Denmark has a problem: it may soon be unable to afford offering such a good deal to its people.
Free health care for all, a $757 monthly stipend for college students and robust safety nets for the less fortunate all cost money – Denmark devotes slightly more than 30 percent of its gross domestic product to social spending, one of the highest levels in the rich world.
According to the Organisation for Economic Cooperation and Development, such a “generous welfare system requires robust public finances.” And while Denmark’s “seem sustainable” for now, the assumptions that underpin that view carry a high level of uncertainty, the OECD warned in a recent survey.
Take labor market participation.
True, an unemployment rate below 4 percent is one of Europe's lowest, and industry frequently complains about shortages in skilled labor. But population projections show that Denmark's 600 billion-krone ($91 billion) welfare system is facing a future of more customers and fewer people around to pick up the bill.
Child benefits and an abundance of nurseries have failed to produce a new baby-boom. Importing labor from abroad isn't an option due to the minority government’s reliance on the anti-immigration Danish People’s Party (last year Denmark accepted less than an eighth of the number of refugees who resettled in neighboring Sweden).
Like many other developed countries, Denmark's population is aging. One obvious solution is to get people to work longer. Successive governments have already canceled early retirement schemes and have increased the minimum pension age (to 68 years by 2030). Further measures may be announced in Prime Minister Lars Loekke Rasmussen’s forthcoming 2025 economic plan.
The alternative to cutting costs, of course, is to increase revenue. But Denmark’s not doing too well there either, with faltering productivity leading to an economy that’s now expanding at a slower pace than the euro area's.
A government commission in 2014 estimated that annual output would have been 360 billion kroner higher, boosting GDP by about 15 percent in the process, had Danes matched the kind of productivity gains seen in the U.S. since the mid-1990s, when American companies accelerated the deployment of computers and other technological advances.
According to the Confederation of Danish Industry, it’s not too late to reap the rewards of automation.
“Robotics, artificial intelligence, connecting everything to the internet - it's all so cheap now,” said Adam Lebech, who represent technology companies at the trade lobby.
Lebech believes technology is already helping bring back to Denmark some of the 150,000 industry jobs that moved abroad after the financial crisis.
Danfoss, for example, is now able to make more sophisticated thermostats in Denmark thanks to advances in robotics and 3D printing.
Robots are also part of the solution for Helge Pedersen, chief economist at Nordea.
“Robots allow us to pull production back home,” he said, but they can also “help improve the return on welfare spending.”
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