Budget Outlook, December 2002

Budget Outlook, December 2002

1. General government finances

The general government surplus is estimated at DKK 21.4bn in 2002 and DKK 24.6bn in 2003, cf. table 1. In per cent of GDP the surplus corresponds to 1.5 per cent in 2002 and 1.7 per cent in 2003.

In 2004 the surplus is expected to reach DKK 33.5bn corresponding to 2.2 per cent of GDP. The estimate for 2004 is largely based on technical assumptions – including an assumed normalisation of the revenues from pension yield taxation after extraordinarily low revenues in 2001-2003.

A decrease in the surplus is expected from 2001 to 2002. Part of the decrease corresponding to app. ½ per cent of GDP is due to an adjustment of the special pension-scheme savings. The pension-scheme is changed into a private/indi­vi­dual scheme, i.e. the previous re-distributive element is cancelled. Hence, the transfer of the pension scheme to the private sector implies a technical reduction of the general government surplus.

The expected decrease in the surplus from 2001 to 2002 is also due to lower revenues from corporate taxes and personal income taxes etc. in light of an expected drop in employment and tax reductions in pursuance of the Whitsun package adopted in June 1998.

Compared to the August projection the current estimate for general government finances in 2002 and 2003 implies a deterioration of app. DKK 8bn or ½ per cent of GDP. Fiscal policy changes since August has an almost neutral impact on the estimated surpluses in 2002 and 2003, cf. below .

The downward revision of the surpluses in 2002 and 2003 is partly due to technical revisions of the national accounts by Statistics Denmark, cf. table 2. The estimated surpluses in 2002 and 2003 are reduced by app. DKK 3-4bn due to the technical revisions. This technical revision of the surpluses has no impact on the central government CIL-account, central government debt, the gross public debt or the sustainability of public finances, cf. Economic Survey , December 2002.

1) Hence forth total public interest expenditures are to be calculated exclusive of interest expenditures on SWAP-arrangements in the national accounts. This statistical revision implies an upward revision of interest expenditures of DKK 0.9bn in 2002 and DKK 2.2bn in 2003. In 2003 the effect of the revision is offset by a downward adjustment of interest expenditures by DKK 2bn in light of an expected lower level of interest rates.

2) In the national accounts imposed but never paid taxes and duties are hence forth to be written off as capital transfers to households and firms.

Increased expenditures for income transfers also contribute to the downward adjustment of surpluses in 2002 and 2003. This is primarily due to an upward adjustment of sick leaves and unemployment.

The downward adjustment of the budget balance can also be referred to an expected reduction of revenues – in particular revenues from corporate taxes. New statistics for corporate income in 2001 indicate that the estimated revenues in 2002 and 2003 will be somewhat lower than expected in the August projection.

Revenues from income taxes etc. and labour market contributions are revised downwards in light of a downward adjustment of employment in both years.

Detailed information about the general government finances including revisions since the August estimate can be found in the annex below .

From 2001 to 2004 the expenditure burden, i.e. the ratio of general government expenditures to GDP, is expected to decrease by 1 percentage point, cf. table 3 . This is primarily due to an estimated reduction of the interest expenditure burden in light of expected lower public debt and lower interest rates.

The estimated drop in the tax burden, i.e. the ratio of aggregate tax revenues to GDP, of app. 1 percentage point from 2001 to 2004 can be referred to the adjustment of the special pension scheme savings, cf. above, and to a reduction of revenues from corporate taxes, that were extraordinarily high in 2001.

A decrease of 1½ percentage points is expected in the revenue burden from 2001 to 2004. Apart from the estimated reduction of the tax burden lower interest revenues are expected to contribute to the drop in the revenue burden.

2. Fiscal stance

The fiscal effect is an indicator of fiscal policy stance. It measures the impact of discretionary fiscal policy changes on economic growth – measured by the effect on GDP in the year discretionary measures are implemented. The fiscal effect is estimated at 0.1 per cent of GDP in 2003, cf. table 4.

Thus, measured by the fiscal effect the central government budget bill for 2003 and the local government budget for 2003 are expected to have an almost neutral impact on economic activity in 2003.

Lower public expenditures contribute about -0.1 to the fiscal effect in 2003. The tightening primarily stems from an expected reduction of public subsidies and non-taxable income transfers.

On the revenue side the contribution to the fiscal effect is app. 0.1 per cent of GDP in 2003. Most of the easing stems from new tax initiatives in pursuance of the central government budget bill for 2002 and 2003. The initiatives include, among other things, reductions of motor vehicle taxes, the annulment of excise duties related to labour environment and reductions of excise duties on tobacco, alcohol and soft drinks. Furthermore, there is a positive contribution to the fiscal effect from the tax freeze of nominal excise duties.

In 2002 growth in public consumption constitutes the most significant contribution to the fiscal effect stemming from the expenditure side. On the revenue side the contribution to the fiscal effect is 0.1 per cent of GDP in 2002. This easing stems primarily from the adjustment of income taxation adopted in the Whitsun package from 1998 .

Fiscal policy is seen as adequate in the present situation with high, but somewhat declining pressure on the labour market, cf. Economic Survey , December 2002.

3. Structural budget balance

The structural budget balance is defined as 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 fiscal policy, differences between the actual and structural rate of unemployment and the underlying growth in the labour force.

The structural budget balance surplus is estimated at 1.7 per cent of GDP in 2002 and 1.9 per cent of GDP in 2003, cf. table 5

1) Fiscal policy is – except for some adjustments including adjustments for tax income on income transfers – measured by the direct revenue effects used in the calculation of the fiscal effect.

2) Measured in hours of working.

3) Special budget items include net interest expenditures, capital transfers etc.

The estimated structural budget balance is more or less in line with the expected actual budget balance in 2002 and 2003. This, however, is to be seen in light of a positive impact on the actual budget balance from the cyclical position of the economy and a negative impact on the actual budget balance from the extraordinarily low revenues from pension yield taxation.

The reduction of the structural budget balance from 2001 to 2002 is primarily due to the adjustment of the special pension-scheme savings. Both the actual and the structural budget balance are reduced by approximately ½ per cent of GDP from 2001 to 2002 due to the adjustment of the scheme.

4. Central government finances

The central government budget bill for 2003 shows a surplus on the so-called CIL-account of DKK 11.1bn or 0.8 per cent of GDP, cf. table 6 . Central government expenditures are estimated at DKK 428.1bn, while total revenues are expected to be DKK 439.2bn.

The new estimate for the CIL-account in 2002 shows a surplus of DKK 12.7bn or 0.9 per cent of GDP. Thus the central government budget surplus is expected to be slightly higher in 2002 compared to 2003 .

The new estimate for the CIL-account in 2002 implies a downward adjustment of the surplus of DKK 3.3bn since August. This is due to lower revenues, especially from the corporation tax.

It should be noted, that the CIL-account is affected by one-off measures and extraordinary events of varying size from year to year. E.g. the very large surplus in 1998 reflected the central government sale of shares in TeleDanmark. Likewise the CIL-surpluses in both 2000 and 2001 among other things were affected by a shortening of the fixed time of credit with respect to VAT payments.

In 2002 the sum of one-off measures and extraordinary events are of a relatively limited magnitude. In 2003 the sum of one-off measures and extraordinary events is perceptibly negative because of extraordinary low expected revenue from the pension yield tax. Thus, corrected for one-off measures and extraordinary events the CIL-account exhibits an improvement from 2002 to 2003, cf. figure 1.

Figure 1. Central government CIL-account, 1997-2003

The underlying improvement of the CIL-account since 1997 is primarily attributable to falling interest expenditures on central government debt and a positive economic development, e.g. increasing employment and decreasing unemployment.

The composition of central government revenues and expenditures based on budget bill figures for 2003 is shown in figure 2.

Income transfers constitute the largest item on the central government expenditure budget. They amount to app. 50 per cent of total expenditures, while operational expenditures (wages to employees, purchase of goods and services) covers app. 20 per cent. Bloc grants to local governments and interest payments constitute in sum almost 20 per cent of central government expenditures. Finally, Denmark’s EU contribution and other expenditures add up to the remaining app. 10 per cent.

Figure 2. Central government revenues and expenditures 2003

Around one third of central government revenues stem from VAT, while duties, labour market contributions and personal income tax amount to app. 20 per cent each. The remaining app. 10 per cent of total revenues comes from corporation tax, pension yield tax and other revenues taken together.

5. Central government capital account

In 2003 central government debt is expected to continue the decrease of recent years as per cent of GDP, cf. table 7

1) Ørestadsselskabet, A/S Storebælt og Øresundsforbindelsen A/S.

In nominal terms, however, central government debt is expected to increase by approximately DKK 12½bn from 2002 to 2003 due to a net financing requirement of DKK 10bn and a loss related to the issuing of bonds in 2003. The net financing requirement is anticipated in spite of a surplus on the CIL-account. This is primarily due to factors such as re-lending to government owned infrastructure entities – approximately DKK 13bn – and technical factors related to periodisation of tax incomes etc. In 2003 central government debt adjusted for re-lending is expected to remain at around DKK 517bn in nominal terms.

In 2002 central government debt is forecast to remain stable around 38 per cent of GDP. In nominal terms debt is expected to increase to DKK 529.8bn. This is regardless of a foreseen surplus of DKK 12.7bn on the CIL-account. The increase in debt can mainly be attributed to technical factors related to periodisation of tax incomes etc. – more than DKK 16bn – and re-lending amounting to DKK 8bn.

Note: The numbers are rounded. Hence, the sum of components does not necessarily equal the total.

1) Including re-lending to infrastructure entities

2) Market value.

In 2003 the gross borrowing requirement is estimated at DKK 117.5bn. This is a sum of DKK 90.5bn in redemption of domestic debt, DKK 17.1bn in redemption on foreign debt, and a net placing requirement of DKK 10bn. The gross borrowing requirement is covered by domestic borrowing equal to DKK 86.5bn, foreign borrowing of 17.1bn and drawings on Danmark’s Nationalbank of DKK 13.9bn. The significant amount of drawings on Danmark’s Nationalbank in 2003 is the result of the latest initiative aiming at better cash management in the government sector. One result of this initiative is a reduction of the balance of the central governments account with Danmark’s Nationalbank.

The gross financing requirement in 2002 is expected to be DKK 133.7bn. This is financed through domestic borrowing equal to DKK 114.9bn, foreign borrowing of DKK 22.5bn and finally DKK –3.7bn in drawings on Danmark’s Nationalbank.

Annex

1) Other expenditures include subsidies, capital transfers, transfers to the Faroe Islands and Greenland, and Danish EU-contributions.

2) Personal taxes etc. include withholding taxes, tax on imputed income from owner-occupied dwellings, specific taxes from households, tax on estates of deceased persons and other personal taxes.

3) Other taxes include social security contributions (labour market supplementary pension scheme contributions, unemployment insurance contributions and early retirement contributions).

4) Other revenues include profits from public enterprises, current and capital transfers from other domestic sectors and EU, and imputed (calculated) revenues such as gross operating surplus and contributions to civil servants’ earned pension.

5) The general government primary balance states the balance of the general government finances before net interest expenditures.

6) The estimates for 2004 are primarily based on technical assumptions.