Time running out for Danish welfare system

A Lego toy factory in Denmark, whose economy is growing at a slower pace than the euro zone's economy.
A Lego toy factory in Denmark, whose economy is growing at a slower pace than the euro zone's economy.PHOTO: REUTERS

Shrinking workforce, lower productivity will see fewer people in future contributing to public coffers

COPENHAGEN • Denmark has a problem: It may soon be unable to afford offering such a good deal to its people.

Free healthcare for all, a US$757 (S$1,020) monthly stipend for college students and robust safety nets for the less fortunate all cost money.

Denmark devotes slightly more than 30 per cent of its gross domestic product to social spending, one of the highest levels in the rich world.

According to the Organisation for Economic Cooperation and Development (OECD), such a "generous welfare system requires robust public finances".

And while Denmark's finances "seem sustainable" for now, the assumptions that underpin that view carry a high level of uncertainty, the OECD warned in a recent survey. 

Take labour-market participation. An unemployment rate below 4 per cent is one of Europe's lowest, and industry frequently complains about shortages in skilled labour.

But population projections show that Denmark's 600 billion krone (S$123 billion) welfare system is facing a future of more customers and fewer people around to pick up the bill.

Child benefits and an abundance of nurseries have failed to produce a new baby boom.

Importing labour from abroad is not an option due to the minority government's reliance on the anti- immigration Danish People's Party

Like many other developed countries, Denmark's population is ageing. One obvious solution is to get people to work longer.

Successive governments have already cancelled early retirement schemes and have increased the minimum pension age - to 68 years by 2030.

Further measures may be announced in Prime Minister Lars Lokke Rasmussen's forthcoming 2025 economic plan.

The alternative to cutting costs is to increase revenue.

But Denmark is not doing too well there either, with faltering productivity leading to an economy that is now expanding at a slower pace than the euro zone's economy.

A government commission in 2014 estimated that annual output would have been 360 billion kroner higher, boosting GDP by about 15 per cent in the process, had Danes matched the kind of productivity gains seen in the United States since the mid-1990s, when American companies accelerated the deployment of computers and other technological advances.

According to the Confederation of Danish Industry, it is not too late to reap the rewards of automation.

"Robotics, artificial intelligence, connecting everything to the Internet - it's all so cheap now," said Mr Adam Lebech, who represents technology firms at the trade lobby.

Mr Lebech believes technology is already helping to bring back to Denmark some of the 150,000 industry jobs that moved abroad after the financial crisis.

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A version of this article appeared in the print edition of The Straits Times on August 20, 2016, with the headline 'Time running out for Danish welfare system'. Print Edition | Subscribe