Michael de Laine

By Michael de Laine, The Copenhagen Voice, 29 June 2009

The recession in the Danish economy has turned the surplus on the state’s finances to a deficit, the liberal thinktank CEPOS says in a new note. It recommends lower public spending and reforms of early retirement system and unemployment allowances.

The recession in the Danish economy has turned the surplus on the state’s finances to a deficit. According to CEPOS, the large deficit on the state’s finances has arisen because the state’s income and spending are very sensitive to economic developments, partly in the form of a pronounced easing of financial policy in both 2009 and 2010.

The deficit will increase the public debt, thereby reversing a trend since 2001 with falling public debt. The poor economic situation and public deficits will continue for some years after 2010 and will thus increase the public debt further, the thinktank says.

It adds that the public debt will be more than150 billion kroner higher in 2015 than expected in the 2015 plan for the country’s economy, and will equal 28,000 kroner per capita.

“Further easing of financial policy will simply increase the public debt and raise the need for more stringent financial policies in the future,” says the thinktank. “The economic crisis and eased financial policy thus reduce the sustainability of the public finances and make meeting the targets of the 2015 plan more difficult.”

CEPOS chief analyst Anders Borup Christensen says politicians seem not to be aware of how serious the situation is.

“Although the prospects for the state’s finances are dismal, politicians stand in line to suggest new ways of reducing public spending,” says Christensen. “But further easing of financial policy will just increase both the debt and the need for a stringent financial policy in the future. The temporary relief that increased public spending has on employment, for example, should be correlated with the increased public indebtedness and possible tax rises later.”

Christensen says the government should therefore refrain from increasing public spendiing while being ready to consolidate the public finances as economic growth increases.

“In it’s latest report, the Organisation for Economic Cooperation and Development (OECD) recommends that consollidation of the public finances should occur through lower spending rather than higher taxes, as higher taxes reduce the underlying growth in the longer term,” the CEPOS chief analyst says. “Apart from tighter control of the public service spending, politicians should restart the reform that has lain dormant for almost a year. With the prospect of a sharp deterioration in the public finances in the coming years, we cannot afford not to reform e.g. the early retirement system and daily unemployment allowances.”

Click here to read the CEPOS note in full, in Danish.

Click here to read comments in Danish by CEPOS chief analyst Anders Borup Christensen.