Budget Outlook, may 2011

30-05-2011

The Danish economy is recovering after the international economic recession, and the unemployment rate has been declining since the summer of 2010.

Fiscal policy was eased substantially in 2009 and 2010, which has lowered the negative impact of the economic recession. However, it has also contributed to a weakening of the public finances by DKK 108bn from 2008 to 2010, and the largest public budget deficit since the early 1990s. This also reflects the bad cyclical conditions with higher unemployment and lower tax revenues. On this background fiscal challenges have grown bigger.

Primarily in light of the Fiscal Consolidation Agreement the structural budget balance is strengthened by approx. ½ percentage point from 2010 to 2012, while the actual budget deficit increases in the same period from 2.9 percent of GDP in 2010 to 4.3 percent of GDP in 2012. This is due to a decrease in the pension yield taxation of 28½ bn. from 2010 to 2012 and the release of the early retirement contributions in 2012.

In Reform Agenda 2020 the challenge of achieving fiscal balance in year 2020 is projected to DKK 47bn. The Fiscal Consolidation Agreement, May 2010, meets DKK 24bn of the challenge, and with the Agreement on Later Retirement and Making Ends Meet agreed upon in May 2011 the remaining challenge of DKK 23bn is met. The measures in these agreements include later retirement age and changes in the early retirement scheme as well as cuts in the defence budget and EU contributions.

The consolidation of the public finances dampens growth in the coming years. However, fiscal policy in 2009-2011 and low interest rates contribute to growth by approx. 1¼ per cent of GDP in 2011. In 2012 the total effect of fiscal policy and the release of early retirement contributions have an almost neutral effect on activity.

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