Council Opinion

of 12 February 2001

on the updated convergence programme of Denmark, 2000-2005

(2001/C 77/04)

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 12 February 2001 the Council examined Denmark's updated convergence programme, which covers the period 2000-2005. The updated convergence programme foresees general government budgetary surpluses of between 2,6-2,9 % of GDP over the entire period and projects the gross consolidated debt to be reduced to 34 % of GDP in 2005. In 2000 the budget surplus turned out to be higher than earlier projected and amounted to 2,7 % of GDP, mainly due to stronger-than-expected growth.

The macroeconomic scenario assumed in the updated programme projects real GDP growth, following an upward revision to 2,4 % in 2000, to slow down to around 1,7 % annually for 2001-2005. The Council notes that this growth scenario has been lowered from the previous update and that the programme's assumptions on productivity rises are moderate by international comparisons. Given the robust performance of the Danish economy in recent years, in particular the buoyant investment in equipment, and the structural reforms undertaken, a somewhat stronger growth and productivity performance could be expected. Moreover, such moderate productivity rises could imply a further loss in cost competitiveness for Danish companies if relative wage increases again turn too high.

The inflation rate started to rise in 1999 and has remained relatively high in 2000. The updated programme expects inflation to gradually decline up to 2002 as externally induced price rises should taper off and wage growth should turn slightly more moderate in the light of a weaker domestic demand growth. While the Council considers that the inflationary outlook, as assumed in the updated programme, seems plausible, the Council reiterates its recommendation to the Danish Government to take further actions in case of significant upward deviations(2), including budgetary ones, the more so as ERM2 membership clearly limits the monetary policy's room of manoeuvre in addressing inflationary pressures.

The Council notes with satisfaction that Denmark has continued to fulfil the convergence criterion on the long-term interest rate and that the exchange rate has remained stable vis-à-vis the euro, also after the referendum on 28 September 2000.

Regarding government finances, the Council welcomes that the Danish authorities maintain their ambition of large budgetary surpluses. As a result, Denmark continues clearly to fulfil 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.

The budgetary consolidation strategy outlined in the previous update of the programme is largely upheld, with a declining primary expenditure to GDP ratio and tax burden over the programme period. However, for the year 2001 the updated programme projects a small increase in both the primary expenditure ratio and the tax burden. The Council would have preferred that the decline in both ratios was implemented without disruption.

The Council calls on all levels of general government to make efforts to limit the real increase in public consumption to the target of an annual 1 %. Furthermore, in 2001 local and regional governments are expected to raise taxes clearly above the agreements with the central government. As these agreements between the central and lower levels of government, aiming at restricting increases in public consumption and taxes, frequently have been exceeded in the past, the Council invites the Danish Government, in line with the recommendations in the broad economic policy guidelines, to strengthen the institutional framework, to avoid further slippage in the future.

The Council welcomes the Danish authorities' ambition to continue substantially to lower the ratio of gross debt to GDP with a view to preparing for the forthcoming financial burden of an ageing population. The focus on longer-term sustainability issues in the updated programme is welcomed and the Council encourages the Danish Government to continue its efforts in preparing to cater for the ageing population.

The Council invites the Danish authorities to maintain the prominent place of structural reforms on the policy agenda. In particular, efforts to raise labour supply could prove necessary. The Council therefore encourages the authorities to consider lowering taxes on labour income also beyond 2002, for which a tax reduction is already planned. However, given that the Danish economy currently seems to be operating at a level slightly above its potential, such a tax cut would need to be compensated by offsetting budgetary measures in order not to add to the risk of overheating.

(1) OJ L 209, 2.8.1997, p. 1.

(2) Council opinion of 28 February 2000 on the updated convergence programme of Denmark for the period 1999 to 2005.