State could be one of the reasons contributing to

State
or Private

 

1a) Hypothesis 1: The effect of Denmark’s high
taxation has discouraged incentives to invest in the country.

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The impact of tax policy’s and administration

Administrations and governments are
eager to attract foreign direct investment (FDI). FDI’s can create new jobs,
bring knowledge of new innovations and advance the development of work. These
prospective benefits continually stimulate the re-examining of tax regulations
to ensure they are attractive to investors.

 

Denmark’s tax system is regarded as
unattractive for foreign companies to establish entities. With a corporate tax rate
of 22-25% it puts itself 6% above the European average 18.88%, but while
taxation is identified as a factor affecting the investment process it’s not
the main determinant. Profit opportunities, stable markets, established legal
regulatory framework, well-developed infrastructure and responsive labour
markets are all factors that these multinational companies take into account.

This is highlighted when looking at countries like Germany with a corporate tax
rate of 30-33%, Finland with 20% and Netherlands with 25% however, they still
are considered some of the most competitive countries in the world with Finland
in 3rd place and Germany just behind in 4th. You can’t
look at corporate taxation as an isolated factor affecting
competitiveness.    

 

A high-income tax can prove problematic
for a foreign company looking to establish themselves in a new country because
it makes it unattractive for their head office employees to relocate to a
country like Denmark, with a punitive individual income tax of around 60%. With
the broad recognition that international income tax competition is increasing
and host countries are constantly reducing tax rates this could be one of the
reasons contributing to why Denmark is falling from 3rd place in
2009 to 15th in 2013.

Hypothesis
2: The macroeconomic stability
is one of the components making Denmark competitive.

 

Is the macroeconomic environment directly associated to
productivity?

A stable macroeconomic environment is not directly
correlated with economic growth but rather it is a fundamental condition to
promote productivity. Low inflation is the first ingredient for a stable
macroeconomic environment. The volatility of prices affects productivity
because prices are less formularized, which means that firms and individual
investors are less likely to invest because long term projects and ventures
become riskier.

 

Denmark’s Central Bank has made it clear that one of
its main objectives is to ensure stable prices through low inflation. They have
adopted an inflation targeting monetary policy regime to keep the Krone stable.

Its goal is to maintain an inflation rate of 2% or just under 2%. At a 2%
inflation rate, you have price stability while also providing an adequate
margin to avoid the risks of deflation. Denmark has an inflation rate of 1.4%.

Its inflation rate is relatively lower than its fellow Scandinavian countries
Sweden (1.58%) and Norway (1.6%). This comparatively lower inflation rate is
making Denmark more competitive because with time the price of its goods will
be increasing at a slower rate.

 

In most cases movement in the exchange rate can be
used as a determinant to assess competitiveness. A sharp depreciation will make
exports cheaper and more competitive, however the movements reflect relative costs. A country like the US with a
low inflation rate, would prompt an appreciation in the exchange rate, making
exports more expensive and less competitive. This however has no effect on
Denmark’s competitiveness because its exchange rate is pegged to the euro which
means that they cannot devalue their currency to intensify competitiveness.

 

Hypothesis
3: What effect do wages
have on international competitiveness?

 

Wages and International Competitiveness

You will have a tendency to lose global
competitiveness if a country’s wage rises relative to other countries. This is
because wages and labour productivity have an orthogonal relationship in the
sense that wage increase doesn’t necessarily lead to an increase in labour productivity.

There is an alternative theory to this, the “efficiency wage theory” which
states that an increase in wages doesn’t result in a loss of competitiveness
but rather an increase in labour productivity because labour loyalty is
re-stimulated.

 

The dollar’s floating exchange rate means that if
wages are increased it will effectuate a depreciation in its exchange rate to
recompense for the loss in competitiveness. This is why the US is able to stay
so internationally competitive. Whereas a fixed exchange rate (EU single
currency) wage growth cannot be counterbalanced because you can’t devalue the
currency which is one of the factors attributing to Denmark’s falling
competitiveness. 

 

Denmark, like Germany, Finland, Sweden and
Switzerland has no legally stipulated minimum wage but it has strong and
powerful trade unions who are increasingly resistant to any pay-cuts or new working
practices. This can be dangerous and can affect productivity especially if
workers have a lack of motivation because they do not fear job loss. Denmark
has adopted a unique proactive labour market policy (“flexicurity”) to remedy
this. The model allows for high levels of flexibility when hiring and firing.

This makes it easier for businesses to adjust its workforce and remain
competitive. As well as this, it has set no restrictions on overtime, all firms
can operate 24 hours a day, 365 days a year.

 

 

 

 

 

 

 

 

Social Democratic Values vs User Fees for Health Services

 

1b) Simon Emil Ammitzbøll from Liberal Alliance
aims to levy user fee charges against the frivolous usage of health services.

But this is sure to have unintended consequences as lower income families as a
result of this will suffer from preventive services because they cannot afford
to go to the hospital.

 

Even if the fee was somewhat negligible i.e. 100 Danish kroner, it
could still be significant to certain lower income families. Hypothetically it
could make a difference if you became ill in the beginning or in the end of a
month. A low-income person who became sick at the end of the month might have
to choose between a visit to the doctor and a meal because there is almost no
money left, while a higher income person could go to the doctor as and when he
or she pleases. That hardly seems right in a welfare state such as Denmark.

 

In addition, it is a slippery slope to implement to user fees for
health services. If we accept this what will be next? Would we next have to pay
user fees for universities? For elderly care? Denmark is facing a demographic challenge, with its aging population
ratio is growing. With its 65 and over age bracket projected to see an increase
of up to 30%. We should not hinder these citizens from regular check-ups.

 

Denmark is one of the highest taxed
countries in the world with a tax rate of 60.2%, it should not be too much to
expect that a government with such great resources takes care of its citizens.

 

Subsidiary assignment B: The state and the market economy  

 

2a) Examine what
can be deduced about Danish public sectors socio-economic role?

 

Danish socio-economic role in the public
sector

 

2002

2004

2006

2008

2010

2012

Employed in the public sector

729

725

731

735

773

749

Total number of employed

2701

2682

2752

2771

2666

2638

Percentage of employment in
public sector

26,99%

27,03%

26,56%

26,52%

28,99%

28,39%

 

Denmark, an
industrialised society, is a welfare state; its government plays a pivotal role
in the social and economic well-being of its citizens.

 

In the table
above you can see that the general trend shows that the percentage of
employment in the public sector is increasing. From 2002 to 2012 the employment
in the public sector increased by 1.4%. An increase in immigration could be the
cause of this. Over the last 30 years Denmark has been party to a constant and
steady stream of primarily non-western immigrants. The shift in the country’s
demographic has meant that we have had to employ more public-sector workers to
counterbalance this issue. This discrepancy requires more people to work in the
public sector to address these employment, educational and cultural gaps.

 

Denmark’s
product market regulations are generally supportive of competition. Its PMR
score of 1.1 reveals that it does not have an excess amount of administrative
burdens or explicit barriers to trade. Unlike countries like Poland and Turkey
who have strong state involvement in business operations which often impedes
competitiveness within a country. Denmark promotes competition.

 

 2b) What
role does the state play in economic growth

 

What does the post-American world look like?

 

Governments can employ many techniques to promote economic growth.

The two main policy regimes are fiscal policy and supply side policy.

 

The US’s aim should be to increase the capacity of the economy and
increasing productivity. This should be an attempt to positively affect the
production side of an economy, through refining the institutional framework. If
the US government’s expenditure should be directed towards its infrastructure so
that they could improve logistics and transfer times which would lower costs as
well as increase productivity.

 

To increase economic growth the government could subsidise a
certain sector of a market that shows potential growth (i.e. green energy) to
lower its costs of production. The same technique can be used to help start-ups
enter a market. Cutting corporate tax will make businesses more profitable
which incentivises them to streamline their production. It also incentivises
companies and individual investors to invest in their country.

 

Like Germany, the US could invest more money into the research and
development branch of technology. In the short term this would increase
aggregate demand and advance economic growth, and it would make the US more
competitive.

 

Fiscal policy regime is used for long term economic growth. It can
be used to liberalise laws making it easier for private companies to set up a
business in the country. As well as this, when income taxation is decreased,
consumers have more disposable income which would inadvertently increase
aggregate demand and foster economic growth. This however is debatable, because
you’re assuming that they don’t save their money or spend it internationally
but domestically.