Dansk Økonomi Efterår 2006 - De Økonomiske Råd

eform would improve public finances as a consequence ofthe derived positive effects on the labour supply.Specifically, a revenue-neutral tax reform is recommendedwhereby the marginal tax on labour income is reduced byDKK 10 billion and the taxation of houses is increased by asimilar amount. Such an increase in the taxation of housesdoes not even total the revenue loss caused by variouspreferential rules and the erosion caused by the tax freezesince 2001. The analysis in section I.7 of the report showsthat the suggested tax reform would ease pressures on thelabour market by the equivalent of 5-10,000 people, partlyas a consequence of the increased labour supply and partlybecause the tax reform would dampen demand, at least inthe short run.Obviously, this tax reform would violate the tax freeze.However, it is difficult to find other fiscal initiatives thathave favourable structural effects, reduce the risk of overheating,and have limited distributive consequences at thesame time.If politicians are not willing to implement a tax reform,either because of the tax freeze or for some other reason,they face an unpleasant choice. One option would be toimplement a traditional tightening of fiscal policy, whichwould not only affect the business cycle, but also bringabout unintended side effects. Alternatively, they couldchoose not to tighten fiscal policy. In that case there wouldbe a substantial risk that the economy would go through aperiod of overheating followed by a prolonged period withhigh unemployment and low growth. Since this risk isconsidered significant, it is recommended that a traditionalfiscal tightening be put into effect, if it is chosen not toimplement the suggested tax reform.A welfare reform was introduced in Denmark in the summerwhich took a significant step in the direction of protectingpublic finances from the consequences of long termdemographic developments. Even though the welfare reformcontains a number of initiatives which will improvethe public finances in the long run, the reform only solves325