The Hindu Business Line : What makes the bumble-bee fly?

The Denmark balance-sheet has been kept healthy thanks in part to profits on North Sea oil, besides the steamrollering economy that has led to higher income
taxes and lower
unemployment dole.

J. Srinivasan

A recent newspaper report that Danes led the Europeans in moonlighting raises questions about the much-vaunted Scandinavian welfare state model. Is this capitalist-approach-with-a-difference past its time? Are the people no longer too happy paying the high taxes (almost 60 per cent at the highest level) and looking to the state for everything — from child care to education to pension? For, the newspaper report would indicate that the Danes are not too happy paying hi gh taxes even if it means that they do not have to save but can spend much of their on-hand income, what with the state delivering goods that elsewhere would have to be purchased.

Though difficult, with very few transactions outside the formal system, the Danes seem not averse to pocketing some money away from the prying eyes of the taxman, one of the wealthiest anywhere. The Tax Ministry’s latest figures show that in the first four months of 2007, some DKK 7 billion (€945 million) more has landed in the treasury than budgeted for. If that trend continues through the year, the state will end up with a surplus of DKK 20 billion. According to the business newspaper Borsen, “Falling unemployment figures have helped boost state revenues. From December to April, some 6,300 unemployed Danes entered the work force, freeing up their social welfare payments and adding taxable income to the economy.”

High job rate

The employment rate is high because the economy is in fine fettle. Though the Budget Outlook, released by the Finance Ministry last week, indicates a cooling, with growth slowing from 3.2 per cent in 2006 to 2.4 per cent in 2007, it paints a rosy picture of state finances in 2007.

After decades of having more debts than assets, the Budget Outlook predicts that by the end of the year, the balance of what the country has borrowed and what it has lent will be in its favour. The treasury will continue to pay DKK 7 billion in interest in 2008 — 0.3 per cent of GDP — but that is a fraction of the 1993 payment of a whopping DKK 40 billion. The balance-sheet has been kept healthy thanks in part to profits on North Sea oil extraction, besides the steamrollering economy that has led to higher income taxes and lower unemployment doles.

With the country facing the dilemma of how to spend the extra money it finds in its pockets, the Government has been urged to cut taxes. But the Finance Minister, Mr Thor Pedersen, argues that with the economy moving ahead at full speed, it is prudent to be cautious. “We’re balancing on the edge of a knife. Such a low unemployment rate means that we can’t just increase output without it having an effect on prices and wages,” he was quoted as saying by Copenhagen Post.

PUBLIC SERVICES

Currently, the Government’s primary focus has been on improving the quality of public services. It has spent an extra DKK 35 billion on social welfare since coming to power in 2001. Whether it can also cut taxes will be announced when it presents its economic roadmap forward to 2015.

There is a growing demand for cutting the tax rate especially with the economy in surplus. As the Head Economist of Nordea Bank was quoted in Copenhagen Post: “There already existed significant room in our finances for tax cuts no matter how you look at it. We have exceeded our debt reduction goals so it is solely a question of political will for tax cuts and not whether there is money available for it.”

Mr Pedersen suggested the extra revenues could be used to dismantle the upper tax bracket. The top tax bracket kicks in when people earn an annual salary of DKK 327,200 or DKK 27,266 per month. When employees exceed that level, an additional 15 per cent tax is slapped onto their basic rate, bringing the maximum income tax rate to 59 per cent.

But this is questioning the received wisdom of welfare state dating back to the 1803 Poor Laws that aimed to do away with beggary, and establish an organisation that would provide those in need with food, clothing, housing, warmth, and care in case of disease. The ideological (liberalistic) development through the 19th century turned this obligation into a right of the municipal councils to decide about their own affairs (as was written in the 1849 constitution).

With additions the people’s claims on the state grew till every thing was formalised in 1933. The industrial accident law and the unemployment insurance laws were retained; one people’s insurance law was created to cover the sickness insurance, the disability insurance, and the old age interest schemes; and laws of social security, replacing the poor law, besides others on child allowance, child re-socialisation, etc., were legislated. Remarkably, the law obliged every inhabitant over 16 to apply for membership to the sickness insurance.

DEFYING GRAVITY

This, says Prof Ashjorn Sonne Norgaard at the Centre for Welfare State Research, Department of Political Science, Syddansk Universitet, Odense, cemented the welfare state idea. With people’s support and no significant challenge to the model what he calls ‘the bumble-bee’ has continued to defy gravity.

But will that change if the people think that they can manage better returns than what the state offers — in the form of support to education and pension — on their investments — that is, taxes? And, would the moonlighting be a symptom of this phenomenon? While Prof Norgaard is not convinced that this will happen, Prof Torben M. Andersen of the Department of Economics, University of Aarhus, thinks that the willingness to support the system depends on what people expect to get in return. But he wonders how in the tightly-controlled Danish system, a parallel economy on a significant scale can emerge.

Concurs Dr Georg Sorensen of the Department of Political Science, Aarhus University, adding that most Danes believe they have a good deal in terms of high taxes and welfare in return. Also, with all political parties underwriting the idea, the welfare state idea is not headed for an early demise.

But there are always possibilities for change with the transforming demographic profile of the country. A skewed demographic profile makes immigration a reality for Denmark which means the emergence of a set of people not used to high taxation. To woo this segment, it may then become politically expedient to lower tax rates and possibly water down the welfare state model.

But that’s still a story-in-the-making.

(The author, a Business Line Deputy Editor, is on sabbatical in Denmark.)