Executive summary

High living standards but slow growth

Danes enjoy high living standards and well-being, not the least because of the reform willingness of their governments. Yet, the economic recovery has been fragile and GDP per capita is still below its pre-crisis levels, although Gross National Income has received a boost from favourable term of trade developments. Investment has been subdued and North-Sea oil production has been a drag on growth. Sluggish productivity growth continues to be a challenge, undermining long-term growth prospects of an economy with an ageing population. In many areas such as domestic services and retail more competitive pressure and innovation would be a boon to growth. A number of reforms have been launched, but more can be done, for instance boosting competition in retail and pharmacies.

Productivity and economic growth lag behind OECD best performers
Gap to the performance of upper half of OECD countries
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Source: OECD, Going for Growth database.

 https://doi.org/10.1787/888933352714

New structural reforms to improve the balance between inclusiveness and work incentives needed

To enhance inclusive growth, barriers to work for some groups at the margin of the labour market need to be removed. The agreed extension of work lives will need to be accompanied by appropriate measures. The welfare system, though costly, provides generous support for those in need. Public finances are sustainable as long as labour force participation and work incentives remain high and the cost of welfare institutions can be held in check. To this end, generous benefits should be provided in a way which does not reduce work incentives and the effectiveness of integration measures for marginalised groups needs to be improved. On the expenditure side, cost pressures can be contained by further integration of welfare services and opening them to private suppliers.

Social spending is high
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Source: OECD Social Expenditure database.

 https://doi.org/10.1787/888933352728

Current monetary conditions call for more action in prudential policy

The current expansionary monetary conditions may lead to rising internal imbalances. Negative interest rates are contributing to the risk of building-up a new bubble in the housing market and may be encouraging excessive risk-taking by households and the financial sector. However, credit growth remains subdued. To mitigate future risks, macro-prudential tools should be extended across the whole country and tax policy of the property market needs to play its counter-cyclical role. Also, the debt-bias in favour of housing and credit should be lowered, in order to limit the vulnerability of households to rising interest rates.

Households hold large balance sheets and their debt is among the highest in OECD
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Source: OECD Analytical database.

 https://doi.org/10.1787/888933352730

MAIN FINDINGS

KEY RECOMMENDATIONS

Ensuring macroeconomic stability

Monetary conditions are very accommodative and automatic stabilisers in the housing market cannot work fully.

Reform property taxation, including by decreasing mortgage interest rate deductibility and regularly updating valuations in order to establish neutrality across different asset classes.

High household debt poses vulnerabilities.

Encourage mortgage institutions to strengthen the use of debt-service-to-income ratios.

Give consideration to extending some of the locally targeted “Best practices” introduced by the regulator for granting a mortgage in hotspot areas to the whole country.

Private rental market is underdeveloped.

Support a bigger private rental housing market by easing rent regulation while striking a balance between landlord and tenant protection.

Maintaining inclusive growth and sustaining the coverage and generosity of social institutions

Inactivity and the number of social benefit recipients have increased. For some groups incentives to return to work or prolonging careers at older ages are low.

Reduce the effective taxation of returning to work by reforming benefits in order to make work pay.

Allocate a permanent disability pension only to those with permanent incapacity to work regardless of age.

Reduce disincentives and barriers to work at older ages originating from public and occupational pension design.

Improve the quality and implementation of integration programmes for migrants.

Monitor work requirements for social assistance recipients.

Social institutions are costly. In order to stay sustainable they need to become more efficient.

Use autonomy of local governments better for drawing lessons from the diversity of approaches in providing social services, which should also strengthen accountability for outcomes.

Integrate welfare, prevention and rehabilitation services to improve provision of public services.

Make general practitioners more responsible for the continuity of care.

Encourage the private supply of welfare services to offer more choice while at the same time reaping efficiency gains.

Productivity growth has been slow.

The government should reintroduce overall quantitative targets for the effects of productivity measures on GDP.

Further analysis of productivity enhancing measures should be carried out in some areas, while in others reforms could go further, notably in non-export oriented services and retail.