CELEX: 52013SC0354
Language: en
Date: 2013-05-29 00:00:00
Title: COMMISSION STAFF WORKING DOCUMENT Assessment of the 2013 national reform programme and convergence programme for DENMARK Accompanying the document Recommendation for a COUNCIL RECOMMENDATION on Denmark's National Reform Programme and for a Council Opinion on Denmark’s convergence programme for 2012-2016

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		52013SC0354
		
			COMMISSION STAFF WORKING DOCUMENT Assessment of the 2013 national reform programme and convergence programme for DENMARK Accompanying the document Recommendation for a COUNCIL RECOMMENDATION on Denmark's National Reform Programme and for a Council Opinion on Denmark’s convergence programme for 2012-2016 /* SWD/2013/0354 final */
			
				
		
		
			
			   	Contents
Executive summary. 3
1........... Introduction. 4
2........... Economic developments and challenges. 6
2.1........ Recent economic developments and outlook. 6
2.2........ Challenges. 7
3........... Assessment of policy agenda. 9
3.1........ Fiscal policy and taxation. 9
3.2........ Financial sector 13
3.3........ Labour market, education and social policies. 14
3.4........ Structural measures promoting growth and competitiveness. 20
3.5........ Modernisation of public administration. 23
4........... Overview table. 25
5........... Annex. 29
1.           Executive
summary
Economic Outlook
After the downturn in 2012, when GDP
growth fell by 0.5%, the Commission expects Denmark's GDP to grow by 0.7% in
2013 and 1.7% in 2014, buoyed by policy
measures stimulating domestic demand, as well as a modest rise in net exports.
Against the background of subdued economic growth, unemployment is expected to
stay high by Danish standards, at 7.7% in 2013 and 7.6% in 2014. Inflation is
expected to ease from 2.4% in 2012 to 1.1% in 2013, rising slightly to 1.6% in
2014, due to weak underlying price pressures and excise tax cuts. However, the
slowdown of external demand is expected to drag down the GDP growth, despite
the improvement in Denmark's cost-competitiveness over the last couple of years.
Denmark's public finances are expected
to improve compared to 2012, with the budget deficit shrinking from 4% in 2012
to 1.7% of GDP in 2013, thereby meeting the excessive deficit procedure
recommendation by the 2013 deadline. The Commission
estimates that the deficit will rise to 2.7% of GDP in 2014 (not taking into
account the one-off pension measures, which were not known at the time of the
forecast). Denmark's medium term objective (MTO) is a structural deficit of
0.5% of GDP. According to the Commission's Spring Forecast, Denmark already fulfils its MTO. Moreover, Danish authorities aim for a balanced budget in
structural terms by 2020. Public debt is projected to remain at a relatively
low level of around 45% of GDP, rising slightly to 46.4% in 2014, though still
significantly below the EU's 60% threshold. 
Key Issues
The economic crisis hit Denmark relatively hard and resulted in a significant drop in employment, though the
authorities have managed to cope with the downturn relatively well. However, in April 2013 the Commission concluded that Denmark was experiencing macroeconomic imbalances, which deserve closer monitoring and effective
policy action. 
Denmark is making progress in
implementing the 2012 CSRs and has an active reform agenda, though most of the
reforms will have an impact only in the medium to long term. A comprehensive reform of the early retirement pension schemes has
been implemented. Reforms of the disability pension and the subsidised
employment schemes have been adopted. Steps have been taken to reform the
public school, vocational training and student allowance systems and the
government intends to increase competition in a number of services sectors,
though only partial progress has been made. Over the short to medium term, Denmark does not seem to face particular challenges with its public finances, though it
should continue to lower the deficit sustainably below 3% of GDP.
To stimulate economic growth and secure
adequate financing for ambitious welfare policies, Denmark needs to get back on
track by boosting productivity growth and competitiveness. The stability of the financial system, in particular the housing
market, also remains an issue of concern, while Denmark also needs to enhance
its long-term labour supply and the cost effectiveness of the education system.
·       
Competitiveness: Denmark has lost significant export market shares over the last decade, and prices are
about 14% higher for services and 5% higher for goods compared to an average of
seven similar EU countries. This is partly because of the low level of
competition in some sectors (for example, the barriers to entry for certain
professions in the retail sector). The authorities have set up a commission to
work on boosting competitiveness and productivity.
·       
Labour market: The
key jobs challenge continues to be how to increase long-term labour supply,
particularly in the light of an ageing population. This problem could be eased
by reintegrating people, such as those with migrant backgrounds, into the
labour market, as the employment rate for non-EU nationals (54.5 % in 2012) is
considerably lower than the overall employment rate (75.4%) and is also below
the EU average.
·       
Education: Despite
Denmark's high proportion of expenditure on education, cost-effectiveness is
weak, there is a lack of apprenticeship places and drop-out rates from high
school and vocational education are high (9.1% overall in 2012). Ambitious
solutions are needed as these measures are vital to improve low productivity
growth, increase labour supply and ensure that the future skills demands are
met. 
·       
Financial sector:
High private-sector debt, particularly household debt – which increased by 52%
between 2001 and 2009 – remains a risk to financial and economic stability, and
has knock-on effects for domestic demand. Measures to address the risks in the
banking and housing sectors have been appropriate, but limited. All these
measures go in the right direction, but close monitoring will be required in
order to make sure they have the desired impact.
1.           Introduction
In May 2012, the Commission proposed a set
of country-specific recommendations (CSRs) for economic and structural reform
policies for Denmark. On the basis of these recommendations, the Council of the
European Union adopted five CSRs in the form of a Council Recommendation in
July 2012. These CSRs concerned public finances, taxation, long-term labour
supply and the labour market, the cost-effectiveness of the education system
and the stability of the housing market and financial system. This staff working
document (SWD) assesses the state of implementation of these recommendations in
  Denmark.
The SWD assesses policy measures in light
of the findings of the Commission’s Annual Growth Survey 2013 (AGS)[1] and the second annual Alert
Mechanism Report (AMR),[2]
which were published in November 2012. The AGS sets out the Commission’s
proposals for building a common understanding of the priorities for action at
national and EU level in 2013. It identifies five priorities to guide Member
States to renewed growth: pursuing differentiated, growth-friendly fiscal
consolidation; restoring normal lending to the economy; promoting growth and
competitiveness for today and tomorrow; tackling unemployment and the social
consequences of the crisis; and modernising public administration. The AMR
serves as an initial screening device to determine whether macroeconomic
imbalances exist or risk emerging in Member States. The AMR found positive
signs that macroeconomic imbalances in Europe are being corrected. To ensure
that a complete and durable rebalancing is achieved, Denmark and thirteen other
  Member States were selected for a review of progress in addressing these
imbalances.[3]
Against the background of the 2012 Council
Recommendation, the AGS and the AMR, Denmark presented updates of its national
reform programme (NRP) and of its convergence programme on 30 April 2013. These
policy plans provide detailed information on progress made since July 2012 and address
most of the challenges identified in last year’s Staff Working Document. Broad
coherence between the two programmes has been ensured. The national reform
programme confirms Denmark’s commitment to address shortcomings in the areas of
competition, the labour market, the education system and the financial sector.
The convergence programme demonstrates Denmark’s commitment to comply with the
recommendations of the Excessive Deficit Procedure, improve the budgetary
position towards the medium-term objective and ensure the long-term
sustainability of public finances in line with the Stability and Growth Pact.
Regarding the stakeholder participation,
the national reform programme went through a consultation process involving regional
and local authorities as well as interest organisations, including
organisations that work on social issues. A consultation was organised through
the Contact Committee for the Europe 2020 Strategy, involving the above-mentioned
bodies. It channelled the discussion of the NRP between national and regional
authorities as well as interest organisations. The NRP was sent to the
Committee for consultation in mid-March and its comments were taken into
account when preparing the programme.
Overall assessment
The analysis in
this SWD leads to the conclusion that Denmark has made some progress on measures taken to address the CSRs contained
in the Council Recommendation. The policy plans submitted by Denmark are relevant, specific and credible but an effective implementation of the measures
needs to be monitored.
The overall goal of the active economic
reform agenda is to put the Danish economy on a sustainable path, in line with
the government’s 2012 national reform programme and revised national 2020 plan,
in particular to ensure the preservation of the Danish welfare system. Over the
short to medium term, with the new economic reforms, Denmark does not seem to
face particular sustainability challenges. A
comprehensive reform of the early retirement pension schemes has been
implemented. Reforms of the disability pension and the subsidised employment
schemes have been adopted. Steps have been taken to reform
the public school system, the vocational training system and the student
allowance system. However, only partial progress has been made in implementing
the 2012 recommendation on education policy and competition in the services
sector, as government proposals have not yet been adopted or fully implemented in
these areas. Limited progress has been made concerning the recommendation on
the stability of the housing market and measures fostering prudent lending and
promoting mortgage amortisation.
The challenges identified in July 2012 and
reflected in the AGS remain valid. In the short term, the main challenge is to spur
economic recovery by boosting productivity and competitiveness, better
utilising the labour force potential and strengthening the stability of the
financial system. Improving the quality and efficiency of education would help buttress innovation
and human capital, improving the medium- and long-term growth prospects.
2.           Economic developments and challenges
1.1.                
Recent economic developments and outlook
Recent economic developments
The economic crisis hit Denmark relatively hard and resulted in a significant drop in employment. However, Denmark has managed to cope with the crisis rather well,
and in spite of increasing unemployment and deteriorating social conditions
automatic stabilisers and government measures have played their part without
jeopardising public finances and debt levels. Interventions in the financial
sector have been relatively successful so far in terms of securing financial
and fiscal stability.
The Danish economy had already started
to slow down before the onset of the global economic and financial crisis,
amidst a correction in the real estate market. In
2012, these developments were compounded by the general weakening of the the
global economy and the on-going sovereign debt crisis in the euro area. This
had a negative impact on net exports and domestic demand and was further
aggravated by continued deleveraging of households and firms, depressed
consumer and business confidence and falling employment. At the same time, the ’flight
to security’ that happened in response to the sovereign debt crisis has led to
strong demand by international investors for highly-rated mortgage bonds and
government securities from Denmark. This resulted in very low interest rates,
which currently underpin a still fragile housing market.
The crisis has taken its toll on the
labour market. Employment fell both in 2011 and
2012 with the unemployment rate reaching almost 8 %, which is high by Danish
historical standards. While still performing well in a European comparison, the
indicators tracking the risk of poverty and social inclusion in Denmark have increased, especially for people in disadvantaged groups, such as those with a
migrant background.
Economic outlook
The economy is expected to gain traction
in 2013 after the downturn in 2012. According to
the 2013 Commission Spring Forecast, the economy is expected to return to
growth in 2013, with real GDP expected to rise by 0.7 % on the back of policy
measures boosting domestic demand. Private consumption is projected to grow
moderately supported by low interest rates and rising wages. Furthermore, the
’investment window’ tax breaks, which will continue until the end of this year,
are projected to temporarily boost investment. However, the slowdown of
external demand is expected to drag down GDP growth despite the improvement in Denmark’s cost-competitiveness over the last couple of years. Consumer price inflation is
expected to ease further in 2013 to 1.4 % due to weak underlying price
pressures and excise tax cuts. Real GDP is set to rise further in 2014 to
around 1.7 % with positive net export growth expected to add to a modest rise
in domestic demand. Employment has surprised on the positive side in 2012, but
the drop in economic activity by the end of the year is expected to have
negative effects on employment in the first half of 2013. However, the gradual
pick-up in economic growth in the course of this year is expected to ensure a
gradual turnaround in the labour market in the second half of 2013.
The economic scenario underlying the national
reform programme and the convergence programme seems realistic. It projects real GDP to grow by 0.7 % in 2013 and 1.6 % in 2014,
which is broadly in line with the Commission’s 2013 Spring Forecast.
The Danish government is focused on
improving growth, employment and competitiveness via structural reforms and a modernisation
of the public sector. By improving the conditions
for private companies and labour market and education reforms, the government
aims to boost annual potential GDP gowth by a third of a percentage point on
average from 2014 to 2020. 
Private employment may increase by
150,000 persons by 2020, according to Danish authorities' estimates. This, however, includes 80 000 persons from the expected economic
recovery, while already implemented reforms and demographic factors are
expected to increase private employment by 37 000 persons. Future reforms and
the effects of the 2012 reforms of taxes, disability pensions and flex-jobs are
estimated to increase employment by 33 000 persons.
1.2.                
Challenges
Denmark faces significant challenges to
boost its competitiveness and productivity and growth, increase competition,
enhance its long-term labour supply and the cost effectiveness of the education
system. The stability of the financial system, in particular the housing
market, also remains an issue of concern. These
issues were already identified in the 2012 SWD. In July 2012, relevant policy
responses were noted and integrated in the CSRs of the Council Recommendation
issued for Denmark. In line with the ,AGS, the AMR, and the 2013 in-depth
review (see Box 1), the policy challenges for Denmark identified in the 2012 Commission
SWD remain essentially unchanged, despite progress with the reform agenda and
its implementation.
To stimulate
economic growth and secure adequate financing for ambitious welfare policies, Denmark needs to boost productivity growth and competitiveness.
  Denmark has lost significant export market shares over the last decade. These
losses seem to be linked to the deterioration of Denmark’s cost competitiveness,
reflecting relatively high wage growth and low productivity growth compared
with its trading partners. Continued losses of export market share despite the
recent improvements in cost competitiveness suggest that non-cost-related
factors may also play a role. One of these factors is arguably the geographical
destination of Danish exports, which do not seem to sufficiently target high-growth
emerging markets. 
An important cause of slow productivity
growth appears to be the low level of competition in some sectors, in
particular services. Despite the steps already
taken in the services sector to improve the regulatory framework (e.g. abolishing
the rules on shop opening hours), there are still significant barriers to
entry, especially in the retail services and in the construction sector. 
The key labour market challenge
continues to be the increase in the long-term labour supply, in particular in
the light of demographic ageing. At the same time,
there is an increasing amount of people finding themselves at the margins of
the labour force, such as those with a migrant background, the long-term unemployed
and people with reduced work capacity. This is an additional labour market
challenge, putting to the test the ability of the Danish flexicurity model to
assist these groups’ reintegration in the labour market.
The education system continues to face challenges
in improving cost-efficiency. Despite Denmark’s high proportion of expenditure on education in GDP, cost-effectiveness is weak,
the upper secondary completion rates are low and drop-out rates are high
(especially in the youth vocational education system). The challenges faced by
the youth vocational educational programmes are linked to their quality and a
lack of apprenticeships. Moreover, the transition periods between different
levels of education and from the education system to the labour market are
among the longest in the EU. It is vital to overcome the education challenges
in order to improve the low productivity growth, increase labour supply and
ensure that the future skill demands are met.
Financial stability remains as an issue
of concern as housing market developments and high private sector debt continue
to affect the economy’s macroeconomic performance. Excessive
swings in house prices and high debt had contributed to wide fluctuations in
private consumption, whilst high private-sector debt, in particular of
households, remains a risk to financial and economic stability. Recent research
into the distribution of assets and liabilities across households shows that a high
proportion of overall household debt is held by high-income households, which
are better equipped to service their debt if interest rates rise. Nevertheless,
if a number of risks, such as rising interest rates, a further fall in house
prices and continued low growth and rising unemployment, materialise
simultaneously, this would pose a significant challenge for the Danish mortgage
system. Regarding the property tax system, although cadastral values continue
to be updated every two years to reflect market values, the value for the
purpose of taxing property has been frozen in nominal terms since 2002, which
is presumed to have contributed to the housing bubble.
Box 1. — Summary of the 2013 in-depth
review (IDR) under the Macroeconomic Imbalance Procedure (MIP)
In the 2012 AMR the Commission recommended
to take a closer look at imbalances in Denmark that had been identified in May
2012. To this end, the second 2013 In-Depth Review (IDR) took a broad view of
the Danish economy, in line with the scope of the surveillance under the
Macroeconomic Imbalance Procedure, to examine the persistence of macroeconomic
imbalances and the remedies. The IDR concluded that Denmark was experiencing
macroeconomic imbalances that warranted monitoring and policy action. Particular
attention should be given to the continuing adjustment in the housing market,
the high level of indebtedness of households and in the private sector and to
the drivers of external competitiveness.
The main findings from this analysis are as
follows:
·        
The
continued losses in export market shares in goods seem to be linked to a
deterioration of Denmark’s cost competitiveness over the last decade, due to relatively
high wage growth and weak productivity growth compared with its trading
partners. Furthermore, nominal effective exchange rate movements have undermined
  Denmark’s competitiveness. Recently, wage and terms-of-trade developments
have improved its cost competitiveness, but low productivity growth remains a
cause for concern.
·        
Regarding
non-cost-related factors, the geographical composition of Danish exports, which
do not seem to be sufficiently represented in high-growth emerging markets, may
also have a negative impact on its market share. However, a relatively
favourable product composition of Danish exports has partly compensated for
adverse impact of the geographical destination of exports. Regarding
cost-related factors, trends appear to have shifted in more recent years. Unit
labour costs have fallen, partly reflecting slower wage growth, but also a
cyclical catch-up in productivity growth. In the coming years, wages in Denmark are expected to rise more slowly than in competitor countries, which will boost its
cost-competitiveness.
·       
High
household debt is an imbalance that poses increased economic risks, in
particular given the potential effects on the financial sector and on private
consumption, although the analysis in the IDR notes certain improvements.
Recent research into Danish household debt indicates that the risks to
financial stability from household indebtedness are relatively contained.
Nevertheless, if multiple risk factors were to arise simultaneously, such as
rising interest rates, a further fall in house prices and continued low growth
and rising unemployment (unlikely though as that is), it would be a major test
for Denmark’s mortgage system.
A wide range of policy responses could be
considered to tackle the above challenges. As regards external competitiveness,
wage developments should track productivity trends. Productivity could be boosted
by removing obstacles to competition and by removing barriers for firms’ use of
knowledge. Non-price competitiveness would improve if exports showed more
geographical flexibility and the adaptability to adjust to changes in global
demand.
With regard to the high level of household
debt, measures could be considered to improve the stability of the housing
market and the financial system in the medium term. Recent and planned
initiatives aim to improve the robustness of the mortgage credit system, limit
policy incentives to take up debt and reduce the risk of an unsustainable
build-up of household debt.
3.           Assessment
of policy agenda
1.3.                
Fiscal policy and taxation
Budgetary developments and debt
dynamics
According to the medium-term budgetary
strategy of the 2013 Convergence programme the fiscal deficit will fall below
the 3% of GDP reference value by the 2013 deadline set by the Council with a structural
improvement of 1½ % of GDP between 2010 and 2013.
Furthermore, the programme aims to reach a medium term objective (MTO) of at
least a balanced budget in structural terms in 2020. The MTO remains unchanged
compared to last year’s programme, and reflects the objectives of the Stability
and Growth Pact. For the years 2013 to 2020, the structural deficit fulfils the
minimum requirement in the Fiscal Compact of a deficit not exceeding 0.5 % of
GDP.
The general government deficit reached
4.0% of GDP in 2012, which is very close to the deficit forecast of 4.1% in
last year’s programme. The deficit in 2012 reflects
an extraordinary increase in public expenditure by 2% of GDP in 2012 due to the
one-off repayment of the Voluntary Early Retirement Pension (VERP)
contributions and the planned frontloading of public investments.
The convergence programme’s’ projection of
a budget deficit of 1.6% of GDP in 2013 is in line with the Commission’s Spring
Forecast of 1.7%. The improvement of the headline
balance compared to 2012 is to a large degree driven by one-off measures. In
2012, the repayment of the VERP contributions reduced the budget deficit by
approximately 1¾ % of GDP. In 2013, the possibility of moving forward taxation
of existing capital pensions at favourable conditions is expected to improve
the budget deficit by close to 1 % of GDP.
The convergence programme projects the headline
budget balance to deteriorate to ‑1.7 % of GDP in 2014 and to -2.8 % of
GDP in 2015, before improving to -2.0% of GDP in 2016. The small change in the headline deficit from 2013 to 2014 reflects
broadly unchanged interest expenditures and the slight deterioration in the
primary balance is due to the government consolidation efforts being more than
offset by lower revenues from one-off items. In the Commission’s Spring
Forecast, the fiscal balance is expected to be at -2.7 % in 2014. The
divergence with the authorities' forecast is mainly due to an extension of the
one-off capital pensions measure into 2014, which was not known by the time of
the finalisation of the Commission's forecast.
According to the convergence programme, public
expenditure and revenue are forecast to fall by 0.8 and 0.9% of GDP,
respectively, in 2014. On the expenditure side, the
fall can be mainly attributed to a lower share of public consumption on the
back of the Growth Plan and a lower share of income transfers. On the revenue
side, the fall comes from lower revenues from direct and indirect taxes,
including from pension yield taxes. From 2014 to 2016, expenditure and revenue
are expected to decrease by 1.9 and 2.2% of GDP, respectively. The main causes
of the expected decrease in the share of public revenues up to 2016 are the
phasing-out of the capital pension taxation measure in 2014 while the decrease
in the expenditure share is forecast to result from the dampening effect of the
‘Growth Plan’ (see Box 4) on public consumption.
According to the convergence programme, Denmark aims to fulfil the EDP recommendation by the 2013 deadline set by the Council. The main fiscal consolidation measures are specified in the 2009
Spring Package 2.0, the 2010 Consolidation Agreement and the fiscal bill for
2012 (see Box 2). The Commission’s Spring Forecast projects the headline budget
balance to fall to -1.7% of GDP in 2013. Hence, the risks for breaching the 3%
reference value appear to be very limited. The bottom-up approach, as
calculated by the national authorities, shows an annual improvement of the
structural balance of 0.8 percentage points in 2011, 0.3 percentage points in
2012 and 0.6 percentage points in 2013.[4]
While the discretionary measures described in the convergence programme appear
plausible to secure the required cumulative structural budget improvement of
1.5% of GDP between 2011 and 2013, the targeted improvement of the structural
budget balance of 0.6 percentage points of GDP in 2013 is ambitious and
requires considerable efforts.
The convergence programme foresees a
deterioration of the structural balance (recalculated with the commonly agreed
methodology) from 0.3 % of GDP in 2013 to -0.6 % of GDP in 2016. Taking into account the ¼ percentage point margin when evaluating
the (recalculated) structural balance, Denmark is projected to respect its MTO
of -½ % of GDP in the years from 2014 to 2016. The structural balance as
calculated by the national authorities is projected to be between 0 and -½ % of
GDP in the period 2013-2016. According to the information provided in the
Programme, the growth rate of government expenditure, net of discretionary
revenue measures, from 2014 to 2016 will not exceed the reference medium-term
rate of potential GDP growth (1.12%). The expenditure projections confirm an
appropriate adjustment to the MTO. The Commission’s Spring Forecast expects the
growth rate of public expenditure to exceed somewhat the lower reference rate
in 2014, but this deviation is not deemed to be significant.
Denmark has reduced its gross public debt
from 46.4 % of GDP in 2011 to 45.7 % in 2012, despite running a 4% of GDP fiscal
deficit. The convergence programme plans a further
reduction of the debt ratio by 2014, a stabilisation in 2015-17 and a further
decrease to around 40% of GDP by 2020. Medium-term debt projections (Graph
below Table V in annex) also confirm that full implementation of the programme
would lead to lower debt in 2020. The debt ratio is thus expected to stay well
below the 60 % reference value in the Stability and Growth Pact and the debt
reduction benchmark is therefore not applicable.
 Box 2. Main fiscal consolidation measures 
   || Denmark's fiscal consolidation effort is based on the financing elements of the 2009 Spring Package 2.0, the 2010 Consolidation Agreement and the fiscal bill for 2012. According to the convergence programme, the effect from these initiatives, measured by the direct revenue effect, amounts to 2.2 % of GDP over the period 2011-201313. A number of other factors influence the structural balance negatively, for example a structural fall in revenues from North Sea oil extraction. Net of these effects, the public finances are projected to improve by 1.7 % of GDP when measured by the bottom-up methodology and by 1.5 % by the top-down methodology as calculated by the national authorities.   ||   
   || Revenue || Expenditure ||   
   || 2011 ||   
   || ·      Financing elements Spring Package 2.0 (0.1 % of GDP) ·      Financing elements Consolidation Agreement (0.3 % of GDP) || ·      Lower growth in public consumption (-0.7 % of GDP) ·      Public investment (0.1 % of GDP) ·      Social transfers (-0.1 % of GDP) ||   
   || 2012 ||   
   || ·      Financing elements Consolidation Agreement (0.1 % of GDP) ·      Financing elements Fiscal Bill 2012 (0.2 % of GDP) || ·      Lower growth in public consumption (-0.1 % of GDP) ·      Public investment (0.1 % of GDP) ·      Social transfers (-0.2 % of GDP) ||   
   || 2013 ||   
   || ·      Financing elements Spring Package 2.0 (0.2 % of GDP) ·      Financing elements Consolidation Agreement (0.1 % of GDP) ·      Financing elements Fiscal Bill 2012 (0.1 % of GDP) || ·      Lower growth in public consumption (-0.1 % of GDP) ·      Public investment (-0.2 % of GDP) ·      Social transfers (0.1 % of GDP) ||   
   || Note: The budgetary impact in the table is the impact reported in the programme, i.e. by the national authorities. A positive sign implies that revenue / expenditure increases as a consequence of this measure. The degree of detail reflects the information made available in the convergence programme and, where available, of a multiannual budget. ||   
 ·           
Box 3. Excessive deficit procedure for Denmark
On 13 July 2010, the Council decided that an
excessive deficit existed in Denmark and adopted the most recent Council
Recommendation under Art. 126(7) TFEU. The Council recommended that the Danish
authorities should put an end to the present excessive deficit situation by
2013.
Specifically, in order to bring the general
government deficit below 3% of GDP in a credible and sustainable manner, the Danish
authorities were recommended to (a) implement the fiscal measures in 2010 as envisaged;
(b) ensure an average annual structural adjustment of ½% of GDP over the period
2011-2013; (c) specify the measures that are necessary to achieve the
correction of the excessive deficit by 2013, cyclical conditions permitting,
and to accelerate the reduction of the deficit if economic or budgetary
conditions turned out better than expected at the time the EDP recommendations
were issued.
An overview of the current state of excessive deficit procedures is
available on: http://ec.europa.eu/economy_finance/economic_governance/sgp/deficit/index_en.htm
(please refer to country sections at the bottom of the page).
Long-term sustainability
Denmark
does not appear to face short-term, medium-term or long-term sustainability challenges. Government debt (45.7  % of
GDP in 2012 and expected to rise to 46.4  % in 2014) is below the
60  % of GDP Treaty threshold, which gives the country some fiscal space
over the medium term. Fiscal sustainability risks would be further mitigated if
the structural primary balance returned to the higher values observed in the
past., such as the average for the period 1998-2012.
Taking more measures to contain
age-related expenditure growth would contribute to the long-term sustainability
of public finances. In particular, expenditure on
long-term care could become a fiscal challenge. Indeed, at 4.5 % of GDP in 2010
  Denmark had the highest current expenditure on long-term care as percentage
of GDP in the EU. On the other hand, the reforms of the Voluntary Early
Retirement Pension scheme and the linkage of the statutory retirement age to
life expectancy will improve the sustainability of public finances in the long
term. 
Fiscal framework
Denmark
is applying a medium-term budgetary framework (MTBF) to all levels of
government. In multi-annual plans it sets annual
growth targets for public consumption expenditure volumes at central, regional
and local level. The basic rule of budgetary policy is to achieve a structural
general government balance or surplus in the medium to longer term. The MTBF is
not based on constitutional or legal acts; it is a political commitment to
achieve fiscal sustainability over the longer term. Nevertheless, the
multi-annual plans have parliamentary support and serve as an anchor for fiscal
policy planning in the annual budget process. Regional authorities (accounting
for 20% of total public expenditure) and local authorities (accounting for 50%
of total expenditure) play an important role in administering public
expenditure. The Ministry of Finance and the Ministry of Economic Affairs and
the Interior function as monitoring and enforcing bodies.
Despite the positive track record of its
fiscal framework, Denmark has a history of substantial expenditure overruns, in
particular at regional and local levels. Hence, the
2010 Fiscal Consolidation Agreement and the annual fiscal bills since 2011
contain penalties and tighter budgetary control in order to tighten expenditure
control in the municipalities and regions. These mechanisms have proved
effective. The penalties are now laid down in an ambitious budget law adopted
by the parliament in June 2012. Under the new budget law, the parliament will set
expenditure ceilings at central, regional and municipal level for four years
starting from 2014.
The new spending regime heralds a
significant shift towards a better controlled expenditure policy.  Particularly, planned spending is now based on a scenario that takes
into account only the effects of measures for which there is a majority in parliament.
In previous medium-term plans, it was usually assumed that planned spending
initiatives could be financed in the future through unspecified measures, which
often proved difficult to find.
Tax system
Denmark still has the highest tax-to-GDP ratio in the EU, despite recent
reductions.[5]
Standard tax performance indicators suggest that the tax system is well
designed with rather broad tax bases and low tax compliance costs. The implicit
tax rate on labour is close to the EU average, but the marginal tax rate is
relatively high for high-income earners.[6] The tax
burden on corporate income is at the EU average but revenue from indirect taxes
is significantly above average. Danish consumption taxes account for the
highest share of GDP in the EU. The proportion of recurrent property taxes —
considered to be one of the least distortive types of tax — remains above the
EU average.
The 2009 and 2012 tax reforms lowered
the tax burden on labour and reduced the progressivity of personal income tax
in order to boost employment and growth. The 2009
tax reform, which being implemented between 2010 and 2019, aims at reducing the
high marginal tax rates on personal income while at the same time reducing
mortgage interest deductibility and increasing energy, transport and
environmental taxes and excise duties on health-related products such as
dietary fats, confectionery, soft and alcoholic beverages and tobacco. The 2012
tax reform, which will be implemented between 2013 and 2023, aims at gradually
raising the threshold for the top income tax rate and increasing the employment
allowance. It will be financed in part through the indexation of some excise
duties but mainly through cuts in public expenditure. The direction taken with
these tax reforms was somewhat reversed in the 2013 budget, with the abolition
of excise duties on fat introduced by the 2009 tax reform and the reversal of
the extension of excise duties on confectionery being financed through higher
personal income taxes. In addition to the above-mentioned measures, the ’Growth
Plan’ on which the government reached an agreement with the opposition in
end-April 2013, aims to reduce costs for businesses through targeted tax cuts
and increased public investment.
Box 4. ’Growth Plan’ assessment
The agreements on the ’Growth Plan’ is a set
of measures designed to improve productivity and competitiveness and to
generate private sector employment. This is to be achieved through a
combination of tax cuts (across the board, but also sector-specific),
initiatives to improve financing conditions among companies and increased public
investment. The initiatives in the plan amounts to an accumulated DKK 75
billion [€ 10.1 billion] over the period 2014 to 2020 (close to ½ % of GDP),
leading to a projected increase in private employment of 17,000 persons in
structural terms by 2020.
According to the government, the ’Growth
Plan’ is fiscally neutral. It is financed by lower public consumption growth in
2014 to 2017 and a regulation of public wages, generating annual savings of
around DKK 5.8 billion [€ 0.8 billion] by 2020. In addition, municipal service
expenditure will be frozen from 2013 to 2014 (creating a permanent saving of DKK
2 billion [€ 0.3 billion]). Dynamic effects are expected to generate revenues
of DKK 1.3 billion [€ 0.2 billion] in 2020.
The gradual reduction of the corporate tax
rate from 25  % to 22  % is the largest revenue reducing item in
this plan. Another main item is the abolition of the energy-saving tax and the
lowering of other energy taxes, with a view to striking a better balance
between environmental considerations and competitiveness of businesses. The third
main item will be the increase in public investment. The public spending cuts will
weigh on economic activity but overall the reform programme is expected to
create a positive net effect in the end. While the final impact of the 'Growth
Plan' is subject to great uncertainty, it sets good framework conditions that
have the potential to boost growth in the coming years.
Regarding the tax system for housing,
cadastral values continue to be updated every two years to reflect market
values, but the property value tax has been frozen in nominal terms since 2002. This has reduced the effective property value tax and will
gradually erode revenue, if not changed. Although the property tax freeze has
arguably contributed to the housing bubble between 2003 and 2007, the
government does not intend to review the property value tax system in the near
term. Given the high overall tax burden, it could be considered to make the
most of the least distortive and most growth-friendly revenue sources, such as
recurrent property taxes, to ease the direct tax pressure on capital and
labour, at least in the medium term, while taking into account the current need
to stabilise the housing market. In addition, there may be the potential to
make overall vehicle taxation more efficient while maintaining revenue and the
current system’s contribution to reducing CO2 emissions and other
transport‑related externalities.[7]
1.4.                
Financial sector 
The stability of the financial system and of the housing market remain
issues of a high concern in Denmark. The high level of household
indebtedness has been in the focus for some years but recent research suggests
that, although to date the risks to financial and economic stability seem to be
contained the situation would require continued monitoring. 
Private sector indebtedness and the
housing market
In 2012 the Council Recommendation for Denmark contained a CSR concerning the stability of the financial system and the need to
consider further preventive measures to strengthen the stability of the housing
market. Although high levels of household gross
debt have long been a structural feature of the Danish economy, housing market
developments have contributed to the build-up of excessively high household
debt levels, that may be considered beyond sustainable levels. As a result of
the sharp rise in house prices and the accompanying surge in residential
investment, the debt of Denmark’s households increased markedly, by 52  %,
between 2001 and 2009. The composition of mortgage loans has also changed since
2003 with deferred-amortisation loans (which are instalment-free in the initial
years of the loan) and adjustable-rate loans becoming more popular than the
less risky but more expensive fixed-rate loans.
The high level of household debt may
pose risks not only to financial sector stability but also to private
consumption. The household debt-to-gross disposable
income ratio decreased from an historical high of 302% in 2009 to 286% in 2011.
According to a recent report by Danmarks Nationalbank,[8] the share of variable-rate loans in total lending by mortgage banks
rose from 46  % in the beginning of 2005 to 68  % in the third
quarter of 2012. Over the same period, the share of deferred-amortisation loans
in total mortgage lending rose from 20  % to 56  %. Worryingly,
these proportions are particularly high among households with the lowest
incomes, considered to be the most vulnerable group. For this reason country-specific
recommendation addressed in 2012 to Denmark called for action to improve the
stability of the housing market, taking into account the results of a study by
the Ministry of Business and Growth on the distribution of assets and
liabilities across households. This study indicated that the risks to financial
stability from household indebtedness are relatively contained, due, in particular,
to the large proportion of overall household debt held by high-income
households, which are better equipped to service their debt if interest rates
rise. Accordingly, even if interest rates were to rise quite substantially, the
potential volume of loans that households would not be able to service does not
seem to pose a threat to the financial stability of the economy. Nevertheless,
in the current fragile financial and macro-economic environment, the high level
and the composition of mortgage debt have increased the exposure of the
financial system to adverse developments. As pointed out in the 2013 In-Depth
Review for Denmark, in the event of a simultaneous materialisation of a number
of risks, such as low growth, rising unemployment, rising interest rates and a
fall in house prices, Denmark’s financial stability could be severely undermined.
Measures to address the risks to
financial stability in Denmark have been appropriate. The Danish authorities have taken measures to improve the robustness
of the mortgage credit system, such as a risk labelling scheme for housing
mortgage loans and the formalisation of informal requirements for borrowers,
according to which variable-interest and/or deferred-amortisation loans are
only granted if the household can afford a fixed-interest loan with
non-deferred amortisation. The mortgage credit institutes, which belong to the
private sector, have also taken measures to ensure the provision of additional
collateral. While these measures go in the right direction, they need to be
closely monitored so as to assure that they have the desired impact.
Banking
The financial sector is recovering from
the housing market crisis, which is still weighing on bank profitability, and losses
on non-performing loans remain significant. In
2012, total bank assets in Denmark grew by 1.1%, a rate comparable to previous
years.. Total bank assets grew by 1.1  %. Lending to households remained
flatand lending to companies was negative. On the liabilities side, the
exceptionally low share of non-financial entities'deposits in the balance sheet
resulted in a still very high loan-to-deposit ratio of of 296% in 2012, down
from 306% in 2011.. Capital adequacy of the Danish banks improved in 2011.[9]The net operating income of banks declined, mainly due to the fall
in lending volumes and increasing funding costs, reflecting the 2011 turmoil in
the international markets. The low income combined with the persisting write-downs
for non-performing loans has resulted in low profitability of Danish banks.
Denmark’s
financial supervision framework has been strengthened in recent years. This was achieved in particular by bringing in the so-called ‘supervisory
diamond’[10] and other tools to monitor individual banks more closely, by
creating a bank resolution regime based on the Financial Stability Company[11] and by setting up new institutions responsible for macro-prudential
oversight[12] of the financial sector and the economy.
Given the
high share of market funding, the Danish banking sector is exposed to
relatively high liquidity and refinancing risks. In
recent years, the Danish banks have made attempts to strengthen their funding
structure. The share of retail deposits has been increasing, especially in
smaller banks. Regarding market funding, short-term debt issuance fallen and long-term
issuance was substantial in 2012, resulting in longer and more evenly spread
average bond maturities. However, the largest banks’ increasing dependence on
short-term funding from foreign banks was a negative development since it has
the potential to increase liquidity risks. The tackling of funding risks has
been supported by the Danish Financial Stability bringing in requirements on
excess liquidity coverage and by making the funding ratio binding since 2012.
The forthcoming new regulatory
requirements may pose challenges to the Danish banking sector. The expected increase in risk weighting of mortgage bonds is a
particular concern for banks, given the role of this instrument in the Danish
banking market. Another concern is the 40  % limit for mortgage bonds in
the portfolio of liquid assets needed to comply with the Basel III liquidity
requirements.
Access to finance
Lending
conditions are not expected to return to pre-crisis levels any time soon. In 2012, the level of outstanding loans to non-financial
corporations decreased by 2  %, bringing theaccumulated decrease since
2008 to almost 5  %.[13].Access to loans has become increasingly difficult for small and
medium-sized enterprises (SMEs) since the start of the economic crisis in spite
of the very low interest rates in Denmark: the rejection rate for loan
applications is 20  % (compared to the EU of 15  %) and the cost of
credit is 50  % higher than for large companies.[14] This
may also have a negative impact on the development of innovative research
projects by SMEs.
The
authorities have adopted some initiatives to tackle the problem of corporate
financing: the ‘Danish Growth Capital’ (Dansk Vækstkapital, a state investment
fund), the ’Development Package’ (Udviklingspakken) and a ‘Credit Package’. The latter includes measures related to additional subordinated
loans, which range from Vækstfonden loans to to guarantees from the Export
Credit Agency (EKF) to support export- oriented projects. A study is being
prepared on the corporate bond market. In addition, an initiative is aimed at
providing a credit guarantee scheme for smaller bank loans (up to DKK 2 million
[€ 0.3 million]), to be run from 2013-2015. 
1.5.                
Labour market, education and social policies
Increasing the labour supply remains a
key long-term challenge for Denmark. Combining ambitious
labour market reforms with improvements of the effectiveness of the education
system, reducing drop-out rates and increasing the number of apprenticeships
will help to increase employment, in particular for young people. Removing
labour market bottlenecks is crucial for increasing Denmark’s economic growth
potential and could directly feed into productivity and competitiveness gains.
Labour market
Denmark has
traditionally had a very well-functioning labour market with smooth labour
market transitions, high employment rates and universal social protection. Nevertheless, it was affected by the crisis. In 2012, the employment
rate for people aged 20-64 was 75.4  %, which is above the EU average of 68.5 %.
The unemployment rate more than doubled from its record low of 3.4 % in 2008 to
7.5 % in 2012. However since 2010 it started to stabilise at 7.5 %. The
unemployment rates for disadvantaged groups, such as people with migrant
background, low skilled workers, long-term unemployed, people with reduced work
capacity and older workers, are higher than the average. Youth unemployment has
also increased, although it remains well below the EUaverage. Long-term
unemployment, as a proportion of total unemployment, rose from 13.5 % in 2008
to 28.0 % in 2012. In addition, the share of people living at a risk of poverty
and in low work-intensity households increased markedly between 2008 and by 2.6%
and 3.1% respectively. 
In 2012,
the Council recommendation addressed to Denmark included a CSR concerning the
labour market and the need to take further steps to enhance long term labour
supply. The policy response was to reform of the disability pension and
flex-job systems, which has been adequate. These
schemes cover approximately 10  % of the working-age population, which
constitutes a significant labour supply potential. The main elements of the
reforms include new individual resource programmes for persons under the age of
40 (instead of a disability pension) and better targeted subsidies in the
flex-job scheme. One objective is that as many as possible should work in the
ordinary job market. As a consequence of the reform all municipalities are now
required to establish rehabilitation teams. The teams will ensure that people
with complex problems receive support across the areas of employment, health,
social services and education, with a focus on individual needs. Persons below
40 years will, as a general rule, not have access to disability pension, but will
instead undergo a labour market reintegration process. The reform also amends
the flex-job system. Persons under 40 years may receive a flex-job for a
maximum of five years, while people over 40 years will have a possibility to
keep the flex-job after the five-year period. Under the new scheme the highest
subsidies will be paid to persons with the lowest incomes, while presently the
highest subsidies are paid to persons with the highest salaries. The reform
bill was adopted by the parliament on 23 December 2012 and came into effect
from 1 January 2013 (the reform aims to save DKK 1.9 billion in total [€ 0.3 billion]). Furthermore,
two new committees have been set up to review Denmark’s active labour market
policies (ALMP). At present, Denmark’s spending on ALMP in terms of GDP is the
highest in the EU. The committee will examine how to ensure that in the future
ALMP can provide quick and lasting employment opportunities based on individual
needs, respecting the principle of availability to work and ensuring optimal
cooperation between the public employment service and private companies.
There is room
for increasing the labour market participation of people with a migrant
background. At 54.5% in 2012, the employment rate of
non-EU citizens was considerably lower than the overall employment rate and
also below the EU average. The government aims at increasing the number of
employed workers with a migrant background by 10 000 by 2020 in order to reduce
the employment gap compared with the rest of the working population. The authorities
are not considering initiatives specifically targeted at people with migrant
background, but plans reaching this target through ongoing reforms of the
social benefit system and active labour market measures, as outlined in the
government’s vision paper from November 2012. Furthermore, an agreement was
reached in April 2013 between the government and the opposition on a reform of
the national social assistance scheme. The main objective is to break the
practise of passive support, where people are left on social assistance for
years with limited assistance or follow-up. For people below 30, the reform
reduces the level of social assistance to that of a student allowance. It will
be important to monitor the effect of the envisaged changes on regular
employment and on levels of poverty and material deprivation. Moreover, the ‘Acute’
package approved in August 2012 introduces additional active labour market
measures for people losing their rights to unemployment benefits due to the
recent shortening of the length of eligibility and for young people. The apprenticeship
and vocational training initiatives included in the 2013 budget are also
expected to have a positive impact on the employment levels of young people
with a migrant background. However, besides the reform of the cash benefit
system, there may be a need for further measures designed to break down the
additional barriers to labour market participation faced by this group, to
facilitate their integration on the labour market.
The risk of marginalisation of the growing group of unemployed is an
emerging challenge on the Danish labour market. The
marked increase in long-term unemployment since the beginning of the crisis
suggests that an increasing amount of people has been losing their foothold on
the labour market. This is confirmed by a significant increase in the number of
people receiving cash benefits, many of them classified by the Public
Employment Service as not being fit to work. Recent reforms of the social and
unemployment benefit systems have reshaped the balance between security and
flexibility on the Danish labour market, putting more weight on ALMP so as to
assure that people who are at the margins of the labour market are keptas close
as possible to employment, in order to avoid the loss of human capital and an
increase in inequality.
The overall progress in addressing the country-specific
recommendation on the labour market has been significant. The disability pension reform, the reform of flex jobs and the cash
benefit reform respond adequately to the recommendation, but the practical
implementation and effects of the reforms will need to be closely monitored and
followed up by further measures if necessary. In order to raise long-term
labour supply and reduce the risk of unemployed people becoming marginalised,,
further efforts are warranted to enhance the employability of those people, who
are the furthest from the labour market, including people with a migrant
background, the low-skilled and the long-term unemployed.
Education
Despite Denmark’s generous spending on its education system, educational outcomes are dismal in a
number of key areas. The upper secondary completion
rate is low, and early drop-out rate from vocational youth education is high.
This high drop-out rate seems to be linked to insufficient quality of educational
programmes, a lack of apprenticeship places and insufficient basic skills such
as literacy and numeracy. Furthermore, lengthy study periods at tertiary level
have long been a characteristic of the Danish higher education system. The
relatively poor performance of the education system is arguably one of the
factors contributing to weak productivity growth.
In 2012, a country-specific recommendation given to Denmark addressed the need to improve the cost-effectiveness of the education system. The authorities have set ambitious targets and implemented plans
that partly address the challenges faced by its education system. The
government is planning general reforms of the compulsory (primary and lower secondary
education) and upper secondary and tertiary education system, with the aim of
improving cost-effectiveness, enhancing quality and decreasing the number of
drop-outs. In December 2012, the Danish government proposed a reform of the
public school system (folkeskolen) aiming at increasing the number of
hours students spend in school and at more practical training, activity-based
education and improving basic skills.The proposal is still under negotiation in
the parliament, with a view to implement the reform in the school year 2014-15.
As regards vocational education and training (VET), the budget for 2012
provided funding for 10.400 additional apprenticeship places and created 1 500
extra in-school training places. There is a political agreement to improve quality
in vocational training and strengthen the ‘education guarantee’ (ensure the
apprenticeship places). In addition, as part of the 2013 budget, a political
agreement was reached on increasing the use of social clauses on training and
apprenticeships in public procurement. Moreover, reforms are in preparation and
the Expert Committee on Vocational Youth Education (formed by representatives
of the government, municipalities, regions and social partners) is due to make
its final proposals before summer of 2013 in order to find a solution to the
continuing problem of a lack of private apprenticeships and high drop-out
rates. The reform should also strengthen the role of guidance centres and trade
committees and support high-quality and attractive upper secondary VET.
Additional recent measures, including the recently announced reform of the
students allowance scheme, should accelerate the throughput of students. Under
this reform, receipt of student allowances will become more dependent on
academic progress. For 2013, in order to address youth unemployment, the
government has proposed a new package stimulating job rotation, apprenticeships
and vocational education.
Some progress has been made in
addressing the country-specific recommendation on the education system. While the measures adopted so far go in the
right direction, but the reform of public school system is still at an early
stage stage and its implementation will need close monitoring. Lasting and ambitious
solutions are needed to remedy the lack of places for apprenticeships, to address
the high drop-out rates in the vocational youth educational system and to
improve thecareer guidance system.
1.6.                
Structural measures
promoting growth and competitiveness
Spurring growth and competitiveness
remains a key challenge for Denmark. In order to
boost Denmark’s external competitiveness educational outcomes need to improve
and obstacles to competition need to be removed. The findings of the
Productivity Commission, expected by the end of 2013, will be central to a more
comprehensive policy agenda. A continued focus on wage moderation and
productivity growth, resulting in further improvements to cost competitiveness,
should limit and reverse the trend of declining export market shares of goods.
Internal market, liberalisation and
competition
In 2012 the Council recommendation for Denmark contained a CSR on competition policy and the need to remove related obstacles. Structural features, such its small market size and large public
sector, influence the conditions for competition in the Danish economy. Despite
the efforts already made to improve the functioning of the regulatory framework,
for instance by loosening the restrictions on shop opening hours, evidence
suggests that there are still obstacles to efficient competition in several
areas of the economy.[15]
Weak domestic competition is resulting
in high mark-ups of services and goods prices According
to an analysis made by the Danish Competition Authority[16], prices in Denmark are about 14 % higher for services and 5 % higher for goods compared to an average
of sevencomparable EU countries[17],
and a substantial part of this difference would be due to weak competition.
Services stand out as the main challenge, as they are often less tradable than
goods and frequently subject to specific regulation. According to the Danish
Competition Authority, this is the case in the construction and the retail
sector, and these two sectors have shown poor productivity developments over
the past decade. The preliminary findings from the Danish Productivity
Commission are identify the service sector as a potential area for improvement.
Although Denmark has transposed the Services Directive, some restrictions
remain for cross-border service providers. However, challenges also remain for
the goods sector. For instance, EU firms who have already passed the internal
market requirements may encounter additional specifically Danish technical
requirements, which may constitute entry barriers to the Danish market[18]. While Denmark generally complies well with internal market rules, including the service directive,
it should be able to generate additional growth by removing further obstacles
to competition. A liberalisation of planning and zoning restrictions could for
example boost competition in the retail sector..
The Danish government launched a ‘competition package’ in October 2012, which sets out
to improve competition in Denmark through three broad channels: the competition
law, sectorial issues (notably non-tradable services) and measures to increase
the effectiveness of public services. In December 2012, the Danish government
amended the Competition act, which included a significant increase in the level
of fines for undertakings and natural persons and made it possible to
significantly increase the level of fines for businesses and individuals and
impose custodial penalties on individuals participating in cartels. The new
legislation is expected to improve competition and enhance compliance with
international standards. The government has also appointed a Productivity
Commission to come up with recommendations (by the end of 2013) on how to
increase productivity in the Danish economy and created business-government
task forces (Growth Teams) to make policy recommendations in specific areas, such
as better regulation, public-private partnerships, attracting foreign direct
investment, export promotion and branding. 
Improving competition in several
regulated services through sectorial measures requires continued efforts. In 2011, the Competition Authority and the government launched a
number of initiatives to improve the regulation of services[19] and the competition package
from 2012 sets out additional sectorial projects[20]. Furthermore, the Competition
Authority is planning to present sectorial strategies for 10-15 priority
sectors in Denmark. Some additional useful steps have been taken, including a
review of consumer policies from August 2012 containing proposed 23 proposals
for initiatives to make it easier for consumers to make active choices.
The public sector in Denmark is relatively large and the effectiveness of the provision of public services is
thus of high importance to the overall economic performance of the country. Although, Denmark’s public sector is generally well managed,
further improvements in performance could generate relatively large benefits. According
to the notices of contracts awarded published in Tenders Electronic Daily (TED),
local and regional authorities published slightly more procurement contracts as
a percentage of the national total than their counterparts in the EU (52 %
against 44 % in on average 2006-2011). A report from the Danish Competition
Authority on competition in the public sector from December 2012 indicates that
the greatest potential for further opening up to competition is within the
health area, which is administered by the regional authorities. For local
authorities, the social area represents the largest potential for open
procurement. As the procurement performance of local authorities differs widely,
there appears to be room for improvement at some authorities. Studies by the
Danish Procurement Council show that public procurers find the procurement
rules too difficult to apply and that complaint cases can impose large costs on
procurers. Therefore, the government is planning to introduce a new legislation
on public procurement, which will also implement the new EU directives in this
area while emphasising effective, simple and more flexible rules and a more
effective complaint system. The government also intends to inform procurers
better about the procedures to be followed.
To address the broader competitiveness
challenge, a ‘Growth Plan’ has been agreed, the aim of which is to create new
jobs by 2020, primarily by cutting costs for businesses, has been agreed. Its main features are a gradual reduction of the corporate tax
rate (from 25  % to 22  %), lower excise duties on energy and
packaging, reintroduction of tax credits for construction works in private
homes, lower costs on waste water, increased public investment and investment
in rural regions. According to the government, the plan is to be fully financed
and will not jeopardise the objectives of the government’s budget policy.
Nevertheless, the actual effect of the package remains to be seen. Some
additional useful steps have been taken by the government to increase competition,
including a review of consumer policies from August 2012 containing proposed 23
initiatives to make it easier for consumer to make active choice.
The analysis leads to the overall sconclusion
that some progress has been made with regard to CSR 4. The effectiveness of measures taken by
the government, notably in the sectorial and public services area, remains to
be seen. Various policy initiatives are still at a very early stage of
implementation and continued efforts are needed to ensure effective implementation.
Research and innovation
In December 2012, Denmark launched a strategy to boost innovation. The innovation
environment for firms in Denmark is favourable and compares well with its
European peers. Denmark achieved its R&D investment target of 3 % already in
2009. However, in some areas, Denmark lags behind other innovation leaders, in
particular in private funding for innovation, in some aspects of
entrepreneurship, in cooperation between universities and business and in the
intensity of local competition. The country may face growing challenges to maintain
its leading position in the global competition in the field of environmental technologies.
To tackle these challenges, Denmark has recently launched reforms and
initiatives to boost innovation and has adopted a new comprehensive innovation
strategy. Given the low productivity growth in Denmark and the need to shift to
broader innovation activity in firms, Denmark would benefit from combining the
strategic focus of its innovation policy with effective public investments in
R&D.
Energy, climate and environment
Regarding energy efficiency, Denmark continues to slowly decrease its primary energy consumption. Transport and household energy consumption are by far the largest
final consumption sectors. The public sector is fulfilling an exemplary role by
reducing the energy consumption in national administration buildings. The
Danish Energy Agency assesses and publishes the government institutions’ energy
consumption and presents it to the Energy Committee of the Danish parliament.
This monitoring should be aligned with the requirements put forward by the
Energy Efficiency Directive. The national energy saving obligation scheme is
currently being revised.
Under the Europe 2020 Strategy, Denmark
has to reduce its carbon emissions not covered by the EU Emissions Trading
Scheme by 20 % in 2020 compared to 2005. Domestically, the government has pledged to
reduce all carbon emissions by 40% in 2020. According to
the latest national projections,[21]
  Denmark is expected to reduce its non-ETS greenhouse gas emissions by 2 2%,
which would meet the 2020 target. A climate plan is
expected to be published in spring 2013, with the required legislation scheduled
for late 2013. The plan is expected to set out the strategy to achieve the
target of the 40 % emissions reductions by 2020.[22] Non-ETS emissions were 7.2 %
below the 2005 level in 2011. 
Currently energy labelling of buildings
and support schemes for household wind turbines are being implemented, but the
challenge remains to further reduce emissions in the energy sector. In the transport sector, since vehicle and fuel taxation appear to
be the highest in the EU (1.5 % of GDP), further emissions reductions should
come through shifts to the use of public transport modes and towards taxing
actual transport use. Earlier plans to introduce green road pricing for cars
have been scrapped, and a dedicated commission is currently working on
proposals for the reduction of congestion and pollution in and around Copenhagen. Greenhouse gas emissions from agriculture have not fallen since 2005 and their
share in total emissions is rising. The Nature and Agriculture Commission was set
up in mid-2012 and is due to report by April 2013 on recommendations and
measures for structural change in this sector.
As set out in the National Energy Agreement
for 2012-20, measures should be taken to drive the change towards 100  %
renewable energy in 2050. As of 2010 (latest
available data), Denmark’s share of renewables in energy consumption stood at
21.8 %. Meeting its national renewable energy sources target of 30 % in 2020
would require developing a consistent, stable and predictable renewable energy
policy, including further implementation of the Danish national renewable
energy action plan. Moreover, particular attention is needed to ensure the
supply of intelligent demand solutions and investment in electricity grids as Denmark is expected to have more than 50 % renewable electricity by 2020. 
There is further room for Denmark to step up efforts to address key challenges within the broader context of resource
efficiency. The amount of municipal waste generated
in Denmark is the highest in the EU, and the country has the highest proportion
of incinerated waste (54 %). Reducing waste generation would improve the
resource efficiency of the Danish economy. Denmark is a leading exporter of
environmental solutions and technology and a number of sectors have high
potential for future eco-innovations and resource efficiency, including
industry, shipping, bio-technology and water technology. 
1.7.                
Modernisation of public administration 
It is widely recognised that the Danish
public administration system performs well, when compared with other countries. Composite indicators regarding government effectiveness,
corruption and fraud, business start and licenses, public procurement, tax
compliance and administration, and civil justice are above the EU average.[23] However, regarding the
efficiency of the public sector, the burden for firms in participating in
public procurement competitions, both in terms of costs (relative to GDP) and
of person-days needed, Denmark is above the EU average. In addition, regarding
civil justice, there is room to improve the indicator on the costs (expressed
as percentage of the claim) of contract disputes: court costs, enforcement
costs and average attorney fees.
Regarding the public administration
modernisation, the indicators tracking the availability of e-government
services and the use of evidence-based instruments are above the EU-average. This is due to the spread of ICT applications, modern human
resources management techniques and evidence-based steering and planning
instruments. Denmark’s NEM-ID system which is a common portal giving secure
access to electronic public services and banking services is a good practice. Among
the most recent initiatives, registering a property was made easier by allowing
the electronic submission of property transfer applications at the land
registry. However, e-health including patients e-records is an area where
further progress is required. 
4.           Overview table 
 2012 commitments || Summary assessment 
 Country-specific recommendations (CSRs) 
 CSR 1: Implement the budgetary strategy as envisaged, to ensure a correction of the excessive deficit by 2013 and achieve the annual average structural adjustment effort specified in the Council recommendations under the excessive deficit procedure. Thereafter, ensure an adequate structural adjustment effort to make sufficient progress towards the MTO, including meeting the expenditure benchmark.     || Significant progress   - The 2013 budget aims to achieve a budget deficit of 2½ % in 2013 and 2¾ % in 2014.   - 2020 plan includes MTO of max. 0.5 % structural deficit by 2020.   - Budget law implements provisions of fiscal compact and sets expenditure ceiling at the central, municipal and regional level. 
 CSR 2: Take further steps to enhance long-term labour supply by reforming the disability pension, better targeting subsidised employment schemes (the ’flex-job’ system) towards people with reduced work capacity, and improving the employability of people with a migrant background. ||  Significant progress - Tax reform from spring 2012 lowers taxes on earned income.   - Reform of disability pension and the ’flex-job’ system by creating rehabilitation teams and setting the minimum age of 40 to access the disability pension and ‘flex-job’ scheme.   - ‘Acute  package’ aims to create job opportunities for the long-term unemployed.   - Reform of the social assistance scheme [also under CSR3] proposed by the government. 
 CSR 3: Implement announced measures, without delay, to improve the cost-effectiveness of the education system, reduce drop- out rates, in particular within vocational education, and increase the number of apprenticeships. || Some progress   - The 2013 budget provides additional DKK 2.9 billion [€ 0.4 billion] for education and vocational training.     - An expert committee is working on proposals (planned for spring 2013) to strengthen the quality of youth vocational education, create additional apprenticeships and provide a well-functioning youth education guarantee   - The new youth reform package includes instruments to support weak students in the youth education system.   - Planned reform of the public school system increases the number of hours students spend in school (6-15 years old).   - In February, the government presented proposal to reform the student allowance system.   - The new innovation strategy also coverss education measures     
 CSR 4: Continue efforts to remove obstacles to competition, in particular in local services, the retail and construction sector, including by further opening the municipal and regional procurement of services to competition and ensuring that competition law sanctions have a sufficiently deterrent effect. ||  Some progress    A Productivity Commission has been appointed with the task of advising the government by the end of 2013 on ways to increase competitiveness.   - The government has updated the Competition act introducing more deterrent penalties under competition law, with higher fines and the possibility of custodial sentences. Refer also to the two other pillars of the Competition plan   - Regarding the removal of obstacles to competition in the retail sector, the Danish law on opening hours expired and shop owners can open shops when they want. However, some restrictions remain in retail services sector and competitive bottlenecks in the provision of local public services still persist. 
 CSR 5: Consider further preventive measures to strengthen the stability of the housing market and financial system in the medium term, including by taking account of the results of the ongoing study by the Ministry of Business and Growth on the distribution of assets and liabilities across households and by reviewing the property value tax system and the municipal land value tax system. || Some progress - The study on the distribution of assets and liabilities across households was published by the Ministry of Business and Growth in January. According to its results, household debt does not constitute a great risk to the economy as debt is concentrated in households with the highest income, which are robust to deal with interest rate hikes. - The government has implemented a ‘traffic light’ labelling scheme that labels mortgage loans according to their riskiness. - The government had formalised already existing requirements for borrowers to be allowed to take up variable rate and deferred-instalment loans, only if they can afford fixed interest rate and repayment loans. - Although cadastral values continue to be updated every two years to reflect market values, the property value tax has been frozen in nominal terms since 2002. The government has signalled no intention to review the property value tax system.   
 Europe 2020 (national targets and progress) 
 Employment rate target: 75 % || Employment rate 2010: 75.8 % 2011: 75.7 %   
 R&D target: 3 % || Denmark reached its national 3 % R&D intensity target already in 2009 (3.16 %). Its ambition can thus be questioned. Since 2010 R&D intensity has remained at slightly above 3 % (2010:3.07 %, 2011: 3.09 %). In 2011 business R&D expenditure represented 2.09 % of GDP (national target: 2 %), public spending 0.99 % of GDP (target 1 %). Denmark has hence also reached the targets for public and private sector R&D spending, despite a slight decline in business research intensity in recent years. 
 Greenhouse gas (GHG) emissions target: -20 % (compared to 2005 emissions, ETS emissions not covered by this national target) || Change in non-ETS greenhouse gas emissions between 2005 and 2011: -7.2 % According to the latest national projections submitted to the Commission and when existing measures are taken into account, the target is expected to be met: -22  % in 2020 compared to 2005 
 Renewable energy target:  30 % Share of renewable energy in the transport sector:  10 % || Share of renewable energy in gross final energy consumption was 23.1% in 2011 and 0.2 % in transport. (Source: Eurostat April 2013. Only formally reported compliant biofuels with Art. 17 and 18 of Directive 2009/28/EC are included).   
 Indicative national energy efficiency target for 2020: primary energy consumption of 744.4 PJ (17.781 Mtoe) in 2020.   This implies reaching a 2020 level of 17.8 Mtoe primary consumption and 14.8 Mtoe final energy consumption. || Denmark has set an indicative national energy efficiency target in accordance with Articles 3 and 24 of the Energy Efficiency Directive (2012/27/EU). It is also expressed  in terms of an absolute level of primary and final energy consumption in 2020 and has provided information on the basis on which data this has been calculated. 
 Early school leaving target: <10 % (Less than 10 per cent school drop-out rates of the population aged 18-24) || Early school leaving rate: 2010: 11.0 % 2011: 9.6 % The EU target has already been achieved. Slight increase compared to 2006: 9.1 % 
 Tertiary education target: >40 % (At least 40 per cent of the population aged 30-34 having completed tertiary) || Tertiary attainment rate: 2010: 41.2 % 2011: 41.2 % The EU target has already been achieved. Slight decrease compared to 2006: 43 % 
 Target on the reduction of population at risk of poverty or social exclusion in number of persons: For DK: Reduce the number of people in households with low work intensity by 22,000 towards 2020. || Number of people in households with low work intensity: 2010: 433.000 persons 
5.           Annex
Table I.  Macroeconomic indicators
Table II. Comparison of macroeconomic
developments and forecasts
Table III. Composition of budgetary
adjustment
Table IV. Debt dynamics 
Table V. Sustainability indicators
Table VI. Taxation indicators
Table VII. Financial market indicators
Table VIII. Labour market and social
indicators
Table IX. Product market performance and policy indicators
Table X. Green
Growth
[1] COM(2012) 750 final
[2] COM(2012) 751 final
[3] 13 in-depth reviews were published on 10 April 2013. While selected
for an in-depth review in the AMR, Cyprus was ultimately not reviewed under the
Macroeconomic Imbalance Procedure in view of the advanced preparations for a
financial assistance programme.
[4] This result
contrasts to the cyclically adjusted balance net of one-off and temporary
measures, as recalculated by the Commission services on the basis of the
information provided in the programme, using the commonly agreed methodology.
According to this calculation the structral balance improves from -0.1% of GDP
in 2010 to 0.3% of GDP in 2013. However, this method does not filter out very
volatile revenue items – such as the revenues from North Sea oil extraction and
the pension yield tax – which plays an important role when assessing the Danish
public finances.
[5] Although the tax-to-GDP ratio dropped by over three
percentage points from 2005 to 47.7 % in 2011, Denmark shows the highest ratio
in the EU. One reason why the tax-to-GDP burden appears to be higher than for
other countries, is that Denmark has both a tradition of using gross recording
and of taxing transfer incomes such as pensions.
[6] Labour is taxed through relatively high taxes on
personal income, with limited use of social contributions.
[7] Danish Council of Environmental Economics:
Economy and Environment (2013), Chapter II (car taxation). English summary: http://www.dors.dk/graphics/Synkron-Library/Publikationer/Rapporter/Miljo_2013/Trykt/M13_English_summary.pdf
[8] Danmarks Nationalbank (2012).
[9] This was confirmed by the EBA 2012 EU Capital
Exercise, in which the four participating Danish banking groups demonstrated
strong capital buffers as per June 2012. Three of them increased their buffers
compared to the previous year and one showed a decrease.
[10] A set of five supervisory requirements with benchmark
values phased in in the period 2010-2012.
[11] During the crisis, the Danish authorities resolved one
third of banks out of the total pre-crisis number of institutions, but their
aggregated assets corresponded to only 6  % of the sector.
[12] The Systemic Risk Council and the interagency
committee to develop prudential arrangements for systemically-important
financial institutions (SIFIs).
[13] ERST, Danish government.
[14] European Commission, Small Business Act Fact Sheet 2012.
[15] See for instance European Commission: ‘The Industrial Performance Scoreboard 2012’.
[16] See competition and consumer report 2011 from the
Danish Competition and Consumer Authority.
[17] Corrected for differences in VAT, excise duties and
levels of prosperity.
[18] According to a recent Conference held by The
Association of Danish Industry and the European Commission on the topic of
obstacles in the internal market  
[19] Such as construction, telecommunications, electricity, postal
services, taxi services and pharmacies.
[20] In the field of TV-distribution, pharmacies, dentists, the retail
sector, construction, energy, waste, financial services, real estate agents,
local train services, taxi services, etc.
[21] Source: European Environmental Agency: Greenhouse
gas emission trends and projections in Europe 2012 — Tracking progress towards Kyoto and 2020 targets, http://www.eea.europa.eu/publications/ghg-trends-and-projections-2012.
[22]http://www.kemin.dk/da-DK/KLIMAOGENERGIOGBYGNINGSPOLITIK/danmark/reduktionafdrivhusgasser/Maalsaetninger_og_rammer/Sider/Forside.aspx.
[23] European Commission (2011-2012), "Excellence in
public administration for competitiveness in EU Member States"