The Danish economy is performing very well, reaping the benefits of 25 years of wellmanaged economic reform that have produced sound macroeconomic policies, a flexible labour market and a competition-friendly regulatory environment. Temporary factors such as revenue from oil exploration have also contributed to strong public finances. After some years of slow growth, the economy started to recover in late 2003, and accelerated to a GDP growth rate of 3% in 2005. Private consumption, exports and investment are all expanding. Consumer confidence is close to its highest level since records began three decades ago. Unemployment is historically low, and firms still expect to hire more people in most sectors of the economy. So far, wage inflation has been remarkably subdued, but that could change rapidly as labour shortages are now very clear in construction and seem likely to spread to other sectors.

The recent performance of the Danish economy is impressive with above-trend GDP growth, decreasing unemployment and high budget and current account surpluses. However, this chapter argues that there is now a risk of overheating, not least as the monetary policy stance that Denmark “imports” from the euro area through its fixed exchange rate regime is quite expansionary in the current situation. This is reinforced by a stronger transmission of interest rate changes to the real economy than in previous cycles. Rapidly increasing house prices – which seem to lose touch with fundamentals – add further stimulus to private consumption. The chapter discusses the policy options to ease near-term capacity constraints: continuing a prudent fiscal policy and boosting labour supply. Such policies are also necessary for long-run fiscal sustainability. Finally, the chapter analyses productivity growth and the role of terms-of-trade trends, which are one aspect of how globalisation affects the economy.

In order to safeguard the welfare state, labour supply must be boosted from a wide range of sources to compensate for the growing share of the population that will be in retirement in the future. This chapter first looks at core workers. Previous OECD Surveys have recommended significant changes to stem early retirement, and the initiatives currently being debated are evaluated on this basis. At the same time, more of those at the margin of the labour market could be helped to enter an active working life, including those with long-term sickness and not-too-severe disability, limited skills or migrant background. Finally, the chapter considers how Denmark could benefit from removing barriers for workers from the new EU member states. The related issues of how tax cuts could motivate more labour supply and how to get young people to start and complete studies earlier are addressed in Chapter 3.

One of the key weaknesses of the Danish economy with respect to reaping the benefits of globalisation is the surprisingly slow progress in human capital formation. Among the 25-34 year olds, only 86% have at least upper secondary education, the lowest level among the Nordics. The share of a youth cohort taking tertiary education is fairly high, but with a typical age of 23 when beginning to study and with prolonged study times, there are too few years left during which the fruits of qualifications can be reaped in the labour market. This chapter reviews government initiatives to improve the quality of education and then looks more closely at how to strengthen incentives to acquire and use human capital.

This Chapter discusses ways of replacing the costly government intervention in the Danish housing market with more market-based mechanisms thereby achieving policy objectives in a more efficient and targeted way. The Chapter begins by describing the institutional features of the housing sector, followed by an assessment of overall subsidisation of housing through direct public expenditures and indirect tax subsidies. This includes a discussion of ways to free resources on public budgets for other purposes that are more central to maintaining the welfare state in an ageing society. The Chapter then reviews the rent regulation framework for private and social rented housing and discusses how to provide more flexibility. The final part reviews owner-occupied housing, particularly how the zoning regulations and municipal incentives could be improved to allow for a more responsive housing supply. It also reviews innovative developments in mortgage financing.