The economy of the future is vulnerable

Even though Denmark is one of the European countries that have been able to prepare for the increased ageing population, the Danish economy remains vulnerable, and we will have a hard time handling yet another financial crisis in the coming decades.

2014.02.26 | Martin Hagelskjær Damsgaard

As professor of economics Torben M. Andersen from Aarhus University draws up the Danish economy for the next 60 years in broad brush strokes, the image shows that overall we have solved the financial challenges through the fact that in the future there will be more elderly Danes. 

Based on the welfare reforms that have been implemented since 2006, Denmark and Sweden stand out as the two European countries, which, from a socio-economic standpoint, are better prepared for handling the substantial financial challenges that will arise in the coming years as a result of the ageing population.

According to Torben M. Andersen, this is quite an accomplishment considering the extent to which life expectancy will increase in the future. Torben M. Andersen predicts that, on average, the remaining life span of 60-year-old men and women in the Nordic countries will be extended by 4-5 years throughout a relatively short period from 1995 to 2055.

If we take a closer look at the economy professor’s projections of the overall public finances that extend as far as the 2070s, it appears that the major challenges raised by ageing have been solved. Large deficits will not arise; however, the Danish economy remains in a very vulnerable position in the next several decades.

From the middle of the 2020s until the beginning of the 2050s, we will live with a public financial deficit amounting to one percent of the Gross Domestic Product (GDP). And at no time in the period from today until the 2070s will the public sector financial surplus increase to more than one percent of the GDP. 

The Danish public sector finances in total
The Danish public sector finances in total: The blue line represents the calculations done prior to the financial crisis, before the Danish welfare reforms were implemented from 2006 and onwards. The red line shows the calculations done after the financial crisis, after the welfare reforms were implemented from 2006 and onwards. (Source: Torben M. Andersen, Department of Economics and Business, Aarhus University) 

- Generally, I see ageing, and especially healthy ageing, as a positive development, since people live longer and remain hale and healthy for much longer. However, we must face the facts that, as a result of the ageing population, we will have to live with a more vulnerable economy in the coming years, says Torben M. Andersen and adds:

- If we are hit by yet another financial crisis in 20 or 30 years, even a country as financially responsible as Denmark will take a hard hit, because we don’t have extensive reserves to draw on.

An unpleasant service joker

Torben M. Andersen also emphasises that his financial projections have been conducted on the basis of of unchanged standards. In this context it means that the figures do not take into account the fact that, on a historical level, there has been an increase in public expenses. There has been an increased demand for services, especially in the health sector, and at the same time  new treatment options emerge due to medical advances.  Moreover, since it is more difficult to increase productivity in service production, it tends to become more costly

It is impossible to predict the extent to which service costs will increase in the future, but it is certain that we will see some upward pressure.

- Of course we can stake it all on increasing efficiency and productivity in the public sector. But it is unlikely that it will be enough to solve all our problems, and we are facing a serious prioritisation problem, which weighs heavily on the desks of our politicians. In other words. If we seek to develop our welfare society, we are dependent on the ability of politicians to explain to us voters that we cannot have our cake and eat it too, concludes Torben M. Andersen.

 

Contact: 

Professor Torben M. Andersen
Aarhus University
Department of Economics and Business, School of Business and Social Sciences

Tel.: +45 8716 5557
Mail: tandersen@econ.au.dk
Website

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