The Danish economy is improving, although GDP growth has been moderate. The improvement is most evident in the labour market where private sector employment has increased by more than 80,000 persons since the end of 2012. In the coming years, employment is projected to continue growing, and fewer idle resources are expected in the economy.
The robust employment growth is primarily made possible by reforms which increase labour supply and strengthen the growth potential in coming years. However, the basis for growth in the Danish economy is dampened by continued low productivity growth. On average, the GDP growth is expected to be approx. 1¾ per cent per annum in the period 2016-20.
With decreasing unemployment and a continued expansionary monetary policy, a gradual tightening of fiscal policy is planned but from an accommodative starting point. This contributes to counteract the risks of a new heating of the economy. It also contributes to making progress in public finances towards the goal of balance between revenues and expenditures in 2020, which is aligned with the overall objective of fiscal sustainability.
In the coming years, the fiscal room for manoeuvre will be limited in absence of new measures. Falling oil prices reduce the expected fiscal space. The total fiscal space for new initiatives in the years 2017 to 2020 has been revised downwards from approx. DKK 15 bn. to approx. DKK 10 bn. since the former 2020 projection from September 2015.
A fiscal space of approx. DKK 10 bn. over a four year period is limited in a historical perspective and also relative to population trends. This should in particular be seen in light of the inflow of refugees which increases the underlying pressure on public services. The increased expenditure pressure must be met within the given fiscal space.
In order to promote employment integration efforts, the government has reached agreements with the municipalities and the social partners in order to support the ambition of government that one out of two refugees should be employed after three years.
In the absence of new initiatives, the room for manoeuvre in fiscal policy should cover the overall priorities for both tax cuts and expenditure growth in high-priority areas. The limited fiscal space increases the need for careful priorities in expenditure policy and ongoing productivity improvements in the public sector. The fiscal space also requires that the high level of public investment is normalized as assumed towards 2020. The medium-term public investment profile includes, among others, investments agreed upon in connection with Togfonden DK, which was established in 2013. Since then, oil prices have fallen markedly.
The government will publish a new medium-term plan for the Danish economy this summer. The plan will provide the framework for fiscal policy towards 2025. In Denmark the medium-term plans are an important tool to address future economic policy challenges.