EN    EN EN 
 
EN    EN  EUROPEAN COMMISSION 
Brussels, 27.1.2011 
SEC(2011) 115 final 
  
COMMISSION STAFF WORKING PAPER 
Analysis by the Commission s ervices of the action taken 
 
by Denmark 
 
in response to the Council Recommendation of  13 July 2010 with a view to bringing an 
end to the situation of excessive government deficit 
   
COM(2011) 22 final 
SEC(2011) 113 final SEC(2011) 114 final SEC(2011) 116 final 
 
EN 2   EN COMMISSION STAFF WORKING PAPER 
Analysis by the Commission s ervices of the action taken 
 
by Denmark 
 
in response to the Council Recommendation of  13 July 2010 with a view to bringing an 
end to the situation of excessive government deficit  
1. INTRODUCTION  
The impact of the economic downturn and a di scretionary fiscal stimulus triggered a 
deterioration of public finances in Denmark. Th e general government ba lance turned from a 
surplus of 3.2% of GDP in 2008 into a defi cit of 2.7% of GDP in 2009, widening to an 
expected 5.5% of GDP in 2010 in th e Commission services' spring forecast1. Against this 
background, on 13 July 2010, the Council decided that an excessive deficit existed and 
addressed recommendations to Denmark in accorda nce with Article 126(7)  TFEU with a view 
to bringing an end to the situation of  an excessive government deficit by 20132. In its 
recommendations, the Council established a dead line of 13 January 2011 for effective action 
to be taken.  
The Council recommended Denmark to bring the general government deficit below 3 % of 
GDP in a credible and sustainable manner by  taking action in a medium-term framework. 
Specifically, to this end, De nmark should: (a) implement th e fiscal measures in 2010 as 
envisaged in the latest update of the converg ence programme and start consolidation in 2011 
in order to bring the deficit be low the reference valu e by 2013; (b) ensure  an average annual 
fiscal effort of at least 0.5 % of GDP ove r the period 2011-2013; (c) specify and rigorously 
implement the measures that ar e necessary to achieve the corre ction of the excessive deficit 
by 2013, cyclical conditions permitting, and accelera te the reduction of the deficit if economic 
or budgetary conditions turn out better than curre ntly expected. 
This paper examines the actions taken by Denm ark to meet the above recommendations, in 
light of the economic and budgetary developm ents since the Council recommendations were 
issued on 13 July 2010. In particular, it ex amines the budgetary c onsequences between 2011 
and 2013 of the 2011 budget and the consolidati on measures presented by the government on 
25 May 2010. The assessment takes into account the information on effective action taken provided by the Danish Mini stry of Finance to the Commission on 13 January 2011. 
2. E
CONOMIC DEVELOPMENTS  
After a sharp contraction of 5.2%  in 2009 (compared to -4.1% for the euro area), the Danish 
economy has rebounded strongly, with real GDP growth expected to reach 2.3% in 2010 in 
the Commission services' autumn forecast (0.7  pp. higher than projected in spring). The 
current recovery has been driven mainly by domestic demand and a strong inventory rebound. 
                                                 
1  In the spring forecast the 2009 defi cit was projected at 2.8% of GDP.  
2  All EDP-related documents for Denmark can be found at the following website: 
http://ec.europa.eu/econo my_finance/sgp/deficit/c ountries/denmark_en.htm 
 
EN 3   EN Government interventions to cushion the negative  effect of the crisis on the labour market and 
on confidence contribute d to the rather swift turnaround. In 2011 and 2012, real GDP growth 
is forecast to revert to a more moderate  path, with annual rates of 1.9% and 1.8%, 
respectively.   
In their latest economic update (December 2010) , Denmark has also revised upwards their 
forecast compared to the 2010 convergence progr amme (submitted in February 2010). They 
now expect real GDP to grow by 2.0% in 2010. However, for 2011-12, the national authorities forecast GDP growth rates of around  1.6% per year, below what was projected in 
the 2010 convergence programme and slightly  below the Commission services' autumn 
forecast. Hence, despite the upward revision for 2010, the national authorities maintain a 
cautious outlook for the whole 2010 - 2012 period. 
 
Table 1: Comparison of macroeconomic developments and forecasts 
2009 2013
OutturnCOM 
SF10COM 
AF10 CP10COM 
SF10COM 
AF10 CP10COM 
AF10 CP10 CP10
Real GDP (% change) -5.2 1.6 2.3 1.3 1.8 1.9 1.6 1.8 2.0 2.3
Contributions to real GDP growth
Final domestic demand -4.3 0.6 0.8 1.0 1.8 1.3 1.3 1.7 2.2 2.3
Changes in inventories -2.0 0.8 1.2 0.6 0.1 0.5 0.3 0.0 0.2 0.2
Net exports 1.2 0.1 0.2 -0.3 -0.1 0.1 -0.1 0.1 -0.3 -0.2
Employment (% change) -3.1 -1.9 -1.4 -2.5 -0.1 0.3 -0.1 0.3 0.3 0.4GDP deflator (% change) 0.4 1.1 2.4 2.0 1.6 2.3 1.7 2.2 2.3 2.42010 2011 2012
Source: COM SF10 - Commission services' spring 2010 forecast; COM AF10 - Commission services' autumn 2010 forecast, CP10 - Dani sh authorities' 
Convergence Programme (February 2010)  
 
3. BUDGETARY PROJECTIONS FOR THE PERIOD 2011-2013 
The recovery, which turned out stronger than antic ipated in the spring forecast, is expected to 
have positive effects on Denmark's public fina nces. Expenditures are now expected to rise 
slightly less this year and the fall in government  revenues is forecast to be less pronounced. In 
particular the better-than-expect ed performance of the labour mark et will help to cushion the 
deterioration of income tax receipts and re duce the cost of automatic stabilisers.  
Over the period 2010-2013, the Commission services' forecast s and the 2010 Convergence 
Programme estimates for total government expe nditures and revenues are similar. Both the 
Commission services and Danish  authorities project a steady reduction of the budget deficit. 
The autumn forecast projects a deficit of  3.5% of GDP in 2012. Compared to the 
Convergence Programme, the projec ted budget deficits are slightly  higher in the latest update 
of the Danish authorities' macroeconomic scen ario, though, which is broa dly in line with the 
Commission's autumn forecast3. These revisions do not derail the overall trajectory of deficit 
reduction.  
                                                 
3  The Danish government's budget balance for 2010 is lower than the Commission services' 2010 autumn 
forecast primarily due to a temporary and unexpect ed boost of pension yield taxation revenues, which 
was not included in the Commissi on services' forecast. These revenu es could consequently turn out 
lower in 2011 than foreseen in the Commission services' forecast. 
 
EN 4   EN Despite the projected improvement in Denmar k's primary and nominal budget balance, the 
structural balance is estimated to deteriorate from -2.5% of GDP in 2010 to -3.0% of GDP by 
2012 according to Commission services' calculations based on the commonly-agreed methodology. Denmark's potential growth rate over the period 2010 – 2013 is estimated to be only 0.4% per annum on average, which is unusua lly low and could point to uncertainties in 
the calculation of Danish potential output at th e current juncture. As a result, the implied rapid 
narrowing of the output gap between 2010 and 2 012 might overstate the cyclical component 
of the budgetary adjustment. 
Table 2: Composition of the budgetary adjustment 
2009
Outturn
% of GDPyoy %-
ch% of 
GDPyoy %-
ch% of 
GDPyoy %-
ch% of 
GDPyoy %-
ch% of 
GDPyoy %-
ch% of 
GDPyoy %-
ch% of 
GDPyoy %-
ch% of 
GDPyoy %-
ch% of 
GDPyoy %-
ch% of 
GDP
Primary expenditure 56.5 4.0 57.1 3.9 56.1 - 56.1 1.4 55.9 2.3 55.0 - 54.8 2.4 54.2 - 53.0 - 51.5
Interest expenditure 1.8 6.0 2.1 4.0 1.8 - 1.6 7.0 2.2 8.0 1.9 - 1.7 8.0 1.9 - 1.9 - 2.1Total expenditure 58.3 4.1 59.2 3.9 57.9 - 57.7 1.6 58.1 2.5 56.9 - 56.5 2.6 56.1 - 54.9 - 53.6
Current taxes on income and wealth 30.0 -6.6 27.4 -4.9 27.2 - 28.4 2.7 27.1 4.2 27.2 - 28.5 4.2 27.2 - 28.1 - 27.9
Taxes on production and imports 16.9 5.7 17.3 4.8 16.9 - 17.1 2.6 17.1 4.3 16.9 - 17.2 4.6 17.0 - 17.2 - 17.4
Total current taxes 46.9 -2.2 44.7 -1.4 44.1 - 45.7 2.7 44.2 4.2 44.1 - 45.9 4.4 44.2 - 45.5 - 45.5
Total revenues 55.6 -2.2 53.7 -1.3 52.8 - 52.4 2.5 53.3 4.2 52.6 - 52.4 4.3 52.6 - 51.8 - 51.8
Primary balance -0.9 -3.4 -3.3 -3.7 -2.7 -2.4 -2.3 -1.5 -1.2 0.3
Budget balance -2.7 -5.5 -5.1 -5.5 -4.9 -4.3 -4.2 -3.5 -3.2 -1.9
Structural budget balance 0 . 9 - 2 . 7- 2 . 5- 1 . 7- 3 . 1- 2 . 9- 1 . 0- 3 . 0- 0 . 7- 0 . 2
Real GDP growth -5.
2 1.6 2.3 1.3 1.8 1.9 1.6 1.8 2.0 2.3
GDP deflator 0.4 1.1 2.4 2.0 1.6 2.3 1.7 2. 2 2.3 2.4
Nominal GDP -4.8 2.7 4.7 3.3 3.4 4.2 3.3 4.0 4.4 4.72010
CP10
Source: COM SF10 - Commission services' spring 2010 forecast; COM AF10 - Commission services' autumn 2010 forecast, CP10 - Dani sh authorities' February 2010 Convergence Programme (February 
2010)2011 2012 2013
COM SF10 COM AF10 CP10 COM SF10 COM AF10 CP10 CP10 COM AF10
 
Due to the uncertainties in the calculation of po tential output at the current juncture, the top-
down assessment of effective action based on structural budget balances needs to be 
complemented by a bottom-up approach of me asures adopted and en acted in Denmark. In 
May 2010 parliamentary support was secured for a se t of additional conso lidation measures to 
the already announced phasing-out of crisis -related expansionary measures. These 
consolidation measures includ e postponing previously planne d tax cuts and temporarily 
suspending the automatic indexation of various  tax thresholds (so-called "§20 regulation") 
until 2014, reforming and shortening the unemployment benefit period from four to two years and introducing a ceiling on dedu ctions for trade union memb ership fees. In addition, 
government consumption growth is restrained between 2011 and 2013. The fiscal consolidation agreement foresees the achieve ment of a structural budget balance by 2015.  
Table 3 presents an overview of these measures  and an estimation of their impact on public 
finances: taken together, the measures are estimated to result in an average annual 
consolidation of about ½% of  GDP over the period 2011 to 2013. The measures from the May 
consolidation package have already been introduced into law, as recommended by the Council. In addition, the budget for 2011 reconfirms the governme nt's intention to contain 
government consumption growth. Amendments to the way municipalities are financed and their expenditures are controlled should help to reduce the risk of expenditure overruns. On 
top of the May fiscal consolida tion agreement, earlier discreti onary measures also contribute 
to the consolidation efforts over the period 2011-2013. 
                                                                                                                                                        
 
 
 
EN 5   EN In addition to the measures already adopted by the Danish parliament and introduced into the 
2011 budget, two further initiatives underway are likely to have budgetary implications in the 
coming years. First, a students' grant reform is currently bei ng negotiated, which could result 
in a reduction in the duration of  student grants. The reform woul d thus be expected to further 
reduce government spending, but in the absence of a clear agreement, it is difficult at present 
to quantify the effects on the government bud get. Second, the government has proposed a 
phasing-out of the early retirement scheme by 2034 with an expected positive impact on long-
term sustainability but with shor t-term budgetary costs. In particular, this reform might result 
in a significant one-off effect  on the government budget balance in 2012. This one-off cost 
would not impact on the correction of the excessive deficit by 2013. 
 
Table 3: Additional consolidation measures  adopted by the Danish government in the 
May agreement 
billion DKK 
Tax and labour market measures 2011 2012 2013 2011 2012 2013
Suspension of §20 regulation from 2011 to 2013 2.1 4.2 6.6 2.1 2.1 2.4Postponement of tax brackets for three years 1.8 1.9 2.0 1.8 0.1 0.1Unemployment benefit reform 0.3 1.7 0.0 0.3 1.4
Ceiling on deductions 0.9 1.6 1.6 0.9 0.7 0.0
Total savings on labour market and tax measures 4.8 8.0 11.9 4.8 3.2 3.9
Freeze on government expenditure growth 4.5 9.0 13.5 4.5 4.5 4.5
Financing of  other measures
10.3 0.6 0.9 0.3 0.3 0.3
Savings May consolidation agreement 9.0 16.4 24.529.0 7.4 8.1
Savings May consolidation agreement (% of 2009 GDP) 0.5 1.0 1.5 0.5 0.4 0.5
2 Due to indirect effects on - among others - VAT revenues, the structural balance is strengthened by DKK 22 billion.cumulative per year
Source: Danish Ministry of Finance, Budget Overview December 2010, appendix 2.1 
1 To fund other measures, the government expects to incur total supplementary expenses of  DKK 0.9 bn over three years. In the a bsence of spending details, this 
amount is spread evenly over the three-year period.