Recent reforms leave Denmark’s welfare state firmly in place

Story Repair | By Mike Alberti |

But Danes have always understood that sustaining their high level of public investment and a generous safety net mean both high taxes and the obligation to work, said Lisbeth Pedersen, an economist at the Danish National Centre for Social Research.

All of the recent reforms, Pedersen said, stem from that understanding. “The driving idea behind all of these reforms is to get people educated and working in high-skill, high-wage jobs as quickly as possible,” Pedersen said. “The Danish model has always been about providing a generous level of social support, but also making sure that people are working in good jobs and paying taxes to sustain it.”


The future of the Danish welfare state

According to Arthur Daemmrich, an assistant professor of business administration at Harvard Business School who has written about the Nordic model, while it may be tempting to see the changes that have taken place since the recession as a slow dismantling of the Danish welfare state, the truth is perhaps closer to the opposite.

“We’re all in agreement about the general goals — creating a high-skill, high-wage economy with low levels of inequality and a large role for the government,” said Ove Kaj Pedersen of the Copenhagen Business School. “The disagreements are just about the best way to achieve those goals.”

“Denmark has a long tradition of renegotiating and tinkering with the welfare state model,” Daemmrich said. “They are always trying to find the right balance between work incentives, economic security, and competitiveness.”

In that sense, the policy debate now going on in Denmark, like those that have generally taken place in that country, are much more about the best way to administer and govern the welfare state than about whether or not to abandon it altogether, said Christian Albrekt Larsen, a professor at Aalborg University. “Nobody is talking seriously about abandoning the Danish model,” he said. “Our elections are about who can run the welfare state most competently. These latest debates are about how to make it function most effectively.”

Ove Kaj Pedersen, an economist at the Copenhagen Business School, agreed. “We’re all in agreement about the general goals — creating a high-skill, high-wage economy with low levels of inequality and a large role for the government,” he said. “The disagreements are just about the best way to achieve those goals.”

One reason for the remarkable consensus about the welfare state, Kaj Pedersen said, is that both business and labor groups recognize that it is Denmark’s primary competitive advantage.

Erik Simonsen, the director of the Danish Confederation of Employers, the largest trade association in Denmark, said that while some business leaders believe that the government should go further in cutting social assistance, there is no significant resistance to the welfare state.

“Businesses recognize that the government is doing them a favor” by pursuing policies that promote economic security, Simonsen said. That the government provides free health care “allows businesses to focus on competing,” and the robust system of higher education and training “is what makes our workforce one of the most skilled in the world,” he said.

Spending increases and tax cuts combined

The recent reforms to the Danish student allowance and social assistance systems are estimated to save the government 3.4 billion Danish kroner, or nearly $600 million, by the year 2020. Those savings will contribute to a wide-ranging package of spending programs and tax cuts meant to stimulate the economy.

The package, which has been dubbed the “Big Bang,” will cost 15.1 billion Danish kroner ($2.7 billion) by 2020. Included in the plan are a cut in the corporate tax rate, to 22 percent from 25 percent, costing an estimated 4.1 billion kroner ($720 million). Oil companies drilling in the North Sea and financial services companies will be excluded from this tax cut. The plan also included some smaller, more targeted tax cuts, such as a reduction in the value-added tax on hotels that is meant to spur tourism.

New spending comprises about 55 percent of the “Big Bang.” That spending totals almost $1.5 billion, including 2.3 billion kroner ($403 million) for the renovation of public housing, 4 billion kroner ($701 million) in aid to municipalities, and 1 billion kroner ($175 million) to expand adult education programs.

According to Lisbeth Pedersen of the Danish National Centre for Social Research, another reason for the widespread support for the Danish welfare state is that Danes have always placed a high value on equality and social solidarity. The recent reforms, she said, proceed from the belief that working is an essential part of participating and being included in society.

“So when a lot of people are not working we see that as a social problem” as well as an economic problem, Pedersen said. “Making sure people can work is seen as part of social justice.”

Ove Kaj Pedersen of the Copenhagen Business School said that observers should be careful not to mistake the reforms for a shift toward the American model. “These reforms are in no way based on the principles of deregulation, outsourcing, or privatization,” he said. “They’re about making the public sector more and more responsible for private issues, and figuring out how the public sector can best solve problems.”

And several experts pointed out that, in addition to the changes that have made cuts in social programs, there have been many reforms to the Danish welfare state in the last several years that have actually expanded it. For example, the number of weeks that many Danes are entitled to paid vacation has increased to six from four over the last decade. Subsidies for child care have been expanded, as well, and restrictions on the eligibility of immigrants for government benefits have been rolled back.

When the broader context is considered, Kaj Pedersen said, the narrative of the decline of the Danish welfare state quickly falls apart. “There is always this effort to say the Danish welfare state has no future, that it’s too big, too extensive,” he said. “But that kind of discussion has been happening for fifty years now, and the welfare state is still around and still continuing to deliver high competitiveness and high equality.”

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