Can Denmark compete with its neighbours for foreign investment?

Industry and opposition parties push for tax cuts in growth plan

Denmark is one of the most expensive countries in the world in which to do business. This should come as a surprise to no-one – Denmark is one of the most expensive countries in the world to do most things – but it is hurting the economy according to the Danish industry advocates, Dansk Industri (DI). With the government set to decide on a new growth plan in the coming weeks, the timing of this declaration seems significant.

Worrying investment gap
Last week we reported that DI’s Global Benchmark Report 2014 found that Danish companies have invested far more abroad than foreign companies have invested into Denmark. 

The report detailed a number of factors that make a country attractive to investors: proximity to markets and customers, a well-educated workforce and (the big one) low costs.

Denmark is already strong in some of these areas – for example, the education level of the workforce. DI recognises that other factors cannot be changed: locating in Denmark does not provide access to a large market (they draw the line at moving the country). But the cost of doing business, according to DI, is something that can and should be addressed.

Lower costs
More specifically, corporation tax should be lower, other taxes affecting businesses should be lower and wages should be lower. Considering the Danish employment model, the lower wages are something that DI will have to take up with the employment unions. But the lower taxes are definitely on DI’s wish list for the new growth plan.

The opposition parties in the ‘blue bloc’ – Venstre, the Konservatives and Liberal Alliance – have all expressed a similar wish.

Corporate tax rate
Mads Lundby Hansen, the vice-president and chief economist of the liberal think-tank Cepos, sees many advantages to lowering the corporate tax rate.
“Corporate tax is the most effective instrument for increasing productivity,” he told Børsen.

“It gets Danish companies to invest more in new machinery, research and technology, so they become more productive. It eventually leads to higher pay. Lower corporate tax also attracts foreign investors.” 

Already reduced
The corporate tax rate has already been reduced as part of the government’s 2013 plan. The effective rate dropped from 25 to 24.5 percent as of January 1 this year, and further gradual reductions will take effect in the coming years so that by 2016 it will reach 22 percent.

Higher than neighbours
But seen in the context of northern Europe as a whole, this is still not necessarily enough to make Denmark competitive. The UK government has lowered the corporate tax rate from 28 to 21 percent since taking power, and it plans to lower it to 20 percent next year. The rate in Finland has already been reduced to 20 percent.

Germany and Norway are now the only northern European countries with higher rates of corporate taxation than Denmark.

Other taxes
Opposition parties and business organisations continue to call for a reduction or abandonment of some of the other taxes and levies affecting businesses, including the NOX levy on CO2 and the PSO levy on electricity consumption. 

According to TV2 News, the minister for business and growth, Henrik Sass Larsen, earlier this month indicated that the upcoming reform will include a reduction of the PSO levy.

However Børsen reports that Margrethe Vestager (R), the minister for economic affairs and the interior, has ruled out the possibility of there being significant tax cuts in this year’s growth plan. The plan is expected after Easter.

Some good news
In contrast with DI’s gloomy outlook, the 2014 report ‘European Cities and Regions of the Future’, carried out by FDI Intelligence, ranked Greater Copenhagen highly. The region came in at #3, ahead of Greater Stockholm, Greater Amsterdam and Greater Zurich. The business website Copenhagen Capacity estimates Copenhagen to be as much as 20 percent more cost-effective than Stockholm.