IMF Concludes Article IV Consultation With Denmark

by Ulrika Lomas, Tax-News.com, Brussels

31 December 2008

The International Monetary Fund (IMF) on Monday published the conclusions of its Article IV consultation with Denmark, which was completed in December.

The IMF observed that Denmark's fiscal position is among the strongest in the EU, and suggested that economic growth is expected to remain weak through 2010 before recovering gradually.

In the Executive Board Assessment, the IMF officials announced that:

"Directors considered that the proposed 2009 budget strikes a good balance between allowing growth to slow in the face of record low unemployment and rapid wage growth, and cushioning the economy from a severe recession. They viewed the moderate positive fiscal impulse in the budget proposal, added to Denmark's strong automatic stabilizers, as an appropriate response to the increased risk of a hard landing. Directors emphasized that, along with progress on structural reforms, wage growth needs to slow if firms are to rebuild profitability and secure Denmark's competitiveness and export market share."

And went on to add:

"Directors welcomed the new financial stability act, noting that it establishes clear rules and sound incentives for the banking system, helping to secure creditor confidence while safeguarding public resources. The act improves incentives for prudent behaviour – including through a temporary dividend moratorium – provides powers to the Danish Financial Supervisory Authority (DFSA) to punish excessive risk-taking, and encourages the private sector to find timely solutions for problem banks. Directors welcomed provisions that level the playing field with respect to cross-border banking operations."

"Directors noted the impressive achievements of the authorities over the past two decades in reconciling the costs of supportive social safety nets for an aging population with the demands of long-term fiscal sustainability. While recognizing that further progress will involve difficult choices, they encouraged the authorities to take additional measures on both the tax and benefits sides toward closing the long-term fiscal gap."

Looking to the future with regard to tax policy, the IMF mission suggested that difficult choices are required in order to make the welfare state compatible with labor market incentives and long-term fiscal balance.

The officials observed that:

"Tax reform needs to be more comprehensive. A broader set of measures should be considered, including user fees, the indexation of the tax on residential property and reducing the deductibility of mortgage interest. On the expenditure side, the proposals recently presented by the Labour Market Commission deserve careful consideration."

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