ECONOMIC POLICY CHALLENGES FOR DENMARK FROM AN INTERNATIONAL PERSPECTIVE Ludger Schuknecht OECD Deputy Secretary General Danish Economic Society Copenhagen 15 January, 219 http://www.oecd.org/eco/surveys/economic-survey-denmark.htm
219 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 55 GDP per capita Thousand USD, constant prices, 21 PPP DNK Other Nordics Euro area USA 5 45 4 35 3 2 22 24 26 28 21 212 214 216 218 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.
The labour market is tightening Unemployment and vacancies Labour shortages % of firms reporting labour shortages % of labour force 9 8 7 Unemployment rate¹, left scale Job vacancy rate, right scale % 2.2 2. 1.8 5 45 4 35 3 Manufacturing Construction Services 6 1.6 25 5 1.4 2 15 4 1.2 1 5 3 25 27 29 211 213 215 217 1. 25 27 29 211 213 215 217 1. Statistical break in 216Q1 and 217Q1. Source: OECD Short-Term Labour market Statistics; Statistics Denmark.
The government budget balance has gradually improved General government budget balance % of GDP 2 1-1 -2-3 -4 21 211 212 213 214 215 216 217 218 219 22 Note: Extraordinary tax revenues (including a pension restructuring) drive the surpluses in 214 and 217. Source: OECD Economic Outlook 14 database.
Recommendations to sustain inclusive growth and improve public sector efficiency 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
TUR LTU POL SVN SVK EST CZE LVA GRC HUN ISR FIN NOR AUT ITA ESP PRT KOR DEU USA BEL SWE ISL FRA CAN JPN DNK CHE GBR NLD IRL LUX The financial sector is very large % of GDP 15 125 Financial corporations Total financial assets by subsector, 217 Monetary financial institutions Insurance and pension funds Other financial institutions 2,261 24,63 % of GDP 15 125 1 1 75 75 5 5 25 25 Note: Other financial institutions includes non-mmf investment funds. Based on unconsolidated data. Source: OECD Financial Accounts.
LVA HUN SVN POL CZE ITA SVK EST DEU AUT ISR GRC USA FRA JPN BEL ESP PRT FIN GBR IRL CAN KOR AUS SWE NOR NLD DNK Household gross debt has decreased but is still very high Household gross debt and net worth % of gross household disposable income 35 3 25 2 Over time 35 3 25 2 Across countries Household gross debt Total net worth of households (right scale) 9 8 7 6 5 15 15 4 1 5 1 5 3 2 1 2 22 24 26 28 21 212 214 216 Source: OECD Economic Outlook database.
Taxation of household capital income favours owner-occupied housing % 7 6 5 4 3 2 1-1 Marginal effective tax rates across asset types Average-rate tax payer, 216 DNK OECD median country % 7 6 5 4 3 2 1-1 -2 Bank deposits Corporate bonds Shares Private pensions Owner occupied property -2 Note: The marginal effective tax rate summarises the tax on investing one additional currency unit across different assets with an expected holding period of five years (2 years for pension funds and housing). The tax rates are adjusted for country-specific inflation over the period 211-16. Source: OECD (218), Taxation of household savings.
Recommendations to strengthen resilience of households and the financial sector 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
LVA ITA GRC POL HUN FRA SVK CZE EST SVN IRL LUX EU PRT AUT ESP DEU LTU SWE NOR BEL FIN NLD DNK LUX NOR BEL NLD CHE FRA GBR CAN DNK JPN DEU FIN AUT OECD AUS SWE USA ISL IRL High digitalisation in firms has not (yet) boosted productivity growth % 7 Firms with high digital intensity 217 Labour productivity growth Total economy, annualised growth, 2-217 4. 6 3.5 5 3. 4 3 2 2.5 2. 1.5 1. 1.5. Source: European Commission, Digital Scoreboard 217; OECD Productivity database.
Productivity growth is lagging behind in services % Over time Annualised labour productivity growth Across countries Annualised labour productivity growth, 2-215 % 5 199-2 2-21 21-217 DNK Other Nordics OECD USA 5 4 4 3 3 2 2 1 1 Business economy Manufacturing Private sector services Private sector services Less knowledgeintensive services Knowledge-intensive services Source: OECD Productivity database and OECD calculations based on OECD STAN database.
Top marginal tax rates on labour and capital income are very high Ov erall PIT+CIT rate on dividend income, %, 217 7 7 FRA 65 65 6 IRL 6 USA CAN 55 KOR BEL 55 DEU DNK 5 GBR AUS PRT 5 NOR NLD JPN 45 LUX SWE 45 MEX AUT ESP 4 OECD ISR ITA FIN SVN 4 NZL CHE ISL 35 GRC CZE CHL 35 TUR 3 POL LVA 3 SVK 25 25 HUN 2 EST 2 2 25 3 35 4 45 5 55 6 65 7 Top marginal tax rate on labour income, %, 217 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 1 R&D investors 217 world ranking in parenthesis NOVO NORDISK (68) DANSKE BANK (287) H LUNDBECK (33) DANFOSS (383) LEO PHARMA (441) NOVOZYMES (468) VESTAS WIND SYSTEMS (487) FERRING PHARMACEUTICALS (654) GRUNDFOS (72) WILLIAM DEMANT (89) GN STORE NORD (95) EUR million 25 5 75 1 125 15 175 2 Note: Annual R&D spending at the corporate group level. Pharmaceuticals and biotechnology companies in red. Source: EU R&D Scoreboard data.
Dependence on foreign workers has increased substantially Inflow of migrants with a work purpose Thousand 25 EU non-eu Thousand 25 2 2 15 15 1 1 5 5 1997 1998 1999 2 21 22 23 24 25 26 27 28 29 21 211 212 213 214 215 216 217 Source: Statistics Denmark.
Recommendations to boost productivity growth (1) 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 welldesigned R&D grants and tax credits for incremental R&D expenses
Recommendations to boost productivity growth (2) 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
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FISCAL FINANCIAL RISKS
Fiscal-Financial Risk Map Growth / demand Fiscal effects from asset price correction Public finances International Banks Shadow banking Bank bailout costs Value of pension fund assets Central banks
Fiscal risks from asset price adjustment (especially housing) Table VIII.2 Asset price related budget sensitivities, 1982-25 Total Belgium.75 Finland.62 France.33 Germany.57 Ireland.62 Italy.45 Netherlands.55 Spain.79 Weighted average.53 Euro area aggregate.28 Source: Richard Morris and Ludger Schuknecht, 27 Total refers to the sum of the effect from a 1% 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 % of GDP 4. 3.5 Tax revenue (PAL-skat) Structural tax revenue % of GDP 4. 3.5 3. 3. 2.5 2.5 2. 2. 1.5 1.5 1. 1..5.5. 2 22 24 26 28 21 212 214 216 218 22. 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 (218).
Fiscal effects from asset price bust/financial crisis 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 1985-89 199-93 1985-89 199-93 Total cumulative change in deficit 4.9-8.9 7.9-16.8 Expenditure 4.3 1.2 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 -.8 2.4-1.5 real estate price changes.3-3.7.6-4.6 Source: Eschenbach and Schuknecht, 24
Fiscal effects from asset price bust/financial crisis Table VIII.4 Post-Crisis Expenditure and Revenue Developments, 27-29 Expenditure Revenue Ireland 11.1-2.8 Spain 7. -6.1 United Kingdom 6.4-1.2 France 4.6 -.1 Germany 4.8 1.3 Italy 4.4.6 Source: OECD
Fiscal Buffers Table VIII.7 Fiscal Buffers General Government Deficit and Debt (% of GDP) 27 217 Deficit Debt Deficit Debt Debt (Increase 217-27) USA -2.9 65-4.6 18 43 Japan -3.2 175-4.2 236 61 Canada 1.8 67-1. 9 23 United Kingdom -2.6 42-2.3 87 45 Germany.2 64 1.1 64 France -2.5 64-2.6 97 33 Italy -1.5 1-1.9 132 32 G7-2.2 81-3.4 119 38 Source: Ameco
Pension savings in Denmark have almost reached 2% of GDP Total pension fund assets % of GDP 25 % of GDP 25 2 2 15 15 1 1 5 5 198 199 2 21 22 23 24 25 26 27 28 29 21 Source: Danish Ministry of Finance (217) and DREAM.
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