By Steen Bocian, Chief Analyst, Danske Bank
The Danish economy is in a stable and healthy phase. After a couple of tough years with minimal economic growth and rising unemployment, the Danish economy is back on track. The general election on February 8 has not had much impact on the economy. As predicted in the polls, the incumbent Liberal-Conservative coalition government was returned to power, and when the newly re-elected government presented its ambitions in their programme for the coming years, there were few surprises. Economic policy will continue on the same course as before – at least for now.
So, the tax-freeze is to be maintained, and economic policy will continue to be based on the “2010 plan”, the main goal of which is the shaving of government debt in order to reduce the challenges presented by the changing demographics of the coming decades. The means to this end is to increase employment by 60,000 people in the period up to 2010 while keeping public spending in check.
The 2010 plan and its predecessor “Pioneering Denmark” have been the cornerstones of economic policy since the mid- 90s – in other words already under the former Social-Democrat- led government. As well as preparing the Danish economy for the ageing of the population by reducing government debt, these plans have also played a very significant role in ensuring consistent medium-term Danish economic policy. This has meant that Denmark, despite an economic downturn and rising unemployment, has managed to maintain a solid budget surplus
The 2010 plan is now to be made more concrete. An outline has been presented of how the employment target is to be reached. Increasing the number of people in work by 60,000 requires the labour force to be expanded. With jobless numbers at current levels, employment can only increase by 20- 30,000 before unemployment dips to around structural levels. The remaining 30-40,000 must be found among those people currently outside the labour market. It is this part of the 2010 plan that is now being fleshed out. The steps outlined are: intensified efforts to integrate immigrants, which should contribute 25,000 people to the workforce; young people to complete their education earlier, giving 5,000; reduced absenteeism due to sickness will add 2,000; delaying departure from the labour market, 7,500; and, finally, a better functioning labour market should contribute 5,000 people to the expansion of the workforce that the 2010 plan demands.
That said, the government is contemplating a revision of the 2010 plan when the Welfare Commission’s work is completed in autumn 2005. The Welfare Commission consists of independent economic experts. It was set up during the Liberal- Conservative government’s first term in office to investigate the long-term challenges facing the Danish welfare state. The preliminary reports coming out of the Welfare Commission have already suggested the need for major adjustments to the Danish welfare state, and the government is opening up to the idea of more real adjustments in economic policy in spring 2006, after the commission finishes its work. The magnitude of any changes is, though, open to question, as they are unlikely to be popular.
The government’s programme for the new term contains no plans for reductions in income taxes. A policy statement mentions that tax on labour should be reduced if there is the economic leeway for it. A number of minor tax alterations have been planned though. For example, a much-needed simplification of the taxes on profits derived from share trading is being considered, as is an easing of taxes on entrepreneurs and a restructuring of the taxes on automobiles. The government’s programme also contained a number of minor adjustments to economic policy, including a reduced administrative burden for business, cheaper childcare, increased family allowance, and so on.
The overall course of economic policy seems set to continue, and the election and its results have had no significant effect on economic conditions in Denmark, where the barometer is indicating “fair weather”.
