On 12 May 2023 the IMF issued a report following consultations with Denmark under Article IV of the IMF’s articles of agreement.

Denmark has made a strong recovery from the crisis caused by the pandemic, but growth is now more moderate due to the effects of high inflation, weaker external demand and tightening financial conditions. Economic growth is therefore projected to slow in the first half of 2023 but to strengthen in the second half of the year if energy prices continue to moderate and external demand improves. GDP growth is projected to fall from 3.8% in 2022 to 0.5% in 2023 and recover to 1.5% in 2024. In the medium-term economic growth is expected to be around 1.3% due to lower global growth and demographic challenges.

Downside risks to growth would come from any escalation of the Ukraine war which would further disrupt global trade; or renewed supply shocks and continued tightening of financial conditions. However, an end to the war in Ukraine, stabilization of commodity markets, and stronger external demand could bring about stronger growth.

The IMF recommends that the Danish government should continue to recalibrate fiscal policy as needed to ensure its long-term sustainability. Any changes to the indexation of statutory retirement age to life expectancy, which is currently one-to-one, would safeguard long-term fiscal sustainability. In the medium-term, the public debt is projected to continue at a level around 30% of GDP.

The IMF report notes that riskier mortgages, especially variable-rate mortgage loans with deferred amortization, have increased. Measures that could be considered to deal with this situation include reviewing the high tax deductibility of mortgage interest expenses and the complex rental market regulations. The report welcomes the plan to link property taxes to market valuations starting in January 2024.

The government’s commitment to further accelerate digitalization will help increase productivity. Tax measures should be considered to support new businesses, including start-ups and high-tech firms, that may typically need to contend with losses in the initial years. The government could consider relaxation of the cap on losses carried forward, reduction of the taxation of dividends (without further distorting the integration of personal and corporate tax), and the introduction of a corporate equity allowance to reduce the cost of capital.

The IMF report notes that in view of the expected decrease in the working age population in future years the government is correct to focus on labour market reforms. The proposed personal income tax reform will help to improve work incentives and the proposed reform to early retirement schemes should also increase employment. Additional measures should be considered, such as a review of the structure of marginal effective tax rates, including benefits, to reduce disincentives to work, or disincentives to earn more, especially for lower-income households.

Carbon pricing should be strengthened as planned under the Green Tax Reform. Other fiscal incentives are required, including feebates (the use of fees and rebates to improve allocation of the costs of negative externalities). Further measures will be required to save energy, including in buildings. The Danish Strategy for Adaptation to Climate Change of 2008 should be updated to include guidance on the government’s adaptation initiatives.