Michael de Laine

By Michael de Laine, The Copenhagen Voice, 24 February 2010

Long-term projections show that fiscal pressures and debt will rise for 20-30 years after 2015, the Ministry of Finance says in its convergence programme report to the European Union. This partly reflects the retirement of large cohorts and falling revenues from gas and oil extraction in the North Sea. However, the Welfare Agreement from 2006 dampens the deficits significantly, the ministry adds. The international crisis has increased the fiscal challenges significantly compared to the Convergence Programme 2008. At the same time, public consumption spending is higher than expected.

Denmark today submitted its Convergence Programme 2009 to the European Union as part of the EU’s Stability and Growth Pact, the Ministry of Finance says.

The ministry says Denmark’s Convergence Programme report takes stock of the 2015 Plan and the outlook for public finances in light of the global crisis and the economic policy measures that have been decided since Convergence Programme 2008, when Denmark fulfilled the convergence criteria for stable exchange rate, inflation, interest rate, as well as the fiscal balance and government debt.

Moreover, the Convergence Programme illustrates the policy requirements in order to meet the targets in the 2015 Plan and expectations that the EU Council of Ministers will recommend Denmark to bring its fiscal deficit below the EU mandate of 3% of GDP by no later than 2013.

“Due to the debt reduction before the international economic crisis and the tax reform in the Spring Package 2.0, Denmark was in a good position to reach the target in the 2015 Plan of (structural) balance in public finances in 2015,” the ministry says. The international crisis has increased the fiscal challenges significantly compared to the Convergence Programme 2008. At the same time, public consumption spending is higher than expected.

In order to reach the target of (structural) balance in public finances in 2015 new initiatives are required that strengthen public finances by 1.8% of gross domestic product (GDP), the ministry adds. “This corresponds to a consolidation of around DKK 31 billion. A consolidation of this scale will also ensure fiscal sustainability.”

As a starting point, the ministry projects fiscal deficit of 5.5% of GDP for this year, which is expected to lead to a recommendation from the EU to bring back the deficit below 3% of GDP no later than 2013 and take effective action to ensure a strengthening of the structural balance by 1.5% of GDP during 2011-13.

On current assumptions, this recommendation is estimated to require consolidation measures of around DKK 24 billion. Adhering to the EU recommendation would therefore contribute about three-quarters of the required consolidation in order to reach the 2015 target.

“The assumed consolidation implies a reduction of public consumption as a share of GDP from a historical high level of just over 28% of cyclically adjusted GDP this year to around 26.75% in 2015,” the ministry says. “This is still high and higher than the benchmark in the 2015 Plan of 26.5% of cyclically adjusted GDP.”

According to the ministry, technical long-term projections indicate that prospects after 2015 are for a period of 20-30 years of rising fiscal pressures and increasing debt. This partly reflects the retirement of large cohorts and falling revenues from gas and oil extraction in the North Sea. However, the Welfare Agreement from 2006 dampens the deficits significantly.

“The international economic crisis has significantly altered the economic realities,” says Minister of Finance Claus Hjort Frederiksen. “The new Convergence Programme illustrates that the crisis has shifted the balance between revenues and expenditures significantly and we are therefore facing an substantial task in order to restore public finances.”

Reaching the 2015 Plan’s target of fiscal balance in 2015 means Denmark must consolidate public finances by a total of DKK 31 billion over the next 5 years, the minister says. If the EU says Denmark must reduce the fiscal deficit to below 3% of GDP, probably no later than in 2013, the government will adhere to this recommendation.

“The government will therefore initiate a multi-annual effort, taking effect already in 2011, in order to re-establish the balance in public finances and to halt the debt accumulation,” Claus Hjort Frederiksen says. “This means, among other things, that we aim to keep public consumption stable for regional, local and central government overall. At the same time, all public expenditures will be examined closely in order to solve the task as gently as possible.”

The minister adds that the government is carrying out a very expansionary fiscal policy in 2010 and will avoid making decisions that may jeopardize the incipient recovery. “At the same time,” he says, “we will prepare consolidation from 2011, provided the economy develops as expected.”

The minister says the government’s specific proposals will be presented among other things in the fiscal bills for the coming years.

“It will not be an easy task, but the longer we postpone the task, the larger the challenge becomes,” Claus Hjort Frederiksen says. “If we do not solve the task relatively quickly, debt and interest expenditures will grow fast, and interest expenditures will, like a cuckoo in the nest, weaken the possibilities to finance important welfare functions.”

He says economic growth will keep Denmark among the wealthiest countries in the world also by 2020. The government will improve education, focus on innovation and green technologies and create more labour supply, including through faster completion of studies and fewer people on early retirement (disability) pension.

These measures are outlined in the government’s policy document, also released today.

Under its Convergence Programme, each country reports on its targets and economic policy measures regarding the development of public finances in the short and medium term within the framework of the common EU rules as well as targets and measures regarding long term fiscal sustainability. EU countries not participating in the Euro report also on their monetary and exchange rate policies.