Oecd Economic Surveys : Denmark 1983-1984.

71 Pages·4.335 MB·English

by  OECD

OECD
ECONOMIC SURVEYS
1983-1984
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DENMARK
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JULY 1984
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OECD ECONOMIC SURVEYS
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DENMARK
JULY 1984
ORGANISATION FOR ECONOMIC CO-OPERATION AND DEVELOPMENT
Pursuanttoarticle I oftheConventionsignedinParison 14th December,
1960,andwhichcameintoforceon30thSeptember, 1961,theOrganisation
for Economic Co-operation and Development (OECD) shall promote
policiesdesigned:
- toachievethe highestsustainableeconomicgrowthandemployment
andarisingstandardoflivinginMembercountries,whilemaintaining
financial stability, and thus to contribute to the development ofthe
world economy;
- to contribute to sound economic expansion in Member as well as
non-membercountries in theprocessofeconomicdevelopment;and
- to contribute to the expansion of world trade on a multilateral,
non-discriminatory basis in accordance with international obliga¬
tions.
The Signatoriesofthe Convention on the OECD are Austria, Belgium,
Canada, Denmark, France, the Federal Republic of Germany, Greece,
Iceland, Ireland, Italy, Luxembourg, the Netherlands, Norway, Portugal,
Spain,Sweden,Switzerland,Turkey, theUnited Kingdomand the United
States.ThefollowingcountriesaccededsubsequentlytothisConvention(the
datesarcthoseonwhichtheinstrumentsofaccessionweredeposited):Japan
(28thApril, 1964), Finland (28thJanuary, 1969), Australia (7thJune,
1971) and New Zealand (29th May, 1973).
TheSocialistFederalRepublicofYugoslaviatakespartincertainworkof
theOECD (agreement of28thOctober, 1961).
©OECD, 1984
Application forpermission toreproduce ortranslate
all or part ofthis publication should be made to:
DirectorofInformation, OECD
2, rue André-Pascal, 75775 PARIS CEDEX 16, France.
CONTENTS
Introduction
I. Implementing the medium-term strategy 8
The initial situation and the new economic policy 8
Fiscal policy 8
Incomes and exchange rate policies 11
Monetary policy 11
II. Towards better economic balance 15
Prices and costs 16
Total demand and imports 17
Output, employment and productivity 20
The balance ofpayments 21
Trends in early 1984 22
Policy assumptions and external environment 24
Prospects for 1984/85 24
III. Problems ofthe recovery 28
The need for reducing the current account deficit 28
Private savings and government indebtedness 31
Competitiveness, employment and labour market flexibility 34
Financial stability 40
IV. Conclusions 43
Notes and references 46
Annex: Chronology of main economic policy events 49
Statistical annex 53
TABLES
Text
1. General government revenue and expenditure 9
2. Central government finance 10
3. Money creation 13
4. Factors affecting bank liquidity 14
5. Wage and price developments 16
6. Supply and use of resources 17
7. Employment and unemployment 21
8. Contributions to changes in the current external balance 22
9. Short-term prospects 25
10. External indebtedness 28
11. Public sector deficits as a share ofprivate savings, 1980-83 34
Statistical annex
A. Supply and use of resources (new SNA) 54
B. Supply and use ofresources (new SNA, 1975 prices) 55
C. General government expenditure and revenue 56
D. Balance ofpayments 58
E. Labour market and production 59
F. Foreign trade, total and by area 61
G. Prices and wages 62
H. Money and credit 63
DIAGRAMS
1. Interest rate developments 12
2. International comparison ofeconomic performance 15
3. Relative export prices, unit labour costs and marketshares 18
4. Indicators ofprivate consumption 19
5. Composite business-cycle indicator 23
6. Manufacturing output and orders 24
7. Investment intentions 26
8. The structure ofthe current account 29
9. Sectoral financial balances 32
10. Private sector profits and savings 33
11. The debt trap 35
12. Decomposition ofunit labour costs 36
13. Real wages, national income and productivity 37
14. Wagedrift and unemployment 38
15. Relative wages 39
16. Income velocities of money 41
17. Money, nominal income and budget financing 42
BASIC STATISTICS OF DENMARK
THELAND
Area(1000*)km) 43 Inhabitantsinmajorcities 1-1-82(1000):
Agriculturalarea(1000sq.km) 1981 29 Metropolitanarea(incl.suburbs) 1740
Copenhagen(excl.suburbs) 494
Aarhus 246
Odciue 169
Aalborg 154
THEPEOPLE
Population,1-1-82(1000) i119 Civilianemployment, 1982(1000) 2394
Numberofinhabitantipersq.km 119 ofwhich:
Nelnaturalincrease, Agriculture 184
average 1978-1981 (I000) 7 Manufacturing(excl.building) 465
Netnaturalincreaie Buildingandconstruction 151
per 1000inhabitanti, 1980 0.3 Marketservices 846
Government 745
PRODUCTION
GrossDomesticProductin 1983(Kr.million) 516026 GrossfixedcapitalformationIn 1983
GDPperhead(USdollars) 11003 (Kr.million): 84251
PercentofGDP 16.3
Perhead(USdollars) 1 796
THEGOVERNMENT
Publicconsumptionin 1983(percentofGDP) 27 CompositionofParliament(no.ofseats):
Generalgovernmentcurrentrevenue SocialDemocrats 56
in 1983(percentofGDP) 46 Conservatives 42
Publicgrossfixedcapitalinvestment People'sSocialists 21
in 1983(percentofGDP) 2 Liberals 22
ProgressiveParty 5
CenterDemocrats 8
Social Liberals 10
LeftSocialists 5
ChristianDemocrats 5
GreenlandandFaroeIslands 4
FreeDemocrats 1
Total 179
Lastgeneralelection: 10.1.1984 Nextgeneralelection:atthelatest:9.1.1988
FOREIGNTRADE
Exportsofgoodsandservices Importsofgoodsandservices
aspercentofGDP(1983) 36 aspercentofGDP(1983) 34
Mainexport»in 1983(inpercent Mainimportsin 1983(percent
oftotalmerchandiseexports): oftotalmerchandiseimports):
Agriculturalproduct* 20 Importstodirectuseintheagriculturalsector 5
Cannedmeatandcannedmilk 5 Importstodirectuseinotherprivatesectors 42
Industrialgoods 68 Fuelsandelectricity 22
Othergoods 7 Machineryandcapitalequipment 9
Transportequipment 4
Consumergoods 17
THECURRENCY
Monetaryunit: Krone CurrencyunitsperUSdollar,
averageofdailyfigures:
Year 1983 9.145
March 1984 9.511
Note:Aninternationalcomparisonofcertainbaskstatisticsagiveninanannextable.
ThisSurveyisbasedontheSecretariat'sstudypreparedfor
theannualreviewofDenmarkbytheEconomicandDevelopment
ReviewCommitteeon 29th May 1984.
Afterrevisionsinthelightofdiscussionsduringthereview,
final approval ofthe Surveyfor publication was given by the
Committeeon 19thJune 1984.
INTRODUCTION
The economic situation of Denmark became increasingly difficult towards the end of
1982. Influenced by the international recession, growth weakened and unemployment,
already high, rose further. At the same time, the underlying rate of inflation in Denmark
improvedlessthan abroad; and thecurrentexternal deficitrose steeply. Moreover, repeated
upwardrevisionsofthepublicsectordeficitcreatedwidespreaduncertaintiesinfinancial and
exchangemarketsaboutthesustainabilityoffiscalpolicies,andinterestratesreachedrecord
highlevels.This led tobroad political acceptancethatexistingpolicies had run theircourse,
and that it was necessary to reactivate the stabilisation efforts initiated in 1979 but later
suspended.
In view of the large domestic imbalances, in October 1982 the incoming Government
presented a medium-term strategy aimed at fostering growth and employment, while
eliminating the current external imbalance and eventually bringing down high foreign
indebtedness. The immediate policy objectives were to secure a sustained reduction in
inflation andgetpublicfinancesunderbettercontrol. A tightincomespolicywas introduced
toreducedomesticcostand priceincreases, andensurebetterinternationalcompetitiveness.
Moreover-afterrepeateddevaluationsofthepreviousyears-a"firm"exchangeratepolicy
aimed at moderating inflationary expectations was introduced. Finally, fiscal policy was
tightened to contain the underlying rise in the public sectorfinancial deficit and reduce the
currentexternalaccountimbalance.Toaconsiderableextent,policyobjectiveswereachieved
in 1983, supported by betterexternal conditions. Domestic cost increases were significantly
reducedandtheriseinconsumerpricesdecelerated.Thepublicsectordeficitwasreduceddue
tofiscal tightening aswell asa strengthening ofeconomic activity and employment through
theyear;andtherateofunemployment,seasonallyadjusted,declinedlittle.Totalproduction
is expected to expand at around 2% per cent in both 1984 and 1985, and assuming
maintenance of the tight incomes policy, inflation may abate further. The current external
account improved appreciably (the deficit was halved, to 2per cent of GDP); part was,
however,due totemporary factors. Projections pointtoa haltin the process ofreducing the
externalimbalance,asdemandathomemayexpandfasterthanabroadinthenearterm.This
clearly poses a problem for policy.
Thefirststepshavebeen takentoput theeconomyona sustainablemedium-term path.
Buttheadjustmentprocesshasonlyjustbegun:consistentpoliciesarerequiredoveraspanof
years before the underlying economic imbalances will be removed. Part I of this Survey
reviews briefly the initial situation and the strategy adopted, followed by a more elaborate
descriptionofdemand-managementpolicies. Part II analysestheresponseoftheeconomy to
thechangeinpolicyenvironmentandassessesprospectsfor 1984/85.Part IIIfocusesonsome
ofthe near- and medium-term problems of the recovery, notably the balance of payments
adjustment process, and the need to halt the build-up of government debt. With the key
elementinthemedium-termstrategybeingasustained improvementincompetitiveness,the
risksofarekindlingofinflationarethekeyfocusinsectionsonlabourmarketproblemsandon
medium-term financial stability. Finally, Part IV offers some policy conclusions.
I. IMPLEMENTING THE MEDIUM-TERM STRATEGY
The initialsituation and the new economicpolicy
InDenmark,aselsewhere,theyearsfollowingthesecondoilshockwerecharacterisedby
deteriorating economic performance. Stagflationary trends strengthened, and a higher
current account imbalance was accompanied by a steeply rising public sector deficit. A
temporary improvement of the external deficit up to 1981 reflected better international
competitiveness and tighterdemand management. However, againstthe pressureofrapidly
rising unemployment, fiscal policy turned progressively expansionary in 1981 and 1982. As
domesticdemand recovered somewhat faster thanabroad, therewas a renewed surge in the
current balance ofpaymentsdeficit. At the same time unemployment continued to increase
and thepriceperformanceimproved lessthan abroad. Withprospectsofslowgrowthand no
immediateimprovementofthecurrentbalance,combined withafurtherdeteriorationofthe
employment situation and a budget deficit projected to exceed 15 per cent of GDP, a
significant reorientation of policy was proposed by the former as well as the incoming
Government.
The stabilisation programme presented in October 1982 emphasised a medium-term
formulation of policies as the cornerstone in a strategy for higher economic growth and
employment, combining an inevitable tightening of demand management in the short run
with measures designed to reduce rigidities and improve performance over the medium
term1:
- Fiscalpolicy was to be tightened, notably through spending cuts, with the view to
scaling back the size ofthe publicsector over the medium term while reducing the
budget deficit, and paving the way for lower interest rates;
- An incomes policy was implemented to lower inflation and ensure external
competitiveness;
- Afirm exchange rate policy was put in place of the "crawling peg" followed since
1979, in order to eliminate the devaluation premium built into price and wage
expectations and nominal interest rates.
The programme did not contain specific objectives as regards monetary policy, but the
implementationoftheotherpartsofpolicyshouldallowareductionoftherecordhighlevelof
interest rates and thus support a revival ofprivate capital formation and employment.
Fiscalpolicy
Fiscal policy was tightened rather sharply. On the expenditure side, cuts in spending
plans amounting to Kr. 10billion (2per cent of GDP) slowed the growth of public
consumptionandoftransferpayments. Risesinpublicemploymentwerelimitedandcertain
maximum transfer benefits were frozen in nominal terms2. Also, the volume of public
investmentwassharplycurtailed(notablyinthemunicipalsector).Nevertheless,totalpublic
sector outlays in relation to GDP rose further (to 54'/4 per cent) due to a continued steep
increase in net interest payments on outstanding debt (attaininga level ofKr. 20të billion),
which accrued despite the fall in the domestic interest rates3 (Table 1). Excluding such
payments,thepublicexpendituretoGDPratiofellby 1 percentagepointto50lA percent.The
budgetpositionwasalsostrengthened byaseriesoftaxincreases, includingthe introduction
ofa temporarywealth tax on pensionschemes (hithertoexemptfrom taxation)4,and higher
socialsecuritycontributions. Furthermore,the"negative"fiscaldragimpliedbytheexpected
rapid decline in inflation was offset5. Also, municipal taxes were increased markedly. Thus,
thedirecttaxpressureroseby 1V* percent,andtotalreceiptsby2Î6 percentofGDP. Witha
strong automatic budget reaction to the recovery of economic activity, the actual general
government deficit fell -for the first time since 1975- by Kr. 4billion to Kr. 38Vi billion
{VA per cent of GDP against 9per cent in 1982).
Table 1. GeneralGovernmentrevenueandexpenditure
1978 1979 1980 1981 1982 1983 1984
Kr.billion
Publicconsumption' 72.1 81.8 94.0 107.8 123.8 133.5 138.8
ofwhich: Wages 52.2 59.2 67.1 76.8 90.0 97.7 101.3
Investments2 14.6 16.6 16.4 16.5 16.9 16.4 17.8
Transferpayments 46.4 53.3 61.9 73.1 83.3 91.0 95.9
Subsidiesandinvestmentgrants3 5.5 6.3 7.6 9.4 11.3 13.8 12.3
Othertransfers 3.0 4.2 4.7 4.9 6.6 6.6 8.2
Interestexpenditurenetofrevenue4 -4.1 -2.5 -2.4 4.5 10.0 20.5 26.3
Totaloutlays 139.9 164.1 184.8 217.2 251.9 281.8 299.3
Directtaxess 75.8 85.4 96.1 104.6 116.9 135.8 151.8
Indirecttaxes 56.6 65.9 69.9 74.9 82.4 91.6 98.1
Feesandemployercontributions 1.9 2.5 3.2 4.1 5.8 10.1 11.8
Otherrevenue'3 3.3 3.1 3.0 3.6 4.2 5.8 6.9
Totalrevenue 137.6 156.9 172.2 187.2 209.3 243.3 268.6
Netlending -2.3 -7.2 -12.6 -30.0 -42.6 -38.5 -30.7
ofwhich: Centralgovernment -3.1 -9.2 -15.6 -32.6 -46.5 -48.4 -41.7
Localgovernments -1.5 -1.0 -0.9 -1.6 -1.9 3.0 3.7
Socialsecurity 2.3 3.0 3.9 4.2 5.8 6.9 7.3
PercentofGDP
Totaloutlays 44.9 47.3 49.4 52.9 53.6 54.6 53.4
Directtaxes 24.3 24.6 25.7 25.5 24.9 26.2 27.1
Totalrevenues 44.2 45.2 46.1 45.6 44.5 47.2 47.9
Netlending -0.7 -2.0 -3.3 -7.2 -9.0 -7.5 -5.5
1. Excludingdepreciationandimputedcontributionstcpensionschemeforcivilservants,
2. Includinginvestmentsandpublicownedenterprises grossofdepreciation.
3. ExcludingFEOGA-financcdexportsubsidies.
4. Excludingsuiplu*ofCentralBank.
5. Includingnegativeincometaxandcapitaltaxes.
Source: MinistryofEconomics.
The lower general government budget deficit, however, covered significantly different
developments among the intra-governmental sectors. The central government financial
deficit, though remaining constant in relation to GDP, widened from Kr. 46Vi billion to
Kr. 48'/6 billion. This was offset by an improvement in the financial position notably of the
municipalsector,which moved intoconsiderablesurplusduetoincreasedtaxationcombined
with(a further)cut-backincapitalformationandaslowerincreaseincurrentspendingthan
in the central government sector. Also, the social security sector improved its financial
position mainly due to higher interest revenue.