Budget Outlook, August 2010

The central government budget proposal for 2011 is presented today. The proposal reflects the Fiscal Consolidation Agreement from May 2010. The agreement includes expenditure cuts, higher taxes and a labour market reform. The agreement consolidates general government finances by approx. DKK 24bn in 2011-2013.

The Fiscal Consolidation Agreement follows the international economic recession in 2008, which has had a severe impact on the Danish economy particularly in 2009. In order to support growth and employment, fiscal policy has been eased in 2009 and 2010. The fiscal stimulus has dampened the increase in unemployment, but it has also contributed to the largest general government budget deficit since the mid-1980’s. With substantial deficits, central government debt is expected to rise from 11 percent of GDP in 2008 to 26½ percent of GDP in 2011.

The general government budget deficits in 2010 and 2011 are expected to exceed the reference value of 3 per cent of GDP in the Stability and Growth Pact of the European Union. On this basis Denmark has received a recommendation adopted by the EU Council of Finance Ministers (ECOFIN) to tighten fiscal policy by 1½ per cent of GDP during the years 2011-2013. The Fiscal Consolidation Agreement contains concrete measures to meet this requirement.

The general government budget deficit is estimated at 4.6 per cent of GDP in 2010 and 4.4 per cent of GDP in 2011. The structural budget deficit is estimated at 1.7 per cent of GDP in 2010 and 0.8 per cent in 2011 corresponding to fiscal consolidation almost 1 per cent of GDP from 2010-2011. This reflects a planned reduction in public investments, the financing elements in the tax reform in the Spring Package 2.0 and consolidation measures in the Fiscal Consolidation Agreement.
 
The estimated effect on activity of fiscal policy is 1.3 per cent of GDP in 2009 and 0.6 per cent of GDP in 2010. The expansionary fiscal policy in 2009 and 2010 is expected to stimulate activity further in 2011. Thus, fiscal policy together with lower interest rates in 2009-2011 are expected to stimulate activity by approx. 1 per cent of GDP in 2011 despite a first year fiscal policy effect of -0.5 per cent of GDP in 2011.

The government budget proposal for 2011 implies a deficit on the current, investment and lending account, i.e. the CIL-account, of approx. DKK 52bn in 2011. In 2010 the CIL-deficit is estimated at DKK 102bn. The reduction from 2010 to 2011 in the CIL-deficit primarily reflects a technical change regarding payments of the pension yield taxation.

The estimates for the general government and central government finances in 2010 and 2011 are based on the short term projections for the Danish economy, cf. Economic Survey, August 2010.

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