16-05-2018The Danish economy is in a period of stable growth and rising employment. GDP has increased by around 2 per cent the last two years, and the economic expansion is expected to continue in the coming years. Thus, the Danish economy is entering an economic boom phase.
In the next few years, the main challenge for economic policy will be to keep the expansion on track and to ensure that more persons actively participate in the labour market.
There are no current signs of emerging imbalances as in the mid-1980s and 2000s, and several factors indicate that it will be possible to maintain stable growth in the coming years.
Since the financial crisis, several measures have been implemented to strengthen the financial sector and contribute to a stable development in the housing market. With the Budget Law, which took effect from the fiscal year 2014, the framework for fiscal policy management has been strengthened. The government is planning a gradual reduction of structural deficits in the coming years, and aims at achieving structural balance in 2025. The structural balance is thus improving towards 2025 despite declining structural North Sea revenues. In the period 2021-2025, there is on average structural surplus in the projection. Fiscal policy thus implies a gradual fiscal tightening which helps to dampen capacity pressures in the Danish economy.
In addition, a number of reforms have been implemented, which increase labour supply, including through later withdrawal from the labour market. In the coming years, reforms will contribute to increase the workforce further. However, a sustainable economic expansion is dependent on a sufficient supply of labour resources. Employment for wage earners has reached a historically high level in 2018, and firms are reporting increasing labour shortages. Experience shows that overheating may occur relatively fast. In particular, this will be a risk if no further efforts are made to increase labour supply.
Fiscal policy is sustainable in the long run given the assumptions of the projection, but with unchanged policy, there will be a period towards the middle of the century, where public deficits will be excessive. In the absence of new reforms, the fiscal room for manoeuvre will also be limited in the coming years.