Recommendation for a Council Recommendation with a view to bringing an end to the situation of an excessive government deficit in Denmark
Date: 2010-06-15
Institutions: European Commission
Subjects: Denmark, budget deficit, economic recession, public debt, public finance, stability pact

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EUROPEAN COMMISSION 

Brussels, 15.6.2010 
SEC(2010) 744 final 

Recommendation for a 

COUNCIL RECOMMENDATION  

with a view to bringing an end to the situation of an excessive government deficit in 
Denmark 

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Recommendation for a 

COUNCIL RECOMMENDATION  

with a view to bringing an end to the situation of an excessive government deficit in 
Denmark 

THE COUNCIL OF THE EUROPEAN UNION, 

Having  regard  to  the  Treaty  on  the  Functioning  of  the  European  Union,  and  in  particular 
Article 126(7) thereof; 

Having regard to the recommendation from the European Commission; 

Whereas: 

(1) 

(2) 

(3) 

(4) 

(5) 

According  to  Article  126  of  the  Treaty  Member  States  shall  avoid  excessive 
government deficits. 

The Stability and Growth Pact is based on the objective of sound government finances 
as a means of strengthening the conditions for price stability and for strong sustainable 
growth conducive to employment creation. 

The  2005  reform  of  the  Stability  and  Growth  Pact  sought  to  strengthen  its 
effectiveness and economic underpinnings as well as to safeguard the sustainability of 
the public finances in the long run. It aimed at ensuring that in particular the economic 
and budgetary background was taken into account fully in all steps in the EDP. 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. 

The Council has decided on [13 July 2010], in accordance with Article 126(6) of the 
Treaty, that an excessive deficit exists in Denmark. 

In accordance  with Article  126(7)  of  the Treaty and Article 3 of Council  Regulation 
(EC) No 1467/97 on speeding up and clarifying the implementation of the excessive 
deficit procedure1 (which is part of the Stability and Growth Pact), the Council is also 
required  to  make  recommendations  to  the  Member  State  concerned  with  a  view  to 
bringing  the  situation  of  excessive  deficit  to  an  end  within  a  given  period.  The 
recommendation  has  to  establish  a  deadline  of  six  months  at  the  most  for  effective 
action to be taken by the Member State concerned to correct the excessive deficit as 
well  as  a  deadline  for  the  correction  of  the  excessive  deficit,  which  should  be 
there  are  special 
completed 
circumstances.  In  deciding  whether  special  circumstances  exist,  “relevant  factors”  as 
clarified in Article 2(3) of Regulation (EC) No 1467/97 should be taken into account. 

identification  unless 

the  year  following 

its 

in 

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OJ L 209, 2.8.1997, p. 6.  

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(6) 

(7) 

(8) 

(9) 

Furthermore, in a recommendation to correct an excessive deficit the Council should 
request the achievement of a minimum annual improvement in the structural balance, 
i.e. the cyclically-adjusted balance excluding one-off and other temporary measures, of 
0.5% of GDP as a benchmark. 

Special circumstances, which are relevant for the greater flexibility in the application 
of  the  EDP  introduced  with  the  2005  reform  of  the  Stability  and  Growth  Pact,  are 
deemed to exist in the case of Denmark. In particular, the 2009 recession reflected the 
abrupt  decline  in  private  consumption,  investment,  and  exports  as  a  consequence  of 
the  financial  crisis  and  the  global  recession,  in  particular  the  slump  in  demand  from 
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  existence  of 
special circumstances authorises the Council to allow the correction of the excessive 
deficit in a medium-term framework. 

According  to  the  April  2010  EDP  notification,  the  general  government  deficit  in 
Denmark is planned to reach 5.4% of GDP in 2010 taking into account the economic 
downturn  and  the  fiscal  impact  of  the  economic  recovery  plan  fleshed  out  in  the 
February  2010  update  of  the  Convergence  Programme.  The  Commission  services' 
spring  2010  forecast  projects  the  government  deficit  to  widen  from  2.7%  of  GDP  in 
2009  to  5.5%  of  GDP  in  2010,  declining  to  4.9%  of  GDP  in  2011  on  a  no-policy 
change basis. This assumption does not take into account consolidation measures for 
2011 which were announced by the government on 25 May 2010 or measures which 
have  not  yet  been  sufficiently  specified.  Benefiting  from  budget  surpluses  prior  to 
2009, Denmark adopted fiscal stimulus measures in line with the EERP reaching 2.2% 
of  GDP  in  2009  and  1.3%  in  2010.  The  recovery  measures  are  split  between 
permanent tax cuts and temporary public investment measures. 

Considering  the  special  circumstances  and  the  EERP  framework,  an  average  annual 
fiscal  effort  is  recommended.  The  fiscal  effort  should  take  into  account  all  factors 
relevant for achieving the fiscal policy objectives, starting with the level of the general 
government  deficit  and  gross  debt  as  well  as  other  indicators,  such  as  the  current 
account  position,  the  level  of  contingent  liabilities  of  the  financial  sector,  interest 
payments,  risk  premia  and  the  expected  change  in  age-related  expenditure  in  the 
medium  term.  In  calculating  the  average  annual  fiscal  effort,  the  2011  deficit  in  the 
Commission  services'  spring  2010  forecast  is  taken  as  the  starting  point.  The  total 
fiscal effort needed to reach the nominal deficit target of 3% by the deadline is then 
calculated by assuming a gradual closure of the output gap by 2015. 

Against this background, it is  appropriate to consider  the correction of the excessive 
deficit  in  a  medium-term  framework  with  a  deadline  for  the  correction  of  2013.  In 
particular,  in  view  of  the  absence  of  major  economic  imbalances,  a  credible  and 
sustainable  adjustment  path  would  require  the  Danish  authorities  to  implement  the 
fiscal  measures  in  2010  as  envisaged  and  ensure  an  average  annual  structural 
adjustment of ½% of GDP over the period 2011-2013; to specify the measures that are 
necessary  to  achieve  the  correction  of  the  excessive  deficit  by  2013,  cyclical 
conditions  permitting,  and  accelerate  the  reduction  of  the  deficit  if  economic  or 
budgetary conditions turn out better than currently expected. 

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(10)  As  reflected  by  its  budgetary  track  record,  Denmark  has  benefited  from  a  relatively 
strong  fiscal  framework,  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  initiatives  involving  economic 
sanctions  could  enhance  incentives  for  municipalities  to  adhere  to  agreed  targets. 
Since  2002  the  Danish  tax  policy  has  been  centred  on  the  tax-freeze,  whereby  no 
indirect  or  direct  taxes  can  be  raised.  The  tax-freeze  has  not  stood  in  the  way  of  a 
major  tax  reform  in  2009,  but  strict  observance  of  the  tax-freeze  may  render  further 
adjustments difficult.  

(11)  According  to  data  notified  by  the  Danish  authorities  in  April  2010,  general 
government  gross  debt  was  41.6%  of  GDP  in  2009  and  set  to  increase  to  45.1%  of 
GDP  in  2010.  According  to  the  Commission  services'  2010  spring  forecast  on  a  no-
policy-change  assumption,  the  debt  level  is  expected  to  increase  to  46%  of  GDP  in 
2010  and  further  to  49.5%  of  GDP  in  2011,  which  is  still  below  the  60%  reference 
value.  

(12)  Enhanced  surveillance  under  the  EDP  will  require  regular  and  timely  monitoring  of 
the  progress  made  in  the  implementation  of  the  fiscal  consolidation  strategy.  In  this 
context,  a  separate  chapter  in  the  forthcoming  updates  of  the  Danish  convergence 
programme could usefully be devoted to this issue. 

(13) 

In general, in the view of the Council, budgetary consolidation measures should secure 
a lasting improvement in the general government balance, while being geared towards 
enhancing the quality of the public finances and reinforcing the growth potential of the 
economy. 

HAS ADOPTED THIS RECOMMENDATION: 

(1) 

Recognising  that  Denmark's  budgetary  position  in  2010  resulted  from  measures 
amounting to 2.2% of GDP in 2009 and 1.3% in 2010, which is an adequate response 
to  the  downturn  and  were  in  line  with  the  European  Economic  Recovery  Plan 
principles, as well as from the free play of automatic stabilisers, the Danish authorities 
should put an end to the present excessive deficit situation as rapidly as possible and at 
the latest by 2013.  

(2) 

The Danish authorities should 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, the Danish authorities should:  

(a) 

(b) 

(c) 

implement the fiscal measures in 2010 as envisaged in the latest update of the 
convergence  programme  and  start  consolidation  in  2011  in  order  to  bring  the 
deficit below the reference value by 2013; 

ensure an average annual fiscal effort of at least ½% of GDP over the period 
2011-2013; 

specify  and  rigorously  implement  the  measures  that  are  necessary  to  achieve 
the correction of the excessive deficit by 2013, cyclical conditions permitting, 
and accelerate the reduction of the deficit if economic or budgetary conditions 
turn out better than currently expected.  

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(3) 

The Council establishes the deadline of [13 January 2011] for the Danish government 
to  take  effective  action  to  and  to  specify  the  measures  that  will  be  necessary  to 
progress  towards  the  correction  of  the  excessive  deficit.  The  assessment  of  effective 
action  will  take  into  account  economic  developments  compared  with  the  economic 
outlook in the Commission services' spring 2010 forecast.  

The  Danish  authorities  should  report  on  progress  made  in  the  implementation  of  these 
recommendations  in  a  separate  chapter  in  the  forthcoming  updates  of  the  convergence 
programmes until the abrogation of the excessive deficit procedure.  

In  addition,  the  Council  highlights  the  importance  of  achieving  the  medium-term  objective 
(MTO) for appropriate budgetary management of economic downturns. It therefore invites the 
Danish authorities to ensure that budgetary consolidation towards the medium-term objective 
for  the  budgetary  position  –  structural  balanced  budget  by  2015  –  is  sustained  after  the 
excessive deficit will have been corrected.  

This recommendation is addressed to The Kingdom of Denmark 

Done at Brussels, 15.6.2010 

For the Council 
The President 

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