Photographer: Freya Ingrid Morales/Bloomberg

Denmark Decides to Make It ‘More Attractive to Work’

Updated on
  • Planned cuts worth $3.7 billion designed to boost employment
  • Danske economist questions whether plan will sustain growth

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Denmark’s government proposed a broad range of tax cuts that will hit all income groups, make it cheaper to save toward retirement and reduce levies on cars.

The center-right coalition of Prime Minister Lars Lokke Rasmussen wants to shrink the country’s tax burden by 23 billion kroner ($3.7 billion), with the proposed measures to be phased in through 2025, according to a statement published on Tuesday. The administration also said it will “monitor” the corporate tax rate to ensure Denmark stays competitive with its trade partners.

“With this proposal, we’re tackling a number of concrete challenges,” Finance Minister Kristian Jensen said in the statement. “We’re increasing the gains associated with working, we’re making it more attractive to work more and we’re ensuring that it’s more worthwhile to save up toward retirement.”

A fast-growing economy has pushed down the jobless rate to just 3.5 percent, prompting concern about potential labor shortages. An aging population is also weighing on the state’s coffers.

Financial Incentives

Boosting immigration is not a viable option due to opposition by the nationalist Danish People’s Party, whose support the government depends on in parliament, leaving financial incentives as the preferred strategy.

By encouraging more people to work, the government expects to generate more revenue via sources such as value-added tax, Jensen said during a press conference in Copenhagen.

"There’s still room for growth in public spending, and room to prioritize, as this government does, welfare for Danes," Jensen said. He said critics of the government’s plan were guilty of a "simplification" of economic principles. "This is not a zero-sum game" between taxes and welfare, he said.

Denmark boasts the planet’s highest tax burden relative to gross domestic product (the OECD estimates the figure was about 47 percent in 2015, the fattest ratio in the rich world). That revenue is used by the state to make sure Danes have universal access to free education, hospitals, childcare and elderly care.

With the government’s proposal, Danes can look forward to a tax burden that will fall to about 44 percent, the Finance Ministry said on Tuesday.

“It’s important for the economy and it’s to the highest degree a boon for hardworking Danes, who will be able to keep more of their earnings,” Jensen said.

Questions Raised

Las Olsen, chief economist at Danske Bank A/S, Denmark’s largest bank, said that while "there’s good reason to believe the proposals will work," there’s still uncertainty about "how big an effect it will have, and how quickly it will feed through."

The additional employment that the measures will spur won’t be enough to sustain economic growth, Olsen said in an email. "There’ll still be a need to look elsewhere for labor."

After cutting registration fees for cars to 150 percent from 180 percent, the government now plans to reduce the levy further to a maximum of 100 percent, it said on Tuesday. Given the risk that Danes may delay car purchases in anticipation of lower taxes, the government said it wants to push through this chunk of the legislation as quickly as possible.

The administration is due to present its complete fiscal plan on Thursday. Jensen has already told parliament that tax cuts will raise the government’s borrowing need in 2018.

Parliamentary approval is not guaranteed: The Danish People’s Party is unlikely to support tax cuts for top income earners, party leader Kristian Thulesen Dahl said in an interview with broadcaster TV2.

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