EUROPEAN COMMISSION Brussels, 23.5.2022 SWD(2022) 607 final COMMISSION STAFF WORKING DOCUMENT 2022 Country Report – Denmark Accompanying the document Recommendation for a COUNCIL RECOMMENDATION on the 2022 National Reform Programme of Denmark and delivering a Council opinion on the 2022 Convergence Programme of Denmark {COM(2022) 607 final} - {SWD(2022) 640 final}



Economic and employment snapshot Robust recovery facing some headwinds Denmark benefited from a prolonged period of sustained and balanced economic growth before the COVID-19 pandemic. In 2019, Denmark’s per capita GDP was 176% of the EU average, with only two EU Member States ahead of it. Economic growth was solid, averaging 2.5% in 2015-2019, well above the EU average. However, prior to 2015, the 2008 financial crisis — combined with a housing market bust in Denmark — had led to prolonged sluggish growth, with average GDP growth of 0.9% between 2011 and 2014 (Annex 18). The COVID-19 pandemic had a significant impact on Denmark, albeit less than in many other EU Member States. While exports saw large declines, consumer spending contracted only moderately thanks to the policy measures taken, and housing construction and public investment boomed in 2020. The economy recovered strongly, with economic output having already returned to pre-pandemic levels in the second quarter of 2021 and real GDP rebounded at a rate of 4.7% in 2021 overall. The strong Danish recovery is causing major labour shortages. The unemployment rate decreased by 0.5 percentage points to 5.1% in 2021. An effective wage support scheme helped avoid significant lay-offs and any major surge in unemployment. As economic activity resumed swiftly following the easing of restrictions, employment has been increasing steadily and unemployment has fallen to one of its lowest rates since 2008 as evidenced by the Social Scoreboard under the European Pillar of Social Rights. High demand for labour has led to labour shortages across the economy: recruitment challenges were already widespread in construction and parts of other industry sectors since autumn 2020, and shortages in the services sector have further emerged after the reopening in spring 2021. Graph 1.1: Total employment Source: Eurostat (Quarterly national accounts) Consumer price inflation has been on an upward trend since early 2021, but still remains below the EU average. The increase is driven mostly by energy and commodity prices, but other factors are also contributing. The ongoing pressure on global supply chains has resulted in rising industrial goods prices. Combined with a marked increase in food prices and a hike in cigarette duties, inflation increased from 0.4% in 2020 to 1.9% in 2021. A steep increase in inflation is expected in 2022, mainly due to further rise in energy, food and raw material prices caused by Russia’s invasion of Ukraine with inflation projected to reach 5.1% in 2022. Although inflation is expected to moderate next year due to a levelling-off of energy prices and normalising supply chains, labour market pressures could nevertheless drive higher wage growth, potentially adding to inflationary pressures. Russia’s invasion of Ukraine constitutes a major downside risk to the economic situation. Surging energy and commodity prices, supply-side restrictions, increased uncertainty and the slowdown in Denmark’s main export markets could dampen business investment and household consumption. On the other hand, the Danish fiscal position is strong, and the slowdown could be partly offset by increased government spending in the areas of public investment and defence. The arrival of people fleeing war is expected to be accommodated through additional government spending. The Danish economy is advanced in terms of smart, sustainable and inclusive growth, but not without challenges. The green transition, digitalisation and innovation provide unique opportunities for further boosting productivity, job creation and health benefits. Denmark faces significant investment needs and policy challenges in particular to achieve its ambitious climate objectives, both as regards the circular economy (Annex 7) and green research and development (Annex 9). Improving skills in the labour force (Annex 12) and addressing labour shortages are key to fostering sustainable and inclusive growth (Annex 6). Denmark ranked top of the European Commission’s 2021 Digital Economy and Society Index, but further digitalisation efforts are needed for small companies and public administration (see Annexes 8 and 11). Despite the high overall level of research and development (R&D), the concentration of R&D activities in a small number of large firms could be a sign of insufficient building of capacity for research within small and medium-sized companies (see also Annexes 9 and 10). While there are many start-up companies created in Denmark, these and small innovative companies struggle to scale up and grow (Annex 10). Given the high household debt, further policy measures could be needed to make indebted households more resilient and the introduction of the new property tax system could limit house price increases and ensure fairer taxation (Annexes 16 and 17). Denmark is making progress on most of the United Nation’s Sustainable Development Goals (SDGs), despite some challenges. Denmark performs very well on SDGs overall, ranking among the global top 5. It excels — and has further improved — in terms of environmental sustainability, fairness and macroeconomic stability. As regards productivity, strengthening digital skills remains a challenge. On the preservation of life on land, Denmark has made some progress, but still scores below the EU average (Annex 1) (). Under the headline ‘Denmark can do more 1’ the government has launched a comprehensive medium-term strategy to relaunch the economy after the pandemic. The strategy, which goes beyond economic policy, comprises a wide range of reforms with a focus on innovation, education, green and digital transition and an increase in the workforce as well as foreign and security policy. As an integrated element in this first set of new policy guidelines, the government is putting forward a new digital strategy, of which the first stages are included in the Danish recovery and resilience plan. The strategy, based on recommendations from a high-level expert group, is expected to encompass a wide array of elements, including public sector digitalisation, digital skills for all, cyber security and research(see Box 1). The “Denmark can do more 2” strategy presented in April 2022 focuses on medium-term ambitions in the field of energy independence. Policy intentions include the phasing out of fossil fuel boilers and support for low-income households; additional wind and solar capacity both offshore and onshore; fostering domestic sustainable biogas production capacity so as to cover 100% national gas demand by 2030; new carbon tax combined with the EU Emissions Trading System to ensure the Fit for 55 ambition is met by 2030; and boosting exports of green solutions at international level. Macroeconomic impact of Russia’s invasion of Ukraine Denmark’s direct economic exposure to Russia is below the EU average. Denmark’s exposure towards Russia in trade and foreign direct investment has decreased substantially since the sanctions and Russian ban on certain products were introduced in 2014 and by now it is well below the EU average. Services trade represents around one third of the total trade with Russia and is mainly related to maritime transport. Accordingly, employment directly and indirectly related to exports to Russia is relatively small. Direct and indirect financial links greatly decreased after the largest Danish bank withdrew from Russia and the Baltic countries in 2016. Energy dependence on Russia is significant but could fall markedly by next year. Coal accounts for 4.7% of Denmark’s energy mix and it is almost wholly dependent on Russian imports. Denmark has a significantly larger share of oil in its energy mix (37.9%), but is much less dependent on Russian imports (12%) (). Lastly, around 13.8% of Denmark’s energy mix is made up of natural gas. Although the country does not import Russian gas directly, its dependence through import of gas from Germany is likely to be significant and constitutes an indirect dependence on Russia for natural gas. The refurbishment of one of the largest Danish oil and gas fields is expected to be finished in Q2 2023, which could significantly reduce the import of oil and make Denmark a net gas exporter again. The government also supports short-term measures to accelerate the exit from Russian natural gas and oil by the temporary increase of domestic gas extraction from the North Sea, increased use of sustainable biogas and accelerating the finalisation of the Baltic Pipe (which will transport gas from Norway to the Danish and Polish markets). Supply side restrictions and price shocks could severely hit certain sectors. Denmark has a relatively significant reliance on Russian imports for iron and steel (around 18% of total supply). Similar to other EU countries, Danish companies are also facing large increases in energy prices. High energy prices could negatively affect companies in the short term. On the other hand they are expected to accelerate investment to sustainable energy solutions and further energy savings. The government decided to give a grant of EUR 792 to approximately 419 000 low-income households in order to compensate for rising energy costs in heating and granted approximately EUR 13.3 million to cover the additional costs faced by municipalities in relation to existing social schemes aimed at pensioners and low-income households in need. In addition, an agreement with district heating companies has been made to spread the price increase over the entire year, instead of only the payments in the winter months.

Denmark expects to receive up to 100 000 Ukrainians fleeing war. On 16 March 2022 Parliament adopted a law giving special refugee status to Ukrainian citizens, implying access to housing, schools and the labour market. The impact on the education, social and health systems is expected to be a significant challenge. Solid public finances helped withstand the pandemic Public finances deteriorated due to COVID-19 support measures and the contraction in GDP. The need for emergency measures hit public finances at a time when these were in a sound starting position, as the general government balance was markedly positive in 2019 (to the tune of 4% of GDP), notably due to particularly strong tax revenues. However, the deterioration turned out to be significantly less severe (government balance of -0.2% of GDP in 2020) than in most other Member States, due to extraordinary tax revenue inflows as well as a less extensive take-up of emergency support schemes than initially expected. In the second half of 2021 public finances recovered, fuelled by the return to near-normal economic activity. As a result, the general government balance stood at 2.3% of GDP in 2021. Meanwhile, the debt-to-GDP ratio resumed its downward trend of recent years and fell below 40% of GDP in 2021 (see Annex 18). Denmark provided far-reaching COVID-19 emergency support to businesses and workers. This large-scale response stabilised the economy, and the choice of emergency measures as well as their timing appears to have been well-judged. Wage support and coverage of businesses’ fixed costs during the lockdown periods were the largest types of schemes. Also, state lending was widespread to prevent liquidity squeezes on closed businesses. General emergency measures were phased out last year and current COVID support measures have been made more targeted. A gradual phasing out of support measures should balance the need to allow resource reallocation while containing corporate insolvency for viable firms in highly impacted sectors. In this respect, gradually transitioning to commercial bank lending could ensure efficient capital allocation. Danish public finances are considered sustainable over the longer term. The expected increases in pension , health and long-term care expenditure due to an ageing population should remain manageable, thanks among other things to already agreed increases in the future pensionable age (linked to increases in life expectancy). As part of a broad political agreement, the government has also presented a plan for a new defence agreement. As part of the agreement, defence expenditure will be gradually raised from the current 1.2% of GDP to 2% of GDP by 2033. Additionally, 0.15% of GDP will be spent in 2022 and 2023 on defence, diplomacy and humanitarian purposes. To finance the increased spending, a change in the Budget Law will allow a structural deficit of maximum 1% of GDP, up from the current ceiling of 0.5% of GDP. The recovery and resilience plan is underway The Danish recovery and resilience plan (RRP) was submitted in April 2021. It includes major measures to accelerate the twin green and digital transitions. The formal submission followed a consultation process with social partners and other civil society organisations. The plan includes a total of 34 measures (29 investments and 5 reforms) structured around three components: (i) advancing the green transition; (ii) accelerating and expanding digital reforms and transformation; and (iii) social and research/development. These are all helping to address challenges relevant to all four dimensions of competitive sustainability (see Annex 2). The Danish RRP promotes environmental sustainability. The share in the Danish RRP dedicated to the green transition is among the highest in the EU. A green tax reform will accelerate the decarbonisation of the economy and is one of the plan’s landmark initiatives.. The reform creates tax incentives for companies in 2021-22 to help them frontload green and digital investment. This will also help them prepare for higher energy taxes from 2023 onwards, which over time are to be replaced by a universal CO2 emission tax. The plan’s measures to foster the green transition, include action on biodiversity and sustainable agriculture (‘green transition of agriculture and environment’). The plan’s energy efficiency component (‘energy efficiency, green heating and carbon capture and storage (CCS) capacity’) is expected to contribute to significant decreases in energy consumption and greenhouse gas emissions. The sustainable road transport component aims to accelerate the decarbonisation of the transport sector. Another component aims to promote R&D projects to accelerate research in various green policy areas: CCS and use of CO2, green fuels, climate-friendly agriculture and, to a limited extent, the circular economy. Several RRP measures address digital and productivity related challenges. A new ‘Digital Strategy’ was adopted to further digitalise the public sector and prepare it for future challenges. The National Digital Strategy entails nine ‘visions’ or sub-reform areas covering both the public and private sector. The digital sub-measures include a strategy to promote the adoption of AI and update the cybersecurity strategy. Funding will be provided to digitalise small and medium-sized enterprises and extend rural broadband coverage. In addition, digital measures in the health component (including expansion of telemedicine use) aim to make the sector more resilient (see Annex 14). The measures in the plan will contribute to ‘Shaping Europe’s digital future’ (). Several measures to support the digital transition for small and medium-sized enterprises have the potential to further improve competitiveness. The investment window combined with targeted support schemes for smaller firms will continue to promote digitalisation in business. The forthcoming digital strategy is expected to address the challenges of the digital transition, namely by investing in the digitalisation of companies and digital skills. As regards innovation, the Danish RRP will fund public-private research partnerships focusing on the low carbon economy, resilience and adaptation to climate change. Focused research projects are included in the field of transport, agriculture and assessing CCS potential. With the help of the RRP and existing tax incentives for R&D, investment will foster private green and digital research projects.



Box 1: Key deliverables under the recovery and resilience plan in 2022-23 ·Launch of the National Digital Strategy ·Implement digital solutions in the health care sector as well as infrastructure and logistics support for critical medical products, and support for COVID-related research ·3 500 households to gain very high-speed broadband coverage ·Increase the number of scrapped diesel cars, up by 36 000 vehicles ·Select research partnerships for green R&D projects ·Call for tenders for energy efficiency measures in industry ·Complete calls for tender aiming to implement climate technologies and remove carbon-rich soils in agriculture ·Further increase emissions tax on industry and publish an expert report on the introduction of uniform CO2 emissions taxation. The Danish plan includes a distinct social dimension, which contributes to the fairness objective and to the implementation of the European Pillar of Social Rights. The plan is expected to help maintain a high degree of social cohesion through supporting employment across the country and by extending digital services. It therefore underpins Denmark’s economic, institutional and social resilience. The measures should strengthen Denmark’s capacity to absorb economic and social shocks. Taken together, several components and measures are expected to support social and territorial cohesion and convergence (see also Annex 3). The plan further contains some measures that are expected to help address the country’s challenges in the area of gender equality and equal opportunities for all. The plan will contribute to macroeconomic resilience and economic growth. It is also in line with the European update of the 2020 new industrial strategy. Economic modelling simulations show that Denmark’s value added could increase by between 0.4% and 0.6% by 2024 thanks to the Next Generation EU package, generating up to 8 000 additional jobs. Being a small, open economy, Denmark is likely to reap substantial benefits from spill-over effects. Lastly, the plan will help address the country-specific recommendations () issued by the European Commission in the context of the European Semester (see Annex 4). Regarding the health sector, the plan includes measures on digitalisation as well as infrastructure and logistics support for critical medical products, as well as support for COVID-related research. Further priorities ahead Beyond the challenges addressed by the RRP, as outlined in section 2, Denmark faces additional key challenges not sufficiently covered in the plan, as outlined in the following section. This concerns in particular certain aspects of reducing dependence on fossil fuels, circular economy, labour supply and skills as well as the resilience of the housing market. Addressing these challenges will also help to make further progress in achieving the SDGs related to affordable and clean energy (goal 7), responsible consumption and production (goal 12), decent work and economic growth (goal 8) and industry, innovation and infrastructure (goal 9). In April 2022 the Danish government presented the ‘Denmark Can Do More II’ Strategy to phase out Russian gas and accelerate the green transition. The new roadmap covers five key elements for weaning households off gas, mostly by switching 400,000 households to district heating and heat pumps, increase production of sustainable biogas, accelerate renovation of North Sea gas fields, quadruple solar and onshore wind before 2030 and introduce a CO2-tax.

Further reducing energy dependence on fossil fuels Denmark has traditionally had a low energy supply dependence due to substantial oil- and gas fields in the North Sea and significant investment in renewable energy. Production of domestic oil and gas has decreased and Denmark is, on a temporary basis, a net oil and gas importer until the re-opening of the country’s largest oil- and gas field (Tyra) in 2023. The share of renewable energy and sustainable biogas reached 43.6% in the total energy mix in 2020 which is expected to increase to 54% by 2030. Denmark has also a high biogas' share of 25% in 2021 (out of its overall gas consumption), up from just over 21% in 2020. Table 3.1: Energy mix Source: Eurostat (2019/2020 data) Danish energy dependence on Russia has increased significantly since 2019 due to temporary factors. Oil makes up 37.9% of the total energy mix, with 12% () of it as direct Russian import in 2020. Gas makes up 13.8% of the energy mix and is mainly imported via Germany (87% of the total supply), where a significant share of gas is Russian-sourced. While coal accounts for a very small share of the energy mix (4.7%), Denmark is almost completely dependent on Russia (97%) for its imports. The total dependency on Russian energy imports for Denmark is 21.1% (EU average 24.4%). Denmark’s oil and gas imports have increased substantially since 2019 due to the closure and ongoing refurbishment of one of the largest oil- and gas fields (Tyra) in the North Sea. Once this investment is finished in Q2 2023, Danish oil imports should decrease significantly, possibly eliminating Russian imports and make Denmark a net exporter of gas again. The government also supports exploring short-term measures to accelerate the exit from Russian natural gas and oil by a temporary increase in domestic gas extraction from the existing fields in the North Sea, and increased use of sustainable biogas. Due to Denmark’s ambitious climate objectives, several measures (including those financed by the RRP) are already being implemented top reduce fossil energy dependence but overall ambition could be increased. Denmark's climate policy objectives aim to reduce greenhouse gas emissions by 70% by 2030, compared to 1990, and achieve climate neutrality by 2050 at the latest, including a commitment to a full coal phase-out by 2028. Denmark’s National Energy and Climate Plan (NECP) estimated additional investments needs between EUR 4-12 billion until 2030 in energy efficiency measures to meet this target. The Danish RRP’s green tax reform provides a general tax incentive for companies to frontload their energy saving investment. Sustainable transport and mobility-related measures are also helping to reduce the dependence on fossil fuels. Energy efficiency investment in private and public buildings as well as for companies, replacing oil and gas burners will further reduce oil and gas dependence. Nevertheless, Denmark indicated a low contribution to the EU energy efficiency 2030 targets in its NECP, hence overall ambitions could be further increased. Denmark is strongly committed to increasing renewable energy capacity in the form of offshore wind capacity. The Danish NECP estimates investment needs of EUR 8-12 billion in renewable electricity generation until 2030 to achieve the climate objectives. The country currently has 2,3 GW of offshore wind installed and has taken steps to add a further 6,15-6,55 GW of offshore wind capacity towards 2030. In June 2020, the Danish Parliament (Folketing) decided to begin preparations for the construction of two energy islands in Denmark – an artificial North Sea energy island and another one on the natural land mass of Bornholm in the Baltic Sea. The energy island on Bornholm is currently planned to have a capacity of 2 GW, while the plan for the energy island in the North Sea will have an envisaged capacity of 3 GW in 2033, rising to 10 GW as soon as possible, with 2040 as a target date, subject to the realisation of necessary grid interconnections. A Commission study () has identified numerous moderate and minor barriers in Denmark that tend to disrupt the often already lengthy and complex permitting and administrative procedures for deploying renewable energy installations, in particular for onshore and offshore wind as well as larger rooftop solar PV plants. In particular, these projects face a growing reluctance from responsible authorities in the planning and preparation processes and complaints from third-parties. The increasing share of renewables and the expected large increase in energy consumption will require significant upgrades in energy transmission networks. As also highlighted in the Danish National Energy and Climate Plan further investment in the electricity grid is necessary to ensure that the increasing share of renewable energy can be integrated in the electricity system. An efficient electricity network, including expansion and upgrading of the Danish transmission grids and interconnections with neighbouring countries, is a precondition for the continued development of efficient and competitive renewable energy production and distribution. Further increasing cross-country interconnection would help to achieve decarbonisation, energy efficiency, and security of supply. Denmark’s geographical location is particularly promising for energy links Denmark’s electricity grid. It is already well interconnected with other countries. Speeding up ongoing interconnection projects can also foster diversification of energy supply Denmark’s potential could be developed even further, in order to increase security of supply and adaptability to regional variances. Strengthening the circular economy to support the green transition Denmark is pursuing ambitious climate objectives and the Danish RRP has a strong focus on the green transition, earmarking 60% of the funds for green initiatives. The country has set a target to reduce greenhouse gas emissions by 70% by 2030 (relative to 1990 levels) and wants to achieve climate neutrality by 2050 at the latest. In 2020, Denmark’s total greenhouse gas emissions were 42% below 1990 levels (). Most of this reduction has come through a shift from fossil fuels to renewable energy. Currently, construction, transport and agriculture are the largest greenhouse gas-emitting sectors outside the EU Emissions Trading System. Denmark has put in place comprehensive policies and measures to further reduce greenhouse gas emissions in these sectors, which will be partially supported by the Danish RRP (see Annex 5). Nevertheless, challenges remain in reaching Denmark’s ambitious climate goals. Additional investment, in particular in research, technology and infrastructure, is likely to be needed. Further action is also warranted in other key sectors and areas such as the circular economy and waste management, and by enhancing carbon sinks in agriculture and water/fisheries management. In taking climate policy forward, attention needs to be paid to regions most affected by the transition due to high concentration of oil and gas industry in South Denmark and North Jutland (See Annex 15). In Denmark, energy poverty overall stands at 3% (EU: 8.2%), with approximately 10% of the two lowest-income deciles in the population being unable to keep their homes adequately warm (see Annex 6). Denmark is under-performing with respect to certain aspects of the circular economy. Danish rates of circular material use are well below the EU average. Graph 3.1 even shows a small decline in secondary material use over the past years. Denmark would thus benefit from investment to boost the circular economy, including through waste prevention and better waste management, as well as improved resource efficiency and secondary material usage (see Annex 7). Graph 3.1: Circular material use rate, 2010-2020 Source: Eurostat Denmark would benefit from an improved municipal waste management system. It currently produces the highest amount of municipal waste1 per capita in the EU, with 845 kg/capita/year. After a downward trend until 2017, municipal waste generation in Denmark has started to increase in recent years (see Graph 3.2). Further efforts to prevent or recycle waste can contribute to achieving Denmark’s ambitious climate objectives. While Denmark’s landfill rate is below 1%, it incinerated 45.2% of its municipal waste, close to double the EU average rate. In kg/capita/year terms incineration exceeds recycling by roughly 20% and despite energy recovery it implies missed opportunities for the circular economy (see also Annex7). Graph 3.2: Municipal waste by treatment in Denmark, 2011-2020 Source: Eurostat Existing national programmes and plans for waste and the circular economy need to be implemented. Preventing products and materials from needlessly becoming waste for as long as possible is the most efficient way to improve resource efficiency and reduce the environmental impact of waste. Waste prevention and re-use are the preferred options at the top of the waste hierarchy in terms of achieving circularity. Already in 2019 (), Denmark received two recommendations for priority action in the field of waste: (i) introducing of new policy instruments to promote waste prevention, and (ii) increasing the country’s recycling share and shifting away from incineration to greener sources of heating generation. While less waste would imply lower energy generation, this could over time be replaced by other environmentally-friendly methods. Training the labour force for the green and digital transition Denmark saw strong employment growth after gradually reopening its economy. After receding in early 2020 due to the COVID-19 pandemic, employment surpassed its pre-pandemic level in the second half of 2021. The COVID-19 outbreak induced a drop in economic activity, although its adverse effects on the labour market were to some extent cushioned by a short-time work scheme. From 2019 to 2020, the employment rate for people aged 20-64 in Denmark decreased, albeit less than in most Member States. Both the employment and unemployment rate in Denmark improved considerably during 2021. Graph 3.3: Real unit labour cost, real compensation per employee and real productivity Source: Eurostat Labour shortages are significant across all sectors, with gaps being historically large in the construction and services sectors. For the construction sector, the share of firms reporting labour shortages was at 43% in April 2022, while services industries reached a new record of 37% in the same month. Wages are on the rise, partly in response to the tight labour market. In the fourth quarter of 2021, nominal compensation per employee increased by 2.3%, which is the largest increase observed since 2010. Meanwhile, real compensation per employee decreased marginally (Graph 3.4). Labour shortages in greening sectors such as professional, scientific and technical activities have also been identified (see Annex 6).

Upskilling and reskilling could be key to perpetuating the current economic expansion. There is still a sizeable reserve of people able to join the labour market and fill vacancies in a range of sectors, provided the right training offers, notably vocational training, are available and sufficiently used. Denmark has increased public expenditure in this area with additional funding for upskilling measures to be implemented during 2020-22. Individuals’ digital skills are high, with 69% in 2021 possessing at least basic digital skills, according to the Digital Economy and Society Index. The Digital Scoreboard (2020) shows that 20.4% of ICT specialists are women, above the EU average. By further strengthening participation in adult learning, Denmark would contribute to reaching the 2030 EU headline target on skills. Denmark is one of the Member States with the highest level of digital skills, yet further improvements would facilitate keeping pace with the digital transition. The country ranks first in digital performance at EU level, scoring well above the EU average in basic and above basic digital skills. An above-average percentage of people possess at least basic digital skills. Technological change and digitalisation are making jobs increasingly skills-intense – both in terms of level and types of skills. Therefore, despite the overall positive relative performance, it is important to further improve the digital skills (see also Annex 8). Attracting foreign students remains a challenge. The introduction of additional work visa categories has helped reduce labour shortages. However, it might not fully compensate lost hiring opportunities entailed by the decrease in foreign students following the curtailment of higher education programmes for English-speaking students. Graph 3.4: Participation, unemployment and NEET rates Source: Eurostat Some labour market trends pose challenges for Denmark in the quest for a skilled workforce. Denmark performs strongly in adult learning, but enrolment rates are falling. While above the EU average (10.8%), the rate of adult participation in learning has declined over recent years . A relatively large share of young adults (17% in 2018) do not finish high school or have no vocational qualification. At the same time, the share of early leavers from education and training has decreased, albeit remaining above the 2015 low (see Annex 13). According to PISA 2018 data, pupils with a migrant background continue to show considerably worse basic reading skills (twice the EU average). Denmark intends to address these challenges as part of its efforts to have an adequately skilled workforce, in line with the European Pillar of Social Rights. Denmark’s ambitious climate objectives will require re-skilling and upskilling in several sectors. To ensure a fair transition the work force in several sectors (such as industry, energy, transport and agriculture) will need to adapt to significant technological changes (see Annex 6). Further investment in skills would help the transition and preserve the competitiveness of these sectors. The high level of digitalisation in the country, both at public and private level, can further the green transition in the Danish economy, including in the utility sectors. Improving the resilience of the housing market Danish households have long carried one of the highest mortgage debt burdens in the EU. Several factors contribute to Danish households’ high debts, including a unique mortgage financing system providing very low interest rates, sizeable pension savings, taxation policy as well as idiosyncratic features of the mortgage market. Mortgage owners can benefit from interest-only, deferred amortisation types of loans (similarly for instance to Sweden and the Netherlands), thereby significantly expanding their loan-taking capacities. The Danish tax system also allows one of the highest tax deductions for mortgage interest payments in the EU, which incentivises debt financing of residential property (Annex 17). As a result, Danish households (together with Swedish and Dutch households) have one of the highest levels of mortgage debts in the EU compared to GDP or household incomes. Following years of moderate growth, increased demand for residential property during the pandemic led to a new spike in house prices. The demand for residential properties more than doubled in 2021 and house price growth accelerated from 4.5% in 2020 to 13.4% in the first half of 2021 in annual terms. Elevated demand has eased since the second half of 2021, returning to the pre-pandemic average, and accordingly the house price increase has gradually slowed to around 4.1% by the end of 2021, but started to increase again in early 2022. The house price increase has been particularly steep in the Copenhagen area compared to the rest of Denmark (see Graph 3.5). Graph 3.5: House price to income ratio evolution Source: Statistics Denmark The new property taxation system would increase housing market resilience and fairness. Recurrent property taxes are currently capped, hence they do not increase with market prices and so are not able to dampen house price cycles. The current system also raises fairness questions, as effective property tax rates can be currently lower in the main urban cities where owners have benefitted from the highest housing price increase. The introduction of the new property tax system was already approved by Parliament in May 2017 () but is still not in place. The implementation of the new system would restore the link between market prices and taxes, smoothen house price cycles and ensure a fairer property taxation system (). Reducing high mortgage interest deductibility would lower households’ incentives to take on debt, while using this saving to increase the personal income tax allowance could increase welfare and economic equality (). Residential construction has kept pace with rising demand, but high demand poses challenges for affordable housing in urban areas. Investment in dwellings surged during the pandemic, growing at around 9-10% both in 2020 and 2021 also due to energy renovation in the social housing stock. However, high prices for owner occupied housing and long waiting times for social housing in the main urban areas increased the need for additional supply of affordable housing units. As a response the Danish government has put in place a range of new initiatives to further increase construction of affordable rental housing, primarily social housing. A total budget of EUR 1.35 billion has been appropriated to support the initiatives, of which EUR 0.67 billion are to be implemented until 2031. The initiative aims to construct 22,000 new affordable rental homes (1.6% of the total stock), including 4,000 student accommodations (10% of the total stock), in the four largest cities of Copenhagen, Aarhus, Odense and Aalborg by 2035. Amongst the new initiatives is an initiative with a budget of EUR 0.12 billion which enables social housing organisations to buy private rental housing and convert it into social housing. Although mortgage lending growth remained modest, some Danish households remain vulnerable to an interest rate hike, or major house price adjustment. The share of loans from new mortgages with a debt-to-income (DTI) ratio above 4 and loan-to-value (LTV) ratio above 60% has increased in the Copenhagen area, but mya be showing first signs of declining again (see Graph 3.6). To avoid further building up of risk, the resilience of such loan takers could be strengthened by opting for fixed interest rates and increasing the amortisation requirement () to prevent rises in debt service costs, especially during economic downturns. Graph 3.6: Share of loans from new mortgages with debt-to-income above 4 and loan-to-value above 60% Source: Nationalbanken Key findings Denmark’s recovery and resilience plan includes measures to address a series of its structural challenges through: ·Accelerating the green transition by supporting the implementation of a green tax reform, fostering investment in the energy efficiency of public and private buildings, funding measures to reduce greenhouse gas emissions in transport, agriculture and other sectors;

·Accelerating the digital transition by adopting a new digital strategy, modernising public administration, helping small and medium-sized firms invest in digital technology and extending rural broadband coverage; ·Promoting R&D investment and involving more companies in research activities, as well as supporting green research and development projects; ·Increasing the resilience of the healthcare system, including digitalising healthcare, infrastructure and logistics support for critical medical products, and support for COVID-related research. Beyond the reforms and investments in the RRP, Denmark would benefit from: ·Reducing dependence on fossil fuels and further decarbonising the economy by accelerating the deployment of renewable energies by streamlining and accelerating permitting procedures, upgrading energy transmission networks and increasing interconnections with neighbouring countries, while improving energy efficiency to reduce energy consumption. ·Making further progress with respect to the circular economy and waste management, in particular on prevention, recycling and reducing incineration of (municipal) waste. ·Supporting digitisation of small and medium-sized firms and public administration to improve productivity and competitiveness as well as boost the transition toward a greener Danish economy (for instance by increased digitalisation of utility services). ·Securing an adequate labour supply as well as investing in re- and upskilling the labour force and increasing vocational training participation to promote the green and digital transitions. ·Introducing the delayed new property tax system to ensure fairer property taxation and mitigate house price increases, address shortages of affordable housing in urban areas through new construction and increase financial resilience of highly indebted borrowers by further limiting the reliance on variable interest rates and deferred amortisation mortgage loans. Annexes List of Annexes Cross-cutting progress indicators Annex 1: Sustainable Development Goals Annex 2: Recovery and Resilience Plan - Implementation Annex 3: Other EU instruments for recovery and growth Annex 4: Progress in the implementation of country-specific recommendations Environmental sustainability Annex 5: Green Deal Annex 6: Employment and social impact of the green transition

Productivity Annex 7: Resource efficiency and productivity Annex 8: Digital transition Annex 9: Innovation Annex 10: Industry and single market data Annex 11: Public administration Fairness Annex 12: Employment, skills and social policy challenges in light of the European Pillar of Social Rights Annex 13: Education and skills Annex 14: Health and health systems Annex 15: Economic and social performance at regional level Macroeconomic Stability Annex 16: Key financial sector developments Annex 17: Taxation Annex 18: Key economic and financial indicators Annex 19: Debt sustainability analysis LIST OF Tables Table A2.1:Key elements of the Danish RRP Table A4.1:Summary table in 2019, 2020 and 2021 CSRs

Table A5.1:Indicators underpinning progress on European Green Deal from a macroeconomic perspective Table A7.1:Selected resource efficiency indicators Table A8.1:Key Digital Economy and Society Index Indicators Table A9.1:Key research, development and innovation indicators Table A10.1:Key Single Market and Industry Indicators Table A11.1:Public administration indicators Table A12.1:Social Scoreboard Table A13.1:EU-level targets and other contextual indicators under the European Education Area strategic framework Table A14.1:Key health indicators Table A15.1:Denmark, selected indicators at regional level Table A16.1:Financial soundness indicators Table A17.1:Taxation indicators on taxation Table A18.1:Key economic and financial indicators Table A19.1:Debt sustainability analysis for Denmark Table A19.2:Heatmap of fiscal sustainability risks for Denmark LIST OF Graphs Graph A1.1: Progress towards SDGs in Denmark in the last five years Graph A2.1: Share of RRF funds contributing to each policy pillar Graph A3.1: 2014-20 European Structural and Investment Funds, - total budget by fund

Graph A3.2: Cohesion policy contribution to the SDGs Graph A4.1: Denmark's progress on the 2019-2020 CSRs (2022 European Semester cycle) Graph A5.1: Fiscal aspects of the green transition Taxation and government expenditure on environmental protection Graph A5.2: Thematic – Energy Share in energy mix (solids, oil, gas, nuclear, renewables) Graph A5.3: Thematic – Biodiversity Terrestrial protected areas and organic farming Graph A5.4: Thematic – Mobility Share of zero-emission vehicles (% of new registrations) Graph A6.1: Fair green transition challenges Graph A6.2: Energy poverty by income decile Graph A7.1: Municipal waste treatment Graph A11.1: Performance on evidence-based policy- making indicators Graph A13.1: Low achievement in reading by migrant background, PISA 2018 Graph A14.1: Life expectancy at birth, years Graph A14.2: Projected increase in public expenditure on health care over 2019-2070 (reference scenario) Graph A15.1: GDP per head (2010) and GDP growth (2010-2019) Graph A15.2: Evolution of labour productivity across Danish regions Graph A15.3: CO2 emissions from fossil fuels per person in Danish regions (2018) Graph A15.4: Territories most affected by the climate transition in Denmark Graph A17.1: Tax wedge indicators

Cross-cutting progress indicators Annex 1: Sustainable Development Goals This annex assesses Denmark’s progress towards the Sustainable Development Goals (SDGs) along the four dimensions of competitive sustainability. The 17 SDGs and their related indicators provide a policy framework under the UN’s 2030 Agenda for Sustainable Development. The aim is to end all forms of poverty, fighting inequalities and tackling climate change, while ensuring that no one is left behind. The EU and its Member States are committed to this historic global framework agreement and to playing an active role in maximising progress towards the SDGs. The graph below is based on the EU SDG indicator set which was developed to monitor progress towards SDGs in an EU context. While Denmark performs very well on several SDG indicators related to environmental sustainability (SDG 7, 9, 11, 12, 13), compared to the EU average, it still needs to catch up on others (SDG 14 and 15). Notably, ‘Net greenhouse gas emissions per capita (as estimated by Eurostat)’ improved from 9.8 t CO2e/capita in 2014 to 8.6 t CO2e/capita in 2019 but ranges above the EU average (7.8 t CO2e/capita). In addressing ‘Affordable and clean energy’ (SDG 7), Denmark has achieved further progress in regard to the share of renewable energy in total energy consumption, which increased from 30.5% in 2015 to 31.6% in 2020, significantly over-performing the EU average in this indicator (22.1% in 2020). Measures included in the energy and green R&D components of the RRP aim to further increase innovation in the energy performance field. The Danish government assessed that there is still progress to make on several goals, including on SDG 12 (). Generation of municipal waste has increased from 814 to 845 kg per person between 2018 and 2020, while the circular material use rate decreased from 8.3% to 7.7% between 2016 and 2020. Denmark performs well on most SDG indicators related to fairness (SDG 1, 2, 3, 4, 5, 8, 10). Denmark outperforms the EU average in most indicators related to gender equality, poverty, inclusive growth and inequality (SDGs 1, 5, 8, 10), which can be attributed to its social benefits system. Denmark improved on various related indicators like ‘Positions held by women in senior management’ (27.1% in 2016, 34.9% in 2021), ‘Employment rate’ (76% in 2016, 79% in 2021) or ‘People at risk of poverty or social exclusion’ (18.6% in 2015, 16.8% in 2020). While Denmark performs very well on some SDG indicators related to productivity (SDG 8, 9), it still needs to catch up on others (SDG 4). In Denmark, the share of households with high-speed internet connections in 2021 (94.9%) is well above the EU average (70.2%) and represents significant progress on this indicator since 2015 (58.1% in 2016, EU: 25.2%). Denmark has one of the highest gross domestic expenditure on R&D (3.03% of GDP in 2020) despite a small decrease since 2015 (3.06% of GDP). As regards quality of education (SDG 4), while Denmark outperforms EU average, several indicators have shown negative trends, such as early leavers from education (7.5% in 2017 to 9.8% in 2021) and the share of underachieving pupils in science (15.9% in 2015 to 18.7% in 2018). For this reason, the RRP includes a large share of investments in the digital component with measures to further tackle remaining digitalisation challenges, notably by promoting further digitalisation measures across the economy and society. Denmark performs very well on SDG indicators related to macroeconomic stability (8, 16). Denmark performs very well, and further improved, on the quality of its institutions, including trust in institutions (SDG 16). The percentage of the population in Denmark with confidence in the EU Parliament increased from 51% in 2016 to 67% in 2021 (EU: 50% in 2021). Denmark also outperforms the EU average on indicators related to ‘Decent work and economic growth’ (SDG 8). Real GDP per capita in Denmark increased from EUR 45 720 in 2016 to EUR 50 200 in 2021 (EU: 27 810 in 2021). Graph A1.1: Progress towards SDGs in Denmark in the last five years Source: Eurostat, latest update of 28 April 2022. Data mainly refer to 2015-2020 and 2016-2021. Annex 2: Recovery and Resilience Plan - Implementation Graph A2.1: Share of RRF funds contributing to each policy pillar Source: RRF Scoreboard https://ec.europa.eu/economy_finance/recovery-and-resilience-scoreboard/country_overview.html The Recovery and Resilience Facility (RRF) is the centrepiece of the EU’s efforts to support its recovery from the COVID-19 pandemic, fast forward the twin transition and strengthen resilience against future shocks. Denmark submitted its recovery and resilience plan (RRP) on 30 April 2021. The Commission’s positive assessment on 17 June 2021 and the Council’s approval on 13 July 2021 paved the way for disbursing EUR 1.551 million in grants under the RRF in 2021-26. The financing agreement was signed on 27 August 2021. The key elements of the Danish RRP are set out in Table A2.1. The share of funds contributing to each of the RRF’s six policy pillars is outlined in Graph A2.1 below. The progress made by Denmark in implementing its plan is published in the Recovery and Resilience Scoreboard. The Scoreboard also gives a clear of the progress made in implementing of the RRF as a whole. Table A2.1: Key elements of the Danish RRP Source: European Commission Annex 3: Other EU instruments for recovery and growth The EU’s budget of more than EUR 1.2 trillion for 2021-2027 is the investment lever to help implement EU priorities. Underpinned by an additional amount of about EUR 800 billion through NextGenerationEU and its largest instrument, the Recovery and Resilience Facility, it represents significant firepower to support the recovery and sustainable growth.

In 2021-27, EU cohesion policy funds () will support long-term development objectives in Denmark by investing EUR 0.61 billion () including EUR 89.0 million from the Just Transition Fund to alleviate the socio-economic impacts of the green transition in the most vulnerable regions. The 2021-27 cohesion policy funds Partnership agreements and programmes are designed taking into account the 2019-20 country-specific reports and investment guidance provided as part of the European Semester, ensuring this money fully complements other EU funding. In addition, Denmark will benefit from EUR 4.8 billion support for the 2023-27 period from the Common Agricultural Policy, which supports social, environmental, and economic sustainability and innovation in agriculture and rural areas, contributing to the European Green Deal, and ensuring long-term food security. In 2014-20, the European Structural and Investment Funds (ESIF) for Denmark are set to invest EUR 1.96 billion () from the EU budget. The total investment including national financing amounts to EUR 2.75 billion (Graph A3.1), representing around 0.14% of GDP for 2014-20 and 3.97% of public investment (). By 31 December 2021, 93% of the total was allocated to specific projects and 50% was reported as spent, leaving EUR 1.39 billion to be spent by the end of 2023 (). Among the 11 objectives the most relevant ones for cohesion policy funding in Denmark are those of sustainable and quality employment, research and innovation, education and vocational training and competitiveness of SMEs (in total EUR 0.6 billion). By the end of 2020, Cohesion policy investments helped improve skills and job opportunities for almost 80 000 persons of which 5500 gained qualifications; supported almost 14 000 SMEs; created over 700 new products, and led to over 20 000 tonnes of reduction in CO2eq. Graph A3.1: 2014-20 European Structural and Investment Funds, - total budget by fund Source: European Commission Cohesion policy funds are already substantially contributing to the Sustainable Development Goals (SDGs) objectives. In Denmark, cohesion policy funds are supporting 5 of the 17 SDGs with up to 93% of the expenditure contributing to the attainment of the goals. REACT-EU under NextGenerationEU provided EUR 181.0 million of additional funding to 2014-2020 Cohesion policy allocations for Denmark to ensure a balanced recovery, foster convergence and provide vital support for regions following the impact of the coronavirus outbreak. REACT-EU support in Denmark focuses on the green and digital transition of the economy, notably helping companies develop and adapt to the transitions, and train their workforce. In 2022, new projects using the Commission’s Technical Support Instrument will start to (i) support the green and circular economy transition through standardisation of product data in digital and automated processes and (ii) develop a methodology for reviewing existing legislation for digital-readiness. Denmark also benefits from other EU programmes. These include the Connecting Europe Facility, which allocated EU funding of EUR 867.3 million to specific projects on strategic transport networks, and Horizon 2020, which allocated EU funding of EUR 1,760.0 million. Graph A3.2: Cohesion policy contribution to the SDGs Source: European Commission Annex 4: Progress in the implementation of country-specific recommendations The Commission assessed the 2019-2021 country-specific recommendations (CSRs) () addressed to Denmark in the context of the European Semester. The assessment takes into account the policy action taken by Denmark to date (), as well as the commitments in the recovery and resilience plan (RRP) (). At this early stage of the RRP implementation, overall 92% of the CSRs focusing on structural issues in 2019 and 2020 have recorded at least “some progress”, while 8% recorded “limited” (see Graph A4.1). Considerable additional progress in addressing structural CSRs is expected in the years to come with the further implementation of the RRP. Graph A4.1: Denmark's progress on the 2019-2020 CSRs (2022 European Semester cycle) Source: European Commission

Table A4.1: Summary table in 2019, 2020 and 2021 CSRs Source: European Commission Environmental sustainability Annex 5: Green Deal The European Green Deal aims to transform the EU into a fair and prosperous society, with a modern, resource-efficient and competitive economy where there are no net emissions of greenhouse gases in 2050 and where economic growth is decoupled from resource use. This annex offers a snapshot of the most significant and economically relevant developments in Denmark in the respective building blocks of the European Green Deal. It should be viewed together with Annex 6 on the employment and social impact of the green transition and Annex 7 for circular economy aspects of the Green Deal. Denmark is not yet in a position to meet European and domestic greenhouse gas emission reduction targets. In 2020 its total greenhouse gas emissions were 42% below 1990 levels (). To meet its domestic reduction target of 70% by 2030 (relative to 1990 levels) and achieve climate neutrality by 2050 it will be necessary to significantly step-up investments and reforms across the Danish economy. In sectors covered by the EU Effort Sharing Regulation (ESR) – including buildings, road transport, agriculture, waste and small industry – greenhouse gas emissions fell by over 25% between 2005 and 2020, overshooting Denmark’s EU 2020 reduction target for these sectors of 20%. However, to meet its ESR emissions reduction target for 2030 (39% reduction relative to 2005 levels), efforts beyond the measures currently slated in Denmark’s National Energy and Climate Plan may still be needed. Additional action will in any case be required to achieve the revised Danish ESR target for 2030 (-50%) that the European Commission has proposed as part of its Fit for 55 package. In its recovery and resilience plan, Denmark allocates 59% of the available resources to climate objectives and outlines crucial reforms and investments to further the transition to a more sustainable, low-carbon and climate-resilient economy. Denmark is performing relatively well with respect to environmental taxation. Its environmental tax revenues as a percentage of total tax revenues, as well as in terms of GDP, are above the EU average (see Graph A5.1). This holds especially for transport taxes, which contribute to one of the highest revenue shares in the EU, as well as, to a smaller extent, taxes on pollution and resources (). It is interesting to note that environmental tax revenues have been decreasing over time, largely due to a reduction in the tax base, as environmental taxation has managed to reduce harmful economic activity. The share of expenditure on environmental protection in total government expenditure is below EU average Graph A5.1: Fiscal aspects of the green transition

Taxation and government expenditure on environmental protection Source: Eurostat Graph A5.2: Thematic – Energy

Share in energy mix (solids, oil, gas, nuclear, renewables) Source: Eurostat With 41% of renewables in its energy mix, Denmark is a frontrunner. Nevertheless, oil and petroleum still represent 38% of the country’s energy mix (see Graph A5.2). Substantial investments and further streamlining of permitting procedures to remove administrative barriers, in particular in the offshore wind sector, will be required for Denmark to meet its domestic objective of reducing its greenhouse gas emissions by 70% by 2030 (from a 1990 baseline) and for renewables to cover at least 55% of the country’s gross final consumption by 2030. In December 2020, the government announced a moratorium on oil & gas exploration, with the objective of ending existing production by 2050. In terms of biodiversity and ecosystem health, Denmark presents a mixed picture. Considering both Natura 2000 and other nationally designated protected areas, in 2019 Denmark was legally protecting 14.8% of its land areas (EU average 26%) and about 19% of marine areas (EU average 8%) (see Graph A5.3). At the same time, the share of habitats with bad or poor conservation status had increased to 61% and the share of assessments for species with bad or poor conservation status had increased to 95%. The percentage of land covered by forests was 16.4% in 2018, well below EU average of 43.5%. The share of organic farming has increased from 6.3% in 2015 to 11.55% in 2020, just above the EU average of 9.7% (2020).

As regards pollution, the situation of nitrates needs to be carefully monitored (). Regarding air quality, air quality limit values were not exceeded in 2020. In terms of mobility, Denmark presents a mixed picture. It is among the EU frontrunners in terms of zero-emission passenger cars as a share of new registrations (see Graph A5.4). At the same time, compared to many other EU Member States, electrification of its railway network is underdeveloped. Graph A5.3: Thematic – Biodiversity

Terrestrial protected areas and organic farming Source: EEA (terrestrial protected areas) and Eurostat (organic farming) Graph A5.4: Thematic – Mobility

Share of zero-emission vehicles (% of new registrations) Source: European Alternative Fuels Observatory



Table A5.1: Indicators underpinning progress on European Green Deal from a macroeconomic perspective Source: Eurostat, JRC, European Commission, EEA, EAFO Annex 6: Employment and social impact of the green transition The green transition not only encompasses improvements to environmental sustainability, but also includes a significant social dimension. While measures in this regard include the opportunity for sustainable growth and job creation, it must also be ensured that no one is left behind and all groups in society benefit from the transition. Denmark envisages a continuation of substantial green investments, providing strong potential for job creation; at the same time, the green economy is significant. The social dimension of the green transition is less likely to be an issue. Denmark’s recovery and resilience plan (RRP) outlines several crucial reforms and investments for a fair green transition. With EUR 923 million allocated towards green measures, these funds make up 59% of the total Danish RRP budget. This includes measures to improve energy efficiency by renovating private and public buildings, and by supporting such measures for small and medium-sized enterprises (SMEs). Among other things, these initiatives will help mitigate pollution, create labour-intensive renovation jobs and support local supply chains, while generating demand for highly energy and resource efficient equipment. In synergy with the Recovery and Resilience Facility, the European Social Fund Plus (ESF+) will help unlock the potential for ‘green jobs’ in Denmark; and the Just Transition Fund (EUR 89 million) will help mitigate the social impact of the green transition. Denmark’s National Energy and Climate Plan (NECP) briefly considers the just and fair transition aspects of its policies, and provides information on the social, employment and skills impacts of the transition to a climate-neutral economy, including the need for skills and employment in the energy sector and in clean transition industries. Energy poverty is partially addressed in the NECP, with Denmark indicating that the issue is addressed through national social measures, such as heating supplements and supplementary benefits, though a target of reducing energy poverty could further enable support for vulnerable consumers through specific and measurable objectives (). The carbon footprint of the economy has slightly decreased and major greenhouse gas emitting sectors (such as the cement sector) remain sizeable. However, the green economy is significant and provides strong potential for further quality job creation. The intensity of greenhouse gas emissions in the Danish economy decreased between 2015 and 2020 (in terms of gross value added) and stands 17% above the EU average. In contrast, Denmark has the highest average carbon footprint per worker at 24.66 tonnes of greenhouse gas emissions in the EU (where the average is 13.61 tonnes) (see Graph A6.1). Energy-intensive industries (EII) provide jobs for a low percentage of the total workforce (1.31%), which is well below the EU average (3%). Cement has been identified as a transforming sector (), with job losses estimated at around 350 direct jobs, as well as further impact on the subcontractors and the regional economy (). Modernising regional economies and increasing their competitiveness is key, in which the transition to a circular economy, innovation, implementation of advanced technologies and up- and reskilling could play an important role (see Annex 15). The environmental goods and services sector already provides jobs to a significant share of the employed population (2.6% vs. 2.2% in the EU) () and wind and solar energy potential as well as energy efficiency improvements offer further opportunities for green jobs (). Labour shortages in greening sectors such as professional, scientific and technical activities have been identified (). As regards the social dimension of the green transition, ensuring access to essential transport and energy services appears overall to be less of a challenge for Denmark than for other EU countries. A relatively low but stable share of the population at risk of poverty lives in rural areas (10.2% vs 18.7% in the EU) (). The share of the population who are unable to keep their homes adequately warm slightly improved between 2015 and 2020 (from 3.6% to 3%), which remains significantly below the EU average (8.2%), with a higher incidence among lower-income groups (see Graph A6.2). Consumption patterns vary across the population: the average carbon footprint of the top 10% of emitters is about 5 times higher than that of the bottom 50% of the population (5.3 times in the EU). Tax systems are key to ensuring a fair transition towards climate neutrality (). Denmark’s revenues from total environmental taxes decreased from 3.97% of GDP in 2015 to 3.29% in 2019, and remained relatively stable in 2020, reaching 3.17% of GDP (against 2.24% in the EU). The labour tax wedge for low-income earners () slightly decreased from 31.1% in 2015 to 30.4% in 2019. It stood at 30.5% in 2021 compared to 31.9% in the EU (see Annex 18). Redistributive measures accompanying environmental taxation could potentially promote progressive measures and have a positive impact on the disposable income of households in the bottom 20% of the income distribution (). Graph A6.1: Fair green transition challenges Source: Eurostat, World Inequality Database Graph A6.2: Energy poverty by income decile Source: Eurostat EU-SILC survey (2020)

Productivity Annex 7: Resource efficiency and productivity The efficient use of resources is key to ensuring competitiveness and open strategic autonomy, while minimising the environmental impact. The green transition presents a major opportunity for European industry by creating markets for clean technologies and products. It will have an impact across the entire value chains in sectors such as energy and transport, construction and renovation, food and electronics, helping create sustainable, local and well-paid jobs across Europe. With respect to the circular economy, Denmark could do better. Between 2016 and 2020, the circular (secondary) use of material in Denmark declined from 8% in 2016 to 7.7% in 2020, well below the EU average of 12.8%. With 1.62 PPS () generated per kg of material consumed in 2020, resource productivity () in Denmark is below the EU average of 2.23 PPS per kg and showed no signs of convergence in the last years on record. Denmark also fell below the EU average for three circular economy indicators relating to employment, value-added and private investments. Denmark is taking some steps to become more circular. The national Action Plan for Circular Economy from July 2021 () contains 129 measures running up to 2032, with a focus on waste prevention and recycling, and gives an extra focus on how value chains within biomass, construction and plastics can become more circular. Furthermore, Denmark is leveraging ERDF programmes that provide support for the circular economy, in particular for strengthening the competitiveness and innovativeness of SMEs. In certain areas of waste management Denmark is underperforming. It has the highest municipal waste per capita figure in the EU with 845 kg/year/inhabitant in 2020 (EU average 505 kg/year/inhabitant). Furthermore, in 2020, 45.2% of municipal waste was still incinerated (albeit with energy recovery) compared to the EU average of 27.1%. In terms of municipal waste collected for recycling, Denmark ranks just above the EU average (53.9% in 2020 (EU average 47.8%)), but with clear room for improvement. In 2018, hazardous waste also accounted for 10% of total waste generated. Graph A7.1: Municipal waste treatment Source: Eurostat Table A7.1: Selected resource efficiency indicators Source: Eurostat Annex 8: Digital transition The Digital Economy and Society Index (DESI) monitors EU Member States’ digital progress. The areas of human capital, digital connectivity, the integration of digital technologies by businesses and digital public services reflect the Digital Decade’s four cardinal points. This Annex describes Denmark’s DESI performance. The Danish recovery and resilience plan (RRP) dedicates 25% of its allocation to measures supporting the digital transformation. The Danish government has taken the first steps in its new National Digital strategy with the budget act of 2022. Further initiatives will be presented, when the overall National Digital Strategy is launched in 2022.. The planned sub reforms in the strategy will focus on further digitalising the public administration and preparing it for future challenges, including, targets to increase public-private innovation partnerships, uptake of AI technologies in public sector and adopting a new cybersecurity strategy. In addition, the plan aims to improve broadband connectivity and digital solutions in the health sector. The shortage of ICT specialists is a key challenge for Denmark in the DESI dimension on human capital. The country scores well above the EU average in basic and above basic digital skill and the percentage of ICT specialists is slightly above the EU average. However, there is a growing problem filling ICT specialist vacancies and the share of firms reporting hard-to-fill vacancies for jobs requiring ICT specialist skills is above the EU average (58.1% compared to 55.4%) ().

Denmark is a leader when it comes to digital connectivity ensuring wide coverage of fast broadband internet. Denmark scores significantly above the EU average both in terms of Very High Capacity Network and 5G coverage, but take-up of at least 1 Gbps is only close to EU average (7.25% compared to 7.58%). Danish companies embrace digital technologies. 79% of SMEs have at least a basic level of digital intensity. Twice as many companies use big data and cloud technologies as the EU average. On Artificial Intelligence Danish companies are the top performers in the EU. The share of enterprises having medium/high intensity of green action through ICT is below the EU average (54% compared to 66%). Improvements in this field could accelerate the country's transition towards a greener economy. Denmark is in the leading group, but not the top performer concerning wide availability of digital public services. The country scores above EU average for digital public services for both citizens and businesses.

Table A8.1: Key Digital Economy and Society Index Indicators Source: Digital Economy and Society Index Annex 9: Innovation This Annex provides a general overview of the performance of the Danish research and innovation system. In the 2021 edition of the European Innovation Scoreboard (), Denmark is an innovation leader, and is in third place overall in the EU. Although still largely exceeding the EU average, Denmark’s innovation performance relative to the EU has decreased somewhat over time. Denmark has a good R&D ecosystem, which is underpinned by significant investment and excellent scientific, technological and innovation outputs. Denmark ranked first in the EU in 2020 in terms of public research intensity (public expenditure on R&D as a percentage of GDP) and it also ranks high on overall R&D intensity (GERD as % of GDP) and business enterprise expenditure on R&D (BERD). This high R&D investment translates into high scientific and technological outputs, performing well above the EU average in terms of high-quality publications and patents, including environmental-related patents, where it more than doubles the EU average. This strong performance reflects the connection of the Danish research and innovation (R&I) system with its ambition to take advantage of the opportunities that the green transformation will open up. Despite the many strengths of the Danish R&I system, investment is concentrated in a small number of large companies and growing productivity gaps between large and small companies suggest weaknesses in the diffusion of technological advances. Broadening the innovation base and involving more companies in R&D activities would promote innovation diffusion (). Denmark’s recovery and resilience plan has a strong R&D focus, with more than 17% of the total spending earmarked for R&D projects. Achieving Denmark’s ambitious greenhouse gas emissions reduction targets also requires incentives for research and innovation. Therefore, the ‘green research and development’ component contains a temporary increase in R&D tax deductibility for all companies, while the mission-based R&D partnerships will focus on four solutions to address the challenges to achieving Denmark’s ambitious climate goals. The focus on broadening the innovation base and R&D for the green transition is also evident in the Danish Cohesion Policy programmes.



Table A9.1: Key research, development and innovation indicators Source: DG Research and Innovation - Common R&I Strategy and Foresight Service - Chief Economist Unit. Eurostat, OECD, DG JRC, Science-Metrix (Scopus database and EPO’s Patent Statistical database), Invest Europe Annex 10: Industry and single market data Productivity growth is a critical driver of economic prosperity, well-being and convergence over the long run. A major source of productivity for the EU economy is a well-functioning single market, where fair and effective competition and a business-friendly environment are ensured, in which Small and Medium Enterprises (SMEs) can operate and innovate without difficulty. Businesses and industry rely heavily on robust supply chains and are facing bottlenecks that bear a negative impact on firms’ productivity levels, employment, turnover and entry/exit rates. This may impact the Member States’ capacity to deliver on Europe’s green and digital transformation. Denmark’s labour productivity level is high compared to other EU Member States and productivity growth has been strong, especially in manufacturing. Denmark has a strong manufacturing sector, with labour productivity above the average of other Nordic countries, while productivity growth in services is slightly lagging behind. The Danish economy is a frontrunner in green growth and digitalisation. However, skills shortages are denting further growth. Moreover, R&D activity remains concentrated in few large firms, while the contribution of SMEs is modest (see Annex 8). Productivity growth is fundamental for maintaining the relatively high level of welfare in Denmark and for ensuring the country’s competitiveness in the longer term. Denmark has a stable and favourable business environment. Firms benefit from an easy access to digital public services. Among the long-term barriers to investment, Danish firms most frequently cite availability of skilled staff (75%) (). While many companies are created in Denmark, start-ups and small and innovative companies struggle to grow and scale up. Late payments can be a problem for certain small companies and the rate of SMEs whose bank loans’ applications were refused or rejected as well as the share of finance constrained firms are above the EU average. Equity financing is less pronounced than in some of the other Nordic countries but better than EU average. Denmark is well-integrated into the single market. Denmark's trade integration in the single market for goods and services is in line with the EU average. It has slightly increased in recent years regarding trade in goods, while it has slightly decreased regarding trade in services. Overall, Denmark is performing relatively well on the Single Market Scoreboard. As in other countries, global supply chain disruptions are currently denting growth. Danish manufacturing firms have been grappling with supply problems for key raw materials and components, as well as price increases. 25% of firms reported disruptions to their operations due to shortages in materials or equipment in 2021 (vs. 26% for the EU average). At the same time, firms in the logistics sector benefited from the surge in demand and increased prices. At the beginning of 2022 business confidence has fallen to an 11-month low and has turned pessimistic for the first time since February 2021 (). Table A10.1: Key Single Market and Industry Indicators (Continued on the next page)

Table (continued) Source: See above in the table the respective source for each indicator in the column “Description” Annex 11: Public administration Good administrative capacity enables economic prosperity, social progress, and fairness. Public administrations at all government levels deliver crisis response, ensure the provision of public services, and contribute to building resilience for the sustainable development of the EU economy. Denmark’s public administration is ranked among the most effective in the EU27 (). The Danish authorities work on various initiatives to improve administrative performance. Areas of particular focus are cross-policy coordination, digital services, as well as increasing and ensuring the proximity of public services. () Denmark is among the best performers when it comes to e-government, offering highly mature digital services. It ranks above the average on the e-government benchmark’s composite indicator (84.3 vs. 70.9 in the EU). The share of users of e-government services is high at 93% in 2021. Against this backdrop, the Danish Recovery and Resilience Plan aims to strengthen the capacity and resilience of public administration by modernising the digital infrastructure, improving cyber and information security in the public administration, and promoting better access to data and interoperable data infrastructure. The latter will also be addressed with the regional development support. Administrative capacity is strong. The share of civil servants participating in adult learning is above the EU average, as is the share of employees in public services who have tertiary education qualifications. Denmark has one of the EU’s youngest public workforces with 43% of employees under 39 years old, and a relatively low share of public sector employees between 55 and 74 years (20.9% in 2021). However, gender parity for senior positions is relatively low, with a deviation from parity nearly twice as high as the average (47.2 vs 21.8 in the EU). Denmark could improve its performance on evidence-based policy making. Its performance on stakeholder engagement and ex-post assessment of legislation is below the EU median (see Graph 10.1) Graph A11.1: Performance on evidence-based policy- making indicators Source: OECD iREG indicators The justice system performs efficiently. The clearance rate for litigious civil and commercial cases improved markedly in 2020 (111.1%, up from 91.78% in 2019). The overall quality of the justice system is good. Digital tools are used in courts; however, a number of gaps regarding digitalisation in the justice system remain to be addressed. As regards judicial independence, no systemic deficiencies have been reported. ()



Table A11.1: Public administration indicators Source: ICT use survey, Eurostat (#1); E-government benchmark report (#2); Open data maturity report (#3); Fiscal Governance Database (#4, 9, 10); Labour Force Survey, Eurostat (#5, 6, 8); European Institute for Gender equality (#7); Single Market Scoreboard public procurement composite indicator (#11); OECD Indicators of Regulatory Policy and governance (#12) Fairness Annex 12: Employment, skills and social policy challenges in light of the European Pillar of Social Rights The European Pillar of Social Rights provides the compass for upward convergence towards better working and living conditions in the EU. The implementation of its 20 principles on equal opportunities and access to the labour market, fair working conditions, social protection and inclusion, supported by the 2030 EU headline targets on employment, skills and poverty reduction, will strengthen the EU’s drive towards a digital, green and fair transition. This Annex provides an overview of Denmark’s progress in achieving the goals under the European Pillar of Social Rights. The Danish labour market was performing well prior to the outbreak of COVID-19 and has shown resilience to the pandemic. It now faces labour shortages. The employment rate is relatively high, at 79.0%, with a comparatively low gender employment gap of 6.9% (10.8% in the EU in 2021). The long-term unemployment rate remained relatively low throughout the crisis (1.0% in 2021), well below the EU average (2.4%). Wholesale and retail trade, accommodation and food service activities were the areas most affected by the COVID-19 crisis. However, the government’s wage compensation scheme prevented a surge in unemployment. Labour market shortages are at the highest level since 2008, with increasing recruitment challenges observed across most industries and regions and an unsuccessful recruitment rate of 33% (December 2021). EU Cohesion Policy funding will support measures addressing skills needs for fair digital and green transitions, with funding under the REACT-EU instrument (Recovery Assistance for Cohesion and the Territories of the EU) further supporting these measures, as well as entrepreneurs and innovation. Tackling these challenges is also key to contribute to reaching the 2030 EU headline target on employment.

Table A12.1: Social Scoreboard Source: Eurostat, Social Scoreboard The declining adult learning participation rate poses challenges to Denmark, especially in view of the green and digital transitions. A decrease was recorded in recent years in adult participation in learning over the past four weeks (from 28% in 2016 to 22.4% in 2021), though the rate remains more than twice the EU average. At the same time, the share of early leavers from education and training has decreased, although remaining above the 2015 low. The difference between native-born and foreign-born children is relatively small (1.4 pps). Denmark has relatively low vocational education and training (VET) participation rates, and attracting students remains a key challenge. It has taken several policy measures in this domain, including a marked increase in public expenditure on primary schools and additional funding for upskilling measures to be implemented in 2020-22. The share of individuals with basic or above basic digital skills is high, at 69% in 2021. There is nonetheless a relatively low share of women in digital jobs, as the Women in Digital Scoreboard (2020) shows, with only 20.4% of ICT specialists being women. Further strengthening the participation in adult learning will allow Denmark to contribute to reaching the 2030 EU headline target on skills. Although the share of people at risk of poverty or social exclusion has decreased in recent years, there is potential for further improvement. At 16.8% in 2020, the rate of people at risk of poverty or social exclusion is relatively low compared to the EU average of 21.9%, although certain groups, and in particular young people, migrants and persons with disabilities, face barriers to accessing the labour market and a higher risk of poverty. Through the Fund for European Aid to the Most Deprived (FEAD) and the expected European Social Fund Plus ESF+ programmes, Denmark utilises EU funding to support the most deprived, focusing on measures supporting the homeless and those at risk of homelessness. While the housing cost overburden remains above the EU average (at 14.1% compared to 7.9% in the EU 2020), it is evolving in the right direction. Annex 13: Education and skills This Annex outlines the main challenges for Denmark’s education and training system in light of the EU-level targets of the European Education Area Strategic Framework and other contextual indicators, based on the analysis from the 2021 Education and Training Monitor. Denmark’s education and training system performs well but still has certain equity challenges that could worsen due to the pandemic. Denmark outperforms the EU average and EU-level targets in terms of participation in the early childhood education, in basic skills, early leavers from education and training, and tertiary education. Early school leaving is slightly more frequent in Denmark than on average in the EU, and there is an urban-rural divide. At 9.8%, early school leaving is slightly above the EU level target (9%), and pupils drop out in rural areas more frequently than in cities. In addition, there is a significant gender gap (3.5 pps) in favour of girls. Participation in early childhood education and care is one of the highest in the EU and reforms aim to improve quality of provision. Educational outcomes and basic skills are good overall, but young people with migrant background lag behind. Parents’ socioeconomic backgrounds still influence educational results in Denmark. PISA results show that 15-year old Danish pupils are performing well overall in reading, maths and science (close to the 15% EU level target for the share of low-achievers, and above the EU average). Nevertheless, the share among disadvantaged pupils of low-achievers in reading is 20 pps higher than among their advantaged peers. This represents a significant gap, but is still below the EU average (26.9 pps). The gap between the performance of foreign and native-born pupils is large at 25 pps, and there has been little improvement for second-generation migrants. The government is increasing funding for primary and lower secondary schools (Folkeskole) systematically until 2023 to allow municipalities to further improve the quality of education. Evidence () shows that teacher policies face major challenges such as teacher shortages and a lack of fully trained teachers. Fewer young people are attracted to initial teacher training programmes, and many drop out during training. 18% of teachers in primary school lack adequate qualification in 2021. Teachers are obliged to participate in continuous professional development. Compared with their peers in other countries they are generally less satisfied with the training available. Graph A13.1: Low achievement in reading by migrant background, PISA 2018 Source: OECD (2019), PISA (2018) Tertiary attainment has further increased in recent years and has surpassed the EU-level target. Its overall recent increase is in line with the EU trend. Tertiary attainment increased by about a quarter for native born and 0.4 pps for EU-born graduates. The share of EU-born graduates now surpasses that of Danish students by about 12 pps and the EU average by some 19 pps. The high attainment rates for foreign-born students hint at the attractiveness of higher education and of the labour market in Denmark, which can help reduce skills shortages. The recent Danish initiative to decrease the number of courses held in English at Danish universities could reverse this trend. Table A13.1: EU-level targets and other contextual indicators under the European Education Area strategic framework Source: Eurostat (UOE, LFS); OECD (PISA) Annex 14: Health and health systems Especially relevant in light of the ongoing COVID-19 pandemic, resilient healthcare is a prerequisite for a sustainable economy and society. This Annex provides a snapshot of the healthcare sector in Denmark. Life expectancy has increased more rapidly than the EU average since 2010 and continued to grow slightly in 2020 despite the COVID-19 pandemic (see Graph A14.1). Only one other EU Member State (Cyprus) did not signal a drop in life expectancy in 2020. As of 17 April 2022, Denmark reported 0.86 cumulative COVID-19 deaths per 1 000 inhabitants and 478 confirmed cumulative COVID-19 cases per 1000 inhabitants. Mortality rates from treatable causes are well below the EU average, while cancer mortality – although falling in recent years - remains high. Graph A14.1: Life expectancy at birth, years Source: Eurostat database Graph A14.2: Projected increase in public expenditure on health care over 2019-2070 (reference scenario) Source: European Commission/EPC (2021)

Health spending relative to GDP was similar to the EU average in 2019. Health spending in real terms, however, grew on average at a rate of 2% per year between 2015 and 2019 – slightly slower than the EU average. Denmark has universal health coverage with mainly public financing (83.3% in 2019). Public expenditure on health is projected to increase by 0.9 percentage points (pp) of GDP by 2070, the same as for the EU as a whole (see Graph A14.2). Denmark has more doctors and nurses per capita than the EU average. However, Denmark faces shortages in General Practitioners (GPs), particularly in rural and remote areas. Several government initiatives were taken to increase the supply of GPs and nurses, both before and during the pandemic. In line with policies aimed at shifting care to outpatient settings, hospital capacity has declined steadily over the past two decades. Still, surge capacity during the pandemic was sufficient (at the cost of suspending non-urgent care and elective surgery). Through its Recovery and Resilience Plan (RRP), Denmark plans to invest EUR 33 million (2% of the total RRP) to boost digitalisation in the healthcare system, through the further rollout of telemedicine. The Danish plan will also help underpin a management system for stocks of critical medical supplies and study the effects and side effects of COVID-19 vaccines. Table A14.1: Key health indicators Source: Eurostat Database; except: * Eurostat Database and OECD, ** ECDC. Annex 15: Economic and social performance at regional level The regional dimension is an important factor when assessing economic and social developments in Member States. Taking into account this dimension enables a well-calibrated and targeted policy response that fosters cohesion and ensures sustainable and resilient economic development across all regions. Regional economic disparities in Denmark increased in 2000-19. The Capital region is the engine of the Danish economy. Three other regions, South Denmark, Central Jutland and North Jutland follow with GDP above the EU average. Only Zealand is below the EU average in GDP terms and is defined as a transition region for cohesion policy funding. While the Capital region accounted for over 40.6% of national GDP in 2019 and has a lead in GDP growth, North Jutland has the slowest GDP growth rate per head (0.9%), below the EU average (1.39%) (see Graph A15.1). Graph A15.1: GDP per head (2010) and GDP growth (2010-2019) Source: European Commission The general labour market conditions show hardly any differences between regions. Only in high-tech and knowledge intensive sectors does the Capital region largely outperforms other regions. Labour productivity was above the EU average for all regions, but the gap between the capital and the rest of the country increased during this period (see Graph A15.2). Graph A15.2: Evolution of labour productivity across Danish regions Source: European Commission There are disparities in innovative capacity across the regions. The capital region stands out in terms of R&D expenditure, and has the highest share of highly-educated people aged between 30 and 34. Only one other Danish region, Central Jutland, is above the EU average of 2.2% for R&D expenditure. The Capital region and Central Jutland are also innovation leaders in the European Research and Innovation Scoreboard. On the other hand, Zealand and North Jutland are the two regions with the lowest R&D expenditure, whereas Zealand and South Denmark have the least highly educated people. When it comes to the impacts of the COVID-19 pandemic, slight increases in unemployment rates took place in all regions between 2019 and 2020, but with no major regional differences. However, there was an almost 15% increase in working from home in the Capital region compared to 5-8% on other regions. Overall, CO2 fossil fuel emissions per person in Denmark are below the EU average. However, Denmark has set very ambitious national targets for the CO2 emissions, which will affect all Danish regions (see Graph A15.3). Graph A15.3: CO2 emissions from fossil fuels per person in Danish regions (2018) Source: European Commission Although the green transition affects the whole of Denmark, two regions are considered most impacted (see Graph A15.4). South Denmark, and more precisely South Jutland, has a high concentration of the country’s oil and gas industry, which is to be phased out by 2050. South Denmark is also the only Danish region with greenhouse gas emissions above EU average. North Jutland, the region with the second-highest greenhouse gas emission intensity in Denmark, has the largest single industrial greenhouse gas emitter in Denmark, the Portland cement factory. Both regions are below the national average in most economic and labour market comparisons, mainly due to the high profile of the capital region as a frontrunner. Table A15.1: Denmark, selected indicators at regional level Source: Eurostat Graph A15.4: Territories most affected by the climate transition in Denmark Source: European Commission Macroeconomic Stability Annex 16: Key financial sector developments

This Annex provides an overview of key developments in Denmark’s financial sector. The banking sector’s solvency has remained quite solid during the pandemic. Danish banks’ capital adequacy ratio was not affected by the pandemic and continued to exceed the EU average in Q3 2021 (22.9% vs 19.3%). The stress test conducted by Danmarks Nationalbank shows that while Danish banks have sufficient capital to withstand a severe recession scenario, some of the systemic banks are close to their buffer requirements. At the same time, the non-performing loan ratio remained unchanged for the last three years. As regards profitability, the annualised return-on-equity recovered to 8.1% in Q3 2021 (vs 7.1% in the EU), which could be explained by the low impairment charges. Due to high staff costs, the efficiency of the banks declined in 2020, but recovered in 2021 following increased focus on cost cutting (cost-to-income of 63.3% in 2020 vs 57.7% in Q3 2021). Credit to non-financial corporations increased towards the end of 2021, driven mainly by the end of government liquidity support schemes, while demand for mortgages continued to rise, although at a more moderate pace than house prices. The residential real estate market exhibits risks that could be addressed by further macroprudential policy measures. The European Systemic Risk Board (2022) () has identified a number of key vulnerabilities: high house price growth, signs of house price overvaluation, high household indebtedness, large (and increasing) share of loans with deferred amortisation of outstanding loans, significant interconnectedness with the Nordic banking system. House prices have risen steadily in the last two years and their overvaluation was estimated on average at 16% in 2020. House price increases have slowed significantly since mid-2021 and overall mortgage lending growth remained moderate. However, lending to highly indebted homeowners as well as interest-only loans represented increasing shares of new mortgages. In addition, some homeowners have a significant exposure to interest rate risk. In 2021 the Systemic Risk Council issued several recommendations to reduce the risks in the system and better prepare the financial system for shocks. Accordingly, the Countercyclical Capital Buffer (CCyB) was raised to 1% as of September 2022. It has been decided that it will increase up to 2.5% as of March 2023. However, the Council’s recommendation on limiting access to interest-only loans for highly indebted borrowers, capping the loan-to-value ratio at 60%, was not followed by the government, who considered at this stage Danish households are in strong financial position and it is sufficient for now to increase monitoring of the residential real estate market. Denmark has taken action to address money-laundering risks and approved several measures to strengthen its anti-money laundering (AML) framework, such as transposing the 4th and 5th AML Directives. The Financial Supervisory Authority and the Financial Intelligence Unit have been strengthened by increasing their budget and adding staff. Procedures applying the risk-based approach, adequate training and qualifications for new staff and better cooperation between relevant Danish and international AML authorities are currently being implemented. However, no evidence has yet been provided of the effectiveness of the recently adopted legislative and reforms. Table A16.1: Financial soundness indicators Source: ECB, Eurostat, Refinitiv Annex 17: Taxation Table A17.1: Taxation indicators on taxation Source: European Commission, OECD This Annex provides an indicator-based overview of Denmark’s tax system. It includes information on the tax structure, i.e. the types of tax that Denmark derives most revenue from, the tax burden for workers, and the progressivity and redistributive effect of the tax system. It also provides information on tax collection and compliance and on risks of aggressive tax planning activity. Denmark’s tax revenues are high in relation to GDP, but the tax structure is balanced and relatively growth-friendly. Denmark is a high-tax country with the highest tax-to-GDP ratio of all Member States for 2020. Although Denmark’s labour tax revenues as a percentage of GDP in 2020 were among the highest in the EU, this is because of the country’s high tax revenues as a share of GDP overall, while the share of labour taxes in total taxation is below the EU aggregate. Similarly, revenues from consumption taxes and environmental taxes as a share of GDP were among the highest in the EU, but this was in part due to the high overall taxation. Yet consumption and environmental tax revenues were also above the EU aggregate as a share of total taxation, indicating Denmark’s growth-friendly tax structure. Recurrent taxes on property, which are also highly conducive to economic growth, are strongly used: revenues from recurrent property taxes were among the highest in the EU both as a share of GDP and as a share of total taxation in 2020. On the other hand, the Danish tax system also allows one of the highest tax deductions for mortgage interest payments in the EU, which incentivises debt financing of residential property. The new property tax system, which would ensure fairer taxation of housing, as endorsed by Parliament back in 2017, is still not in place. Denmark’s labour tax burden is relatively low across the income distribution. The labour tax wedge for Denmark in 2020 was substantially lower than the EU average at various income levels, i.e. for single persons at the average wage (100%) as well as at 50%, 67% and 167% of the average wage. Second earners at a wage level of 67% of the average wage, whose spouse earns the average wage, also face a tax wedge slightly below the EU average, but the difference in their tax wedge compared to single persons at the same wage level is above the EU average. On the other hand, in 2020 the tax-benefit system helped reduce inequality (as measured by the GINI coefficient) by substantially more than the EU average. Denmark is doing moderately well on digitalisation of the tax administration, which can help reduce tax arrears as well as cut compliance costs. From 2018 to 2019 outstanding tax arrears have increased slightly by 0.4 pp. to 8.4% of total revenue. This is significantly below the EU27 average of 31.8%, though that average is inflated by very large values in a few Member States. The VAT gap (an indicator of the effectiveness of VAT enforcement and compliance) has remained relatively stable in Denmark at 8.6%, below the EU-wide gap of 10.5%. It is positive that the new IT system PSRM doubled debt collection from DKK 1.6 billion in 2020 to DKK 3.7 billion in 2021. () Graph A17.1: Tax wedge indicators Source: European Commission Annex 18: Key economic and financial indicators Table A18.1: Key economic and financial indicators Source: Eurostat and ECB as of 2022-05-02, where available; European Commission for forecast figures (Spring forecast 2022) Annex 19: Debt sustainability analysis Table A19.1: Debt sustainability a