Future challenges for the danish economy and society

Future challenges for the Danish economy - and society

Along with the rest of the developed world, the Danish welfare state will be put to the test over the coming decades. Most experts would agree that financial pressures on public finances and welfare services will rise, despite significant labour market and budgetary reforms. No one truly knows how sustainable the current model will prove to be as the population ages, demand for health care and social services increases, and the process of globalisation continues its steady advance.

Add to this the immense challenges posed by global climate issues – a problem which has been largely ignored by the international key players – and the impending issues appear even more daunting. Global warming must be confronted decisively if we are to hope for a positive outcome.

I will concentrate on four challenges that I consider to be among the most pressing issues of our time:

• Creating a sufficient framework for efficient private production.

• Stepping up efficiency and productivity in the public sector, thereby achieving more value for taxpayers’ money.

• Deciding on future tax-reforms to ensure a fair sharing of the burden, and financing a sufficient level of long-term welfare in an efficient manner.

• Fighting global warming.

Creating a sufficient framework for efficient private production

Fundamentally, there are two ways to improve economic growth: Work harder or work smarter. I will return to the “work harder”-part later on, and concentrate on the work smarter issue for now. We have become a lot smarter during most of the 20th century – productivity and living standards have improved a lot – but the process has slowed markedly in recent decades. The rise in labour productivity has levelled off. We have to reverse this trend, if we wish to increase growth more permanently. There is no simple way to do this. The Productivity Commission finds that it is crucial to improve productivity and innovation in particular in our service sectors. The Commission points out three ways of doing this: More internationalization, improved regulation and stronger competition.

We stand to benefit greatly from international trade end globalization if we continue to improve our framework conditions. These include high-quality education, a flexible labour market, a competitive tax system, better access to capital for innovative firms and efforts in many other areas.

Our ability to take up technological progress and stimulate innovation, while preserving high employment, is paramount going forward. Gradual reform targeting the challenges that we face has been a successful strategy so far, and will continue to be so in the future. Compared to other countries, we have many small and medium-sized firms and only few global players. Maybe we are a bit short of a so called “growth layer” of innovative medium-sized companies that are willing to continue operating in Denmark while they expand their businesses. This could be a problem. You need a certain “critical mass” to start investing in R&D activities and to invest in world markets.

Stepping up efficiency and productivity in the public sector

There is little doubt that efficiency in providing public services is a key challenge, if we want to maintain our welfare model. Public consumption and transfers require financing mainly through taxes. But taxes can distort private production and eventually, a tipping point might be reached. I cannot say for sure, but we may be approaching this tipping point. There is virtually no political support for higher taxes. On the contrary, the political agenda points towards lower taxes. At the same time, we are facing demographic headwinds – the number of elderly people will increase dramatically over the next 20 years. Demand for health services and certain other labour intensive services may continue to increase more than our tax base. To help contain this pressure, we need to produce more for less.

We must implement new technology, and be a leader in finding new ways to reduce red tape and bureaucracy. We need to improve leadership in the public sector. We need to focus on results and value for money instead of work processes. We should embrace competition and benchmarking, if these help to improve efficiency and the quality of public services. And we should take steps to create a more innovative and inspiring environment for public employees, based on trust and a targeted delegation of tasks. To achieve all of this may seem like putting a square peg in a round hole, but we must rise to the challenge.

Deciding on future tax-reforms to ensure a fair sharing of the burden

For decades, employment has been high in Denmark compared to most other countries. Since the 1950s when “our women” started to join the labour market and demand education – finally being acknowledged as individuals – the public sector has grown significantly in size, partly to incorporate the responsibility for childcare, care for the elderly, etc. Today, Denmark holds two records. We have more employees in the public sector than any other OECD-country, and we pay higher taxes than any other OECD-country. And as always, incentives matter. The much-repeated mantra of ‘making work pay’, is unlikely to fade away soon.  When taxes are high, it becomes even more important that the tax-system is efficient. We need to achieve our distributional goals in the most cost-effective way. For some time this has generated pressure to reduce certain taxes and to limit the size of the public sector.

Surely, we can expect tax competition from other countries to continue - a downward push to attract the best and brightest, and investments too. If we lose this battle for talent and productive investments, then we will be forced to accept the consequences in terms of lower living standards.  In this respect, we are between a rock and a hard place, attempting a tricky balancing act between distributional concerns and competitiveness.

Fight global warming

The conclusions are very clear in the most recent report from IPCC. Humans have caused the current climate changes, the consequences may be dramatic, and large reductions of greenhouse gas emissions are necessary to limit climate changes: PCC: “Human influence on the climate system is clear. This is evident from the increasing greenhouse gas concentrations in the atmosphere, positive radiative forcing, observed warming, and understanding of the climate system.” “Continued emissions of greenhouse gases will cause further warming and changes in all components of the climate system. Limiting climate change will require substantial and sustained reductions of greenhouse gas emissions.” IPCC projects the global sea level to increase between ¼ and ¾ meter by 2100. One could fear that we are close to kick starting an irreversible ‘run away process’ of global warming. In this respect, we face two major challenges: First, it may already be too late to stop the process. When the world’s key players - USA, China, etc. – finally wake up and perceive the problem, it may be too late to create sufficient political momentum for comprehensive action. The second problem is even more fundamental. Climate change is a problem that crosses borders, which means that the ability to free ride is substantial. I fear that international diplomacy is too slow to negotiate binding agreements in time.

Most people around the world would prefer to leave an unspoiled earth for their children. But the well-being of future generations is not high on the agenda for those who must slave all day merely to afford the next bowl of rice. This is easy to understand. But for wealthy nations this is not a viable excuse. Fighting global warming appears costly because the available green technologies cannot compete with fossil fuels. But we might reduce the costs in all countries if we can speed up the development of competitive green technologies and ensure that these technologies are spread around the world. It would also make a difference if we could persuade a large number of countries to stop subsidizing fossil fuels. My view is that Denmark – as a rich country - should take responsibility and lead in the process of developing new technologies. Our aim should be to prove that we can make a significant contribution to reduce global warming, and still maintain a position among the top ten countries in terms of GDP per capita.

I would note in conclusion that I think we have done well so far, in this country. But to sit back and relax, to rest on your laurels, is a dangerous tactic. The world is changing faster than ever right in front of our eyes, and if we do not step up to the challenge, we will regret it in a not-so-distant future.