Fiscal space of 27 billion DKK until 2025

This analysis calculates the fiscal space, taking into account the various political agreements from this past autumn and winter. Agreements have been made regarding defence, tax reforms, a business package, and the budget for 2018. Before these autumn and winter agreements, there was a fiscal space of 38 billion DKK (1.7 percent of GDP) until 2025. Taking into account the new agreements, the fiscal space has been reduced by ¼ to 27 billion DKK (1.2 percent of GDP). The fiscal space can be spent on either greater public spending or lower taxes, depending on politicians’ preferences.

The main explanation for this reduction to the fiscal space is the defence agreement, which will take 4.8 billion DKK of the fiscal space, while approximately 5 billion DKK more is set aside through the budget for 2018, tax cuts, etc. If politicians were to use the entire fiscal space to cut taxes, a tax reform could be put together that would increase employment by about 21,000 persons and increase the GDP by 36 billion DKK (1.6 percent of GDP), based on calculations from the Ministry of Finance. Such a reform package would include a flat tax of 40 percent. This would result in a lower marginal tax rate for high-income individuals than in the UK, Germany, and the Netherlands. The revenue loss under a flat tax of 40 percent would be 15 billion DKK (0.7 percent of GDP) according to the Ministry of Finance. Furthermore, the corporate tax rate would be reduced from 22 percent to 17 percent, as planned in the UK for 2020. The shareholder tax would be lowered from 42 percent to 30 percent (the Swedish level), while the vehicle registration fee would be halved.