EN    EN EN 
 
EN    EN  EUROPEAN COMMISSION 
Brussels, 12.5.2010 
SEC(2010) 585 final 
  
REPORT FROM THE COMMISSION 
Denmark 
 
Report prepared in accordance with  Article 126(3) of the Treaty 
 
EN 2   EN REPORT FROM THE COMMISSION 
Denmark 
 
Report prepared in accordance with  Article 126(3) of the Treaty 
1. T HE APPLICATION OF THE STABILITY AND GROWTH PACT IN THE CURRENT CRISIS 
SITUATION  
Many EU countries are presently facing genera l government deficits above the 3% of GDP 
reference value set in the Treat y. The often strong deterioration in the budget balance as well 
as the debt positions must be seen in the cont ext of the unprecedented global financial crisis 
and economic downturn. Several factors are at  play. First, the economic downturn has 
brought about declining tax revenue and rising social benefit expenditure (e.g. unemployment 
benefits). Second, recognising that budgetary polic ies have an important role to play in the 
current extraordinary economic situation, the Co mmission called for a fiscal stimulus in its 
November 2008 European Economic Recovery Plan (EERP), endorsed by the European Council in December. The Plan foresaw that the stimulus should be differentiated across 
Member States to reflect their different positions  in terms of public finance sustainability and 
competitiveness and should be reversed when economic conditions improve. Finally, several countries have taken measures to stabilise the financial sector, some of which have impacted 
on the debt position or constitute a risk of higher deficits a nd debt in the future, although 
some of the costs of the government s upport could be recouped in the future. 
The Stability and Growth Pact requires the Commission to prepare a report such as the 
present one whenever an actual or planned defi cit of a Member State exceeds the 3% of GDP 
reference value. This report, which represen ts the first step in the “excessive deficit 
procedure” (EDP), analyses the reasons for the breach of the reference value with due regard 
to the economic background and all other relevant  factors. The amendments to the Stability 
and Growth Pact in 2005 aimed specifically at ensuring that in particular the economic and 
budgetary background was fully take n into account in all steps in the EDP. This means for 
instance that, if an “excessive deficit” is deemed to exist, adequate consideration needs to be paid to the economic background and outlook when making recommendations on the pace of the correction. In this way, the Stability and Growth Pact  provides the framework supporting 
government policies for a prompt return to sound budgetary positions taking account of the economic situation. 
2. L
EGAL BACKGROUND  
This report, which assesses recent and curre nt budgetary developments in Denmark and 
reviews the short- and medium-t erm prospects in the light of overall economic conditions and 
policy action taken by the government, is prepar ed according to Article 126(3) of the Treaty 
on the Functioning of the European Union (TFEU). 
 
EN 3   EN Article 126 TFEU includes the provisions for an  excessive deficit procedure (EDP). This 
procedure is further specified in Council Regulation (EC) No 1467/97 “on speeding up and 
clarifying the implementation of the excessive deficit procedure”1, which is part of the 
Stability and Growth Pact. Acco rding to Article 126(2) of the Treaty, the Commission has to 
monitor compliance with budgeta ry discipline on the basis of  two criteria, namely: (a) 
whether the ratio of the planned or actual government deficit to gross domestic product 
(GDP) exceeds the reference value of 3% (unle ss either the ratio has declined substantially 
and continuously and reached a le vel that comes close to the reference value; or, alternatively, 
the excess over the reference value is only ex ceptional and temporary and the ratio remains 
close to the reference value); and (b) whether the ratio of go vernment debt to GDP exceeds 
the reference value of 60% (unless the ratio is  sufficiently diminishi ng and approaching the 
reference value at a satisfactory pace). 
Article 126(3) stipulates that, if a Member St ate does not fulfil the requirements under one or 
both of these criteria, the Commi ssion has to prepare a report. Th is report also has to “take 
into account whether the government deficit exceeds government investment expenditure and take into account all other relevant factors, including the medium-term economic and 
budgetary position of the Member State”. 
According to data notified by the Danish authorities in April 2010
2, the general government 
deficit is planned to reach 5.4% of GDP in 2010, thus exceeding the 3% of GDP reference 
value, while general government gross debt would amount to 45.1% of GDP, below the 60% 
of GDP reference value, but  higher than five years ago and on a rising trend.  
Table 1 : General government deficit and debt a 
 2004 2005 2006 2007 2008 2009 2010 2011 
       COM DK COM 
General 
government 
balance 2.1 5.2 5.2 4.8 3.4 -2.7 -5.5 -5.4 -4.9 
General 
government 
gross debt 44.5 37.1 32.1 27.4 34.2 41.6 46.0 45.1 49.5 
Note : 
a In percent of GDP . 
Source : Eurostat, Commission services’ spring 2010 forecast, the April 2010 EDP notification.  
The planned figure in the notification for the deficit in 2010 provides prima facie  evidence on 
the existence of a planned excessive deficit in  Denmark in the sense of the Treaty and the 
Stability and Growth Pact. The Commission has th erefore decided to initiate the excessive 
deficit procedure for Denmark with the adopti on of this report. Sect ion 3 of the report 
examines the deficit criterion and section 4 d eals with public investment and other relevant 
                                                 
1 OJ L 209, 2.8.1997, p. 6. The report also takes into account the “Specifications on the implementation 
of the Stability and Growth Pact and guidelines on the format and content of Stability and Convergence 
Programmes”, endorsed by the ECOFIN Council of 10 November 2009, available at  
http://ec.europa.eu/economy_finance/sgp/legal_texts/index_en.htm. 
2 According to Council Regulation (EC) No 479/2009, Member States have to report to the Commission, 
twice a year, their planned and actua l government deficit and debt le vels. The most recent notification 
of Denmark can be found at:  
http://epp.eurostat.ec.europa.eu/portal/government_fin ance_statistics/procedure/edp_notification_tables 
 
EN 4   EN factors. This report takes into account th e Commission services’ spring 2010 forecast, 
released on 5 May.  
3. D EFICIT CRITERION   
According to the April 2010 notification of the Danish authorities, the general government 
deficit is planned to re ach 5.4% of GDP in 2010.  
Well in excess of 3% of GDP, th e planned deficit is not close  to the Treaty reference value. 
The planned excess over the 3% of GDP reference value can be regarded as exceptional . In 
particular, it results from a se vere economic downturn in the sense of the Treaty and the 
Stability and Growth Pact. A ccording to the Commission servi ces’ 2010 spring fo recast, real 
GDP in Denmark is projected to recover at 1.6% in 2010 after the shar p contraction of 4.9% 
in 2009. The 2009 recession reflected the abrupt de cline in private inve stment, consumption 
and foreign trade in the export-oriented manu facturing sector as a consequence of the 
financial crisis and the global sl owdown, in particular the much lower growth prospects of the 
main trading partners (Germany, United Kingdom,  Sweden and Norway). The deficit in 2010 
is a consequence of both the economic downturn and the stimulus measures taken in line with the EERP by the Danish authorities. 
The excess over the 3% of GDP reference value can not
 be regarded as temporary  in the sense 
of the Treaty and the Stability and Grow th Pact. The Commission services’ spring 2010 
forecast projects that, taking into account the m easures adopted in the current year for the 
2010 budget, the deficit would decline to 4.9% of GDP in 2011 on a no-policy change3 basis. 
According to the February 2010 update to the convergence programme, the deficit is 
projected to decline to  4.1% of GDP in 2011 and to declin e further in 2012 to 3.1% of GDP 
before reaching 1.8% of GDP in 2013, based partly  on already implemented measures such as 
the financing elements of the 2010 tax reform  and normalisation of public investments.  
Table 2 : Macroeconomic and budgetary developments a 
  2004 2005 2006 2007 2008 2009 2010 2011 
Real GDP (% change) 2.3 2.4 3.4 1.7 -0.9 -4.9 1.6 1.8
Potential GDP (% change)  1.2 1.3 1.7 1.6 1.4 0.4 0.4 0.6 
Output gap (% of potential GDP) -0.3 0.8 2.5 2.6 0.2 -5.1 -3.9 -2.7 
General government balance 2.1 5.2 5.2 4.8 3.4 -2.7 -5.5 -4.9
Primary balance 4.4 7.1 6.8 6.3 4.8 -0.7 -3.4 -2.7 
One-off and other temporary measures 0.0 0.0 0.0 0.0 0.0 0.0 -0.2 0.0 
Government gross fixed capital formation 1.9 1.8 1.9 1.9 1.8 2.1 2.4 1.9 
Cyclically-adjusted balance 2.3 4.7 3.5 3.1 3.3 0.6 -3.0 -3.1 
Cyclically-adjusted primary balance 4.6 6.5 5.2 4.7 4.7 2.6 -0.9 -1.0 
Structural balance b 2.3 4.7 3.5 3.1 3.3 0.6 -2.7 -3.1 
Structural primary balance 4.6 6.5 5.2 4.7 4.7 2.6 -0.6 -1.0 
                                                 
3 The no-policy change forecast takes into account the (partial) withdraw al of measures of extraordinary 
nature linked to the crisis. 
 
EN 5   EN Notes : 
a In percent of GDP unle ss specified otherwise. 
b Cyclically-adjusted balance excluding on e-off and other temporary measures. 
Source : Eurostat, Commission services’ spring 2010 forecast, the April 2010 EDP notification. 
In sum, the planned deficit in 2010 is not close to the 3% of GDP reference value and 
although the excess over the reference value can  be regarded as exceptional it is not 
temporary in the sense of the Treaty and the Stab ility and Growth Pact. This analysis suggests 
that the deficit criterion in the Treaty is not fulfilled.  
4. R ELEVANT FACTORS  
Article 126(3) of the Treaty pr ovides that the Commission report “shall also take into account 
whether the government deficit exceeds governme nt investment expenditure and take into 
account other relevant factors including the me dium-term economic and budgetary position of 
the Member State”. These factors are further cl arified in Article 2(3)  of Council Regulation 
(EC) No 1467/97, which also specifies that “any  other factors which, in the opinion of the 
Member State concerned, are relevant in order to comprehensively assess in qualitative terms 
the excess over the reference value and which the Member State has put forward to the 
Commission and to the Council” need to be given due consideration.  
In view of the above provisions, the following four subsections consider in turn (1) the 
medium-term economic position; (2) the medium -term budgetary position (including public 
investment); (3) other factor s put forward by the Member State and (4) other factors 
considered relevant by the Commission. 
4.1. Medium-term economic position 
Cyclical conditions and potential growth.  Prior to the current gl obal crisis, Denmark had 
benefited from an extended peri od of rapid growth, building up a substantial surplus in the 
current account and in the gove rnment finances. This has allowed Denmark to implement a 
large discretionary fiscal stimulus amounti ng to about 3½% of GDP  over 2009-2010 and to 
allow the full operation of automatic stabilisers, which to some extend has cushioned the effect of the crises on the domestic market . The Commission services' spring 2010 forecast 
projects a Danish GDP growth of 1.6% in 2010, driven by a rebound in  private consumption 
and stockbuilding. In 2011, the mode rate recovery is set to con tinue, with real GDP growth 
reaching 1.8%, as investments begin to pick up. The output gap turned strongly negative in 2009 and 2010. According to Commission services' calculations, potential output growth was 
below its long-run average of 2% in the last 3 year s, and is projected to abate further to ¾% in 
2010 and 2011, reflecting a decrease in labour contribution and lower capital accumulation as a result of a drop in investment. 
Recent structural reforms.  At a microeconomic policy leve l, Denmark's National Reform 
Programme 2008-2010 (NRP) outlines  as a priority the streng thening of the educational 
system and the research and development envi ronment. Cornerstones of the national reform 
programme are ambitious goals to have 95% of a youth cohort have an upper secondary education and 50% to have a tertiary educ ation by 2015 and increasi ng spending R&D in the 
public sector to 1% of GDP. According to the 2009 NRP spending on public R&D would 
reach 1% of GDP in 2010 and with private spending at about 2% of GDP total spending on R&D stands at about 3% of GDP, which is in  line with the Lisbon St rategy for Growth and 
Job's objective. The 2009 tax reform significan tly lowered the tax burden on labour income 
 
EN 6   EN and strengthened incentives to work and save. At the same time e.g. tax on energy 
consumption or excise duties were raised. 
4.2. Medium-term budgetary position 
Structural deficit and fiscal  consolidation in good times.  Between 2006-2008 Denmark 
was clearly in economic good times, as assessed in terms of strong GDP growth and a positive output gap. However, the structural balance worsened markedly by 2.7 pp in 2009 to 0.6% of GDP and is expected to deteriorate further to -2.7% of GDP in 2010. One-offs, 
according to the Commission services’ estimates,  amount to 0.2% of GDP deficit reducing in 
2010 due to a capital transfer stemming from a reform of the pension yield taxation. The 
output gap turned negative in 2009 at -5.1% of GDP and is expected to improve to -3.9% in 
2010, which suggest that Denmark is experi encing economic bad times in both 2009 and 
2010. Denmark's medium-term objective (MTO) is to achieve a structurally balanced budget 
by 2015. The structural balance, as recalcula ted by the Commission services' using the 
commonly agreed method, is projected to be s lightly negative by -0.4%  in 2015. According to 
the Commission services’ 2010 spring forecast, the st ructural deficit is expected to increase 
by 2.1 p.p. in 2010 and increase by 0.4 p.p. in 2011, su ggesting that the fiscal stance is 
expansionary in 2010 and in 2011. 
Public investment.  Government investment (as a share of GDP) averaged slightly below 2 % 
of GDP from 2005 to 2009, increasing to just a bove 2% of GDP in 2009 and is expected to 
increase to about 2½% of GDP in 2010 on account  of the fiscal stimulus measures taken. 
From 2011 government investments are expected to begin normalising as fiscal consolidation 
takes hold and gradually return to  previous levels. The general government deficit is therefore 
expected to exceed total public investme nts in both 2010 and 2011. The structural budget 
balance according to the Commission services' 2010 spring forecast is expected to show a deficit of 2.7% of GDP in 2010 and 3.1% of GDP in 2011. Government investments are 
therefore not expected to exceed the stru ctural budget balance in both 2010 and 2011.  
Quality of public finances.  General government expenditure fe ll from about 55% of GDP in 
2000 to 50.9% in 2008. Driven by the measures in response to the economic and financial 
crisis and additional expenditure due to automati c stabilisers, the expenditure-to-GDP ratio is 
expected to increase by 6.8 percentage point s to 57.7% of GDP in 2010. The February 2010 
convergence programme acts as an update of the Danish macro-fiscal framework, the 2015 
plan, and puts forward the fiscal requirements for long-term sustainability of public finances. 
According to the convergence programme, part from the financing elements of the 2010 tax reform and the normalisation of public investments, fiscal consolidation will take hold from 2011 through expenditure constraints while rulin g out tax increases. The programme targets 
zero real growth in public consum ption expenditure from 2011 to 2013. 
Long-term sustainability of public finances.  In its opinion of 26 April 2010 on the most 
recent convergence programme, the Council a ssessed the long-term sustainability of 
Denmark’s public finances as follows. The long -term budgetary impact of ageing is clearly 
lower than the EU average. The budgetary pos ition in 2009, as estimated  in the programme, 
contributes to the reduction of  gross debt. Ensuring high primary surpluses over the medium 
term would contribute to reducing the risks to the sustainability of public finances which were 
assessed in the Commission 2009 Su stainability Report as low. 
 
EN 7   EN 4.3. Other factors put forwar d by the Member State 
The authorities of Denmark have submitted a list of  relevant factors according to Article 2(3) 
of Council Regulation (EC) No 1467/97. The list is replicated below. 
The global financial crisis affected the Dani sh economy significantly. The fiscal balance is 
expected to deteriorate from a surplus of 3½ per cent of GDP in 2008 to a deficit of close to 
5½ per cent of GDP in 2010. Close to 2/3 of the de terioration in public finances reflects the 
direct budgetary impact from the economic sl owdown, notably the oper ation of automatic 
stabilisers, which are large in  Denmark. A good 1/3 reflects expans ionary fiscal measures of a 
total of 3.5 per cent of GDP in  2009 and 2010, including public investments and tax reform, 
in line with the EERP to cushion the effects of the crisis on economic activity and employment. The Danish economy is exp ected to recover gradually in 2011-2015. 
Denmark has a strong track record of sound pub lic finances, including consolidating public 
finances in good times. Fiscal surpluses amount ed to 4.6 per cent of GDP on average in 2005-
2008, with structural surpluses of 1.8 per cen t of GDP on average during the same period. 
Denmark has a track record of largely countercyc lical fiscal policy as measured by the fiscal 
effect. The key fiscal policy ta rget is to achieve structural balance on public finances by 2015, 
which is Denmark's MTO. Balance in 2015 w ill halt debt accumulation and allow fiscal 
policy to fulfil the long-term re quirement of fiscal sustainabi lity. The planned improvement in 
the structural balance of 1½ pe r cent of GDP from deficit of  around 1½ per cent of GDP in 
2010 will bring the structural fiscal position cl ose to balance in 2013. The planned structural 
improvement will thus be an important step on the way towards the primary objective of 
structural balance in 2015. 
The concept of fiscal sustaina bility has been a ke y focus in fiscal planning since the 1990's 
and form the basis of the government's medium te rm plans. Besides cons olidation, structural 
reforms contribute to sustaina bility. Thus, the welfare agreem ent of 2006 includes a major 
pension reform, which significantly supports long-term fiscal sustainability. The 2009 tax 
reform significantly lowers the tax burden on la bour income and strengthe ns the incentives to 
work and save, while raising taxes on energy consumption, excise duties etc. The reform is fully financed over time in terms of direct re venue effects and strengthens public finances in 
the long run by 0.3 per cent of GDP. The Govern ment will initiate th e preparation of a 
comprehensive plan which will outline key structural and fiscal policy requirements towards 2020 aiming at maintaining the overall objectiv e of long-term fiscal sustainability. 
Apart from the deficit on public finances and rising unemployment, the Danish economy does 
not suffer from other imbalances. Denmark has a current account surplu s estimated at 2.9 and 
2.4 per cent of GDP in 2009 and 2010 respectivel y and low inflation. Even though gross 
public debt has risen due to the public finance e ffects of the crisis, it remains on a relatively 
low level and net debt – which includes all financial assets and liabilities of the general 
government – stood at a net asset position of 3.8 pe r cent of GDP in 2009. In a recent analysis 
the Commission has found that Denmark is among the Member States with the strongest 
fiscal framework. Expenditure rules, in comb ination with (structural) balance rules and 
revenue rules (tax freeze) have been effective in  reconciling fiscal discip line and stabilisation. 
The long-term interest rate sp read vis-à-vis Germany has rema ined on low levels and below 
most euro area member states. While the public sector retains risks on guarantees extended to 
the financial sector, including individual loan guarantees after the expiry of the current 
scheme covering all bank creditors, no loss ev ents leading to the guarantees becoming 
 
EN 8   EN effective have occurred so far.  Currently it is expected that there may be a limited, one-off 
public sector surplus from  the bank guarantee scheme. 
4.4. Other factors considered relevant by the Commission 
In its opinion on the most recent update of the convergence programme, the Council 
considered that the budgetary  outcomes in the medium term could turn out worse than 
projected in the programme. While the risks in the short run are limited as the latest forward-looking indicators confirm a continuous recovery  of consumer and business confidence, the 
budgetary outcome in the outer years may be worse than projected given the favourable growth assumptions underlying the budgetary projections. Given the track record of 
expenditure frequently exceeding targets, the assumed zero real growth in public consumption expenditures betw een 2011 and 2013 appears optimis tic. In addition, although 
the financial sector ap pears stable, the rescue measures  enacted during the crisis have 
increased the government's risk exposure to the sector.  The Council therefore invited 
Denmark to reinforce efforts ensuring that th e planned breach of the 3%-of-GDP reference 
value would remain contained as well as to sw iftly correct the projecte d excess of the deficit 
over the reference value, and to specify the measures to underpi n fiscal conso lidation for the 
MTO to be reached by 2015 as planned. 
5. C
ONCLUSIONS  
The general government deficit in Denmark is notified to reach 5.4% of GDP in 2010, above 
and not close to the 3%-of-GDP reference valu e. The planned excess over the reference value 
can be qualified as exceptional within the mean ing of the Treaty and the Stability and Growth 
Pact. However, it cannot be considered tempor ary. This suggests that the deficit criterion in 
the Treaty is not fulfilled. 
General government gross debt remains well be low the 60%-of-GDP reference value. This 
suggests that the debt criter ion in the Treaty is fulfilled. 
In line with the Treaty, this report has also ex amined “relevant factors”, which, according to 
the Stability and Growth Pact - can only be taken into account in the steps leading to the decision on the existence of an excessive deficit if the twin condition - that the deficit remains 
close to the reference value and that its excess over the reference value is temporary - is fully 
met. Considered on their own merit, the releva nt factors in the current case seem to be 
relatively favourable.