The Danish economy is healthy and competitive. Furthermore, the Danish society is based on high institutional efficiency, mature political and institutional frameworks that encourage fiscal discipline and a relatively low national debt.
Municipalities and regions safeguarding the Danish welfare society
Denmark has one of the most decentralised public sectors in the world, with tasks divided between the central government, regions and municipalities. The Danish municipalities and regions represent more than half of public expenditure.
The municipalities are responsible for most of the services offered by the Danish welfare system to its citizens, including schools, elder care, day care facilities for children and young people, employment initiatives, social integration of marginalised people, local roads, the environment, culture and preventive health measures.
The municipalities are also responsible for planning utility services, such as water and heating supplies. This responsibility is often managed through municipal companies.
The regions are responsible for tasks which are best handled in a decentralised setting, but require a larger catchment population than that represented by even the large municipalities in Denmark. The regions’ responsibilities include hospitals, regional development, participation in regional public transport companies, and specialist social institutions.
Regions and municipalities both play a key role in ensuring the sustainable transition of local communities in Denmark. Their ambitions and efforts will have crucial significance for whether Denmark will reach the Danish parliament’s 2030 climate ambition of cutting its greenhouse gas emissions by 70 pct. relative to 1990. And of Denmark being climate-neutral by 2050.
Central government bears the risk associated with economic fluctuations
Income taxes paid by the citizens represent a little more than half of the income for municipalities. The rest of the income are block grants and central government reimbursements as well as user fees and property taxes that are set by the individual municipalities. However, municipalities may raise loans for municipal capital expenditure within the framework set by the Danish Ministry of the Interior and Health. In addition, municipalities can provide loan guarantees for other entities’ capital expenditure provided such guarantees are authorised under municipal law (e.g. utility companies). The Danish municipalities’ debt-to-equity ratios are low in an international perspective.
Denmark has an extensive economic equalisation system for municipalities. The equalisation system is to ensure a uniform level of service for all citizens regardless of each municipality’s tax base and service expenditure. The overall economy of the municipalities is not affected by economic cycle setbacks, as central government bears the risk associated with general economic trends. In other words, the central government offers compensation to municipalities for excess expenditure related to transfer payments and reduced tax revenues caused by a potential economic slowdown.
It is a basic principle under Danish administrative law that a municipality cannot be declared bankrupt. This principle was also upheld in a High Court ruling, referring to the fact that the supervisory authority, the Government, must ensure that a municipality is able to meet its financial obligations.
Regional funding consists of government grants and municipal contributions and charges. Regions may raise loans for specific capital expenditure within the framework set by the Danish Ministry of the Interior and Health.
Throughout its 124-year history, KommuneKredit has never suffered losses on loans or leasing.
The Danish municipalities and regions are characterised by high creditworthiness, which is expressed in the CRR/CRD IV risk weight of 0 pct. The risk weight is used to calculate credit institutions’ capital requirements. A risk weight of 0 pct. means that municipalities and regions belong to the most secure category, in which no losses are expected.
Ministerial supervision
The Ministry of the Interior and Health is the ultimate supervisory authority in respect of municipalities and regions.