a shifting of taxes from labour income to real estate (i.e. shifting taxes in the
direction of less mobile tax bases). However, increased taxation of real estate
would be immediately capitalized in prices causing a capital loss for housing
owners on top of the liquidity problem the tax increase may create (in partic-
ular for families which have recently entered the market)28. By phasing in tax
reductions on labour income quicker than the tax increase on real estate it is
possible both to eliminate the immediate liquidity problem and to moderate the
price effect29 . This reform element thus has the element of first deteriorating
public finances, but eventually public finances will improve, and the reform can
thus be seen as an "investment" in a better tax structure.
Note that the packages also includes increase public spending on research
(to reach a target for public expenditures on research of 1 % of GDP) and pre-
funding of pensions for groups not covered by mandatory labour market pension
or similar pension scheme. This explains the short span of years for which the
primary balance is in deficit, cf figure 15.
Since it is an implication of the package that it brings public finances to a
situation very close to budget balance, it follows that exposure to various forms
of risk is reduced. This applies to variation in the interest rate and the growth
rate. For changes in longevity - where increase beyond the relative moderate
projections made here may be expected - this only applies if the underlying
indexation formula is maintained.
7 Concludingremarks
The issue of fiscal sustainability has been considered in an explicit intertemporal
setting, and indicators based on either a period-by-period (gradual) approach
or a once-and-for-all (permanent) approach have been considered and applied
for Denmark. The framework here allows an explicit consideration of reforms
aiming at eliminating the systematic trends towards making the situation fis-
cally unsustainable. Likewise it is possible to evaluate how reform proposals
motivated by other concerns would affect fiscal sustainability.
It is an open question over how long horizons policies should be planned.
However, it is important to consider the short term position of public finances
in relation to medium to long run trends. The current situation for Denmark is
a case in point - despite current budget surpluses and a trend decline in public
debt, it is the case that current policies are not fiscally sustainable. There is
a clear and systematic trend towards deterioration of public finances for un-
changed welfare and taxation systems. Since this primarily is driven by de-
mographic changes and a substantial lead time is needed to make changes in
retirement and pensions systems it is necessary to consider public finance over a
horizon of non-trivial length if sudden changes in policies should be prevented.
28Note that since the taxation (ejendomsværdiskat) depends on the price development it
follows that the liquidity problem is moderated the larger the price effect, and vice versa.
29Evaluated in a partial model the effect is a price reduction of 11%. Taking into account
the whole package and the general equilibrium effects, the effect is halfed.
31