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Contents | Executive summary | How to obtain this publication | Additional info
The following OECD assessment and recommendations summarise chapter 2 of the Economic survey of Denmark published on 19 February 2008.
Contents
The targets in the 2015 medium-term fiscal strategy are laudable, but clearer mechanisms are needed to ensure that they are met
In August 2007, a new medium-term fiscal framework was presented by the government: the 2015 Strategy. Starting from fiscal sustainability as the overarching objective, it stipulates a set of targets that will guide fiscal policy. In line with the preceding 2010 Strategy, net lending adjusted for cyclical and other temporary factors should be in surplus by ¾-1¾ per cent of GDP until 2010. From 2011 to 2015, it should at least be in balance. Consequently, a small net asset position will develop while gross debt, measured according to the Maastricht definition, could be reduced to about 15% of GDP in 2015, although this is not an explicit target. The volume of public consumption spending will be allowed to increase, on average, by 1% a year. This implies a slight increase in the share of public consumption spending in cyclically adjusted GDP, although it is required not to exceed 26½ per cent in 2015. Finally, to achieve these targets, the strategy requires actions to counteract the negative demographic impact on working hours and to raise structural unsubsidised employment by 20 000 (0.7%) by 2015. These paths for the structural surplus and net debt imply a reasonable balance between pre-funding and supply-oriented reforms to tackle the fiscal consequences of ageing. The focus on employment-oriented reforms helps to make room for the ambitious – but costly – priorities in Danish social and welfare policies.
The preceding 2010 Strategy has been successful at building consensus for maintaining budget surpluses in good times. The boost to revenues from pension taxation and North Sea oil and gas production in recent years has, to a large extent, been channelled into faster-than-planned debt reduction. This is a remarkable achievement. Meanwhile, the volume of public consumption has grown almost twice as much as envisaged in the original 2010 Strategy, and this tension is set to continue: under the 2015 Strategy, the target for public consumption growth is 1¾ per cent in 2008, but thereafter falls to 1% per year until 2012 and ¾ per cent in 2013-15. The strength of the consensus-based framework to withstand pressures in difficult times might, therefore, need to be enhanced by clearer mechanisms to ensure that the targets are met. In particular, the expenditure ceiling should be applied each year in the sense that if actual and projected spending indicates that the limit on public consumption spending in 2015 may be breached, action should be taken to redress excess spending up front. Indeed Danish experience shows that it is extremely difficult to reverse any accumulated excesses in public consumption growth. Strict adherence to the annual spending targets is vital. It will also promote clearer prioritisation of government expenditures. As much of the spending overrun has traditionally occurred in local and regional authorities, these would need to be better controlled, not least to prevent municipal tax hikes. Transparency could be improved with more accurate and up-to-date statistics on budget execution coupled with clearer consequences for overspending to break the pattern where aggregate public consumption spending drifts above the annual targets. If recent labour market reforms do not raise structural employment by as much as assumed, the requirement for new reforms would be commensurately higher. In this context, it is important that the new labour market commission presents specific measures going well beyond the labour supply requirements of the 2015 Strategy.
Public debt has fallen more than planned,
but public consumption has grown more than planned
The ongoing surpluses change the government’s balance sheet
Unless the government has more costly liabilities than government bonds, debt repayment should continue. The fixed exchange rate and closeness to the euro area means that euro-denominated government bonds can substitute for kroner bonds in many roles, such as pricing benchmarks and instruments for managing maturity-related interest risks. But re-entry may be associated with higher interest cost after a period of zero debt issuance. Being an oil producer, Denmark faces large fluctuations in revenue: for example, revenue from North Sea oil and gas production has risen by 1½ percentage point of GDP since 2003. If high oil prices continue, purchases of financial assets may then be required. It would then be important to have a clear framework for the prudent and efficient management of the assets. The framework should also ensure that the funds are used in a fiscally sustainable way consistent with the 2015 Strategy.
How to obtain this publication
The Policy Brief (pdf format) can be downloaded in English. It contains the OECD assessment and recommendations.The complete edition of the Economic survey of Denmark 2008 is available from:
- SourceOECD for subscribing institutions and many libraries
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OLISnet, under "Publication Locator", for government officials with accounts ( subscribe)
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Additional information
For further information please contact the Denmark Desk at the OECD Economics Department at eco.survey@oecd.org. The OECD Secretariat's report was prepared by Jens Lundsgaard and David Turvey under the supervision of Stefano Scarpetta. Research assistance was provided by Lutécia Daniel.
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