Denmarks Convergence Programme has been sent to the EU

Today Denmark has submitted its Convergence Programme 2009 to the EU. The Convergence Programme is prepared in accordance with the provisions of the EU’s Stability and Growth Pact.

The Convergence Programme takes stock of the 2015 Plan and the outlook for public finances in light of the global crisis and the economic policy measures that have been decided since Convergence Programme 2008.

Moreover, the Convergence Programme illustrates the policy requirements in order to meet the targets in the 2015 Plan and an expected recommendation from the EU Council of Ministers of bringing the fiscal deficit below 3 per cent of GDP by no later than 2013.

Key elements of the Convergence Programme 2009:

• Due to the debt reduction before the international economic crisis and the tax reform in the Spring Package 2.0, Denmark was in a good position to reach the target in the 2015 Plan of (structural) balance in public finances in 2015.
  
  
• The international crisis has increased the fiscal challenges significantly compared to the Convergence Programme 2008. At the same time, public consumption spending is higher than expected.
  
  
• In order to reach the target of (structural) balance in public finances in 2015 new initiatives are required that strengthen public finances by 1.8 per cent of GDP. This corresponds to a consolidation of around DKK 31 bn. A consolidation of this scale will also ensure fiscal sustainability.
  
  
• As a starting point, a fiscal deficit of 5½ per cent of GDP is projected this year. This is expected to lead to a recommendation from the EU to bring back the deficit below 3 per cent of GDP no later than 2013 and take effective action to ensure a strengthening of the structural balance by 1½ per cent of GDP during 2011-13. The recommendation is estimated – based on current assumptions – to  require consolidation measures of around DKK 24 bn. Adherence to the EU recommendation would therefore contribute about ¾ of the required consolidation in order to reach the 2015 target.
  
  
• The assumed consolidation implies a reduction of public consumption as a share of GDP from a historical high level of just over 28 per cent of cyclically adjusted GDP this year to around 26¾ per cent of cyclically adjusted GDP in 2015, which is still high and higher than the benchmark in the 2015 Plan of 26½ per cent of cyclically adjusted GDP.
  
  
• The technical long-term projections indicate that prospects after 2015 are for a period of 20-30 years of rising fiscal pressures and increasing debt. This partly reflects the retirement of large cohorts and falling revenues from gas and oil extraction in the North Sea. However, the Welfare Agreement from 2006 dampens the deficits significantly.
  
  
• In 2008, Denmark fulfilled the convergence criteria for stable exchange rate, inflation, interest rate, as well as the fiscal balance and government debt.

The Minister of Finance, Claus Hjort Frederiksen, states:

’The international economic crisis has significantly altered the economic realities. The new Convergence Programme illustrates that the crisis has shifted the balance between revenues and expenditures significantly and we are therefore facing an substantial task in order to restore public finances.

In order to reach the 2015 Plan’s target of fiscal balance in 2015 we need to consolidate public finances by a total of DKK 31 bn. over the next 5 years. We should also expect a recommendation from the EU to reduce the fiscal deficit to below 3 per cent of GDP, probably no later than in 2013. The Government intends to adhere to this recommendation. This in itself implies a need of consolidation through new measures corresponding to some DKK 24 bn. over the next 3 years.

The Government will therefore initiate a multiannual effort, taking effect already in 2011, in order to re-establish the balance in public finances and to halt the debt accumulation. This means, among other things, that we aim to keep public consumption stable for regional, local and central government overall. At the same time, all public expenditures will be examined closely in order to solve the task as gently as possible.

We are carrying out a very expansionary fiscal policy in 2010 and we will avoid making decisions that may jeopardize the incipient recovery. At the same time, we will prepare consolidation from 2011, provided the economy develops as expected.

The Government’s specific proposals will be presented among other things in the Fiscal Bills for the coming years. It will not be an easy task, but the longer we postpone the task, the larger the challenge becomes. If we do not solve the task relatively quickly, debt and interest expenditures will grow fast, and interest expenditures will, like a cuckoo in the nest, weaken the possibilities to finance important welfare functions.

Economic growth shall keep Denmark among the wealthiest countries in the world also by 2020. The Government will work purposefully on creating better education, focus on innovation and green technologies and create more labour supply, including through faster completion of studies and fewer people on early retirement (disability) pension.

The Convergence Programme is available here

Note: Under the regulations, Euro area member states are required to prepare stability programmes, while other countries prepare convergence programmes.  In its programme each country reports on its targets and economic policy measures regarding the development of public finances in the short and medium term within the framework of the common EU rules as well as targets and measures regarding long term fiscal sustainability. EU countries not participating in the Euro report also on their monetary and exchange rate policies. The procedure for stability and convergence programmes is part of the Stability and Growth Pact, cf. Council Regulation (EU) No. 1466/97 and 1467/97 as amended by Council Regulation No. 1055/2005 and 1056/2005.