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$Unique_ID{bob00164}
$Pretitle{}
$Title{Denmark
Economic Policy}
$Subtitle{}
$Author{Anders Olgaard}
$Affiliation{Press and Cultural Relations}
$Subject{danish
economic
government
denmark
policy
since
public
deficit
fact
industry
see
tables
}
$Date{1988}
$Log{See Table 5.*0016401.tab
See Table 6.*0016402.tab
}
Title:       Denmark
Book:        Fact Sheets on Denmark
Author:      Anders Olgaard
Affiliation: Press and Cultural Relations
Date:        1988

Economic Policy

     The surge in public spending, accompanied as it was by a steep rise in
the number of public employees, meant at the same time that the country needed
greater tax revenue to pay for it all. The need was aggravated by the fact
that expansion occurred during a period of full employment; in order to
attract the necessary labour, central and local government had to offer higher
salaries than private employers, a fact that pushed up government
expenditures.

     Consequently, the 1960s were a decade of soaring taxes; rates of tax on
motor cars, alcohol, tobacco, etc., were increased and are today among the
highest in the world. In addition, a general purchase tax was introduced in
the early 1960s and superseded in 1967 by a 10% value-added tax (VAT).

     But although indirect taxation began taking a bite, it was income tax
that brought in an ever-increasing share of government revenue. In the late
1960s the income-tax system was restructured to increase its yield, with the
result that even blue-collar and white-collar employees in the medium-income
bracket found themselves footing a heavy tax bill. The tax burden is another
area in which Denmark has something of a world record.

     The pattern of economic growth in the 1960s, despite full employment, has
since been decried as unsatisfactory, partly because it brought with it an
inflationary tendency and especially because it generated a chronic
balance-of-payments deficit. As already indicated, Denmark's net indebtedness
to foreign creditors was eliminated in 1960 - but since then, with one single
exception, each year has seen a balance-of-payments problem. Hence the net
foreign debt has increased constantly for the past two decades.

     The payments deficit of the 1960s was caused basically by the fact that
the rise in industrial and other exports was not sufficient to make up for the
decline in agricultural exports. A contributory factor in this situation was
that the public sector soaked up the bulk of available labour, offering higher
salaries than industry could afford.

     As a means of breaking out of the deadlock of this situation, the
incomes-policy debate played an important role in the 1960s. The conclusion
emerged that a policy of wage restraint should enable industry to increase its
export competitiveness. A successful attempt in this direction was made in
1962 but - this solitary event apart - the most significant experience gained
from the exercise was that it is easier to talk about an incomes policy than
it is to implement it effectively during a period of full employment.

     Another venture at getting the payments deficit under control is worthy
of mention. In November 1967 the pound was devalued by 15%. Following a day or
two of hesitation, it was decided that the Danish krone should follow sterling
part of the way; this meant in effect that the krone was revalued in relation
to sterling, the rate of exchange dropping from 19.34 to 18.00.

     The decision was made partly to cope with current economic problems. But
it also had a more fundamental aspect. Britain's role as a trading partner had
been diminishing, partly because farm exports were on the decline. Industry
has its principal markets in Scandinavia and a number of EC countries,
particularly the Federal Republic of Germany. There was thus an increasing
degree of common sense in linking the Danish krone to the German mark rather
than to the pound. This has in fact been the policy pursued since 1967. As we
shall see in a moment, the Danish krone joined the Snake in 1972, i.e. even
before Denmark became a member of the European Community.

     In conjunction with the exchange-rate adjustment of November 1967, the
Social Democrat government tried to put a brake on rising wages by applying
an incomes policy. The government's proposals, however, failed to find a
majority in Folketing - and the government chose to resign, the richer for the
lesson that it is extremely difficult to improve industry's competitiveness in
a period of full employment and a strongly expanding public sector.

EC membership and an oil crisis

     From the strictly economic standpoint, 1973 has since proved the most
eventful year in Denmark from 1949-50 up to the present time. At the beginning
of the year, trade and the economy were booming - as indeed they were in other
countries, too. Added to this was the fact that Denmark - acting in concord
with Britain - had joined the European Community, one effect of which was to
earn the country higher prices for its farm exports and thus better terms of
trade. But at the same time there was a shortage of labour and inflation was
increasing steeply.

     The first oil crisis, in autumn 1973, fed the flames of inflation. And it
largely cancelled out the improvement in our terms of trade that had been
gained by membership of the European Community. Denmark was particularly hard
hit by rising oil prices because, for one thing, we had to import all of our
fuel.

     In December 1973 the country went to the polls in its 12th general
election since the war. Several years' tax increases, the depressing effects
of the oil crisis, rampant inflation, internal disagreement on the
desirability of EC membership - e.g. within the ruling Social Democrat
party - and perhaps a range of other factors has aroused such dissatisfaction
in the people that they reacted by returning to Folketing not the five parties
that had been in the previous parliament but 10! Portending the lack of
economic stability that was to follow in the years ahead, the presence of so
many splinter parties made political stability on the Danish parliamentary
scene difficult to achieve.

     With deepening international recession and deteriorating terms of trade,
Denmark's balance-of-payments problem heightened. A contributory factor was
the rate of inflation; it had reached a level not experienced since World War
I. In the period 1973-75 wages rose by about 20% p.a. and prices by more than
15%. At the same time the unemployment figures climbed, and until summer 1976
employment considerations were given high priority. Part of the reason was
that it was hoped international recession would last for only a limited
period. To stimulate demand, one of the government's measures was to
temporarily reduce the rate of VAT in autumn 1975 from 15% to 9.25% (today it
is 22%!). The national product did indeed rise by 6-7% from 1975 to 1976 - but
at the same time the balance-of-payments deficit increased from D.kr. 3,000m
in 1975 to D.kr. 12,000m a year later. With the deficit position so acute - it
equalled 5% of the national product - the problem of external payments was
again given priority over unemployment.

Lean years

     The problem was exacerbated by the second oil crisis of 1978-80, which
brought about a worsening of Denmark's terms of trade equivalent to the effect
of the first crisis, i.e. about 10%. Indeed, in the period since 1979 the
Danish balance-of-payments deficit has been chronic and substantial: approx.
D.kr. 15,000m per annum. An increasing share of the deficit - approx. D.kr.
18,000m in 1982 - relates, however, to interest payments on the country's net
foreign debt, which on account of the permanence of the payments deficit has
reached approx. D.kr. 150,000m or one-third of the national product. In this
light, one might thus be permitted the slightly optimistic view that even a
large balance-of-payments deficit can be taken as an indication of a
successful shift in a country's economic policy - provided that the deficit is
kept more or less constant - because, of course, the constancy of the deficit
should be considered in relation to the fact that the national product at
current prices is increasing and that interest payable on foreign debt, too,
is rising.

     To an increasing extent, economic policy has been adjusted with the aim
of sharpening the competitive edge of Danish export industries. As an integral
part of this policy, a tight rein has been kept on Danish labour costs.
Whereas wages rose at an annual rate of more than 20% p.a. in the wake of the
first oil crisis, they increased by only approx. 10% after the
second - slightly less than prices generally.

     In recent years real wages in real terms have been fairly constant, while
disposable income in real terms has declined.

     At the same time competitive ability has improved thanks to a series of
minor devaluations of the krone. In 1972 Denmark joined the Snake, the
currency arrangement set up by members of the European Community. Denmark has
participated without interruption in this co-operation ever since, the most
recent development being membership of the European Monetary System (EMS). As
a result of devaluation of the Danish krone, the value of the DM has gradually
appreciated - from 2.33 kroner to the mark in 1973 to approx. kr. 3.50 in
1982. The value of the SDR unit - the combined basket of currencies calculated
by the International Monetary Fund - against the krone, however, has risen at
a slower rate: from just under kr. 7 in 1974 to just over kr. 9 in 1982.

     Against this background, it could be claimed that the strategy of keeping
the lid on inflation and improving the ability of Danish companies to compete
with foreign ones has succeeded - at any rate, in part. It should be borne in
mind that the policy outlined above has been pursued in the face of extremely
unfavourable economic conditions on the international market. Firstly,
economic expansion in our export markets has been modest - and secondly,
international interest rates have been very high. The latter factor not only
increased interest payments on Denmark's foreign debt-it also kept domestic
interest rates at a correspondingly high level.

[See Table 5.: Taxation, Percentage of Gross National Product]

[See Table 6.: Danish Economic Indicators 1971-82]

     With domestic interest rates buoyed up by external factors, the
apparently inevitable consequence of a slower rate of inflation has been an
increase in domestic real-interest rates. This has been the case in Denmark in
recent years-and has not exactly fostered an atmosphere conducive to
investment. Housing has been particularly hard hit. Housing starts in the
1950s numbered around 20,000 units annually; in the early 1970s annual housing
production topped 50,000 units. But by 1982 production had declined to less
than the level of the 1950s.

     In addition, consumer spending has been falling for some years, a
reflection of the drop in real disposable income.

     The decline in the main components of domestic demand has helped keep
imports under control, thus benefiting the balance of payments. But the price
has been a sharp rise in unemployment. In 1983 the number of people out of
work was almost 300,000 or approx. 11% of the labour force.

     Partly in consequence of these developments, public finances have
deteriorated rapidly since the mid 1970s. Some of the aggravation has been
automatic: sluggish-and at times even negative-growth in production and
rising unemployment have meant that transfer payments in the form of
unemployment benefit, etc., have grown while the tax base has remained more or
less constant. Moreover, rates of both direct and indirect taxation have risen
so high that it is difficult to augment government revenue substantially
within the existing system of taxation. And, of course, current expenditures
have increased with the number of people joining government service. During
the 1970s, the total labour force increased by almost 300,000 people; at the
same time the number of people in public employment rose by rather more than
300,000 to a total of more than 700,000. This puts the number of government
employees in the same order of magnitude as the agricultural and industrial
workforces combined.

     Against the background of these figures it has to be acknowledged that in
the 1970s and early 1980s it proved impossible to achieve the goal most Danes
agree on: to change the pattern of employment and open up new jobs in those
sectors that complete with foreign companies, especially industry, etc. In
fact, the reverse was true: between them, agriculture and industry lost
something in the region of 200,000 employees in the 1970s.

A new government, a new policy in 1982

     In more than 25 of the 30 years that have elapsed since adoption of the
present constitution in 1953, the Social Democrats have formed the government
in Denmark. And over the past decade-since the 1973 general election
described earlier-Danish governments have been minority ones without a
stable majority in Folketing.

     The ruling minority government from 1975 to 1982 was formed by the Social
Democrats. As has already been indicated, that government recorded some-but
not a substantial degree of-success in tackling Denmark's economic problems.
But the burden of foreign debt became increasingly heavy, and belief that the
government would manage to bring public finances under control-see table:
Public finances, percentage of gross national product-dwindled, perhaps even
among members of the government itself. In the event, the government resigned
in September 1982, surrendering power-without an election-to a new,
non-socialist government.

     The objectives of the new government were not all that different from
those of the outgoing Social-Democratic administration but its ambitions with
regard to its use of the necessary tools for the job were on a vastly higher
plane. And as the non-socialist government has succeeded in implementing an
important part of its declared programme during its first year of office, it
would not be incorrect to say that Denmark is ruled by a new policy. The
principal elements of this policy are:

     - A brake on wage and price increases. A firm incomes policy has been
introduced to accomplish this, part of it adopted by Folketing in autumn 1982,
part of it resulting from labour-market negotiations in spring 1983. The net
result is that the general rate of wage increases over the next few years is
expected to be halved-from about 10% to about 5% p.a.

     - At the same time the government has emphasised repeatedly since it came
into power that devaluation would no longer be employed as a means of
improving competitive ability. What had become a steady depreciation of the
Danish krone-see table: Danish economic indicators 1971-82-has been halted.

     - As a result, domestic rates of interest have fallen sharply since
autumn 1982, as the prospect of a stable krone and low wage increases has
lessened the chances of inflation. Unfortunately, the decline in the nominal
rate of interest has not yet brought about a fall in the rate of real
interest, which remains very high.

     - In addition to all this, the government has managed to introduce
substantial cutbacks in public expenditure with a view to halting the
increasing deficit in government finances.

Light at the end of the tunnel?

     Although there has been a definite change of course in Danish economic
policy since autumn 1982, there is still a long way to go before the country
has solved its problems of economic balance. This applies to deficits in the
balance of payments and in government finances. And it very much applies to
the problem of unemployment. As already indicated, more than 10% of the labour
force was out of work in 1983.

     The Danish economy is unlikely to regain its momentum until economic
recovery sets in at an international level-which will improve market
prospects for Danish exports. But this presupposes that there will not be
another round of heavy increases in international energy prices.

     If these factors materialise, there is every chance of more jobs becoming
available within Danish industry, provided that the Danish business community
can preserve a high level of competitiveness. Such a development would
automatically improve the government's financial situation, partly due to a
reduction in unemployment. In a process of this nature it would be possible-
and necessary-for government to impose further restrictions on growth of the
public sector.

     With particular regard to the balance-of-payments problem, Danish oil and
gas production in the North Sea should be contributing to the recovery by the
second half of the 1980s.

     There are a number of reasons for believing optimistically that the
Danish business community-and particularly Danish industry-would be able
to increase its share of the market, presuming that international conditions
picked up. There have been earlier periods-especially the 1960s, as has
already been pointed out-when industry found it difficult competing for
labour with other sectors, which could afford larger wage increases. This was
the case, for example, with the building trade-but particularly with the
public sector. In this respect, however, developments have altered radically
since the mid 1970s; government salaries have risen only moderately, a fact
that has made it easier for companies trading with abroad to keep the lid on
wages.

     Then there is the fact that Danish industry, as has already been pointed
out, is made up primarily of small, labour-intensive companies constantly on
the lookout for new products and manufacturing processes. This kind of
economic pattern permits a high degree of flexibility in production, enabling
companies to adapt responsively to change in demand. The ability to adjust
rapidly will undoubtedly be an asset to Danish industry-which, of course, in
an international context plays only a very small role-when it comes to
securing new market shares. Moreover, an economic structure of this type is
relatively invulnerable to competition from the emerging industrialised
countries of the Third World, who owe their competitive edge more to low
labour costs than to product development, design, etc.

     Finally, it should be borne in mind that successive Danish governments
have been very unwilling to grant subsidies and other public support to
lame-duck companies-even those in industry. This has been particularly true
in recent years, when return on investment has been constantly diminishing.
This policy has been pursued with the blessing of Danish industry-and
perhaps more consistently in Denmark than elsewhere in western Europe. As a
result, Danish industry is economically sound-as it bides its time and waits
to tackle the potential of tomorrow.

Bibliography

     The bulk of Danish statistics appears in publications issued by Danmarks
Statistik (Danish National Bureau of Statistics.) Each autumn, normally in
September, the Bureau publishes Statistisk arbog (Statistical yearbook).
Table headings, column introductions, etc., are in both Danish and English.
The 1983 edition, pp. 635-40, has a list in Danish and English of publications
issued by the Bureau.

     The main statistics are updated by the Bureau in Statistisk
manedsoversigt (Monthly review of statistics). This publication, too, has
headings, etc. in both Danish and English.

     Comparative statistics for the past decade are given by the Bureau in its
annual publication Statistisk tiarsoversigt ( Statistical 10-year review, in
Danish).

     Regular surveys of and comments upon economic developments in Denmark are
published by several bodies, including:

     The Economic Secretariat, Ministry of Economic Affairs: Okonomisk
oversigt (Economic survey, in Danish), normally published once or twice a
year.

     The Economic Council, presidium: Dansk okonomi (The Danish economy, in
Danish). The Council was set up by statute in 1962 and comprises the leaders
of a number of business and special-interest organisations, etc., in Denmark.
It is headed by the three independent economists, who form the presidium. Two
annual reports are compiled, normally under the title stated above.

     Danmarks Nationalbank: The bank's Beretning (Annual report, in Danish) is
published in March, followed by an English translation in May. It also
publishes quarterly surveys.

     The problems encountered in controlling public finances are considered in
a publication, Budgetredegoresle (Budget report, in Danish), issued annually
since 1979 by the budget department of the Ministry of Finance.

     Statistical material on individual trades and industries is published
more or less systematically. Danish agriculture is particularly well-served in
this respect. Detailed statistics-usually with English translations of table
headings, etc.-are issued by Statens Jordbrugsokonomiske Institut
(Institute of Agricultural Economics).

     A historical account of economic development in Denmark is presented in a
two-volume, Danish-language monograph by Svend Aage Hansen: Okonomisk vaekst
i Danmark (Economic development in Denmark), vol. I: 1720-1914, 2nd edition
1976, 315 pages, and vol. II: 1914-1975, 2nd edition 1977, 386 pages.

     There is an English-language monograph, dealing in particular with recent
decades, up to 1977, and giving a fuller account of the article contained in
this factsheet, Anders Olgaard: The Danish economy, Collection Studies,
Economic and Financial Series no. 14, Commission of the European Communities,
Brussels and Luxembourg, 1980, 255 pages.