Convergence Programme for Denmark - Updated programme for the period 2005-2010

01-12-2005

The Danish economy is developing positively with fairly strong output growth, falling unemployment, rising employment, moderate inflation and surpluses on the fiscal and external balances. Both general government debt and foreign debt are being reduced.

The Danish economy is developing positively with fairly strong output growth, falling unemployment, rising employment, moderate inflation and surpluses on the fiscal and external balances. Both general government debt and foreign debt are being reduced. 

In the latest economic forecast (published in August), economic growth is projected to average some 2¼ per cent in 2004-2006 after subdued growth of ¾ per cent annually during the period 2001-2003 . Initially, the recovery was driven primarily by strong private consumption growth, which has been supported by, in particular, the lowering of income taxes in 2004, low interest rates and rising house prices.

Economic growth appears to become gradually more balanced in 2005 and 2006 as business investment and exports are expected to gather pace, while private consumption growth is expected to ease. Fiscal policy in both 2005 and 2006 is set to be broadly neutral in terms of economic activity, after a notable stimulus in 2004 stemming not least from the tax reductions.

Unemployment has declined by more than 30,000 persons since the end of 2003 and is expected to decline by an additional 10,000 persons by end 2006. The unemployment rate (national definition) is thus reduced from almost 6 per cent of the labour force in 2003 to just above 5 per cent in 2006. Meanwhile, employment is expected to increase by some 35,000 persons (1.3 per cent) from 2003 to 2006 – of which some 30,000 persons in the private sector. Overall, these trends point to increasing labour market pressures.

Based on the positive cyclical outlook and other factors, the general government surplus is expected to reach 2.5 percent of GDP in 2005 and 1.9 per cent of GDP in 2006 using national account principles, where ATP is classified as part of the private sector.  In part, the projected surpluses represent a temporary strengthening of the fiscal balance. Hence, the increase in oil prices is projected to generatel relatively high revenue from North Sea oil and gas activities. Moreover, in 2005 the tax on pension funds’ returns is projected to yield above-normal revenues due to large capital gains on stocks and bonds. The average structural surplus, which excludes these and other transitory factors, is projected at roughly 1 per cent of GDP in 2005 and 2006, which is consistent with medium-term objectives, cf. chapter 2 and 4.

The favourable economic outlook provides a sound basis for focusing on long-term objectives and challenges. In spring 2006 concrete proposals on improved education, research and development, innovation and entrepreneurship will be put forward. The efforts will be based primarily on the work of the Globalization Council established by the government in 2005 and the ongoing discussions with the social partners on a strengthening of lifelong learning. Furthermore, in light of the upcoming report of the government-appointed Welfare Commission and the following debate on the commission’s recommendations, the government will put forward proposals in the welfare area in the first part of 2006.

The 2005 Convergence Programme (CP05) sets out the broad fiscal and structural policy objectives towards 2010 . Compared with CP04, the medium-term require-ments for fiscal policy and employment growth have been reassessed in light of, in particular, the proposed fiscal bill for 2006, the latest agreement on improved labour market integration of immigrants and a revised population projection etc. Overall, the projection implies that the targets and assumptions for taxation, public services and employment towards 2010 are consistent with fiscal sustainability under neutral economic policy assumptions after 2010, cf. chapter 5.

The convergence programme is based on the latest short-term economic forecast for 2005 and 2006, cf. Economic Survey, August 2005, which incorporates the proposed fiscal bill for 2006 and the agreements reached in June 2005 on the local governments’ finances for 2006.  A new assessment of the short-term outlook, which incorporates the politically agreed fiscal bill for 2006, is scheduled for publication in the beginning of December. The growth prospects for 2005 and 2006 together are expected to be slightly higher than in the August figures, cf. chapter 3. Meanwhile, the forecast hori-zon will be extended to 2007.

The Convergence Programme for 2005 should be seen together with Denmark’s national reform programme, October 2005, which outlines the Danish government’s strategy on structural reform.

Convergence Programme for Denmark