1999 No. 3 ISSN 0376-6438 J A OECD N Latest Surveys Available: U D A AUSTRALIA, DECEMBER 1998 R Y AUSTRIA, APRIL 1998 1 ECONOMIC 9 BELGIUM-LUXEMBOURG, APRIL 1997 9 9 CANADA, NOVEMBER 1998 O CZECH REPUBLIC, MAY 1998 E C SURVEYS DENMARK, JANUARY 1999 D FINLAND, AUGUST 1998 EC O FRANCE, FEBRUARY 1997 N GERMANY, AUGUST 1998 O M C GREECE, DECEMBER 1998 I C HUNGARY, JUNE 1997 S U ICELAND, MAY 1998 R IRELAND, MAY 1997 V E Y ITALY, DECEMBER 1998 S JAPAN, NOVEMBER 1998 D KOREA, SEPTEMBER 1998 E N MEXICO, FEBRUARY 1998 M 1999 NETHERLANDS, MARCH 1998 A R NEW ZEALAND, APRIL 1998 K E NORWAY, FEBRUARY 1998 POLAND, JUNE 1998 PORTUGAL, JANUARY 1998 SPAIN, MARCH 1998 SWEDEN, FEBRUARY 1998 SWITZERLAND, AUGUST 1997 SPECIAL FEATURES TURKEY, JUNE 1997 UNITED KINGDOM, JUNE 1998 Structural reform UNITED STATES, NOVEMBER 1997 Housing policies O Surveys of "Partners in Transition" Countries THE SLOVAK REPUBLIC, SEPTEMBER 1996 Non-member Countries BULGARIA, MARCH 1997 ROMANIA, FEBRUARY 1998 RUSSIAN FEDERATION, DECEMBER 1997 SLOVENIA, MAY 1997 O DENMARK E 1999 Subscription (18 issues) C FF 2 250 £230 US$395 9:HSTCQE=V[^\\\: DM 675 ¥ 49 500 D (10 1999 13 1 P) FF 150 - ISBN 92-64-16977-6 99 (cid:211) OECD, 1999. 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OECD ECONOMIC SURVEYS 1998-1999 DENMARK ORGANISATION FOR ECONOMIC CO-OPERATION AND DEVELOPMENT ORGANISATION FOR ECONOMIC CO-OPERATION AND DEVELOPMENT Pursuant to Article 1 of the Convention signed in Paris on 14th December 1960, and which came into force on 30th September 1961, the Organisation for Economic Co-operation and Development (OECD) shall promote policies designed: – to achieve the highest sustainable economic growth and employment and a rising standard of living in Member countries, while maintaining financial stability, and thus to contribute to the development of the world economy; – to contribute to sound economic expansion in Member as well as non-member countries in the process of economic development; and – to contribute to the expansion of world trade on a multilateral, non-discriminatory basis in accordance with international obligations. The original Member countries of the OECD are Austria, Belgium, Canada, Denmark, France, Germany, Greece, Iceland, Ireland, Italy, Luxembourg, the Netherlands, Norway, Portugal, Spain, Sweden, Switzerland, Turkey, the United Kingdom and the United States. The following countries became Members subse- quently through accession at the dates indicated hereafter: Japan (28th April 1964), Finland (28th January 1969), Australia (7th June 1971), New Zealand (29th May 1973), Mexico (18th May 1994), the Czech Republic (21st December 1995), Hungary (7th May 1996), Poland (22nd November 1996) and Korea (12th December 1996). The Commission of the European Communities takes part in the work of the OECD (Article 13 of the OECD Convention). Publie´ e´galement en franc¸ais. (cid:211) OECD 1999 Permission to reproduce a portion of this work for non-commercial purposes or classroom use should be obtained through the Centre franc¸ais d’exploitation du droit de copie (CFC), 20, rue des Grands-Augustins, 75006 Paris, France, Tel. (33-1) 44 07 47 70, Fax (33-1) 46 34 67 19, for every country except the United States. In the United States permission should be obtained through the Copyright Clearance Center, Customer Service, (508)750-8400, 222 Rosewood Drive, Danvers, MA 01923 USA, or CCC Online: http://www.copyright.com/. All other applications for permission to reproduce or translate all or part of this book should be made to OECD Publications, 2, rue Andre´-Pascal, 75775 Paris Cedex 16, France. Table of contents Assessment and recommendations 9 I. Recent trends and prospects 21 Demand and production: reducing excess demand 23 A tighter labour market but stable inflation 27 The short-term outlook 31 II. Macroeconomic policies 35 Monetary policy 35 Fiscal policy 45 Improving the control of public expenditure 53 III. Implementing structural reform: A review of progress 61 Introduction: implementing the OECD Jobs Strategy 61 Recent labour-market performance 62 Progress in structural reform 63 Assessment and scope for further action 81 IV. Policies for the housing market 89 Introduction 89 Objectives, institutions and instruments 91 Economic impact of government interventions to regulate and support the housing market 102 Scope for further reform 128 Notes 135 Annexes I. Fiscal and structural indicators 141 II. Chronology of main economic events 147 ••••• Boxes 1. The Stability and Growth Pact for non-EMU member states 46 2. The 1998-2002 tax reform 52 3. Central-local government fiscal arrangements 55 4. Greater scope for decentralisation in private-sector wage systems 66 5. The quality evaluation of the Danish education system: analysis and recommendations 72 6. Energy production and the environment 80 7. Developing the instruments of labour market policies 84 OECD 1999 OECD Economic Surveys: Denmark 4 8. Implementing the OECD Jobs Strategy 86 9. Housing policy over the past three decades 100 10. The Danish urban renewal programme 117 11. Recommendations to improve the working of the Danish housing market 133 Tables 1. Main demand components 21 2. Exports of goods and services 26 3. Imports of goods and services 27 4. The current account 27 5. Growth in value added by sector 28 6. Economic policy assumptions and the external environment 32 7. Short-term outlook 33 8. Money and credit 42 9. Co-variation between GDP in Denmark and other European countries 44 10. Government budget balances: intentions and outcomes 47 11. Long-term trends in transfers 58 12. The labour force and labour-market policies 1994-1998 63 13. Business sector support from central government 74 14. Barriers to entry and regulation of trade 77 15. Availability and quality of housing 90 16. Tenure in housing 93 17. Housing consumption relative to GDP 105 18. User costs and subsidies in housing 106 19. Public expenditure on housing 107 20. House prices, private consumption and household wealth 111 21. Effect of rent control 115 22. Impact on house prices of rent control in major metropolitan areas 119 23. Housing segments and socio-economic representation 122 24. Mobility in the different housing segments 127 Annexes A1. Public sector revenues and expenditures in selected OECD countries 142 A2. The public sector 143 A3. Tax rates 144 A4. Production structure and performance indicators 145 A5. Labour market indicators 146 Figures 1. Macroeconomic performance 22 2. Private demand 24 3. Unemployment and labour-market programmes 29 4. Inflation developments 30 5. Short-term interest rates and the exchange rate 36 6. Long-term interest rates 38 7. External debt 39 8. Implicit price expectations in financial markets 40 9. Monetary conditions 41 10. General government budget balances 48 OECD 1999 5 Table of contents 11. General government expenditure and tax ratios 49 12. Implementation of fiscal policy 50 13. Consumption expenditure in local government 56 14. Wage systems in the DA/LO area 66 15. Marginal tax rates on labour income 68 16. State aid to manufacturing 75 17. Degree of regulation of utility sectors 79 18. The age-tenure structure of the housing stock 92 19. The development of housing rents 95 20. Housing investment in selected OECD countries 103 21. The development in house prices, incomes and after-tax interest rates 104 22. The housing market 109 23. Cyclicality in house prices and housing investment 110 24. House prices, housing investment and private consumption 113 25. Rents in social housing by year of construction 116 26. Transaction costs and relative price levels in housing 120 27. Housing benefits by income interval 123 28. Coverage of individual housing benefits 124 29. Marginal effective tax rates allowing for means-tested housing benefits and withdrawal of subsidies to child-care institutions 126 OECD 1999 BASIC STATISTICS OF DENMARK THE LAND Area (1 000 sq. km) 43 Inhabitants in major cities, 1.1.1998 Agricultural area (1 000 sq. km) (1994) 27 (thousands): Copenhagen 488 A˚rhus 282 Odense 184 A˚lborg 161 THE PEOPLE Population, 1.1.1998, thousands 5 295 Civilian employment, 1997, thousands 2 649 Number of inhabitants per sq. km 123 By sector: Net natural increase Agriculture 99 (average 1991-1997, thousands) 6 Industry 516 Net natural increase per 1 000 inhabitants, Construction 176 1997 1.5 Market services 914 Community, social and personal services 921 Other 22 PRODUCTION Gross domestic product, 1997 Gross fixed capital formation in 1997 (Kr billion): 1 122.98 (Kr billion): 225.3 GDP per head (1997 US$) 32 144 Per cent of GDP 20.1 Per head (US$) 6 443 THE GOVERNMENT Public consumption in 1997 Composition of Parliament (number of seats): (percentage of GDP) 25.3 Social Democrats 64 General government current revenue in 1997 Liberals 43 (percentage of GDP) 56.7 Conservatives 17 Public gross fixed capital investment in 1997 People’s Socialists 13 (percentage of GDP) 1.9 Danish People’s Party 13 Centre Democrats 8 Social Liberals 7 Left Alliance 5 Christian Democrats 4 Progressive Party 4 Independent 1 Total 179 Last general elections: 11.03.1998 Next general election: 11.03.2002 (at the latest) FOREIGN TRADE Exports of goods and services as percentage Imports of goods and services as percentage of GDP, 1997 36.0 of GDP, 1997 32.6 Main exports in 1997, percentage of total Main imports in 1997, percentage of total merchandise exports: merchandise imports: Agricultural products 14.7 Intermediate goods for agriculture 2.8 Crude materials, mineral products, oil 7.7 Intermediate goods for other sectors 43.3 Chemical and related products 10.9 Fuels and lubricants 4.9 Machinery and instruments 25.9 Capital goods 12.2 Other manufactured products 28.8 Transport equipment 7.3 Other products 12.0 Consumer goods 30.3 THE CURRENCY Monetary unit: Krone Currency units per US$, average of daily figures: Year 1997 6.604 October1998 6.227 Note: An international comparison of certain basic statistics is given in an Annex table. This Survey is based on the Secretariat’s study prepared for the annual review of Denmark by the Economic and Development Review Committee on 9 November 1998. • After revisions in the light of discussions during the review, final approval of the Survey for publication was given by the Committee on 4 December 1998. • The previous Survey of Denmark was issued in June 1997. Assessment and recommendations Overview of The expansion, now five years old, has been characterised current policy by strong employment growth and falling structural unem- issues ployment. Inflation has remained close to 2 per cent and interest rates have converged to core EU levels in response to exchange-rate stability and a return to budget balance. However, domestic demand growth has substantially exceeded the 3 per cent projected when Denmark was last reviewed in April 1997, and has outstripped supply poten- tial, prompting a series of fiscal packages to reduce personal consumption. The 1994-96 labour market reforms have enhanced the supply potential of the economy, but their impact on structural unemployment is now close to being complete, and the scope for further increases in potential output depends upon raising the labour supply in the face of a rather high burden of taxes and transfers. With produc- tivity growth slowing and international competitiveness weakening, economic policies thus face the challenge of translating recent good economic performance and achieve- ment of social goals into balanced, longer-run growth. Against this background, the Survey begins by assessing demand and supply prospects up to 2000 in the context of recent stabilisation initiatives (chapter I). The monetary and fiscal background is examined in chapter II in the light of Denmark’s opt-out from the EMU and the need for better control over spending programmes, especially on the part of the local authorities. Chapter III assesses progress in struc- tural reform, from the perspective of the recommendations given in the OECD Jobs Strategy and the follow-up in the 1997 Economic Survey of Denmark. The in-depth structural chapter is devoted to the housing market, which is crucial to under- standing Danish business cycle behaviour over the past three decades, and has important implications both for effi- cient resource use and the outcome of distributive policies. OECD 1999