Budget Outlook, August 2005

1. Introduction

The central government budget proposal for 2006 and the agreements with local governments on the economy for 2006 reflect the economic priorities of the Danish government in 2006. The budget proposal also reflects the medium term expenditure policy priorities of the Danish government, where accumulated DKK 24bn are reserved for new initiatives in the years until 2010.

With the budget proposal and the local government agreements for 2006 the challenges in light of increased globalisation is given priority, i.e. research, education, innovation and entrepreneurship. In addition to this care for the elderly, healthcare, vulnerable groups and better terms for families with children are areas of high priority in the budget proposal.

Based on the short term forecast for the Danish economy, cf. Economic Survey, August 2005, the central government budget proposal and the agreements with local governments on the economy for 2006, both the central government current, investment and lending account, i.e. the CIL-account, and the general government finances are expected to show surpluses in 2006.

From an overall perspective economic policy is in line with the medium term targets towards 2010, and fiscal policy is expected to be broadly neutral to economic activity in 2006.

2. General government finances

Statistics Denmark has in June published revised figures for public finances in the period 1990-2004 reflecting a number of methodological changes. Among other things the pension fund, ATP, has been reclassified from the public sector to the private financial sector and the periodisation of corporate taxes has been changed.

The estimates of the general government finances in 2005 and 2006 are based on the revised specification of public finances and reflect the short term forecast for the Danish economy, cf. Economic Survey, August 2005. Furthermore, the estimates are based on the central and local government budgets for 2005, the central government budget proposal for 2006 and the agreements with local governments on the economy in 2006.

The general government surplus is estimated at DKK 38.9bn in 2005 and DKK 30.8bn in 2006, cf. table 1. The surpluses correspond to 2.5 per cent of GDP in 2005 and 1.9 per cent of GDP in 2006.

Note: The specification of the central and local governments budget balances do not fully reflect, that central government through transfers to local governments bears the risk of fluctuations in expenditures and revenues due to the business cycle.The local government deficits in the years 2002-2004 reflect among other things that the ascertained local government tax revenues are lower than the transfers from the central government. 

The estimated increase in the general government surplus from 2003 to 2005 primarily reflects estimated larger revenues from pension yield taxation and the North Sea oil and gas exploration activities and also lower net interest expenditure. The estimated decline in the general government surplus from 2005 to 2006 is mainly due to expected lower revenues from the pension yield taxation.

Revenues from pension yield taxation and the North Sea oil and gas exploration activities are to a large extent considered to reflect a temporary strengthening of public finances.

The structural budget balance is estimated at 1.0 per cent of GDP in 2005 and 0.8 per cent of GDP in 2006 after correction for the effects of a suspension of Special Pension (SP) contributions for the period 2004-2007.

Compared to the May projection the general government surplus is unchanged in 2005, while the surplus has been adjusted downwards with approx. DKK 5½bn in 2006, cf. table 2.

The changes in the general government budget balance in 2005 and 2006 reflect relatively large technical downward adjustments as a consequence of the methodological changes. These downward adjustments are to a certain degree offset by upward adjustments due to new estimates – in particular for the public revenues. Corrected for methodological changes the general government budget balance has been adjusted upward adjusted by approx. DKK 13bn in 2005 and DKK 15¼bn in 2006 due to new estimates.

The most significant methodological change concerns the reclassification of the pension fund, ATP, from the public sector to the private financial sector, which implies a downward adjustment of the general government budget balance of approx. DKK 13-15bn per year in 2002-2006 compared to the May projection.

The upward adjustment of DKK 13bn in 2005 due to new estimates, primarily stems from pension yield taxation. As a consequence of expected capital gains on bonds and higher returns on shares, the revenues from pension yield taxation have been adjusted upward by approx. DKK 9bn in 2005.

Due to higher oil prices, the revenues from the North Sea oil and gas exploration activities have been adjusted upward by approx. DKK 2¾bn in 2005 and approx. DKK 7¼bn in 2006.

The revenues from VAT and other excise duties have been adjusted upward by approx. DKK 2¼bn in 2005 and DKK 3¼bn in 2006 compared to the May projection. The adjustment reflects among other things a higher estimated revenue from the vehicle registration fee of approx. DKK ¾bn in both 2005 and 2006. In addition, a higher expected inflation rate in both years and an upward adjustment of real growth in private consumption and private investment in 2006, contribute to larger estimated VAT-revenues.

In 2006 the revenue from income taxes has been adjusted upward by DKK 7bn compared to the May projection. This adjustment mainly reflects the continued suspension of SP-contributions in light of the political agreement in June between the government and “The Danish People’s party”.

Detailed information about the general government finances, including adjustments since the May projection, can be found in Annex 1 below.

The expenditure burden, i.e. the ratio of general government expenditures to GDP, is expected to decrease by 1.9 percentage points from 2001 to 2006, cf. table 3. The estimated decrease in the expenditure burden is mainly a consequence of a reduction of the estimated interest expenditure burden of approx. 1¾ percentage points, which results from an expected lower public debt and lower interest rates.   

The estimated decrease in the tax burden, i.e. the ratio of aggregate tax revenues to GDP, of approx. ¾ percentage points from 2001 to 2006 reflects among other things a decrease in the personal income tax burden due to the tax cuts in 2004. Pension yield taxation and corporate taxes (including the revenues from the North Sea oil and gas activities), on the other hand, contribute to an increase of the tax burden of almost 1 per cent of GDP from 2001 to 2006.

The revenue burden, i.e. the ratio of general government revenues to GDP, is expected to decrease by approx. 1¼ percentage points from 2001 to 2006. Apart from the estimated reduction in the tax burden this is due to lower estimated interest revenues.

Detailed information about the expenditure, tax and revenue burdens can be found in Annex 2 below.

3. Fiscal stance

The fiscal effect is an indicator of the fiscal policy stance. The fiscal effect measures the impact of fiscal policy changes on economic activity – measured by the effect on GDP.

Based on the central government budget proposal for 2006 and the agreements with local governments on the economy in 2006 the fiscal effect is estimated at approx. -0.1 per cent of GDP in 2006 primarily due to relatively modest growth in public expenditures, cf. table 4.

In 2005 fiscal policy is also estimated to have a more or less neutral impact on economic activity. Compared to the May projection the fiscal effect in 2005 has been adjusted downward from 0.1 per cent of GDP to -0.1 per cent of GDP. This downward revision is mainly the result of a higher growth of public expenditure in 2004, which reduces public expenditure growth in 2005. The upward revision of public expenditure in 2004 is primarily a consequence of higher spendings in local governments according to their final accounts.

Fiscal policy is estimated to be consistent with the expected economic cycle in 2005 and 2006, cf. Economic Survey, August 2005.

4. Structural budget balance

The structural budget balance is the general government budget balance adjusted for the estimated positive or negative impact on the budget from the cyclical position of the economy. Thus, the development in the structural budget balance is mainly determined by the fiscal policy stance, differences between the actual and structural rate of unemployment and the underlying growth in the labour force.

As a consequence of the methodological changes in the specifications of public finances, the target interval for the structural budget balance has been adjusted to average surpluses of ½-1½ per cent of GDP compared to the earlier target of 1½-2½ per cent of GDP.

The structural budget balance surplus is estimated at 1.2 per cent of GDP in 2005 and 1.1 per cent of GDP in 2006, cf. table 5. Corrected for the effect of the suspension of SP-contributions the structural budget balance is estimated at 1.0 per cent of GDP in 2005 and 0.8 per cent of GDP in 2006. The structural budget balance is thus expected to be within the target interval in both years.

Corrected for methodological changes, the estimated structural budget balance surplus is approx. unchanged compared to the May projection. This indicates, that the upward adjustment of the general government budget balance, which is mainly caused by larger estimated revenues from pension yield taxation and the North Sea oil and gas activities, to a large extent reflects a temporary strengthening of public finances.

The estimated increase in the structural budget balance surplus of approx. ¾ percentage points from 2002 to 2006 mainly reflects reduced net interest expenditures. In addition to this the impact of the composition of aggregate demand contributes to a higher structural budget balance mainly due to the relatively strong growth in private consumption. The share of excise duties in private consumption is relatively high compared to other components of GDP, and a strong growth in private consumption therefore tends to increase the structural budget balance. Fiscal policy and the labour force development, on the other hand, contribute to a reduction of the structural budget balance from 2002 to 2006.

5. Central government finances

The central government budget proposal for 2006 implies a surplus on the current, investment and lending account, i.e. the CIL-account, of approx. DKK 40bn or 2.5 per cent of GDP in 2006, cf. table 6.

In 2005 the surplus on the CIL-account is estimated at approx. DKK 50bn or 3.3 per cent of GDP. The estimated surpluses in 2005 and 2006 are to a great extent due to revenues from the pension yield taxation and the North Sea oil and gas activities, which imply a temporary strengthening of the CIL-account.

The estimated surpluses on the CIL-account in 2005 and 2006 are subject to uncertainty because of the sensitivity to changes in the oil price and financial market developments.

The estimated CIL-account surplus in 2005 has been adjusted upward by approx.

DKK 19½bn compared to the May projection. This is primarily due to an upward adjustment of central government revenues from pension yield taxation and North Sea oil and gas activities.

Corrected for one-off measures etc. the CIL-account surplus is estimated at approx. DKK 23½bn in 2005 and DKK 31½bn in 2006, cf. figure 1. The relatively large corrections in 2005 and 2006 are again primarily due to revenues from pension yield taxation and the North Sea oil and gas activities.

Figure 1.

Central government CIL-account, 1997-2006

From 2005 to 2006 the CIL-account surplus is estimated to decrease by approx. DKK 10bn, which reflects a modest increase in central government revenues of approx. DKK 2½bn and an increase in central government expenditures of approx. DKK 12½bn.

The modest increase in central government revenues from 2005 to 2006 primarily reflects lower estimated revenues from pension yield taxation in 2006 compared to the large revenues in 2005. The estimated increase in central government expenditures from 2005 to 2006 is among other things due to additional expenditures on social pensions of approx. DKK 5bn and an increase of the block grant to local governments of approx. DKK 6¾bn.

From 2002 to 2006 the block grant to local governments has been increased by approx. DKK 23bn, cf. figure 2. The considerable increase during this period reflects, that local governments in light of the tax freeze are fully compensated for the agreed expenditure growth, including real growth of local government consumption. In addition, local governments are compensated for the tax reductions introduced in 2004 and any fluctuations in income transfers and tax revenues due to the business cycle.  

Figure 2.

Block grant to local governments, 2000-2006

In order to ensure overall balance in the local government economy the block grant is adjusted, so that local government revenues correspond to local government expenditure. This overall balance is not reflected in the specification of the local government budget balance from Statistics Denmark, cf. table 1.

6. Central government financing requirement and debt

Central government debt measured as a percentage of GDP is estimated to decrease by approx. 4½ percentage points in 2005 and by additional 3¼ percentage points in 2006, cf. table 7. From 2003 to 2006 the total decrease in central government debt is estimated at approx. 11 percentage points.

Measured in nominal terms central government debt is estimated at DKK 417.9bn in 2006 and DKK 451.1bn in 2005 compared to a level of DKK 493.6bn in 2004.

The estimated reduction of central government debt is thus approx. DKK 33¼bn from 2005 to 2006 due to a net balance amounting to approx. DKK 33¾bn in 2006, cf. table 8.

While the CIL-account is expected to show a surplus of approx. DKK 40bn in 2006, the net balance is somewhat lower primarily due to relending to government garanteed infrastructure entities etc. amounting to approx. DKK 5¼bn.

Central government debt adjustet for on lending is expected to decrease by approx. DKK 34¼ to DKK 396.8bn in 2006.

In 2005 the net balance is estimated at approx. DKK 45½bn. Compared to the May projection the net balance in 2005 has been adjusted upward by approx. DKK 19bn, primarily as a consequence of a higher estimated surplus on the CIL-account.  

Annex 1

Annex 2

1)       The specification of total public expenditures and revenues deviates from the revised specification from Statistics Denmark. Public consumption includes revenues from sales and calculated depreciation expenditure and in this light, the previous specification has been maintained. The specification of public expenditure from Statistics Denmark does not include public sales, which has been reclassified as revenue and calculated depreciation is not included in public expenditures and revenues. In light of this, the expenditure and revenue burden differ from the ascertained burdens based on the specifications according to Statistics Denmark.