Tax Policy – Denmark Unplugs the Economy
The coronavirus pandemic has prompted lawmakers all over the world to pass sweeping relief packages for citizens and businesses unable to work and operate normally. Because of social distancing, shelter-in-place, and quarantines, the economy has practically been “frozen” and the relief packages are supposed to carry companies and workers over to the other side of the crisis.
The political and economic response to this crisis should be temporary and targeted and policymakers should abstain from inventing harmful policies that might hurt economic growth when the crisis abates. Several fiscal policy tools, including some suggested by the OECD, have been implemented in countries around the world.
Denmark, a high-tax country with 5.5 million citizens, has implemented policies designed to avoid layoffs and bankruptcies and basically unplug the economy during the pandemic. The hope is that the economy can be plugged back in when the crisis passes.
Prime Minister Mette Frederiksen ordered schools closed and public officials sent home on March 13. Gatherings of more than 10 people are not allowed.
A total of DKK 285 billion (US $42 billion) has been appropriated in a number of “relief packages” to support businesses and workers until June. This spending represents almost 13 percent of the Danish GDP, making the Danish plan one of the most expansive in the world.
The specific policies include:
- Delayed VAT payments and labor contributions
- Increased tax account limit
- Salary guarantees and sick leave payments
- Cash flow assistance and loan guarantees
Large companies, normally required to pay VAT monthly, will have 30 additional days to pay VAT, while all companies will be granted four additional months to pay their labor contributions, known as “a-taxes.”
Further, the government has lifted the ceiling on businesses’ tax accounts so that companies won’t have to pay negative interest rates when placing cash in the bank. That limit is rising from the current level of DKK 200,000 ($30,000) to DKK 10 million ($1.5 million) until the end of November. The purpose of this measure is to limit companies’ exposure to Danish banks’ negative interest rates on deposits, which could grow as the postponement of deadlines might result in additional cash reserves for certain companies.
The government will support 90 percent of wages of hourly workers who are sent home up to DKK 26,000 ($3,800) a month and salaried workers will get 75 percent covered up to DKK 23,000 ($3,350). The salary guarantee program is organized through the Danish three-party-negotiation system, which consists of the government, unions, and employer organizations. Small independent companies outside the system will also be eligible. The program is best compared with the German short-time work scheme, where the government partly replaces an employee’s lost income from reduced working hours. In Denmark, the workers, who are sent home but still on contract, will not be allowed to do any work. This program is designed to maintain the relationship between employers and employees and is supposed to run until June. The government will also cover sick leave costs related to coronavirus. Sick leave is normally paid for by the employer through the first month.
Small businesses expecting to lose 40 percent of revenue can get up to 80 percent of regular expenses, such as rent, covered by the government. If the business has been ordered to close (restaurants and hairdressers), the government will cover up to 100 percent of regular expenses. Larger businesses expecting to lose 30 percent of revenue can take out loans backed by the government up to 70 percent.
While these programs seem exceedingly generous, they require administration that will create extensive administrative and bureaucratic burdens for business owners and government agencies—especially considering that economic relief is needed short term. Despite a high level of trust among businesses, taxpayers, and government in Denmark, the different program requirements have to be enforced to limit fraud. Beside the bureaucracy cost, the salary guarantee could limit an employer’s ability to find new workers for emerging needs during the crisis. Delivery services and grocery stores need additional workforce to meet demands during the lockdown. If the policy results in a labor force freeze it could create shortages of workers in the parts of the economy that are still running.
Denmark’s strategy has been to unplug the economy and hopefully restart on the other side—in other words, the focus is on solving very short-term issues created by the lockdown. If the economic downturn accelerates, all parties in the Danish Parliament have committed to spending another DKK 100 billion ($15 billion) on relief. This strategy differs from many other countries that focus on relieving tax burdens on specific industries and improving growth-limiting tax provisions—something that could promote long-term growth.
Source: Tax Policy – Denmark Unplugs the Economy
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