.5%) x taxable pension savings x the tax rate (15.3%).

Source: Danish Ministry of Economic Affairs and the Interior (2018).

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020

% of GDP% of GDP

Tax revenue (PAL-skat) Structural tax revenue

Table VIII.3 Decomposiiton of the change in Deficit, 1985-93

United Kingdom and Sweden

Components of cumulative change in deficit United Kingdom Sweden

Base year 1984 1985-89 1990-93 1985-89 1990-93

Total cumulative change in deficit 4.9 -8.9 7.9 -16.8

Expenditure 4.3 10.2

Revenue -3.1 -4.4

Decompositon

Non-asset price effect 2.9 -6 4.9 -8.2

Asset price effect 2 -2.9 3 -6.1

Thereof: stock price changes 1.8 -0.8 2.4 -1.5

real estate price changes 0.3 -3.7 0.6 -4.6

Source: Eschenbach and Schuknecht, 2004

Fiscal effects from asset price bust/financial

crisis

Table VIII.4 Post-Crisis Expenditure and Revenue Developments, 2007-2009

Expenditure Revenue

Ireland 11.1 -2.8

Spain 7.0 -6.1

United Kingdom 6.4 -1.2

France 4.6 -0.1

Germany 4.8 1.3

Italy 4.4 0.6

Source: OECD

Fiscal effects from asset price bust/financial

crisis

Table VIII.7 Fiscal Buffers

General Government Deficit and Debt (% of GDP)

2007 2017

Deficit Debt Deficit Debt Debt

(Increase

2017-2007)

USA -2.9 65 -4.6 108 43

Japan -3.2 175 -4.2 236 61

Canada 1.8 67 -1.0 90 23

United Kingdom -2.6 42 -2.3 87 45

Germany 0.2 64 1.1 64 0

France -2.5 64 -2.6 97 33

Italy -1.5 100 -1.9 132 32

G7 -2.2 81 -3.4 119 38

Source: Ameco

Fiscal Buffers

Pension savings in Denmark have almost reached

200% of GDP

Total pension fund assets

Source: Danish Ministry of Finance (2017) and DREAM.

0

50

100

150

200

250

0

50

100

150

200

250

1980 1990 2000 2010 2020 2030 2040 2050 2060 2070 2080 2090 2100

% of GDP% of GDP

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