Denmark under OECD's loop

This week Denmark is subjected to an OECD survey and as a citizen in the country I will obviously provide you with an outline.

See also the executive summary as well as the policy brief  (PDF-format).

Actually the Danish economy is fairing quite well; in fact so well that OECD is pointing to a potential overheating of the economy primarily caused by the fixed exchange rate with the Euro which is fostering pro-cyclical pressures.

"The fixed exchange rate framework continues to serve Denmark well. However, in situations like the present one when the Danish economic cycle differs considerably from that in the euro area, other policy instruments need to show extra flexibility. Monetary conditions transmitted from the euro area via the fixed exchange rate regime will most likely remain too expansionary in the near future since the main drivers of the economy (investment, exports, consumption increases driven by rising housing wealth) continue to steam ahead. Measures are therefore needed to damp demand and boost supply. Fiscal policy must remain tight and structural reforms must go on."

Furthermore the OECD reports of a tightening supply side because a declining work force in the long run and low labour participation brought about by high marginal taxes. This is obviously particularly important in Danish context because of our expensive welfare state.

"Looking further ahead, a significant downward trend in labour supply is looming that will tend to reduce the potential growth rate. In the longer term, a declining workforce and ageing-related expenditure increases make the current public welfare system difficult to sustain. Although labour force participation is high, the number of hours worked is low, not least because of high marginal taxes.

(...)

The tight labour market provides a fertile environment for reforms to boost labour supply. The government's proposals to increase the age thresholds for early retirement by three years and the age pension by two years for citizens younger than 50 years today followed by an indexation of the retirement age to life expectancy are commendable and a major step to secure the sustainability of public finances"

Now, what is really going to catch the headlines here in Denmark concerning the OECD survey is the suggestion to tax the high and rising asset bubble in the housing sector so that the high (marginal) income taxes can be lowered.

"Denmark is well endowed with housing and its vast support programmes are not very well targeted. Tax concessions for housing should be given up and used to create room for reducing other, more distorting taxes. Regulation of rents should be phased out and the supply of new housing should be made more flexible."

For many domestic economists this has long been a standing discourse but it has yet to be officially captured by any of the political parties and since the Socialdemocrats in Denmark have merely adapted Mr. Fogh Rasmussen's tax policy the "OECD model" might be a way for the Socialidemocrats to re-position themselves.