Michael de Laine

By Michael de Laine, The Copenhagen Voice, 31 August 2009

The government’s budget for 2010 shows a deficit of 86.3 billion kroner, compared with a surplus of 59.5 billion kroner in 2008; there will be a deficit of 33.5 billion kroner in 2009. The finance ministry sees an increasing number of more certain signs that the fall in activity is slowing.

In the words of Minister of Finance Claus Hjort Frederiksen, “The international financial crisis has turned the economic situation in Denmark upside down.”

The minister presented the government’s 2010 budget last Tuesday.

It shows a deficit of 86.3 billion kroner, compared with a surplus of 59.5 billion kroner in 2008; the financial crisis and the subsequent recession are costing Denmark 145.5 billion kroner. There will be a deficit of 33.5 billion kroner in 2009. These figures correspond to 2% of gross domestic product (GDP) in 2009 and about 5% of GDP in 2010.

Because of the international financial crisis, the Danish economy has changed from a situation characterised by historically low unemployment rates and labour market pressure to decreasing demand and increasing unemployment – although unemployment is still relatively low. At the same time the large surpluses on the general government budget balance in the period 2004-2008 will turn to large deficits in 2009 and 2010.

The government has introduced a number of political initiatives to alleviate the effects of the weak cyclical conditions and support employment. These include a substantial rise in total public investments, tax cuts deriving from the tax reform agreement in the spring, and the release of savings in the special pension scheme (SP).

Total public investments are expected to increase from an annual level of 31.24 billion Kroner in 2004-2008 to 42.5 billion kroner in 2010. The real growth rate in public investment will reach about 15% per year in 2009 and 2010, so double-digit growth rates are expected for two consecutive years for the first time since the 1960s. At the same time, public investment is expected to reach approximately 2.5% of GDP in 2010, the highest level since 1981.

The central government budget proposal for 2010 allocates about 6 billion kroner from the Quality fund for public investments to investments in modern hospitals, public schools, day-care facilities and the elderly-care sector. Spending on research and education, including technological investments in university laboratories, will get approximately 2.25 billion kroner from the Globalization fund. The work to protect nature, environment and climate will receive about 0.75 billion kroner in 2010. A further 0.75 million kroner is earmarked for the Danish defence. Vulnerable groups and healthy meals to children in day-care institutions are also among the major focus areas.

“In the aftermath of the global financial crisis last autumn, production and demand in Denmark and in other countries have fallen further in the first half of 2009,” the Ministry of Finance says in its latest Economic Survey. “There are now, however, an increasing number of more certain signs that the fall in activity is slowing considerably, helped by the significant fiscal and monetary policy initiatives implemented in many parts of the world. Conditions in the financial markets have generally improved, and confidence has strengthened.”

The ministry expects employment to fall both this year and next, mainly as a result of the large fall in production since last autumn. Unemployment is expected to rise with diminishing pace and reach a level of 150,000 (full-time) persons on average in 2010. The level corresponds to around 5.25% of the labour force – roughly 2 percentage points lower than the average unemployment rate over the last three decades.

Next year the fiscal deficit is expected to exceed the EU reference value of 3% of GDP. The surplus in 2008 of 3.4% of GDP is thus expected to turn into deficits of 2.0% in 2009 and 4.9% in 2010.

“This raises considerable requirements regarding consolidation of public finances in order to reach the central objective in the 2015-plan of at least balance in public finances in 2015,” the ministry says.

When presenting the budget, Claus Hjort Frederiksen said the government’s key priority “is to support demand and employment in the short run, and to make sure, that public deficits are temporary and in line with medium term fiscal targets as set out in the 2015-plan.”