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Regeringens forslag til tilbagetrækningsreform er et betydeligt skridt i retning af en langsigtet løsning på finansieringen af fremtidens velfærd. Det skyldes ikke mindst, at forslaget indfører et princip om at regulere pensionsalderen med levetiden. På trods af de positive takter er der risiko for, at ændringen i tilbagetrækningsalderen er for lille, kommer for sent og vil blive udsat yderligere af fremtidige politikere.

CS fremkommer i en artikel i dette nummer af Samfundsøkonomen med en lang række kritikpunkter af Velfærdskommissionens analyser og forslag. I det følgende vil vi kommentere de vigtigste af disse påstande og henvise til de relevante sider i Velfærdskommissionens endelige rapport, Velfærdskommissionen (2006).

Jesper Jespersen (JJ) kritiserer i artiklen ”Velfærdskommissionen på et neoklas-sisk vildspor” forskellige forhold, som ikke drejer sig specielt om Velfærdskom-missionens fremskrivninger, men er helt generelle for den makroøkonomiske model DREAM (Danish Rational Economic Agents Model). Der er forskellige fak-tuelle misforståelser i JJs artikel, men derudover er et kernepunkt i JJs kritik, at DREAMs opbygning, ikke mindst af arbejdsmarkedet, overdriver finansieringsbe-hovet som følge af den demografiske udvikling. Hovedpointen hos JJ er, at et større efterspørgselspres fra den offentlige sektors side i sig selv skulle kunne fremskaffe et permanent større beskæftigelsesniveau.

Economic theory points out that immigration of even low-skilled immigrants may improve public finances in Western welfare states, and it is some times suggested that fiscal sustainability problems in Western countries caused by ageing populations could be solved by increasing immigration. We examine consequences of various immigration scenarios using the large-scale computable general equilibrium model DREAM describing the Danish economy. It turns out that increased immigration will generally worsen the Danish fiscal sustainability problem. Improved economic integration of immigrants and their descendants, however, may alleviate the problems of the public sector considerably.

Indvandrere og efterkommeres gennemsnitlige økonomiske adfærd afviger fra jævnaldrene personer af samme køn fra den Resterende befolkning. De har en lavere erhvervsfrekvens, et større træk på offent-lige indkomstoverførsler, herunder højere ledighed og en lavere gennemsnitlig løn for de beskæftigede. Antages hypotetisk, at indvandrere og efterkommere har en gennemsnitlig økonomisk adfærd svarende til Resterende befolknings, betyder det en stigning i produktionen på 6 procent. Samtidig forbedres den finanspolitiske holdbarhed væsentligt. Der er således et stort potentiale for forbedret integration. En for-øgelse af indvandringen med 5000 personer om året, der har samme adfærd som nuværende indvan-drere, vil forøge befolkningen betydeligt på længere sigt, men kun have en begrænset negativ effekt på produktion og forbrug pr. capita. Den finanspolitiske holdbarhed forværres kun lidt, hvis den forøgede indvandring består af personer fra både mere og mindre udviklede lande. Hvis merindvandringen kun kommer fra mindre udviklede lande er forværringen af den finanspolitiske holdbarhed noget større.

Based in generational accounts and a simple welfare calculus, this paper studies two alternative scenarios of sustainable fiscal policy in Denmark. A strategy of tax smoothing is found to provide a fairly even intergenerational distribution of the financial burden associated with population ageing. While tax smoothing causes a relatively sharp increase in public debt along the transition path, a strategy of debt smoothing is shown to pass a larger part of the financial burden onto current generations but without changing the intergenerational distribution profile in any dramatic way. A comparison based on a social welfare function indicates a marginal superiotity of tax smoothing.

The welfare gains from VAT, income tax and corporation tax reductions are evaluated in the dynamic CGE model DREAM. The welfare gains are defined as the sum of the discounted equivalent variations for all current and future generations divided by the discounted value of the lump sum taxes necessary to finance the reduction. We find that a decrease of 5 per cent in each of the tax rates generate welfare gains in the area of 9.49 to 22.94 cents per euro of revenue loss. The different values may indicate a potential welfare gain from a change in the tax structure. However, the intergenerational distribution of the welfare gains differs significantly from one tax experiment to another. This indicates that a change in the tax structure might also generate a shift of welfare between generations. The reduction of VAT and corporation tax increases welfare but involves a generational redistribution of from future generations to current generations. In the case of an income tax cut, welfare increases, and almost all living and future households are better off.

Two macroeconomic models for Denmark; the macroeconometric model ADAM (Annual Danish Aggregate Model) and the dynamic CGE-model DREAM (Danish Rational Economic Agents Model) are compared. An analytical model that contains as special cases a representation of the stationary state in each of the two large simulation models is set up. Analytical multipliers are compared for three different types of policy. In simulations the entire dynamic path of the marginal effects of the same policy changes are compared. Our conclusions are: 1) The qualitative long run effects are similar in the two models. 2) The quantitative effects are in most cases comparable in the long run. 3) The dynamic evolutions of the multipliers are surprisingly similar. A major contributor to quantitative differences is the dissimilarity of the wage curves in the two models: A negative supply effect is the outcome of an increase in the tax burden in DREAM whereas no supply effect is present in ADAM. Second, the price-wage mechanism in ADAM is much stronger than in DREAM. Even if the modelling of private consumption differs significantly between the models, the evolutions of total private consumption in the two models are very similar for all three policy-simulations.

An earned income tax credit is introduced in a dynamic CGE model with overlapping generations and imperfectly competitive labor market segments. The model is calibrated to a 10 percent sample of a register of all persons and workplaces in Denmark and scaled to the level of National Accounts. Each labor market segment is covered by a collective bargaining agreement, except one that is competitive. In all segments a distribution of workers with different productivity exists. A tax credit, which increases the net income of the poorest full.time employed workers in the economy by DKK 5000, reduces unemployment by 2.5 percentage points. Since the marginally employed have a productivity lower than the average worker, employment measured in productivity units increases only by approximately 1.5 percentage points. Women and younger generations tend to gain from the policy. The effect of the policy depends crucially on the initial level of unemployment because the productivity distributions are highly non-linear: if the initial level of unempolyment is halved to 5 percent so are the effects of unemployment and employment.

The structural effects of the Danish tax reform of 1993 are evaluated using DREAM, a dynamic CGE model of the Danish economy featuring overlapping generations of agents who have perfect foresight. The tax reform implied a reduction in the tax burden and the progressivity of the labor income taxation, an introduction of "green" taxes as revenue raising instrument and a restructuring of the capital income taxation. We find that the overall macroeconomic effects of the total reform are limited, but that the accumulation of wealth in the private sector is stimulated, which generates a long run increase in aggregate consumption. Analyzing the three parts of the reform separately reveals that the small net effect of the reform is due to counteracting forces of each of the parts. The reform is a strict Pareto improvement - given the initial calibration of the model - in the sense that all generations are better off after the reform.

To a large extent, Danish wage contracts are minimum wage contracts, where the wage of an employed worker consists of a negotiated minimum wage and a personal raise. This paper considers bargaining over minimum wages given that the members of the union have different levels of productivity. We show that the total wage of an individual in this case depends on both individual productivity and standard opportunity costs of the union. Further, it is shown that ceteris paribus the minimum wage is lower in this economy than the (total) wage in an economy where all workers have the same productivity. Finally, it is shown that increasing progressivity of the tax system does not necessarily imply a reduction in the minimum wage. A log-linearized version of the wage equation is estimated for 6 major unions using a panel which is a sub-sample of a representative 5 per cent sample of the Danish population. Estimated parameters of the marginal tax are negative for most male workers whereas this is not the case for women. Even for male workers the coefficients are much smaller than in previous studies based on macro data.

This paper gives an introduction to computable general equilibrium (CGE) models. The paper focuses on static CGE-models - how they are constructed, calibrated and used for policy evaluation. The paper also briefly presents the handful of models that at present are being used or are under development in Denmark. It is also discussed how the method differs from the traditional macroecenometric models, as well as the pros and cons of the approach.

0. Contents
1. Preface
2. Introduction
2.1 A note on dating conventions
3. An Overview of the Model
3.1 Introduction
3.1.1 Producers
3.1.2 Households
3.1.3 The labour market
3.1.4 The government sector
3.1.5 International relations
3.1.6 Financial markets and equilibrium
3.1.7 Pension systems
3.2 DREAMs base-line projection
3.2.1 Population
3.2.2 Aggregate macroeconomic development
3.2.3 Composition of GDP
3.2.4 Prices
3.2.5 Government finances
3.2.6 National wealth

4. Producers behavior
4.1 The value of the firm
4.2 The problem of the private firm
4.2.1 Production function and nest structure of the firm
4.2.2 Investment and capital stock
4.2.3 Demand faced by the firm
4.3 Solving the problem of the private firms
4.3.1 Intertemporal optimization
4.3.2 Intertemporal optimization
4.4 Symmetric equilibrium
4.5 Aggregation across firms
4.5.1 Intertemporal optimization
4.5.2 Intertemporal optimization
4.6 Government production
4.6.1 Solving the problem of step 1
4.6.2 The output price of the government sector
4.7 Appendix: Equations describing private and government production i growth- and inflation-corrected terms
4.8 Appendix: Production technology

5. Households
5.1 Overview
5.2 Construction and assumptions
5.3 Preferences
5.3.1 Period utility
5.3.2 CES subutility
5.3.3 Lifetime utility for planning households
5.3.4 Bequest motive
5.4 Income and budget
5.4.1 Non-capital income
5.4.2 Capital income and asset accumulation
5.5 Consumption and saving
5.5.1 Consolidated budget
5.5.2 The Keynes-Ramsey rule
5.5.3 The bequest decision
5.6 Labour supply
5.6.1 Union model
5.7 Non-planning households
5.8 Consumption split
5.9 Appendix: Equations describing household behaviour in growth- and inflation-corrected terms

6. Pensions
6.1 The budget conditions of the pension fund
6.1.1 Retirement pensions
6.1.2 Spouse pensions
6.1.3 Disablement pensions
6.2 Forecasting, pension undertakings and principles af precaution
6.2.1 Actuarial constants
6.2.2 Pension undertakings
6.2.3 Principles of precaution
6.3 Derivation of individual pensions and premiums
6.3.1 Spouse pensions
6.3.2 Disablement pensions
6.3.3 Pension undertakings
6.3.4 Retirement pensions
6.4 The bonus
6.4.1 Overview of required assets
6.5 Evolution of pensions
6.6 Average pensions
6.6.1 Non-retired members
6.6.2 Retired members
6.6.3 Disabled members
6.6.4 Spouse pensioners
6.6.5 Member stocks

7. The government sector
7.1 Government revenue
7.1.1 Gross operating surplus
7.1.2 Land rent
7.1.3 Withdrawals from quasi corporations
7.1.4 Indirect taxes
7.1.5 Source taxes
7.1.6 Other revenue sources
7.2 Government expenditure
7.2.1 Government consumption
7.2.2 Investment expenditure
7.2.3 Subsidies
7.2.4 Transfers
7.3 The primary budget and government debt
7.4 Projection of government sector variables
7.4.1 Special indexation equations used in conection with the Danish tax freeze
7.4.2 Indexation of government consumption
7.4.3 Indexation according to wage regulation
7.4.4 Indexation of current and capital trandfers following GDP
7.4.5 Lump-sum transfers resulting from the calibration process
7.5 Sustainability of fiscal policy
7.6 Appendix: Equations describing government sector in growth- and inflation-corrected terms
7.6.1 Government revenue
7.6.2 Government expenditure
7.6.3 The primary budget and government debt
7.6.4 Projection of government sector variables

8. Miccellaneous
8.1 The foreign sector
8.2 Equilibrium conditions
8.3 National account measures
8.4 Financial assets
8.5 Steady state
8.6 Appendix: Equations describing miscellaneous behaviour in growht- and inflation-corrected terms

9. Data sources and calibration
9.1 Technique of calibration process
9.1.1 Static calibration
9.1.2 Dynamic calibration
9.1.3 Dynamic calibration and the base-line scenario
9.2 Procedure and results
9.2.1 Population
9.2.2 Labour market
9.2.3 Capital stocks and depreciation rates
9.2.4 Production
9.2.5 Final demand
9.2.6 Government finances
9.2.7 Growth, inflation, interest rates and the risk premium og shares
9.2.8 Labour-market pension funds, private pensions, ATP, SP and LD funds
9.2.9 Household wealth and saving
9.2.10 Foreign assets

10. Dynamic effects of policy experiments and exogenous shocks
10.1 Effects of a permanent rise in the (real) interest rate
10.2 Effects of a permanent rise in inflation and nominal interest rate
10.3 Effects of a permanent rise in productivity growth
10.4 Effects of a rise in the risk premium
10.5 Effects of a permanent decline in mark-ups
10.6 Effects of a permanent fall in the structural unemployment rate
10.7 A rise in the bottom-bracket tax rate
10.8 A rise in the VAT rates
10.9 A corporation tax hike
10.10 A rise in land taxation
10.11 A rise in the tax on owner-occupied dwellings
10.12 A change in the tax on interest income
10.13 A rise in the tax on pension funds income
10.14 A rise in the tax on resource revenue from yhe North Sea
10.15 A 5-year extension og the tax freeze

The Scandinavian welfare states are mature in the sense of having a high level of standards for public provisions of welfare services as well as a high replacement level for income transfers, especially for low income groups. In this welfare model, individuals have basic rights to welfare services and social transfers independently of their ability to pay, their labour market history etc. The financial viability of the model relies on a high tax burden and a high level of labour force participation for males and females. Evaluated on the basis of international comparisons of income levels and inequality, the model has performed well. In a forward looking perspective, however, the welfare model faces problems that may bring the financial viability of the model at stake. Two important challenges are demographic changes and the so-called growth dilemma (increased demand for services and leisure). We discuss these issues using Denmark as an example and argue that while these two challenges may be of the same order of magnitude, it is easier to propose solutions to the demographic challenges than to the growth dilemma which are consistent with the basic principles of the welfare state.

Conventional generational accounts are insufficient as instruments to judge the appropriateness of policies which may change intergenerational distribution. One of the reasons is that they are forward-looking and hence do not measure the impact of historical events. We construct a measure of full lifetime incomes and net government contributions for all generations born in Denmark from 1930 to 2030, combining historical figures with future projections on the large computable general equilibrium model DREAM. Despite many short-term fluctuations, the resulting development in lifetime income figures is relatively smooth, and net government contributions make up only a modest part of each generation’s consumption possibilities, even though present and expected future tax rates in Denmark make up no less than half of GDP.

This paper presents a quantification of the economic impacts to Denmark of the European Unions’ upcoming East enlargement. Specifically the effects of customs liberalization, market integration and immigration are quantified with due regard to estimated repercussions to transfers to and from the European Union and enhanced growth in the new member states. In the basecase projection, which excludes additional immigration, a steady state increase of aggregate GDP at factor costs of 0.08 percent is found along with a welfare gain of 1.27 percent of 1998 GDP. The welfare gains are demonstrated to be highly dependent on the catching up of the CEE region and the route taken by the EU for funding the enlargement.

In a world where labor earnings are uncertain and borrowing-constraints are present, progressive taxation is likely to have risk mitigating benefits for consumption-smoothing agents; higher tax payments are due in periods of life when income is relatively high, and less tax must be paid when income is low. This lowers the probability that the borrowing constraint becomes binding. The question is if this income-smoothing risk-mitigating property of progressive taxation has any value to the consumers? Simulations using a large-scale computable general equilibrium model with competitive markets show that consumers prefer progressive taxation of labor earnings to proportional taxation - a result that is contrary to the findings in the deterministic framework by Auerbach and Kotlikoff (1987). However, there is a trade-off between the positive risk-migating properties of progression, and the negative distortionary effects; indeed it turns out that there is an optimal level of progressivity.

This paper examines the consequences of introducing an idiosyncratic uncertain interest rate in a standard life-cycle model à la Auerbach and Kotlikoff (1987). Since the labor market has no uncertainty, labor earnings are used by the consumers to compensate for the risks in the capital market. The multi-period general equilibrium model introduces the possibility for consumers to adjust their labor supply ex post in response to new information becoming available (in addition to the opportunity to hedge ex ante). Increased uncertainty causes the number of hours worked to increase, since some old agents start supplying labor to compensate the poor performance of their savings. The framework also makes it possible to quantify the value of labor supply flexibility for these old agents.

This paper investigates the importance of the usual assumption of divisibility. In the labor market a finite set of choices is introduced: between working full or part-time or not to work at all. To add realism and to ensure smooth aggregate behavior the option of limited overtime for individuals working full time is introduced. The simulations show that indeed indivisibilities matter - the results obtained in each of the two models are markedly different. The impact of the policy experiment (a move from progressive to proportional taxation of labor income) is much larger in the case where the labor supply is continuous; the welfare gains of the switch from progressive to proportional taxation is almost 150 percent larger with continuous labor supply. The sensitivity analysis shows that this result depends on how the indivisibilities are specified, but in almost all cases are the welfare gains from the tax reform more than twice as large in the continuous model.

Recently David Laibson and others have argued in favor of using hyperbolic discount functions. The purpose of this paper is to investigate whether conventional wisdom, based on the standard model with exponential discounting, also holds in the case where consumers have hyperbolic discount functions. In other words do hyper-bolic preferences matter for practical policy evaluation? Within the framework of a suitably modified standard General Equilibrium model à la Auerbach and Kotlikoff, this is done by simulations of both fundamental changes in the tax base, as well as more marginal experiments comparing the excess burden of taxation. Based on the simulations it turns out that the answer to the question is a maybe: if preferences are sufficiently hyperbolic then policy conclusions change. Unfortunately this degree of hyperbolicness in the discounting function is at the level that is considered realistic by empirical studies.

Based on generational accounts and a simple welfare calculus, this paper studies two alternative scenarios of sustainable fiscal policy. A strategy of tax smoothing is found to successfully distribute the financial burden associated with population ageing across generations, but this happens at the cost of a sharp increase in public debt along the transition path. This can be avoided if a strategy of debt smoothing is followed, but this shifts the financial burden onto current generations. A comparison based on a social welfare function indicates a marginal superiority of tax smoothing.

The efficiency gains of VAT, income tax, corporate tax and capital income tax reductions are evaluated in the dynamic CGE model DREAM. The tax rates are reduced from 5% to 25%; the reduction is fully financed by lump sum taxation. The efficiency gains are calculated as the marginal and average efficiency gains defined as change in society welfare measured in kroner per kroner change in tax revenue. We find that a decrease of 5% results in marginal efficiency gains in the area of 9.49% to 22.94%. The reduction of the VAT increases the society welfare due to intertemporal redistribution of the households’ welfare. In the case of an income tax cut the society gain welfare because almost all-living and future households are better off. The reduction of the capital income result in a society welfare loss since both living and future households suffers welfare loss. However, the marginal efficiency gain is still positive since the reduction causes a tax revenue gain. In spite of the existence of the ” tax paradox” the society gain welfare by a reduction of the corporate tax. We argue that the chosen financing rule and the discount rate in the society welfare function heavily affects the measures of efficiency as well as the individual household’s welfare.

The sustainability of the fiscal policy program is evaluated given the major increase in the demographic ageing and the derived increase in the public expenditures. The proportion of elderly in the population is expected to increase by 55 percent until 2040. At the same time the absolute size of the labor force is expected to be reduced by 7.5 percent measured in the potential number of working hours. The introduction and the extension of the fully funded labor market pension schemes on the other hand generates an expected increase in the income tax base due to the fact that present contributions to the system is deductible in current income before taxation whereas future receipts from the pension system are taxable. A measure of fiscal sustainability, called the sustainable tax-rate, is introduced. Using the computable general equilibrium model of Statistics Denmark, DREAM it is calculated that the sustainable tax-rate is 2.8 percentage points higher than the actual tax rate in 2003. The taxation of future receipts from the fully financed pension schemes account for 40 percent of the increase in the expenditures relative to GDP. The public net-debt will increase substan-tially from 2020 and converge to 67 percent of GDP in the long run. As most of the increase will take place in the period from 2020 to 2040, we expect that, in practice, this scenario will imply increased cost of finance for the public sector. To reduce the problem measures of reduced public spending and incentives to increase labor supply are needed. We find that a permanent increase in the rate of fertility will not reduce the fiscal burden. In fact the sustainable tax-rate is higher in this case. The same result is true for increased immigration, where immigrants are assumed to have the same labor market behavior as the current stock of immigrants.

Two macroeconomic models for Denmark; the macroeconometric model ADAM (Annual Danish Aggregate Model) and the dynamic CGE-model DREAM (Danish Rational Economic Agents Model) are compared. An analytical model that contains as special cases a representation of the stationary state in each of the two large simulation models is set up. Analytical multipliers are compared for three different types of policy. In simulations the entire dynamic path of the marginal effects of the same policy changes are compared. Our conclusions are: 1) The qualitative long run effects are similar in the two models. 2) The quantitative effects are in most cases comparable in the long run. 3) The dynamic evolutions of the multipliers are surprisingly similar. A major contributor to quantitative differences is the dissimilarity of the wage curves in the two models: A negative supply effect is the outcome of an increase in the tax burden in DREAM whereas no supply effect is present in ADAM. Second, the price-wage mechanism in ADAM is much stronger than in DREAM. Even if the modelling of private consumption differs significantly between the models, the evolutions of total private consumption in the two models are very similar for all three policy-simulations.

An earned income tax credit is introduced in a dynamic CGE model with overlapping generations and imperfectly competitive labor market segments. The model is calibrated to a 10 percent sample of a register of all persons and workplaces in Denmark and scaled to the level of National Accounts. Each labor market segment is covered by a collective bargaining agreement, except one that is competitive. In all segments a distribution of workers with different productivity exists. A tax credit, which increases the net income of the poorest full.time employed workers in the economy by DKK 5000, reduces unemployment by 2.5 percentage points. Since the marginally employed have a productivity lower than the average worker, employment measured in productivity units increases only by approximately 1.5 percentage points. Women and younger generations tend to gain from the policy. The effect of the policy depends crucially on the initial level of unemployment because the productivity distributions are highly non-linear: if the initial level of unempolyment is halved to 5 percent so are the effects of unemployment and employment.

The structural effects of the Danish tax reform of 1993 are evaluated using DREAM, a dynamic CGE model of the Danish economy featuring overlapping generations of agents who have perfect foresight. The tax reform implied a reduction in the tax burden and the progressivity of the labor income taxation, an introduction of "green" taxes as revenue raising instrument and a restructuring of the capital income taxation. We find that the overall macroeconomic effects of the total reform are limited, but that the accumulation of wealth in the private sector is stimulated, which generates a long run increase in aggregate consumption. Analyzing the three parts of the reform separately reveals that the small net effect of the reform is due to counteracting forces of each of the parts. The reform is a strict Pareto improvement - given the initial calibration of the model - in the sense that all generations are better off after the reform.

To a large extent, Danish wage contracts are minimum wage contracts, where the wage of an employed worker consists of a negotiated minimum wage and a personal raise. This paper considers bargaining over minimum wages given that the members of the union have different levels of productivity. We show that the total wage of an individual in this case depends on both individual productivity and standard opportunity costs of the union. Further, it is shown that ceteris paribus the minimum wage is lower in this economy than the (total) wage in an economy where all workers have the same productivity. Finally, it is shown that increasing progressivity of the tax system does not necessarily imply a reduction in the minimum wage. A log-linearized version of the wage equation is estimated for 6 major unions using a panel which is a sub-sample of a representative 5 per cent sample of the Danish population. Estimated parameters of the marginal tax are negative for most male workers whereas this is not the case for women. Even for male workers the coefficients are much smaller than in previous studies based on macro data.

This paper gives an introduction to the Computable General Equilibrium (CGE) modelling, and presents an application of the technique to the analysis of the Europe Agreements between the EU and Hungary, Poland and the former Czechoslovakia. The main purpose of the paper is to illustrate the method, rather than present a state-of-the-art analysis. The CGE-approach makes it possible to pursue the analysis further than possible with analytical methods, and it can yield qualitative as well as quantitative results. A model is presented, and it is used to analyse the consequences of the Europe Agreements as well as the sensitivity of the results to important assumptions. The analysis shows only moderate long run gains for the Eastern Europe countries (around 1-2% of GDP per year), and very small gains for the EU countries. The sensitivity analysis shows that the results are relatively robust to the way the model is calibrated.

This paper gives an introduction to computable general equilibrium (CGE) models. The paper focuses on static CGE-models - how they are constructed, calibrated and used for policy evaluation. The paper also briefly presents the handful of models that at present are being used or are under development in Denmark. It is also discussed how the method differs from the traditional macroecenometric models, as well as the pros and cons of the approach.