Denmark: Staff Concluding Statement of the 2021 Article IV Mission

May 11, 2021

A Concluding Statement describes the preliminary findings of IMF staff at the end of an official staff visit (or ‘mission’), in most cases to a member country. Missions are undertaken as part of regular (usually annual) consultations under Article IV of the IMF’s Articles of Agreement, in the context of a request to use IMF resources (borrow from the IMF), as part of discussions of staff monitored programs, or as part of other staff monitoring of economic developments.

The authorities have consented to the publication of this statement. The views expressed in this statement are those of the IMF staff and do not necessarily represent the views of the IMF’s Executive Board. Based on the preliminary findings of this mission, staff will prepare a report that, subject to management approval, will be presented to the IMF Executive Board for discussion and decision.

Washington, DC:

Denmark entered the pandemic on a strong economic footing. The
authorities decisively utilized Denmark’s large policy space built over
time to successfully navigate the crisis and lay the ground for a
strong recovery. With one of the smallest contractions in Europe, the
decline in real GDP in 2020 was mainly driven by weak private
consumption and net exports. The swift and sizable fiscal response
cushioned the impact on activity. Fiscal policy continues to support
the recovery and public debt is sustainable. Unprecedented policy
measures supported the labor market; thus, unemployment increased only
slightly. The current account surplus declined, mainly due to
deteriorating services’ exports. A comprehensive financial policy
package—together with measures to support households and corporates helped mitigate financial stability risks.
Macrofinancial vulnerabilities stem largely from accelerating housing
price growth amid high and increasing household leverage. Policies
should support the recovery, facilitate the green and digital
transitions, safeguard the most vulnerable groups, and enhance
macrofinancial resilience.

Key Policy Recommendations:

  • Fiscal Policy.

    The fiscal framework should remain flexible given the uncertain
    outlook and provide a bridge to the economy of the future. If the
    recovery falters, Denmark should deploy its substantial fiscal
    space as needed. Once the recovery is fully entrenched, a plan to
    return to the medium-term objective remains appropriate.
  • Labor market.

    As the recovery gains momentum, policies should shift from
    exceptional support to continue strengthening “flexicurity”
    measures to facilitate efficient resource reallocation. Efforts to
    improve employment prospects for the young, the low-skilled, and
    the foreign-born should continue.
  • Macrofinancial.

    Targeted policies are required to address vulnerabilities due to
    high household leverage amid rapid housing price increases while
    supporting the extension of credit to facilitate the recovery.
    These include tightening macroprudential tools in coordination with
    balancing tax incentives, and improving housing supply. Efforts to
    further strengthen anti-money laundering and combating the
    financing of terrorism (AML/CFT) supervision should continue.
  • Green transformation.

    A strategy including enhanced carbon pricing, reinforced by
    fiscal incentives across different sectors would help Denmark
    attain its ambitious emissions goal.

    Incentives for green investment (Green Tax Reform Phase 1) and the
    planned increase in public investment are welcome. But given
    Denmark’s sizable climate-related investment needs, more needs to
    be done, including creating further incentives for the private
    sector to step up green investment.

Outlook and Risks

The near-term outlook is for a rebound in activity.

This is predicated on the continued rollout and increased availability of
the vaccine by the second half of the year. With the expected lifting of

output growth is projected to rebound to 2.6 and 3.3 percent in 2021
and 2022 respectively.

Activity will be supported by a recovery of private consumption and net
exports. The momentum in investment should strengthen in 2022 on the back
of various initiatives that incentivize green investment and
digitalization. The labor market will continue to improve, supporting
wages. With the projected recovery, the negative output gap is estimated to
close by 2022. Thanks to various initiatives to raise investment and labor
supply, potential growth will pick up in the medium term, thus helping to
limit scarring from the pandemic.

Amid high uncertainty, risks are tilted to the downside.

The recovery could be impeded by further waves of infections, including new
virus variants, and a slower-than-expected vaccination roll out. On the
upside, the pandemic could be contained faster than expected with a quicker
vaccination rollout. A disorderly reallocation towards a different
post-pandemic economic landscape poses a downside risk in the
near-to-medium term. Macrofinancial vulnerabilities remain elevated as
housing prices rose sharply during the pandemic amid high and increasing
household leverage. A domestic or regional house price correction,
triggered possibly by a reassessment of fundamentals or tighter global
conditions, could ignite adverse feedback loops and weigh on consumption

Macroeconomic Policies

Fiscal policy should keep on supporting the recovery while facilitating
the economic transformation.

The fiscal deficit this year is expected to deteriorate on the back of
continued COVID crisis support and measures that facilitate the green and
digital transformations. In the medium term, the fiscal stance is envisaged
to remain broadly neutral. This seems appropriate, as in the near term,
fiscal policy should support lives and livelihoods until the recovery is
well-entrenched, facilitate reallocation, and back reforms for the economic
transformation. The broadly neutral stance in the medium term would help
protect buffers—in view of significant future
health care costs and adverse demographics.

Importantly, given the uncertain outlook, fiscal policy should remain

If the recovery falters, Denmark should deploy its substantial fiscal space
and allow its strong automatic stabilizers to operate fully with further
discretionary loosening as needed. Once the recovery is fully entrenched, a
plan to return to the medium-term objective remains appropriate.

The fixed exchange rate policy continues to serve Denmark well,
therefore the objective of monetary policy should remain to preserve
the peg.

The policy provides a framework for low and stable inflation in Denmark.
The central bank should stand ready to deploy its toolkit to defend the peg
in the event of undue pressure.

Financial Sector Policies

The banking system remains profitable, liquid, and highly capitalized,
though in a challenging environment.

Bank profitability is challenged by the low interest rate environment in
Denmark and globally. Setting interest rates on deposits and loans remains
the banks’ commercial decision. This is an essential market mechanism to
preserve the efficiency of the financial system. Amid large buffers before
the pandemic, exposures to sectors hit hardest by the pandemic were low. As
the crisis unfolded, measures to support households and corporates
mitigated liquidity and credit risks. The full release of the
countercyclical capital buffer (CCyB) provided additional lending and
loss-absorbing capacity. However, impairments are likely to increase once
support schemes expire. Moreover, the current outlook with very loose
financial conditions, increasing asset prices—with rapid and significant
growth in residential real estate prices—and
prospects for a rapid recovery provides ground for risk build-up. The
financial system is highly interconnected within Denmark and regionally,
exposing banks to domestic and regional spillovers.

Prudential tools should be deployed to maintain financial stability.

Unless the risk build-up subsides markedly or there is a new negative shock
to the economy, the CCyB should be increased with an appropriate phase-in
period. Enhanced monitoring of credit cycles in different sectors would be
appropriate. If credit is identified as fueling overheating-prone sectors,
differentiated risk weights at the sectoral level could be considered to
ensure that capital buffers remain consistent with the higher risk in such
sectors. Staff also recommend that guidance on dividend payouts and share
buybacks remain in place as needed, consistent with ESRB and EBA guidelines
to protect capital buffers. The newly implemented credit registry offers a
unique opportunity to develop a fully risk-based prudential framework to
timely monitor risk dynamics. Staff welcome advances to the AML/CFT
framework, which led to a third consecutive upgrade by the Financial Action
Task Force.

High and increasing household leverage amid rapid house price growth
warrant tightening macroprudential tools and deploying coordinated tax
and housing supply policies.

The authorities should tighten debt-to-income ratio (DTI) caps for all
loans irrespective of loan-to-value ratios. DTI caps could be
differentiated based on borrowers’ riskiness. Highly leveraged households
should be subject to mandatory amortization, regardless of maturity and
rate-type. Also, tighter limits on income-based measures for interest-only
and floating-rate mortgages or increasing minimum down-payment requirements
should be considered. Mortgage interest deductibility should be reduced in
a manner consistent with the overall tax framework. Supply constraints
should be relaxed further with streamlined zoning and planning procedures
and reduced rent control.

Labor Market Policies

The flexicurity model equips Denmark with a powerful framework to
effectively implement and target labor market policy.

Flexicurity was enhanced and complemented during the crisis through wage
compensation and workshare schemes. This helped cushion the impact of the
pandemic on the labor market. However, past labor market issues were
exacerbated as unemployment among the youth, the low-skilled, and the
foreign-born increased disproportionately, albeit similarly to peer

Efforts to improve employment prospects for the young, low-skilled, and
foreign-born are welcome.

It is encouraging that the authorities expanded incentives for vocational
education of in-demand skills (VET), increased funding for upgrading skills
and extended training to include health courses and green economy jobs. To
continue promoting labor market participation of refugees, the basic
integration education (IGU) program was expanded in 2020. Also, a new
migrant full-time activation scheme has been announced.

As the recovery gains traction, policies should be fine-tuned, shifting
emphasis from exceptional support to other measures embedded in

Once the recovery is entrenched and lockdown restrictions lifted, more
focus should be given to facilitate matching and, as demand for jobs firms
up, facilitate the reallocation of labor from contracting to expanding
sectors through upskilling and education. Simultaneously, exceptional
support measures should be phased out to protect the flexibility of the

Policies to increase labor supply, which is

critical for the long-term sustainability of the system, should

Staff welcome the ongoing pension reform that links retirement age to
life-expectancy. Other measures, that would increase labor supply and
alleviate inactivity traps should be considered, including a comprehensive
tax reform that uses targeted in-work benefits. Improvements to the
provision of after-hours public childcare should be pursued.
Simplifying the certification of foreign degrees would help attract
skilled foreign labor.

Reforms to boost investment and productivity

Denmark’s transformation to a greener and more digital economy provides
an opportunity to lift investment.

Green Tax Reform Phase 1
is envisaged to have a small impact on emissions. Staff analysis indicates
that a strategy including enhanced carbon pricing, reinforced by fiscal
incentives across different sectors would help Denmark attain its ambitious
emissions goal. A prompt definition of the tax framework for green
investment, including the level and base of carbon taxation would reduce
uncertainty, and provide further incentives for the private sector to scale
up green investment. Climate adaptation will also offer an opportunity to
significantly increase investment. While Denmark already ranks high on
digitalization, there is scope to enhance information and communication
technology (ICT) investment. This can be achieved by policies that support
the expansion of knowledge-intensive sectors, which are typically
ICT-intensive. Such policies include rebalancing taxation for start-ups and
high-technology firms—including relaxing the cap of carry-forward losses
and reducing the taxation of dividends—to improve conditions for investment
and ensuring the provision of technical and digital skills to nurture an
adequate supply of human capital.

Better access to equity finance would improve funding options for new,
small, or high-technology firms.

These types of firms might be subject to credit constraints due to lack of
collateral. Hence, continuing with the implementation of investment
vehicles by which pension sector and public resources are invested in SMEs
remains relevant. Assessing how to properly implement an incremental
Allowance for Corporate Equity (ACE) should be considered, as ACE would
reduce the debt bias and the cost of capital. By raising investment and
productivity, along with policies to bolster labor supply, these measures would also boost potential
growth, limiting the pandemic-induced scarring.

The mission thanks the authorities and other counterparts for their
accommodative flexibility, warm hospitality, and for candid and
high-quality discussions.

IMF Communications Department


Phone: +1 202 623-7100Email:


Source: EIN Presswire