COMMISSION STAFF WORKING PAPER Analysis by the Commission services 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
Date: 2011-01-27
Institutions: European Commission
Subjects: budget deficit, budget policy, budgetary control, economic analysis, economic recession, public debt, public expenditure, reflation, stability programme

EN 

EN 

   EN 

 
 
EUROPEAN COMMISSION 

Brussels, 27.1.2011 
SEC(2011) 115 final 

COMMISSION STAFF WORKING PAPER 

Analysis by the Commission services 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 

   EN 

 
 
 
  
 
 
 
 
 
COMMISSION STAFF WORKING PAPER 

Analysis by the Commission services 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  discretionary  fiscal  stimulus  triggered  a 
deterioration of public finances in Denmark. The general government balance turned from a 
surplus  of  3.2%  of  GDP  in  2008  into  a  deficit  of  2.7%  of  GDP  in  2009,  widening  to  an 
expected  5.5%  of  GDP  in  2010  in  the  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 accordance 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 deadline 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,  Denmark  should:  (a)  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; (b) ensure an average annual 
fiscal effort of at least 0.5 % of GDP over the period 2011-2013; (c) 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. 

This  paper  examines  the  actions  taken  by  Denmark  to  meet  the  above  recommendations,  in 
light of the economic and budgetary developments since the Council recommendations were 
issued on 13 July 2010. In particular, it examines the budgetary consequences between 2011 
and 2013 of the 2011 budget and the consolidation measures presented by the government on 
25  May  2010.  The  assessment  takes  into  account  the  information  on  effective  action  taken 
provided by the Danish Ministry of Finance to the Commission on 13 January 2011. 

2. 

ECONOMIC 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  
2  

In the spring forecast the 2009 deficit was projected at 2.8% of GDP.  
All  EDP-related  documents 
found  at 
http://ec.europa.eu/economy_finance/sgp/deficit/countries/denmark_en.htm 

for  Denmark  can  be 

the 

following  website: 

EN 

2 

   EN 

 
 
 
                                                 
Government interventions to cushion the negative effect of the crisis on the labour market and 
on confidence contributed 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 programme (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 

Real GDP (% change)
Contributions to real GDP growth
Final domestic demand
Changes in inventories
Net exports
Employment (% change)
GDP deflator (% change)

2009

Outturn
-5.2

COM 
SF10
1.6

2010
COM 
AF10
2.3

-4.3
-2.0
1.2
-3.1
0.4

0.6
0.8
0.1
-1.9
1.1

0.8
1.2
0.2
-1.4
2.4

CP10
1.3

1.0
0.6
-0.3
-2.5
2.0

COM 
SF10
1.8

1.8
0.1
-0.1
-0.1
1.6

2011
COM 
AF10
1.9

1.3
0.5
0.1
0.3
2.3

CP10
1.6

1.3
0.3
-0.1
-0.1
1.7

2012

COM 
AF10
1.8

1.7
0.0
0.1
0.3
2.2

CP10
2.0

2.2
0.2
-0.3
0.3
2.3

2013

CP10
2.3

2.3
0.2
-0.2
0.4
2.4

Source: COM SF10 - Commission services' spring 2010 forecast; COM AF10 - Commission services' autumn 2010 forecast, CP10 - Danish authorities' 
Convergence Programme (February 2010)

3. 

BUDGETARY PROJECTIONS FOR THE PERIOD 2011-2013 

The recovery, which turned out stronger than anticipated in the spring forecast, is expected to 
have  positive  effects  on  Denmark's  public  finances.  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-expected performance of the labour market will help to cushion the 
deterioration of income tax receipts and reduce the cost of automatic stabilisers.  

Over  the  period  2010-2013,  the  Commission  services'  forecasts  and  the  2010  Convergence 
Programme  estimates  for  total  government  expenditures  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 projected budget deficits are slightly higher in the latest update 
of the Danish authorities' macroeconomic scenario, though, which is broadly 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 unexpected boost of pension yield taxation revenues, which 
was  not  included  in  the  Commission  services'  forecast.  These  revenues  could  consequently  turn  out 
lower in 2011 than foreseen in the Commission services' forecast. 

EN 

3 

   EN 

 
 
 
 
                                                 
Despite  the  projected  improvement  in  Denmark'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 unusually low and could point to uncertainties in 
the calculation of Danish potential output at the current juncture. As a result, the implied rapid 
narrowing of the output gap between 2010 and 2012 might overstate the cyclical component 
of the budgetary adjustment. 

Table 2: Composition of the budgetary adjustment 

2010

2011

2012

Primary expenditure
Interest expenditure
Total expenditure

Current taxes on income and wealth
Taxes on production and imports
Total current taxes
Total revenues

Primary balance
Budget balance

Structural budget balance

Real GDP growth
GDP deflator
Nominal GDP

2009
Outturn

% of GDP

56.5
1.8
58.3

30.0
16.9
46.9
55.6

-0.9
-2.7

0.9

-5.2
0.4
-4.8

COM SF10 COM AF10
yoy %-
% of 
GDP
ch

yoy %-
ch

% of 
GDP

4.0
6.0
4.1

57.1
2.1
59.2

3.9
4.0
3.9

56.1
1.8
57.9

17.3

-6.6 27.4 -4.9 27.2
16.9
5.7
-2.2 44.7 -1.4 44.1
-2.2 53.7 -1.3 52.8

4.8

-3.4
-5.5

-2.7

-3.3
-5.1

-2.5

CP10

yoy %-
ch

-
-
-

-
-
-
-

% of 
GDP

56.1
1.6
57.7

28.4
17.1
45.7
52.4

-3.7
-5.5

-1.7

1.6
1.1
2.7

2.3
2.4
4.7

1.3
2.0
3.3

COM SF10 COM AF10
yoy %-
% of 
GDP
ch

yoy %-
ch

% of 
GDP

55.0
1.9
56.9

27.2
16.9
44.1
52.6

-2.4
-4.3

-2.9

1.4
7.0
1.6

2.7
2.6
2.7
2.5

1.8
1.6
3.4

55.9
2.2
58.1

27.1
17.1
44.2
53.3

-2.7
-4.9

-3.1

2.3
8.0
2.5

4.2
4.3
4.2
4.2

1.9
2.3
4.2

CP10

% of 
GDP

54.8
1.7
56.5

28.5
17.2
45.9
52.4

-2.3
-4.2

-1.0

yoy %-
ch

-
-
-

-
-
-
-

1.6
1.7
3.3

COM AF10
yoy %-
% of 
GDP
ch

CP10

2013
CP10

yoy %-
ch

% of 
GDP

yoy %-
ch

2.4
8.0
2.6

4.2
4.6
4.4
4.3

1.8
2.2
4.0

-
-
-

-
-
-
-

54.2
1.9
56.1

27.2
17.0
44.2
52.6

-1.5
-3.5

-3.0

-
-
-

-
-
-
-

53.0
1.9
54.9

28.1
17.2
45.5
51.8

-1.2
-3.2

-0.7

2.0
2.3
4.4

2.3
2.4
4.7

% of 
GDP

51.5
2.1
53.6

27.9
17.4
45.5
51.8

0.3
-1.9

-0.2

Source: COM SF10 - Commission services' spring 2010 forecast; COM AF10 - Commission services' autumn 2010 forecast, CP10 - Danish authorities' February 2010 Convergence Programme (February 
2010)

Due to the uncertainties in the calculation of potential 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  measures  adopted  and  enacted  in  Denmark.  In 
May 2010 parliamentary support was secured for a set of additional consolidation measures to 
the  already  announced  phasing-out  of  crisis-related  expansionary  measures.  These 
consolidation  measures  include  postponing  previously  planned  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  deductions  for  trade  union  membership  fees.  In  addition, 
government  consumption  growth  is  restrained  between  2011  and  2013.  The  fiscal 
consolidation agreement foresees the achievement 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  government'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 consolidation agreement, earlier discretionary measures also contribute 
to the consolidation efforts over the period 2011-2013. 

EN 

4 

   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 being negotiated, which could result 
in a reduction in the duration of student grants. The reform would 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  budget.  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 short-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
Suspension of §20 regulation from 2011 to 2013
Postponement of tax brackets for three years
Unemployment benefit reform
Ceiling on deductions
Total savings on labour market and tax measures

Freeze on government expenditure growth

cumulative
2012
4.2
1.9
0.3
1.6
8.0

2013
6.6
2.0
1.7
1.6
11.9

2011
2.1
1.8
0.0
0.9
4.8

per year
2012
2.1
0.1
0.3
0.7
3.2

2013
2.4
0.1
1.4
0.0
3.9

9.0

13.5

4.5

4.5

4.5

2011
2.1
1.8

0.9
4.8

4.5

Financing of  other measures 1
Savings May consolidation agreement
Savings May consolidation agreement (% of 2009 GDP)
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 absence of spending details, this 
amount is spread evenly over the three-year period. 
2  Due to indirect effects on - among others - VAT revenues, the structural balance is strengthened by DKK 22 billion.

0.9
24.52
1.5

0.6
16.4
1.0

0.3
9.0
0.5

0.3
8.1
0.5

0.3
7.4
0.4

0.3
9.0
0.5

EN 

5 

   EN