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  Assessment and Recommendations

  The Danish economy has a sound underlying macroeconomic position that has enabled it to cope well with the current international slowdown. Assuming that the projected recovery in global demand transpires, the pace of activity is expected to gradually pick up from its current rate of around 1½ per cent to around 2½ per cent growth next year, sufficient to reverse the recent up-tick in unemployment. With a current budget surplus of 1½ per cent of GDP and inflation running just above 2 per cent, the economy is well-balanced. But Denmark’s output gap is currently smaller than that of the euro area and is likely to close sooner. Monetary conditions could thus be slightly looser than desirable given available capacity, leading to some risk of future overheating. Against this backdrop, any additional stimulus from fiscal policy would be unhelpful, so that tax cuts planned for 2004 to 2007 should be combined with restrained growth in public expenditure. Prudent macroeconomic policies are in place and need to be maintained. But the principal focus of policy in Denmark is appropriately set on addressing longer term economic challenges, and this is also the main focus of this Survey.

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  Key Challenges

  The Danish economy has continued to perform well despite the weak international economic climate. The macroeconomic policy framework provides a sound underpinning for a policy stance that aims to guide the country safely through short-term developments by steadfastly focussing on medium-term priorities rather than allowing itself to be blown off course. This steady-as-she-goes approach enables policymakers to concentrate most of their efforts on addressing the longer-term challenges it faces.

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  Raising Labour Supply for the Longer Term

  This chapter first examines the measures announced in the package and considers areas where it could usefully be extended. The discussion then turns to the two ends of the working-age distribution, the relatively late entry of young people into the workforce and the early exit to retirement, where policies could be adjusted to sharpen the incentives to spend more years in work. Finally, the chapter considers some other dimensions that would boost the total hours worked each year, notably by reducing temporary absences.

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  Migration and Integration

  This chapter first sets out the trends in immigration since the early 1960s and the key demographic characteristics of the foreign population. The next section reviews the entry policies that currently apply for those immigrants from outside the European Economic Area. The recent changes affecting each main type of entry — asylum seekers, family reunification and highly skilled immigrants — are set in an international context and linked back to the authorities’ wish to better integrate those immigrants that are already in Denmark. The challenges of integration are discussed in the following section. The government’s ultimate goal is that foreigners participate in economic activity on an equal footing with native Danes. Such an ambitious goal will obviously not be reached quickly or easily, and the authorities consider the critical intermediate objective to be getting more immigrants into jobs as a prerequisite to their future economic success. The measures already put in place go in the right direction, and the concluding section makes some suggestions as to how policies might be improved further.

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  Refining the Medium-term Fiscal Framework

  This chapter deals with the tax and spending policies applied to achieve the government’s medium-term objectives. The first two sections assess the power of the tax freeze as an instrument to lower taxes as a share of GDP and as a spending-control mechanism. In the following section, the newly implemented sanctions on local governments are described. The agreed earned income tax cuts from 2004 are subsequently assessed, and then some policy recommendations are summarised.

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  Some environmental aspects of sustainable development

  There is growing concern that long-run sustainable development may be compromised unless countries take measures to achieve balance between economic, environmental and social outcomes. This chapter looks at three issues of sustainable development that are of particular importance for Denmark: reducing greenhouse gas emissions, water pollution and household waste production. In each case, indicators are presented to measure performance and an assessment is made of government policies. The chapter also considers whether institutional arrangements are in place to integrate policymaking across the different areas of sustainable development (see Box 8).

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  Annexes
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