Council Opinion

of 5 March 2002

on the updated convergence programme of Denmark, 2001-2005

(2002/C 64/01)

THE COUNCIL OF THE EUROPEAN UNION,

Having regard to the Treaty establishing the European Community,

Having regard to Council Regulation (EC) No 1466/97 of 7 July 1997 on the strengthening of the surveillance of budgetary positions and the surveillance and coordination of economic policies(1), and in particular Article 9(3) thereof,

Having regard to the recommendation of the Commission,

After consulting the Economic and Financial Committee,

HAS DELIVERED THIS OPINION:

On 5 March 2002 the Council examined Denmark's updated convergence programme, which covers the period 2001-2005. The macroeconomic scenario assumed in the updated convergence programme projects real GDP growth to increase from 1 % in 2001 to 1,5 % in 2002 and 2,5 % in 2003 and then level off to around 2 % in both 2004 and 2005. Inflation is expected to remain below 2 % and unemployment to remain low. The Council notes that this economic scenario seems plausible and is in line with the Commission's 2001 autumn forecast.

The Council notes with satisfaction that Denmark has continued to fulfil the convergence criteria on inflation, long-term interest rate and on the exchange rate.

Regarding public finances, the Council notes, that while the outcome for the government surplus for 2001 was below expectations, mainly due to shortfall in revenue linked to the downturn in the stock market, a comfortable surplus was still achieved. The Council welcomes the maintenance of the objective of keeping surpluses between 1,5 to 2,5 % of GDP over the programme period, during which the general government debt is expected to be reduced to 35 % of GDP by 2005. As a result, Denmark continues to fulfil, comfortably, the requirement of the stability and growth pact of a budgetary position of "close to balance or in surplus" over the entire period covered by the programme. Denmark is also expected to be able to withstand a normal cyclical downturn without breaching the 3 % of GDP deficit reference value.

The budgetary consolidation strategy including a declining primary expenditure to GDP ratio and tax burden over the programme period outlined in the previous update of the programme is upheld. The strategy has been further strengthened by the government's commitment to freeze all taxes and excise duties in order to put a halt to the upward drift in the tax burden. The Council welcomes this measure, while noting that it should not prevent reductions of marginal taxes on labour.

The Council notes that expenditure control has had a rather mixed record in recent years as the target of restraining real public consumption growth to 1 % has frequently been overstepped. The need for expenditure control, especially in local government and countries is even more important now that the decision to freeze taxes has been taken, if high general government surpluses are to be assured. The Council therefore calls on all levels of general government to make efforts to control expenditure such that the real increase in public consumption fulfils the target of an average annual growth of 1 %. It also invites the Danish Government to strengthen the institutional framework to avoid further slippage in the future, as already recommended in the Council Opinion last year(2).

The focus on longer term sustainability issues in the programme is welcomed. The Council notes with satisfaction that the objective to substantially lower the ratio of gross debt to GDP enhances the sustainability of the public finances, thereby rendering the Danish economy in a good position to handle the projected expenditure rises due to the ageing of the population and still continue to be in compliance with the stability and growth pact. It notes that these results are conditional on the continued realisation of the high surpluses. The projections also assume a continued high tax ratio to GDP between 2005 and 2050. The Council notes that such a high tax ratio to GDP may be difficult to achieve in a framework of increased mobility of certain tax bases as a result of the globalisation.

Increase in the labour force participation rates in Denmark is an important assumption of the projections in the programme. A large part of this increase is likely to come from reforms already undertaken, where the full effect has not yet set in. Further structural reforms are, however, needed on the functioning of the labour market, including reductions in taxes on labour which might help increase the labour supply. The Council therefore encourages the authorities to proceed with these measures, while of course maintaining adherence to the stability and growth pact requirements.

(1) OJ L 209, 2.8.1997.

(2) OJ C 77, 9.3.2001.