Presentation of the 2019 OECD Economic Survey of Denmark

2019 OECD ECONOMIC SURVEY OF DENMARK Sustaining prosperity and wellbeing Copenhagen, 15 January 2019 http://www.oecd.org/eco/surveys/economic-survey-denmark.htm

@OECDeconomy @OECD

Key messages

Policy should take advantage of the good economic conditions

Hard decisions are required to further reduce financial vulnerabilities

Boosting productivity is the key challenge to sustain high living standards

The economy is growing after a long recovery GDP per capita Thousand USD, constant prices, 2010 PPP 55

DNK

Other Nordics

Euro area

USA

50

45

40

35

30 2000

2002

2004

2006

2008

2010

2012

2014

2016

2018

Note: Other Nordics is a simple average of Finland, Iceland, Norway and Sweden. Euro area is a weighted average (19 countries).

Source: OECD National Accounts database.

Other factors have lifted real incomes and compensated for weak economic growth Real income growth per capita Average annual growth, 2000-2017 4.0

GDP per capita

3.5

Export pric es relativ e to import prices

Net income from abroad

4.0

GNI per capita

3.5

3.0

3.0

2.5

2.5

2.0

2.0

1.5

1.5

1.0

1.0

0.5

0.5

0.0

0.0

-0.5

-0.5

-1.0

-1.0

-1.5

CHE

BEL

FIN

FRA

Source: OECD National Accounts.

NLD

AUT

DNK

GBR

USA

CAN

NOR

SWE

DEU OECD AUS

IRL

-1.5

Wellbeing ranks at the top in most dimensions OECD Better Life Index Country rankings from 1 (best) to 35 (worst), 2017 20% top performers

60% middle performers

9

9

20% bottom performers

7

4

3

Denmark 3

2

1

14 22

Housing

21

Health status

Income

Education & skills

Source: OECD Better Life Index 2017 database.

Personal Environmental security quality

Jobs & earnings

Civic Social engagement connections & governance

Work & life balance

Subjective well-being

Gender gaps are slowly closing

Labour market participation gap % points 30

% points 30 DNK

Other Nordics

OECD

25

25

20

20

15

15

10

10

5

5

0

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

2010

2012

2014

Note: The participation gap is defined as the difference in labour force participation rates for men and women aged 15-64.

Source: OECD Labour Force Statistics.

2016

0

Employment rates for foreign-born are close to OECD averages – but the gaps to natives are sizeable Employment rates by place of birth for age 25-64 2017

Women

Men

%

% Native-born

Foreign-born

Native-born

Foreign-born

90

90

Source: OECD Migration Statistics.

NOR

GBR

SWE

DEU

OECD

DNK

AUT

NLD

FIN

FRA

BEL

GBR

OECD

40

DEU

40

NOR

50

AUT

50

NLD

60

DNK

60

SWE

70

FIN

70

BEL

80

FRA

80

Employment growth has been strong – though not as strong as in other OECD countries Employment growth over the last 5 years %-change of number of persons employed, 2013Q3-2018Q3 % 20 18

Employment growth, 2013Q3-2018Q3

Employment rate, 2013Q3 (right axis)

% 90 85 80

14

75

12

70

10

65

8

60

6

55

4

50

2

45

0

40

NZL LUX IRL ISL HUN ESP ISR TUR SVK GRC AUS PRT MEX SWE USA GBR OECD CHL SVN CZE CHE NLD DNK EST DEU POL LTU JPN KOR BEL CAN ITA AUT FRA NOR FIN LVA

16

Note: Employment rate for age 15-64.

Source: OECD Labour Force Statistics.

The labour market is tightening Unemployment and vacancies

Labour shortages % of firms reporting labour shortages

% of labour force 9

8

% 2.2

Unemployment rateยน, left scale Job vacancy rate, right scale

50

Manufacturing

45 2.0

7

1.8

Construction

40

Services

35 30

6

1.6

5

1.4

4

1.2

25 20 15

10 5

3

2005

2007

2009

2011

2013

2015

2017

1.0

0

2005

1. Statistical break in 2016Q1 and 2017Q1.

Source: OECD Short-Term Labour market Statistics; Statistics Denmark.

2007

2009

2011

2013

2015

2017

Monetary conditions remain very accommodative – reflecting the peg to the euro Central bank lending rate Certificates of deposit rate % 6 5 4 3 2 1 0 -1

-2

2000

2002

2004

Source: Danmarks Nationalbank.

2006

2008

2010

2012

2014

2016

2018

Growth is projected to continue, but moderate

Economic growth projections Annual percentage change, volume

Gross domestic product (GDP) Private consumption Government consumption Gross fixed capital formation Exports of goods and services Imports of goods and services Unemployment rate Consumer price index

2017 2.3 2.1 0.7 4.6 3.6 3.6 5.7 1.1

2018 1.2 2.5 0.5 7.7 -0.5 2.9 5.2 0.9

2019 1.9 2.2 0.5 1.5 2.8 2.2 5.1 1.8

2020 1.6 2.2 0.4 3.3 3.0 3.8 4.9 2.0

Note: Unemployment rate is % of labour force. A statistical recording of the export of a single pharmaceutical patent has distorted GDP data, boosting growth in 2017 and reducing it in 2018.

Source: OECD Economic Outlook 104 database.

A hard Brexit would hit Danish agri-food and manufacturing sectors hard ‌

Reduction in exports to the UK, %

Simulated impact on sectoral exports Size of circles represent the sectoral share of total Danish exports 0

0 Transport & Communication

-5

Trade

-10

Electronic equipment

Manufactures nec

-5 Financial & Insurance

Energy & Natural Resources

-10 Motor vehicles and parts

-15 Machinery and equipment nec

Metals -20

-15

Business services Chemicals

Agri-food -25

-20

Construction & Utilities

-25

Transport equipment Materials manufacturing

-30

-30

-4

-3

-2

-1

0

1

Reduction in total exports, % Source: OECD calculations using the METRO model.

2

3

4

… Making Denmark among the most exposed countries to a hard Brexit Trade with the United Kingdom

Simulated effect of a hard Brexit on exports and GDP B. The effect of Brexit on exports and GDP

% of GDP

A. Trade in goods and services % GDP, 2016 16

DNK

NLD

%%

IRL

12

0

0

-5

-1

-10

-2

-15

-3

-20

-4

8

4

DNK 0

Exports to the UK

Imports from the UK

Source: OECD calculations using the METRO model.

-25

Exports to the UK

NLD

IRL GDP (right scale)

-5

The government budget balance has gradually improved General government budget balance % of GDP 2 1 0 -1 -2 -3 -4

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

Note: Extraordinary tax revenues (including a pension restructuring) drive the surpluses in 2014 and 2017.

Source: OECD Economic Outlook 104 database.

2020

Ambitious indexation of statutory retirement ages to life expectancy is planned

Age 100 95 90

Planned indexation of statutory retirement ages

Senior employment is rising Employment rate for age 55-64 DNK NOR

Statutory retirement age Early retirement age Life expectancy at age 60

SWE OECD

75 70

85

80

65

75

60

70 65

55

60 55 2010 2015 2020 2025 2030 2035 2040 2045 2050 2055 2060

% 80

50 2010 2011 2012 2013 2014 2015 2016 2017

Source: Danish Government (2018); OECD Labour Force Statistics.

Public finances are sustainable – if retirement ages rise as planned Government budget balance

% of potential GDP 5

4 3

Government gross debt

Baseline with indexation

Baseline with indexation

Fixed statutory retirement ages from 2030

Fixed statutory retirement ages from 2030

% of GDP 100

90 80

2

70

1

60

0

50

-1

40

-2

30

-3

20

-4

10

-5 0 2015 2020 2025 2030 2035 2040 2045 2050 2055 2060 2015 2020 2025 2030 2035 2040 2045 2050 2055 2060

Note: Baseline with indexation to life expectancy assumes that the statutory and early retirement ages are increased by up to one year every five years according to the adopted indexation mechanism. The alternative assumes no rise from 2030 onwards.

Source: OECD calculations based on the Danish Government (2018).

Recommendations to sustain inclusive growth and improve public sector efficiency • Gradually tighten fiscal policy to reflect the economic upturn and build fiscal space for a future setback • Increase flexibility in the provision of childcare services to further narrow gender gaps in the labour market • Encourage parents to split parental leave more equally by reserving the share reserved for each parent • Spread best integration practices across municipalities and strengthen co-ordination of services • Improve the integration-training programme in collaboration with social partners and make it permanent • Reform public sector collective bargaining towards broader and higher-level agreements, allowing more bargaining at the local level • Implement the most cost-efficient greenhouse gas emission reductions first

The financial sector is very large Financial corporations Total financial assets by subsector, 2017 % of GDP 1500

% of GDP 2,261 24,063

Monetary financial institutions

Insurance and pension funds

Other financial institutions

1500

Note: Other financial institutions includes non-MMF investment funds. Based on unconsolidated data.

Source: OECD Financial Accounts.

LUX

IRL

NLD

GBR

CHE

DNK

JPN

CAN

FRA

ISL

SWE

BEL

USA

DEU

KOR

PRT

ESP

ITA

AUT

NOR

FIN

ISR

0

HUN

250

GRC

250

LVA

500

CZE

500

EST

750

SVK

750

SVN

1000

POL

1000

LTU

1250

TUR

1250

0

Household gross debt has decreased but is still very high Household gross debt and net worth % of gross household disposable income

Across countries

Over time 350

350

300

300

Household gross debt Total net worth of households (right scale)

900 800 700

250

250

200

200

500

150

150

400

100

100

50

300 200

50

2000 2002 2004 2006 2008 2010 2012 2014 2016

Source: OECD Economic Outlook database.

0

100 LVA HUN SVN POL CZE ITA SVK EST DEU AUT ISR GRC USA FRA JPN BEL ESP PRT FIN GBR IRL CAN KOR AUS SWE NOR NLD DNK

0

600

0

House prices have risen rapidly in Copenhagen Real house price index 2000=100 320

Owner-occupied flats

One-family houses

270

220

170

120

70

2000

2002

2004

2006

Note: Deflated by private consumption deflator.

Source: Statistics Denmark.

2008

2010

2012

2014

2016

2018

Taxation of household capital income favours owner-occupied housing Marginal effective tax rates across asset types Average-rate tax payer, 2016 % 70

DNK

60

% 70

OECD median country

60

50

50

40

40

30

30

20

20

10

10

0

0

-10

-10

-20

-20

Bank deposits

Corporate bonds

Shares

Private pensions

Owner occupied property

Note: The marginal effective tax rate summarises the tax on investing one additional currency unit across different assets with an expected holding period of five years (20 years for pension funds and housing). The tax rates are adjusted for country-specific inflation over the period 2011-16.

Source: OECD (2018), Taxation of household savings.

Recommendations to strengthen resilience of households and the financial sector • Reduce deductibility of interest expenses in personal income taxation • Deregulate the rental market and remove favourable conditions for parents to buy-to-let flats to their children • Review the pension and tax system and implement reform to ease personal financial planning • Improve prudential supervision and international collaboration by joining the European Banking Union • Increase scrutiny and implement more severe penalties for money-laundering activities

High digitalisation in firms has not (yet) boosted productivity growth

% 70

Firms with high digital intensity

Labour productivity growth

2017

Total economy, annualised growth, 2000-2017 4.0

60

3.5

50

3.0 2.5

40

2.0

30

1.5

20

1.0

0

0.0

LUX NOR BEL NLD CHE FRA GBR CAN DNK JPN DEU FIN AUT OECD AUS SWE USA ISL IRL

0.5

LVA ITA GRC POL HUN FRA SVK CZE EST SVN IRL LUX EU PRT AUT ESP DEU LTU SWE NOR BEL FIN NLD DNK

10

Source: European Commission, Digital Scoreboard 2017; OECD Productivity database.

Productivity growth is lagging behind in services

%

5

Over time

Across countries

Annualised labour productivity growth

Annualised labour productivity growth, 2000-2015

%

1990-2000

2000-2010

2010-2017

DNK

Other Nordics

OECD

USA

5

4

4

3

3

2

2

1

1

0

Business economy

Manufacturing

Private sector servic es

Private sector servic es

Less knowledge- Knowledge-intensiv e intensive services servic es

Source: OECD Productivity database and OECD calculations based on OECD STAN database.

0

Mark-ups are stable on average, but on the rise in certain sectors Average mark-up rate in Danish firms Main sector of activity 1.5

Total economy ICT services

1.4

2

Retail trade Pharmaceutical products (right scale)

1.8

1.3

1.6

1.2

1.4

1.1

1.2

1

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

Note: Mark-up rates are calculated at the industry level as the ratio between operating surplus and input costs.

Source: Égert and Vindics (2018).

2015

1

Business investments are picking up and shifting towards intangibles Total business investments % of GDP 18 17

DNK

SWE

DEU

16

Composition of business investments

% of GDP

Intellectual property products Buildings and structures Machinery, ICT and transport equipment

8 7

6

15

14

5

13

4

12

3

11

2

10

9

2000 2002 2004 2006 2008 2010 2012 2014 2016

Source: OECD Economic Outlook database; Statistics Denmark.

2000 2002 2004 2006 2008 2010 2012 2014 2016

1

The average tax wedge and the corporate income tax rate are close to OECD averages

% 60

Average tax wedge

Corporate income tax rate

2017

2018

%

40 35

50

30 40

25

30

20 15

20

10

10

CHE IRL CAN DEU GBR LUX FIN ISL USA OECD DNK SWE NOR JPN AUT NLD BEL AUS FRA

CHE IRL AUS CAN GBR USA JPN ISL OECD NOR DNK LUX NLD SWE FIN AUT FRA DEU BEL

0

5

Note: The average tax wedge comprises income taxes plus employee and employer social security contributions for a single household with average wage.

Source: OECD Tax database

0

Top marginal tax rates on labour and capital income are very high

Ov erall PIT+CIT rate on dividend income, %, 2017 70

FRA

65 60

IRL

USA

55

KOR

50 45

MEX

40

NZL

35

CHL

CZE

30

LVA EST

20 20

LUX

GBR NOR

DEU AUS

AUT ESP OECD ISR CHE ISL TUR

POL

25

30

35

65 60

CAN DNK

NLD

JPN

ITA GRC

FIN

BEL

55

PRT SWE

50

SVN

40

45

35 30

SVK HUN

25

70

25 20 40

45

50

55 60 65 70 Top marginal tax rate on labour income, %, 2017

Note: The top marginal tax rate includes personal income tax and employee social security contributions (All-in rate).

The overall personal and corporate income tax (PIT+CIT) rate on dividend income reports the overall tax rate on distributed profit, Taking into account taxation prior to distribution and at the household level, showing the highest rate.

Source: OECD Tax database.

Business R&D is highly concentrated in pharmaceuticals and biotechnology Danish companies among the world top 1000 R&D investors 2017 world ranking in parenthesis EUR million 0

250

500

750

1000

1250

1500

1750

NOVO NORDISK (68) DANSKE BANK (287) H LUNDBECK (330) DANFOSS (383) LEO PHARMA (441)

NOVOZYMES (468) VESTAS WIND SYSTEMS (487) FERRING PHARMACEUTICALS (654) GRUNDFOS (702) WILLIAM DEMANT (890) GN STORE NORD (950)

Note: Annual R&D spending at the corporate group level. Pharmaceuticals and biotechnology companies in red.

Source: EU R&D Scoreboard data.

2000

Public support to business R&D is relative low – even after reform Direct government funding of business R&D and tax incentives for R&D, 2015 or latest available year % of GDP 0.5

% of GDP 0.5 Direct government funding of BERD

Tax incentive support for BERD

0.4

0.4

0.3

0.3

0.2

Estimate after 2017 reform

0.2 0.1

0.0

0.0

LVA CHL SVK EST LTU GRC CHE LUX MEX POL DEU FIN DNK NZL ESP DNK TUR CZE ITA ISR JPN PRT CAN ISL SWE SVN AUS NLD NOR USA GBR AUT HUN KOR IRL BEL FRA

0.1

Source: OECD, R&D Tax Incentive Indicators.

The share of science (STEM) graduates is low

Tertiary educated adults with STEM as a % of 25-64 year old non-students, 2015

Note: STEM refers to science, technology, engineering and mathematical subjects.

Source: OECD Survey of Adult Skills (PIAAC).

CZE

KOR

DEU

SVK

CHL

EST

AUT

0

CAN

0

ISR

5

ESP

5 POL

10

SVN

10

FRA

15

FIN

15

GRC

20

IRL

20

NZL

25

NOR

25

SWE

30

DNK

30

ITA

35

TUR

35

JPN

40

USA

40

AUS

45

NLD

45

Labour market returns to ICT tasks – and skills in general – are relatively low

% 5

Returns to ICT tasks¹

% 25

Returns to skills² (right scale)

USA

KOR

JPN

IRL

CAN

EST

NLD

GBR

CZE

DEU

FIN

BEL

LTU

ESP

NZL

SVK

AUT

SWE

AUS

CHL

0

POL

0

NOR

5

SVN

1

FRA

10

ITA

2

GRC

15

DNK

3

TUR

20

ISR

4

1. Percentage change in hourly wages for a 10% increase in ICT task intensity. Labour market returns to task intensities are based on OLS wage regressions (Mincer equations) using data from the OECD Survey of Adult Skills (PIAAC) (Grundke et al. (2018).

2. Percent increase in hourly wages for a standard deviation increase in numeracy. Data show the coefficients on numeracy scores from country-specific regressions of log hourly wages (including bonuses) of wage and salary earners (in PPP corrected USD) on proficiency scores standardised at the country level.

Source: OECD STI Scoreboard 2017; OECD Employment Outlook 2015.

Dependence on foreign workers has increased substantially Inflow of migrants with a work purpose Thousand 25

EU

non-EU

Thousand 25

20

20

15

15

10

10

5

5

0

1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Source: Statistics Denmark.

0

Recommendations to boost productivity growth (1)

Strengthen incentives through the tax system • Reduce top marginal tax rates on labour and capital income • Withdraw reduced inheritance taxation of family-owned businesses • Implement an allowance for corporate equity (ACE) • Broaden public support to business R&D through welldesigned R&D grants and tax credits for incremental R&D expenses

Recommendations to boost productivity growth (2) Refining the competition framework • Provide greater power to competition authorities to impose administrative fines and structural remedies within constitutional constraints • Develop clearer standards for exemptions from the Competition Act and involve competition authorities in their determination Ensuring supply of the right skills • Strengthen incentives by reducing student grants for tertiary education and relying more on students loans • Assess whether current visa schemes for non-EU workers sufficiently address skill needs and consider simplifying entry procedures

For more information Disclaimers: The statistical data for Israel are supplied by and under the responsibility of the relevant Israeli authorities. The use of such data by the OECD is without prejudice to the status of the Golan Heights, East Jerusalem and Israeli settlements in the West Bank under the terms of international law.

This document and any map included herein are without prejudice to the status of or sovereignty over any territory, to the delimitation of international frontiers and boundaries and to the name of any territory, city or area.

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