Scandinavia’s Weakest Nation Finds Welfare Habits Too Costly (Aug 2013)

welfare_state

Source: Bloomberg – Scandinavia’s Weakest Nation Finds Welfare Habits Too Costly

Notable excerpts:

Scandinavia’s weakest economy can no longer afford the kinds of entitlements its citizens were raised on, according to Danish Finance Minister Bjarne Corydon.

“We live in a world of global competition for jobs,” the 40-year-old minister said in an interview in Copenhagen. “For any finance minister wanting to be taken seriously, it’s something to deal with. That requires a modernization of the welfare state.”

Denmark this week cut its economic forecast and predicted a widening budget deficit. The AAA rated nation, whose economy contracted 0.2 percent in the first half, needs to contain welfare spending or risk losing the respect of investors, Corydon said. Danes, who like Swedes and Norwegians, are used to generous jobless pay as well as state-financed education and health care, need to learn that those privileges come at a cost, he said.

“We could spend more if we were willing to pay the price,” Corydon said. “But the price would be to create distrust and uncertainty.” Denmark’s challenge now is to ensure its welfare habits don’t leave it unable to compete with populations that work harder at a lower cost, he said.

From 2000 to 2012, average hours worked in Denmark fell 8 percent, according to the Organization for Economic Cooperation and Development. Danes spent 1,431 hours working last year, 24 percent less than the OECD average, the Paris-based group estimates.

The development has left the country’s workforce less productive. Since 2000, Denmark’s unit labor costs have risen 30 percent, compared with an 11 percent increase among its trade competitors, according to a 2012 OECD study.

Denmark’s $320 billion economy, which shrank 0.5 percent in 2012, is trying to adjust to the fallout of a property boom that started early last decade. While house prices have slumped about 20 percent since a 2007 peak, wages haven’t dropped enough to restore competitiveness, the OECD says.

Though Danes with jobs earn more and work less, on average, than their rich-world peers, out-of-work Danes in some cases earn even more than those in low-skilled jobs.

An Aug. 27 report by the Economy Ministry showed that about 250,000 Danes have no economic incentive to give up their unemployment benefits and take a job. That compares with 2.64 million people in full- and part-time jobs, according to Statistics Danmark.

Corydon, who said he wants to keep public investments close to a 30-year high to create jobs, has promised to pursue policies designed to protect Denmark’s stable AAA rating. The yield on Denmark’s benchmark 10-year bond was little changed at about 2.03 percent at 11:25 a.m. in Copenhagen, compared with 1.84 percent on similar-maturity German bunds.

With a debt load of 45 percent of gross domestic product — less than half the average in the euro zone — Denmark has managed to keep its borrowing costs close to record lows. It costs less, using five-year credit default swaps, to insure against non-payment of Danish government debt than it does to guard against a German default, according to data compiled by Bloomberg.

Corydon argues the modern welfare state needs to acknowledge the power of the bond markets in putting a price tag on public benefits.

“Those who say we’re at the end of the road for the welfare state are just as wrong as those saying any modernization will kill it,” Corydon said. “The modern welfare state needs to prioritize things in a new way and create the best possible conditions for people to get a job.

 

 

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