Denmark’s economy is characterized by a high tax and spend regime, strong labor market policies, high income equality and close to equal wealth distribution. It makes a great case study for a successful social democracy where the state has actively intervened in the market to achieve low unemployment, high-income equality, and generous social services for all.
Denmark has long been a social democracy, both in terms of its government, and its social market economic model. The Social Democrats, vanguards of the welfare state, have ruled for the better part of the last half century, pointing to the fact that Danes do not want to part with their welfare state.
The argument against big government goes something like this – high taxes, large government transfer and services programs hurt the economy because they reduce the incentive to work hard, develop new skills, save or invest, or start a new business. Denmark’s overall tax-to GDP ratio was 47.7 percent in 2011, which is quite high compared to other wealthy countries (Eurostat news release April 2013), but GDP growth, per capita income and unemployment have all seen favourable growth over the past years. Currently, unemployment is 4.4 percent, much lower than many countries in Europe, and the U.S. The Danish model must have got something right.
Strong SME presence – Denmark’s economy is dominated by small and medium sized enterprises, albeit in low- and medium- tech industries such as food, textiles, and construction. However, Denmark is not without a stronghold in high-tech sectors such as renewable energy, engineering and pharmaceuticals. SME’s are known to drive growth and create jobs, which they successfully have in Denmark.
‘Flexicurity’ – The term refers to the flexibility in the Danish labour market brought about by major structural overhauls, which made labour mobile and employment protection minimal. But this is offset by the generous social security net.
A less harmful tax mix – High taxes have not hampered employment or growth in Denmark. This is because the main sources of tax revenue are consumption and income taxes, instead of social security taxes or corporate/ employer taxes. In 2007, consumption taxes totaled 16 percent of GDP in Denmark and 13 percent in Sweden, compared to just 5 percent in the U.S. In the same year, incomes taxes accounted for 14 percent of GDP in the U.S., versus 19 percent in Sweden and 29 percent in Denmark. Income tax rate is among the highest in the world in Denmark at 55.6 percent in 2013.
Supply-side versus demand-side economics – Denmark was able to introduce supply side structural reforms early on which improved the level and the quality of the production sector, particularly technology and human capital. It recognized that favourable industrial policies, labor market policies, education and training policies, and other structural policies are the key to sustainable progress. Denmark was among the first to deregulate its financial markets and liberalize capital movements, it introduced new technology polices and labour market overhauls and an array of industrial reforms – all accomplished by 1980s. What is remarkable about these reforms is that they did not weaken the welfare state model.
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Although Denmark has not adopted the Euro, its exchange rate and monetary policy are linked to the EU. This gives Denmark little influence over the value of its currency – which is usually always stronger than the Euro and this in turn, makes Danish goods and services uncompetitive.
On a minor note, the social welfare state is ingrained in the cultural identity of Danes – regardless of where you are on the political spectrum. Yes, the liberals often try to cut down on various entitlements and such, but any government which suggests a complete shift away from the foundations of the Danish model, will be kicked out immediately.
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