Denmark: Reforms needed to tackle labour shortages, adapt to population ageing

The latest OECD Economic Survey of Denmark says that GDP growth is projected to slow to 1.2% in 2024 before picking up to 1.5% in 2025.

Denmark’s economy was resilient to the COVID-19 crisis and recovered swiftly. Over the past two years, economic activity has slowed related to higher energy prices and costs of living. Living standards remain high, supported by well-designed policies. Reforms should focus on addressing long-term challenges posed by population ageing and the digital and green transitions.

The latest OECD Economic Survey of Denmark says that GDP growth is projected to slow to 1.2% in 2024 before picking up to 1.5% in 2025. Headline inflation is expected to decline to 2.8% in 2024 and 2.5% in 2025.

Employment growth has been strong, despite the slowdown in economic activity, and recruitment difficulties persist. Consumption and investment have decelerated. Higher borrowing costs have contributed to the weakening of the housing market. Key risks to the outlook include a more severe correction in housing and real estate markets and the inflationary impact of labour market developments.

“Denmark’s economy showed resilience to the COVID-19 crisis, though growth has slowed over the past two years. Its public debt, at around 30% of GDP, is one of the lowest in the OECD, and pension reform has helped to improve long-run fiscal sustainability,” OECD Deputy Secretary-General Ulrik Vestergaard Knudsen said, presenting the Survey in Copenhagen alongside Denmark’s Minister for Finance Nicolai Wammen. “Looking ahead, key policy priorities will be to encourage longer working lives and address persistent labour shortages, especially in long-term care and digital sectors. Further incentivising emissions cuts across sectors would make an important contribution to advancing with the green transition.”

Despite successful pension reforms and rising employment rates among older workers, population ageing poses risks to the Danish social model. While public spending on pensions is projected to decline thanks to past reforms and private pension saving is high, annual net ageing costs including health and long-term care are projected to increase by around 1.1% of GDP by 2050.

Reducing the regulatory constraints on local government autonomy, as planned, can help to achieve savings, but the impact of the reform on the quality of services needs to be carefully monitored. Other avenues for efficiency gains include improving public procurement, deepening cooperation across municipalities and reforming public employment services. Reform of early retirement schemes should ensure that people with reduced work capacity can remain in the labour market.

Persistent labour shortages are holding back growth and complicating the provision of welfare services, especially long-term care. Moving taxation further away from personal income to housing would bolster work incentives. Changing the education and training systems to match evolving skills needs and easing obstacles to international recruitment in shortage areas would help.

Education reform can speed up youth entry into the labour market. Limiting the duration of very generous student allowances as planned and targeting the tenth grade to students with greater learning needs will help to reduce graduation ages. Too few students opt for vocational education and training. Reforms to tackle the lack of mobility between vocational and academic tracks are needed, as well as efforts to promote the opportunities offered by vocational education.

Denmark has put in place ambitious greenhouse gas emission reduction targets and made significant progress in achieving efficient climate change mitigation policies. Further policy reforms are needed. The green tax reform needs to be completed to accelerate emission reductions and avoid distortions across sectors and technologies.

Introducing a tax on emissions from agricultural production as currently under discussion could help to achieve this in a cost-efficient way. Tax revenues could be used to help farmers to switch to less emission-intensive activities or to reduce the emissions intensity of their production.

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