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  Assessment and Recommendations

  The Danish economy was operating at close to its potential when the international downturn occurred. The underlying pace of activity slowed somewhat last year, although the estimated GDP growth of 1¼ per cent in 2001 overstates the apparent deceleration, since output in 2000 had been boosted by rebuilding work following the hurricane in December 1999. Export volume growth weakened sharply to around 4 per cent, and business investment shrank as sales prospects deteriorated. Nevertheless, increases in public and private consumption underpinned aggregate demand, total employment continued to rise, and unemployment fell further. With the labour market remaining tight, hourly earnings growth reached 4¼ per cent in the third quarter.

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  Steering a Steady Macroeconomic Course

  The Danish economy has been performing close to its potential in recent years. The so-called "Whitsun package" of tax measures, implemented over the period 1999 to 2002, has achieved both a "soft landing" and a subsequent rebalancing of activity towards export markets and business investment (Figure 1). Private consumption was weak until early 2001 and price inflation remained within reasonable bounds, especially once the impact of energy prices is excluded. A robust fiscal surplus of 2 to 3 per cent of GDP has been maintained throughout. Moreover, the current account surplus has grown steadily since 1999, in sharp contrast to 1997 and 1998 when vigorous domestic demand and the resulting capacity constraints led to significant losses of export market shares and a sharp deterioration of the external balance. However, the labour market has remained tight; unemployment fell below the OECD’s estimates of the structural rate in 1997 and has continued to edge down until late 2001 (Figure 2). The combination of a turnaround in the external balance and the further inroads that have been made on unemployment illustrate the extent to which the economy has been successfully re-oriented.

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  Renewing the Momentum for Structural Reforms

  This chapter examines recent progress in implementing structural reforms, reviews obstacles and identifies areas where continuing efforts are needed to broaden and deepen the structural reform agenda. At the time of the previous Survey in mid-2000, reforms of tax policy, the early retirement system, active labour-market policies (ALMPs) and competition and energy policies were being enacted. These have mostly been pursued as planned and have paid off in terms of further progress on a number of counts. In particular, unemployment has abated to its lowest rate in almost three decades, while the low-inflation environment remains well protected. Moreover, robust surpluses have been established on both the current account and the general government budget, the latter implying that Denmark – though already having high labour force participation rates – probably has a better starting point than many other countries for managing the inter-generational transfers implied by an ageing population.

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  Enhancing Expenditure Control with a Decentralised Public Sector

  A central feature of the Scandinavian welfare state such as Denmark’s is its fine-mesh social-security safety net and the provision of a broad range of free or almost free public services. Such a system almost inevitably implies a high level of public outlays and considerable redistribution of income and consumption. The analysis of Danish expenditure policies in this chapter takes as a point of departurethat the current system enjoys broad support, at least in its fundamental design. Nonetheless, an assessment of expenditure policies cannot escape dealing with issues seen by many as basic features of the welfare state. However, the principal issue faced here is not whether the level of public spending is appropriate, but whether adequate policies are in place to encourage a high level of efficiency and ensure overall spending control.

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  Annexes
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