On an internationally comparable basis, the unemployment rate is estimated to be about 5 percent, among the lowest in industrial countries.
The strike, which was ended only after legislative intervention, affected about a fourth of the labor force and is estimated to have reduced GDP in 1998 by about ½ of 1 percent.
From a terms of trade perspective, Denmark did not benefit from the decline in energy prices as it is a small net exporter of energy products. In addition, prices for exports of pork (which account for 7 percent of merchandise exports) fell significantly in 1998, partly offsetting the decline in the prices of commodity imports.
The projected increase in the primary structural surplus from 1998 to 1999 (1.8 percent of GDP) is much larger than the official estimate of the restrictive impact of the budget on aggregate demand. Part of the difference is accounted for by the decision to convert the temporary 1 percent contribution to the supplementary pension fund, which was an off-budget item, into a permanent source of revenue. This change is unlikely to have any impact on demand in 1999. In addition, the reduction in transfer payments and increase in revenues associated with ongoing progress in lowering structural unemployment and raising participation rates is not viewed in the official calculations as a discretionary policy change that restrains demand, although it does, of course, contribute to strengthening the structural budgetary position.
The authorities did not consider that there was any significant risk of overkill. They noted that the unemployment rate had continued to fall, albeit slowly, in recent months and that business and consumer surveys were not reliable leading indicators of demand. In any case, the fiscal stabilizers are powerful in Denmark and would help moderate any precipitous fall in private demand.
Staff calculations, based on historical experience regarding the amplitude of cyclical fluctuations in economic activity, indicate that a general government financial surplus of about ½ percent of GDP would be needed to allow Denmark to respect the excessive deficit provisions of the Pact even in the event of a protracted cyclical downturn. The calculations take into account the fact that the sensitivity of the budget to cyclical conditions is one of the highest among EU countries.
The net impact on the fiscal position would be less severe, however, as income transfers (and other unearned income, including pensions not financed by the state) are subject to tax.
In the worst-case scenario the required increase in the tax burden during the 30 years to 2035 was estimated to be as high as 5 percentage points of GDP. The scope for further broadening tax bases was thought to be limited and international competition made it unwise to contemplate any increases in corporation taxes, indirect taxation, or taxes on capital income. Thus, any increase in the tax burden would have to take the form mainly of increases in marginal tax rates on labor incomes.
Although there is no rigid definition of nonperforming loans, banks tend to be conservative in making provisions for potential credit losses and the Financial Supervisory Authority has the power to require additional provisions (or reductions), as appropriate.