Council opinion of 10 March 2009 on the updated convergence programme of Denmark, 2008-2015
Date: 2009-03-10
Institutions: Council of the European Union
Subjects: Denmark, budget estimate, economic convergence, economic forecasting, public finance, stability programme

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Official Journal of the European Union

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I

(Resolutions, recommendations and opinions)

OPINIONS

COUNCIL

COUNCIL OPINION

of 10 March 2009

on the updated convergence programme of Denmark, 2008-2015

(2009/C 63/01)

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 surveil-
lance 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:

(1)

(2)

On 10 March 2009, the Council examined the updated convergence programme of Denmark, which
covers the period 2008 to 2015.

Following a protracted upswing, Denmark's economic slowdown in 2008 has been rapid and
pronounced, driven mainly by the cooling housing market and mounting financial turmoil. Going
forward, weaker demand, both domestically and internationally, will further exacerbate the downturn.
With deteriorating external conditions, ensuring financial stability and an orderly correction in the
housing market will be particularly challenging. In the short and medium-term, the downturn and
anticipated developments in asset and energy prices will have significant adverse implications for
public finances.

Specifically, downward pressure is expected on revenue from the pension yield tax, corporate taxes
and from the estimated declining extraction of oil and gas in the North Sea. Warranted by a fiscally
sound point of departure, the budget adopted for 2009 entails a discretionary fiscal expansion of
around 1 percentage point of GDP, including permanent income tax cuts amounting to 0,5 % of
GDP. Pressure on the Danish krone and drains on foreign exchange reserves forced the Danish central
bank to increase interest rates in October 2008. Along with the ECB's cutting of interest rates, this
led to a widening of the policy interest rate spread with the euro. The Danish central bank subse-
quently cut policy interest rates at the end of 2008 and early 2009, following ECB interest rate cuts,
and implemented additional cuts, leading to a gradual narrowing of the spread. However, the spread
remains high at 1 percentage point against 0,35 percentage point before the crisis.

(1) OJ L 209, 2.8.1997, p. 1. The documents referred to in this text can be found at the following website:

http://ec.europa.eu/economy_finance/about/activities/sgp/main_en.htm

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(3)

(4)

(5)

(6)

Based on the underlying macro-economic scenario, real GDP growth is projected to fall from 0,2 %
in 2008 to – 0,2 % in 2009, recover subsequently to 0,7 % in 2010, and average 1,7 % over the rest
of the programme period. The recovery in 2011-2012 reflects technical assumptions of output and
unemployment gaps closing in 2012 as calculated by the Danish authorities using national methodo-
logies. The underlying assumption is that capacity utilisation gradually increases to a normal level,
supported by an emerging recovery abroad as well as low interest rates. Assessed against currently
available information (1), the scenario appears to be based on favourable growth assumptions. In
2009, the slowdown in domestic demand appears underestimated in light of the most recent develop-
ments. From 2011 onward, growth appears on the high side in the light of historical productivity
growth and estimated potential growth. Inflation is foreseen to decrease substantially in 2009 to
1,3 %, and fluctuate around a level just below 2 % over the rest of the programme period. The cause
of the fluctuations is unclear but the projected development in the GDP deflator appears realistic.

For 2008, the general government surplus is estimated at 3,1 % of GDP in the Commission services'
January 2009 interim forecast, close to the target of 3,0 % of GDP set in the previous update of the
convergence programme. Due to the lagged reaction of the labour market to the downturn, employ-
ment and wage growth remained robust for most of the year, resulting in higher income tax revenue
and lower social expenditure than foreseen. Meanwhile, the financial crisis led to markedly lower
revenue from the pension yield tax and corporate taxes. Moreover, expenditure exceeded the projec-
tion due to higher intermediate consumption expenditure and a one-off capital transfer to households
as part of the 2007 reform of the pension yield tax.

For 2009, the programme foresees a balanced general government budget, against a projection of a
deficit of 0,3 % of GDP in the Commission services' interim forecast, implying a negative swing of
3 percentage points of GDP. Automatic stabilisers account for about 1 percentage point of the overall
decline.
In addition to the discretionary fiscal expansion of about 1 percentage point of GDP,
including income tax cuts of 0.5 percentage point of GDP, the decline in energy and asset prices is
anticipated to reduce particularly volatile revenues by around 1,5 percentage points of GDP compared
with trend levels. While projecting a structural surplus, the change in the structural balance, based on
the cyclically-adjusted balance recalculated by the Commission services using the commonly agreed
methodology and on the Commission service's definition of one-off and other temporary measures,
estimated at around 2,5 percentage points of GDP, confirms a markedly expansionary fiscal stance (2),
although substantially affected by a decrease in volatile revenues.

A further deterioration in the headline balance is foreseen for 2010, partly due to automatic stabili-
sers, but mainly due to another planned one-off capital transfer to households as part of the 2007
reform of the pension yield tax. The programme aims to continue to achieve its medium-term objec-
i.e. cyclically adjusted net of one-off and other temporary
tive (MTO) of structural surpluses,
measures, in the range of 0,75-1,75 % of GDP until 2010. After 2010, Denmark is revising its MTO
downwards to a structural balance as a minimum, which it plans to continue to achieve until 2015.
The MTO respects the minimum benchmark of a deficit around 0,5 % of GDP and adequately reflects
the debt ratio and the average potential growth in the long run. Consequently, the new objective is
assessed to be appropriate and in line with the Stability and Growth Pact. The programme projects
the general government balance to return to a small surplus in 2011. This largely hinges on the tech-
nical assumptions of output and unemployment gaps closing in 2012, resulting in a cyclically deter-
mined revenue increase. The targets are based on a scenario requiring unspecified structural reform
measures to improve the general government balance permanently by 0,7 % of GDP toward 2015 to
ensure fiscal sustainability according to the national methodology. Over the programme period, the
structural surplus calculated according to the commonly agreed methodology is foreseen to decrease
by around 3,5 percentage points of GDP, but stay in positive territory. In addition to the financial
the Credit Package of
stability measures taken in autumn 2008 and outlined in the update,

(1) The assessment notably takes into account the Commission services' January 2009 forecast, but also other information

that has become available since then.

(2) Differences in the definition of one-offs and temporary measures imply that estimates for the structural balance are not

readily comparable with the Commission services' January 2009 forecast.

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(7)

(8)

(9)

18 January 2009 implies temporary hybrid capital injections of up to DKK 100 billion (5,5 % of
GDP) from mid-2009, which will have an immediate impact on the debt developments of the update
and a potential impact on the general government balance over the programme period.

The budgetary outcomes projected in the programme are subject to several risks. The downside risks
due to favourable growth assumptions and uncertainty about measures to deliver the structural
reforms required are not outweighed, despite the positive budgetary track record, by upside risks
linked to potentially higher revenues in the event of higher energy prices and lower interest rates.
Moreover, measures launched to address financial stability entail a significant
increase in risk
exposure.

The long-term budgetary impact of ageing is lower than on average in the EU, notably thanks to the
recent pension reform. Moreover, the budgetary position in 2008 as projected in the programme,
with a large structural surplus, contributes to the reduction of gross debt. Maintaining high primary
surpluses over the medium term would contribute to limiting the risks to the sustainability of public
finances, which are currently at a low level.

As reflected in its budgetary track record, Denmark has benefited from a relatively strong fiscal frame-
work, notable for its wide coverage and the transparency and visibility of its fiscal rules. General
government consumption expenditure has, however, been prone to exceeding targets. Recent initia-
tives involving economic sanctions could enhance incentives for local governments to adhere to
agreed targets. Furthermore, some actions have been initiated to strengthen the focus on the
cost-effectiveness of public spending. Nevertheless, further measures will be needed to curb expendi-
ture growth in line with the Government's targets.

(10) With a view to supporting financial stability, the Danish authorities have adopted a range of measures
including amending the regulatory framework of the pension and life-insurance sector, the Financial
Stability Act of October 2008 and the Credit Package mentioned above. The Financial Stability Act
effectively provides an unlimited government-backed guarantee for unsecured creditors until
30 September 2010, where participating banks cover claims up to DKK 35 billion (2 % of GDP), and
the state covers any exceeding claims. From 1 October 2010 a deposit insurance threshold of
DKK 750 000 is foreseen. The Credit Package addresses the mounting pressure on the solvency of
banks and mortgage institutions in order to contribute to a normalisation of lending policy.

(11)

(12)

In line with the EERP agreed in December by the European Council, Denmark proceeded to imple-
ment a discretionary fiscal expansion of around 1 percentage point of GDP with the adoption of the
2009 budget, including permanent measures that enhance work incentives (income tax cuts) and
improve the growth potential (investment in R&D). Part of the expansion is due to large public sector
wage increases. A green transport infrastructure plan agreed on 29 January 2009 is foreseen to
provide a further fiscal stimulus of DKK 5 billion (0,25 % of GDP) spread over 2009 and 2010.
These measures are related to the Lisbon medium-term reform agenda as reviewed by the Commis-
sion on 28 January 2009.

Based on the information in the programme update, the structural balance is foreseen to deteriorate
by 2,5 percentage points in 2009 and a further 1 percentage point over the remaining programme
period. In part, the decline reflects lower revenue from particularly volatile and transitory sources. In
view of the fiscally sound point of departure and the strong automatic stabilisers at play, the planned
expansionary fiscal stance appears to be an adequate response to the economic downturn.
Throughout the programme period, the budgetary projections indicate that Denmark's fiscal position
is fully in line with the criteria of the Stability and Growth Pact.

(13)

The programme update provides all required and most of the optional data (1).

(1) In particular, the total revenue and total expenditure figures and some subcomponents do not correspond to the harmo-
nised definitions, complicating the assessment. Moreover, a specification of the stock-flow adjustment is missing among
the optional data.

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The overall conclusion is that, at the current juncture and given the comfortable fiscal position, the overall
fiscal stance is considered adequate in view of the discretionary fiscal expansion of around 1 percentage
point of GDP in 2009 and in view of the relatively strong automatic stabilisers. The programme foresees a
reduction in the general government surplus by around 3 percentage points of GDP in 2009 and about
1,25 percentage point further in 2010. The programme's growth assumptions are favourable. The fiscal
policy aims to continue to achieve the MTO, being consistent with the objective of long-term sustainability
throughout the programme period, thus maintaining a sufficient safety margin to the reference value.
Following a period of high budgetary surpluses, benefiting from a relatively strong fiscal framework, general
government gross debt has declined to a low level.

In view of the above assessment, Denmark is invited to:

(i) implement the fiscal plans for 2009, including the stimulus measures; in line with the EERP and within

the framework of the Stability and Growth Pact;

(ii) identify the required structural reform measures; notably aiming at strengthening labour supply, in order

to achieve budgetary targets in the outer years.

Comparison of key macro-economic and budgetary projections

Real GDP
(% change)

HICP inflation
(%)

2007

2008

2009

2010

2011

2012

2015

CP Dec 2008

1,6

0,2

– 0,2

0,7

1,9

1,7

1,6

COM Jan 2009

1,6

– 0,6

– 1,0

0,6

n.a.

n.a.

n.a.

CP Dec 2007

2,0

1,3

1,1

0,5

n.a.

n.a.

n.a.

CP Dec 2008

1,7

3,6

1,3

2,1

1,4

1,8

1,8

COM Jan 2009

1,7

3,6

1,6

1,9

n.a.

n.a.

n.a.

CP Dec 2007

1,7

2,4

1,6

1,9

n.a.

n.a.

n.a.

Output gap (1)
(% of potential GDP)

CP Dec 2008

1,4

0,0

– 1,4

– 1,8

– 1,2

– 0,8

– 0,5

COM Jan 2009 (2)

1,8

– 0,1

– 2,1

– 2,4

n.a.

n.a.

n.a.

Net lending/borrowing
vis-à-vis the rest of the
world
(% of GDP)

General government
revenue (4) (6)
(% of GDP)

General government
expenditure (4) (6)
(% of GDP)

CP Dec 2007

1,0

0,3

– 0,4

– 1,5

n.a.

n.a.

n.a.

CP Dec 2008

0,7

1,7

1,8

2,3

2,6

2,6

1,8

COM Jan 2009

0,7

1,7

1,5

1,5

n.a.

n.a.

n.a.

CP Dec 2007

1,7

1,3

1,9

2,2

n.a.

n.a.

n.a.

CP Dec 2008

54,5

53,2

51,2

51,5

52,1

51,8

51,5

COM Jan 2009

55,4

54,8

52,8

53,4

n.a.

n.a.

n.a.

CP Dec 2007

53,4

52,9

52,0

51,7

n.a.

n.a.

n.a.

CP Dec 2008

49,9

50,2

51,2

52,8

51,8

51,7

51,6

COM Jan 2009

50,9

51,6

53,1

54,9

n.a.

n.a.

n.a.

CP Dec 2007

49,6

49,8

50,0

50,5

n.a.

n.a.

n.a.

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General government
balance (6)
(% of GDP)

Primary balance
(% of GDP)

Cyclically-adjusted
balance (1)
(% of GDP)

Structural balance (3) (5)
(% of GDP)

Government gross debt
(% of GDP)

CP Dec 2008

COM Jan 2009

CP Dec 2007

CP Dec 2008

COM Jan 2009

CP Dec 2007

CP Dec 2008

COM Jan 2009

CP Dec 2007

CP Dec 2008

COM Jan 2009

CP Dec 2007

CP Dec 2008

2007

2008

2009

2010

2011

2012

2015

4,5

4,5

3,8

6,1

6,1

5,2

3,6

3,3

3,1

3,7

3,3

3,5

3,0

3,1

3,0

4,2

4,5

4,2

3,0

3,2

2,8

4,0

3,8

3,4

0,0

– 1,2

– 0,3

– 1,5

2,0

1,5

1,2

3,0

0,9

1,0

2,3

2,6

1,1

2,5

1,2

0,2

0,0

2,1

0,0

0,1

2,2

1,7

0,9

2,5

0,3

n.a.

n.a.

1,6

n.a.

n.a.

1,1

n.a.

n.a.

1,3

n.a.

n.a.

0,1

n.a.

n.a.

1,3

n.a.

n.a.

0,6

n.a.

n.a.

0,6

n.a.

n.a.

– 0,1

n.a.

n.a.

0,7

n.a.

n.a.

0,2

n.a.

n.a.

0,2

n.a.

n.a.

26,3

30,3

27,9

26,3

25,4

24,6

22,6

COM Jan 2009

26,3

30,3

28,4

27,0

CP Dec 2007

25,6

21,6

19,2

18,6

n.a.

n.a.

n.a.

n.a.

n.a.

n.a.

Notes:
(1) Output gaps and cyclically-adjusted balances from the programmes as recalculated by Commission services on the basis of the informa-

tion in the programmes.

(2) Based on estimated potential growth of 1,8 %, 1,4 %, 1,0 % and 0,9 % respectively in the period 2007-2010.
(3) Cyclically-adjusted balance excluding one-off and other temporary measures. One-off and other temporary measures are – 1,0 % of
GDP in 2008, – 1,7 % in 2009 and 2010, and – 0,2 % in 2011, all deficit-reducing/surplus-increasing, according to the most recent
programme, and – 0,5 % of GDP in 2008, – 0,2 % in 2009 and – 0,8 % in 2010, all deficit-reducing/surplus-increasing, according to
the Commission services' January 2009 interim forecast.

(4) The programme data for revenue and expenditure differ from the data reported to Eurostat, following the harmonised approach
(cf. Commission Regulation (EC) No 1500/2000), on which the Commission services' forecast is based. The difference relates primarily
to the treatment of public sales of goods and services and of the consumption of fixed capital. The balance is, however, unaffected.
(5) Using the recalculated cyclically-adjusted balance, based on the information in the programme, and the definition of one-offs and other
temporary measures applied by the Commission services, the structural balance would be 3,6 % of GDP in 2008 and 1,1 in 2009, and
0,9 in 2010.

(6) For 2007, the figures differ from those reported to Eurostat in the October 2008 EDP notification. The figures used reflect more

recent, revised data published by Statistics Denmark, which has not yet been validated by Eurostat.

Source:
Convergence programme (CP); Commission services' January 2009 interim forecasts (COM); Commission services' calculations.