28.5.2010   

EN

Official Journal of the European Union

C 138/6

(1)

On 26 April 2010 the Council examined the updated convergence programme of Denmark, which covers the period 2009 to 2015.

(2)

The economic crisis hit the Danish economy hard in 2009, pushing Denmark into its deepest recession since the end of the Second World War. Denmark entered the crisis from a relatively comfortable position after a period of sustained strong growth with substantial surpluses in the current account and government finances and low public debt. The downturn began in 2008 when the housing bubble burst and was aggravated by falling exports, reflecting the collapse in world trade and declining investment on the back of receding final demand and tighter financing conditions. Despite disposable incomes still rising, private consumption weakened significantly, as the bleak economic outlook, falling real estate prices and rising unemployment affected consumer confidence. In response to the sharp fall in output, the Danish authorities adopted several large fiscal stimulus measures in line with the European Economic Recovery Plan (EERP) comprising tax cuts, investment projects and raising public consumption expenditures. On top of the fiscal support to economic activity, two bank rescue packages were adopted, providing guarantees and capital injections. These measures are expected to turn a comfortable budget surplus in 2008 into a deficit as from 2009 that is set to exceed the 3 %-of-GDP reference value of the Stability and Growth Pact between 2010 and 2012. Public debt, while moving up in parallel, is still expected to remain below the 60 %-of-GDP reference value. The exchange rate has been stabile throughout 2009 and the interest rate spread vis-à-vis the ECB has come down substantially. In order to ensure a sustainable development of public finances, a key challenge will be to ensure continued reform to increase labour supply. Another challenge for the Danish authorities will be to ensure that the scaling back of stimulus measures takes place in a timely manner once the recovery is self-sustaining.

(3)

Although much of the observed decline in actual GDP in the context of the crisis is cyclical, the level of potential output has also been negatively affected. In addition, the crisis may also affect potential growth in the medium term through lower investment, constraints in credit availability and increasing structural unemployment. Moreover, the impact of the economic crisis compounds the negative effects of demographic ageing on potential output and the sustainability of public finances. Against this background it will be essential to accelerate the pace of structural reforms with the aim of supporting potential growth. In particular, for Denmark it is important to undertake reforms in the areas of the labour market and early retirement benefits in order to increase labour supply.

(4)

The macroeconomic reference scenario underlying the programme envisages that real GDP growth, after a setback of – 4,3 % in 2009, will resume to 1,3 % in 2010, accelerating to an average rate of 2,2 % over the rest of the programme period. Assessed against currently available information (2), this scenario appears to be based on plausible growth assumptions until 2011 and favourable ones thereafter. There are differences between the programme and the Commission services’ 2009 autumn forecast in terms of the composition of growth. The programme assumes that the recovery will be driven by domestic demand, primarily by private consumption from 2010 and followed by gross fixed capital formation as from 2011, with public consumption growth levelling off from 2011 onwards and the external contribution turning slightly negative. The Commission services’ 2009 autumn forecast assumes the recovery to be driven by both private consumption and net exports. The programme's projections for inflation and employment appear realistic. The macro-economic scenario is deemed consistent with the Danish fixed exchange rate policy.

(5)

The programme estimates the general government deficit in 2009 at 2,9 % of GDP. The massive swing from a surplus of 3,4 % of GDP in 2008 reflects to a large extent the impact of the crisis on government finances, but was also brought about by stimulus measures amounting to 2,2 % of GDP which the government adopted in line with the European Economic Recovery Plan (EERP). The deterioration was mainly driven by an increase in expenditure due to the working of automatic stabilisers, although the government's stimulus measures also included significant tax cuts. According to the programme, fiscal policy is planned to remain supportive in 2010 before turning restrictive in the outer years of the programme. In view of Denmark's relatively favourable starting situation the continued fiscal expansion in 2010 is appropriate and in keeping with the EERP. In order to return to a sustainable public finance position, the programme assumes fiscal consolidation to begin from 2011 and states that the measures needed to this effect — over and above what follows from the phasing-in of financing elements in the 2010 tax reform and bringing public investment back down to normal — will be specified later.

(6)

The programme plans for the general government deficit to widen to 5,3 % of GDP in 2010 caused by both a decreasing revenue ratio and an increasing expenditure ratio. The decreasing revenue ratio reflects the coming into force of the 2010 tax reform while the increasing expenditure share of GDP reflects the working of automatic stabilisers and additional government stimulus measures. Stimulus measures and tax cuts are expected to amount to 1,3 % of GDP, while volatile elements reported in the programme, including revenue from North Sea oil extraction and subsidies to Greenland and the Faroe Islands amount to – 1,7 % of GDP in 2010 (3). The structural balance, i.e. cyclically-adjusted balance recalculated by the Commission services using the commonly agreed methodology, is set to worsen by 2,5 p.p. confirming a markedly expansionary fiscal stance. The difference compared to the size of the stimulus measures and tax cuts is mainly explained by revenue shortfalls.

(7)

The goals of the programme's medium-term budgetary strategy are a structurally balanced budget by 2015, a long term sustainability indicator (4) of minimum zero and an improvement of the structural balance by a total of 1,5 % of GDP from 2010 to 2013. The programme expects the headline and primary deficits to gradually narrow from 2011 onwards, with the primary balance set to turn positive from 2013 and the headline balance reaching zero in 2015. The corresponding path of the structural balance recalculated according to the commonly agreed methodology on the basis of the information in the programme, indicates that the fiscal policy stance is somewhat expansionary in 2015 by – 0,4 % of GDP, which is slightly below the goal set out in the programme. Besides assuming zero real growth in public consumption expenditures from 2011 to 2013, normalization of public investment and implementation of the financing elements in the tax reform, the envisaged consolidation is based on yet unspecified measures, but the programme states that consolidation is to be based on expenditure restraint, while ruling out tax increases. The programme update sets the medium-term objective (MTO) for the budgetary position at a structurally balanced budget. Given the most recent projections and current debt levels, the MTO more than adequately reflects the objectives of the Pact.

(8)

While the budgetary projections in the programme appear plausible for 2010, the outturn for 2011 and beyond could be worse than projected. The revenue projections in the update remain realistic but subject to downside risks and the planned consolidation on the expenditure side is not underpinned by measures. In addition, the macroeconomic scenario underlying the budgetary projections assumes strong growth in private consumption and restraint on public consumption. Given the track record of expenditure frequently exceeding targets, the assumed zero real growth in public consumption expenditures between 2011 and 2013 appears optimistic. The financial sector appears stable, but the financial rescue measures enacted during the crisis have increased the government's risk exposure to the sector.

(9)

Government gross debt is estimated at 38,5 % of GDP in 2009 and is set to increase to 48,3 % in 2012 before declining to 45,0 % of GDP in 2015. This is largely driven by the rapid increase in the deficit and the fall in GDP in 2009. In view of the negative risks to the budgetary targets, the debt ratio could rise more than projected in the programme. However, the net financial position of the general government is positive at the beginning of the programme period but will turn slightly negative during the programme period. The gross debt ratio is projected to remain below the 60 %-of-GDP reference value stipulated by the Stability and Growth Pact.

(10)

Medium-term debt projections that assume GDP growth rates to only gradually recover to the values projected before the crisis, and tax ratios to return to pre-crisis levels and that include the projected increase in age-related expenditures show that the budgetary strategy envisaged in the programme, taken at face value and with no further policy change, would be more than enough to stabilise the debt-to-GDP ratio by 2020.

(11)

The long-term budgetary impact of ageing is clearly lower than the EU average. The budgetary position in 2009, as estimated in the programme, contributes to the reduction of gross debt. Ensuring high primary surpluses over the medium-term would contribute to reducing the risks to the sustainability of public finances which were assessed in the Commission 2009 Sustainability Report (5) as low.

(12)

As reflected by its budgetary track record, Denmark has benefited from a relatively strong fiscal framework, notable for its wide coverage and the transparency and visibility of its fiscal rules. General government consumption expenditure has, however, been prone to exceeding targets. Recent initiatives involving economic sanctions could enhance incentives for municipalities to adhere to agreed targets. Since 2002 the Danish tax policy has been centred on the tax-freeze, whereby no indirect or direct taxes can be raised. The tax-freeze can as such be seen as an instrument to control public expenditures. The tax-freeze has not stood in the way of a major tax reform in 2009, but strict observance of the tax-freeze may render further adjustments difficult and it locks in certain inefficiencies in the tax structure, especially in relation to real-estate taxation.

(13)

As one of the main long-term challenges for the Danish economy is to increase labour supply, the government has initiated measures to strengthen work incentives and discourage absentees. In 2009, prompted by the global economic crisis and within the limits of the tax freeze, a tax reform was passed effective from 2010, which significantly lowers the tax burden on labour. The different elements of the tax reform will gradually be implemented in the period from 2010 to 2019. In 2010 the net revenue losses are estimated at around 0,6 % of GDP, but the financing elements render the reform fully financed over time in terms of direct revenue effects (with a neutral impact in 2013 and positive by 2015). In addition, the improved incentives to labour supply are estimated by the Danish authorities to strengthen public finances in the longer run (by about 0,3 pct. of GDP).

(14)

Overall, the strategy to maintain supportive fiscal policies also in 2010 can be considered in line with the EERP. Following the negative effects of the economic crisis, the general government deficit is projected to breach the 3 %-of-GDP reference value in 2010, 2011 and 2012. However, in view of the risks to the budgetary projections in the outer years of the programme, the planned return to a balanced budget may not be achieved and the planned correction of the structural budget balance of 1,5 % by 2013 may not be reached. The projected fiscal stance, as measured by the change in structural balance, indicate that fiscal consolidation takes hold from 2011, albeit at a moderate pace approaching the 0,5 % of GDP benchmark (6). The programme mentions that consolidation through new measures will take place on the expenditure side, but, this is not backed up by specific consolidation measures apart from the assumption that zero real growth in public consumption will form the basis for budget planning in 2011-2013. Therefore, the budgetary strategy would need to be reinforced to be in line with the requirements of the Pact. Moreover, whereas the programme targets the achievement of the structural balance by 2015, the structural balance, as recalculated by the Commission services’ using the commonly agreed method, is projected to be slightly negative by – 0,4 % in 2015, and is subject to the same risks as mentioned above.

(15)

As regards the data requirements specified in the code of conduct for stability and convergence programmes, the programme provides all required and most of the optional data (7).

(i)

reinforce efforts ensuring that the planned breach of the 3 %-of-GDP reference value would remain contained as well as to swiftly correct the projected excess of the deficit over the reference value, and to

(ii)

specify the measures to underpin fiscal consolidation for the MTO to be reached by 2015 as planned.