Abstract
This paper describes economic developments in Denmark during 1990–96. After a prolonged period of stagnation in the second half of the 1980s and early 1990s, GDP rose by 4¼ percent in 1994, reflecting a surge in domestic demand and recovery in export markets. The expansion of GDP slowed to a 2¾ percent pace in 1995 as domestic demand moderated and as exports decelerated sharply. The slowing of external markets intensified in the course of 1995 with the result that GDP in the fourth quarter was barely above its first quarter level.
III. The Public Finances
The medium to long-term objective of fiscal policy in Denmark is to reduce the public debt. To this end, it is planned to achieve a fiscal surplus over the business cycle. Within the limits of this objective, short-term fiscal policy should be is used to stabilize the economy by counteracting the effects of cyclical shocks.
A. Recent Fiscal Developments and the Budget for 1997
The balancing of short and medium-term concerns of fiscal policy is evident in the medium-term strategy elaborated by the authorities in early 1993. The authorities used fiscal policy in 1993-94 to jump start the economy. The actual deficit peaked at 4 percent of GDP in 1993, as the further structural deterioration in 1994 was offset by the effects of the strong growth, and the overall deficit declined to 3½ percent of GDP (Chart III-1).1 As domestic demand revived and economic slack was absorbed, the immediate emphasis of fiscal policy turned to the medium-term goals. Over 1995-96, the overall deficit declined to 1½ percent of GDP, with a primary surplus of 1¼ percent of GDP (Appendix Table A7).
Denmark Fiscal Developments
(In percent of GDP)
Citation: IMF Staff Country Reports 1997, 025; 10.5089/9781451811025.002.A003
Sources: Danish authorities; IMF World Economic Outlook: and staff estimates.1/ Excluding asset sales and loans to public enterprises.2/ Data reflect changed tax treatment of benefits from 1994 which has raised the expenditure and revenue rates by about 2 percentage points of GDP.3/ Adjusted for government deposits with the central bank, government holdings of non-government bonds, and government debt related to public enterprises.The fiscal adjustment since 1993 has been reflected particularly in spending, with the primary expenditure burden declining by 3¼ percentage points. Public consumption accounted for more than one-third of the fall in the expenditure ratio, reflecting a relatively small increase in public employment, slower public sector wage growth than in the economy at large, and restrained spending on goods (Table III-1). Falling transfers to households accounted for a similar share of the fall in the expenditure ratio, due notably to the large decline in transfers to households (the unemployment rate dropped from 12¼ percent to 8¾ percent). While the fall in unemployment was in part offset by an increased participation in other labor market support programs (see Chapter II), the compensation rates in these other programs were for the most part lower than provided through unemployment insurance. The decline in other expenditures, reflects a variety of factors including reductions in subsidies.2
Tax and Expenditure Burdens, 1993-97
(In percent of GDP)
Official estimate for 1996 and projection for 1997.
Adjusted for the effects of making certain benefits subject to taxation from 1994. This increased the tax and expenditure burden by 1.9 and 2.0 percentage points, respectively.
Personal taxes etc. include: withholding taxes, specific taxes from households, inheritance tax, gift tax and other personal taxes.
Tax and Expenditure Burdens, 1993-97
(In percent of GDP)
| 1993 | 1994 | 1995 | 1996 1/ | 1997 1/ | |
|---|---|---|---|---|---|
| Consumption | 26.3 | 25.7 | 25.1 | 25.1 | 24.8 |
| Transfer payments 2/ | 20.4 | 20.0 | 19.5 | 19.1 | 18.1 |
| Investment | 2.1 | 2.1 | 2.0 | 2.0 | 2.0 |
| Interest expenditures | 7.8 | 7.1 | 6.7 | 6.5 | 6.0 |
| Other types of expenditure | 7.6 | 7.3 | 7.1 | 6.9 | 6.6 |
| Expenditure burden | 64.2 | 62.2 | 60.3 | 59.7 | 57.4 |
| Personal income taxes etc. 2/ 3/ | 27.5 | 23.7 | 22.9 | 22.2 | 21.2 |
| Social security contributions | … | 2.8 | 3.4 | 4.0 | 4.6 |
| Real interest tax | 1.5 | 1.4 | 1.3 | 1.1 | 1.0 |
| Corporate tax | 2.2 | 2.1 | 2.1 | 2.5 | 2.8 |
| Value added tax | 9.8 | 10.0 | 9.9 | 10.0 | 10.1 |
| Excise duties | 7.7 | 8.1 | 8.1 | 8.3 | 8.5 |
| Other taxes | 1.8 | 1.8 | 1.7 | 1.7 | 1.7 |
| Tax burden | 50.5 | 50.0 | 49.5 | 49.9 | 49.8 |
| Interest revenue | 4.3 | 3.8 | 3.6 | 3.6 | 3.3 |
| Other non-tax revenue | 5.6 | 5.1 | 5.4 | 4.6 | 4.6 |
| Revenue burden | 60.3 | 58.9 | 58.5 | 58.1 | 57.7 |
| General government balance | -3.9 | -3.4 | -1.9 | -1.6 | 0.2 |
| Memorandum items: | |||||
| Expenditure excluding interest | 56.4 | 55.1 | 53.6 | 53.2 | 51.4 |
| Receipt excluding interest | 56.0 | 55.1 | 54.9 | 54.5 | 54.4 |
| Primary balance | -0.4 | 0.0 | 1.3 | 1.3 | 3.0 |
Official estimate for 1996 and projection for 1997.
Adjusted for the effects of making certain benefits subject to taxation from 1994. This increased the tax and expenditure burden by 1.9 and 2.0 percentage points, respectively.
Personal taxes etc. include: withholding taxes, specific taxes from households, inheritance tax, gift tax and other personal taxes.
Tax and Expenditure Burdens, 1993-97
(In percent of GDP)
| 1993 | 1994 | 1995 | 1996 1/ | 1997 1/ | |
|---|---|---|---|---|---|
| Consumption | 26.3 | 25.7 | 25.1 | 25.1 | 24.8 |
| Transfer payments 2/ | 20.4 | 20.0 | 19.5 | 19.1 | 18.1 |
| Investment | 2.1 | 2.1 | 2.0 | 2.0 | 2.0 |
| Interest expenditures | 7.8 | 7.1 | 6.7 | 6.5 | 6.0 |
| Other types of expenditure | 7.6 | 7.3 | 7.1 | 6.9 | 6.6 |
| Expenditure burden | 64.2 | 62.2 | 60.3 | 59.7 | 57.4 |
| Personal income taxes etc. 2/ 3/ | 27.5 | 23.7 | 22.9 | 22.2 | 21.2 |
| Social security contributions | … | 2.8 | 3.4 | 4.0 | 4.6 |
| Real interest tax | 1.5 | 1.4 | 1.3 | 1.1 | 1.0 |
| Corporate tax | 2.2 | 2.1 | 2.1 | 2.5 | 2.8 |
| Value added tax | 9.8 | 10.0 | 9.9 | 10.0 | 10.1 |
| Excise duties | 7.7 | 8.1 | 8.1 | 8.3 | 8.5 |
| Other taxes | 1.8 | 1.8 | 1.7 | 1.7 | 1.7 |
| Tax burden | 50.5 | 50.0 | 49.5 | 49.9 | 49.8 |
| Interest revenue | 4.3 | 3.8 | 3.6 | 3.6 | 3.3 |
| Other non-tax revenue | 5.6 | 5.1 | 5.4 | 4.6 | 4.6 |
| Revenue burden | 60.3 | 58.9 | 58.5 | 58.1 | 57.7 |
| General government balance | -3.9 | -3.4 | -1.9 | -1.6 | 0.2 |
| Memorandum items: | |||||
| Expenditure excluding interest | 56.4 | 55.1 | 53.6 | 53.2 | 51.4 |
| Receipt excluding interest | 56.0 | 55.1 | 54.9 | 54.5 | 54.4 |
| Primary balance | -0.4 | 0.0 | 1.3 | 1.3 | 3.0 |
Official estimate for 1996 and projection for 1997.
Adjusted for the effects of making certain benefits subject to taxation from 1994. This increased the tax and expenditure burden by 1.9 and 2.0 percentage points, respectively.
Personal taxes etc. include: withholding taxes, specific taxes from households, inheritance tax, gift tax and other personal taxes.
The primary revenue ratio fell by 1½ percentage points between 1993 and 1996, mainly in the area of non-tax revenue. The tax burden declined by only 1½ percentage point over this period. The tax reform being phased in over 1994-98 was designed to be revenue neutral, with lower marginal income tax rates, offset by increases in employee social security contributions, excise, and environmental taxes.3
The decline in the deficit over 1993-94 contributed to a fall in gross general government debt from 82 percent of GDP at end-1994 to 75 percent at end-1996.4 Asset transactions also contributed to the decline. Notably, the run-up in debt in 1992-93 was due partly to external borrowing in support of the currency, with the corresponding assets held at the central bank; these positions were unwound in the subsequent years. Moreover, a shift in the portfolio composition of the Social Pension Fund toward increased holdings of government debt (by about DKr15 billion, or 1½ percentage points of GDP) reduced the gross debt ratio. Asset sales included in general government revenue (see footnote on previous page) were in the range of ¼-½ percent of GDP a year over 1994-95.
The draft budget for 1997, sent to parliament in August 1996, had envisaged a small deficit of about ¼ percent of GDP in 1997; the final budget agreement, in December, estimated a budget surplus of ¼ percent of GDP. In framing fiscal plans for 1997, a key consideration was to ensure a sufficiently restrictive stance to avoid an acceleration of wages.
As in previous years, the adjustment is focussed on expenditure. Primary expenditure is budgeted to fall by 1¾ percentage points of GDP. Over half of the decline reflects a projected fall in transfer payments because of further declines in unemployment and reduced compensation rates under some programs. Public consumption is projected to be ¼ percent of GDP lower in 1997 while the public investment share remains unchanged.
The budget envisages that the tax burden for 1997 will decline slightly relative to GDP. This reflects a variety of influences. In particular, as part of the 1994-98 tax reform, there is a further decline in personal income taxes, offset by increased social security contributions of households and green (excise) taxes on households. In addition, local income tax rates are to increase by 0.8 percentage point.
B. Measures of the Structural Balance and the Budget’s Macroeconomic Impact
The melding of the medium-term goals of fiscal consolidation with short-term stabilization needs has caused fiscal policy to impart a positive impulse in 1993-94 and a withdrawal in the years since. However, beyond these broad parameters, gauging the structural deficit and macroeconomic impact of the government finances on a year to year basis is quite complicated. In addition to the usual uncertainties in making such calculations, additional complications are introduced by the labor market measures that have been put in place during this period.5
The following tabulation provides some estimates of the underlying effects of the measures taken. The staff estimate of the structural balance indicates that the deterioration in the fiscal accounts in 1993-94 was broadly offset in 1995-96 and that the budget plans for 1997, combined with the staffs macroeconomic outlook (which is slightly weaker than that of the authorities) entails a shift to a structural budget surplus in 1997. The reductions in the structural deficit over the period 1995-97 reflects to a significant extent declines in the structural rate of unemployment and in net-interest payments, and therefore tends to give an exaggerated impression of the contractionary stance of the budget.
The calculations of the fiscal effect in the tabulation are made by the authorities and are attempts to gauge the first year impact on GDP of the fiscal measures. They differ from changes in the structural deficit in that the components of expenditure and revenue are weighted differently in assessing their demand impact. Moreover, the fiscal effect does not give weight to declines in structural unemployment and net interest expenses. These considerations contribute to the differences between the authorities’ measure of the fiscal impact and the staff’s estimate of the change in the structural balance.6 Thus the budget for 1997 entails an improvement in the structural balance amounting to 1¼ percentage points of GDP and a contractionary fiscal effect of only ½ percent of GDP.
General Government Accounts
(In percent of GDP)
Staff estimate. In estimating the structural balance, potential output is based on the staff’s adjusted trend participation rate (see Chapter II)
The estimate of the effect of fiscal policy use by the Ministry of Finance is designed to isolate the first-year effect on GDP of purely discretionary measures. It is measured against a benchmark budget in which direct and indirect tax rates are fixed, the number of public sector employees is kept constant, wages in the public and private sector grow at the same rate, public consumption and investment is kept constant in volume terms, and the value of transfer payments grows at the rate of inflation. (See Finansredegorelse (1996) for a description of the latest revision to the methodology underlying this measure).
General Government Accounts
(In percent of GDP)
| 1992 | 1993 | 1994 | 1995 | 1996 | 1997 1/ | |
|---|---|---|---|---|---|---|
| Overall balance | -2.9 | -3.9 | -3.4 | -1.9 | -1.6 | -0.11/ |
| Structural balance1/ | -0.8 | -1.0 | -1.6 | -1.6 | -1.0 | 0.3 |
| Fiscal effect2/ | 0.9 | 0.8 | -0.1 | -0.5 | 0.2 | -0.5 |
Staff estimate. In estimating the structural balance, potential output is based on the staff’s adjusted trend participation rate (see Chapter II)
The estimate of the effect of fiscal policy use by the Ministry of Finance is designed to isolate the first-year effect on GDP of purely discretionary measures. It is measured against a benchmark budget in which direct and indirect tax rates are fixed, the number of public sector employees is kept constant, wages in the public and private sector grow at the same rate, public consumption and investment is kept constant in volume terms, and the value of transfer payments grows at the rate of inflation. (See Finansredegorelse (1996) for a description of the latest revision to the methodology underlying this measure).
General Government Accounts
(In percent of GDP)
| 1992 | 1993 | 1994 | 1995 | 1996 | 1997 1/ | |
|---|---|---|---|---|---|---|
| Overall balance | -2.9 | -3.9 | -3.4 | -1.9 | -1.6 | -0.11/ |
| Structural balance1/ | -0.8 | -1.0 | -1.6 | -1.6 | -1.0 | 0.3 |
| Fiscal effect2/ | 0.9 | 0.8 | -0.1 | -0.5 | 0.2 | -0.5 |
Staff estimate. In estimating the structural balance, potential output is based on the staff’s adjusted trend participation rate (see Chapter II)
The estimate of the effect of fiscal policy use by the Ministry of Finance is designed to isolate the first-year effect on GDP of purely discretionary measures. It is measured against a benchmark budget in which direct and indirect tax rates are fixed, the number of public sector employees is kept constant, wages in the public and private sector grow at the same rate, public consumption and investment is kept constant in volume terms, and the value of transfer payments grows at the rate of inflation. (See Finansredegorelse (1996) for a description of the latest revision to the methodology underlying this measure).
C. Fiscal Policy in the Medium Term
The 1997 budget represents an important step toward meeting the medium-term fiscal goal of achieving a surplus over the cycle. The latest medium-term outlook is based on the assumption that growth averages 2½ percent in the period 1998-2000 and then slows to 2¼ percent for the period 2001-2005 (Chart III-2). Inflation is assumed to hold steady at 2¼ percent aided by enhanced competition in product markets, particularly the services sector. Labor market programs lower the structural rate of unemployment to 7 percent by 2000 and 5 percent by 2005; the programs are assumed to reduce the drop-out rate among students, strengthen the elements within active labor market programs to qualify workers for jobs, and improve vocational training. The success of these labor market programs is vital for the success of achieving the fiscal goal of improving the government balance with reductions in the expenditure share.
Denmark Authorities’ Medium-Term Scenario
Citation: IMF Staff Country Reports 1997, 025; 10.5089/9781451811025.002.A003
Source: Ministry of Finance: “Finansredegoerelse 1996” and Budgetoversigt No. 4 1996”.1/ Data reflect changed tax treatment of benefits from 1994 which has raised the expenditure and revenue rates by about 2 percentage points of GDP.2/ Number of unemployed people in percent of the labor force.3/ Labor force in percent of working age population.The fiscal stance is assumed to be neutral after 1997 in the medium-term outlook so that the fiscal effect is nil with respect to GDP growth. The government balance is assumed to achieve a surplus of 2 percent of GDP on average during 1996-2000 and reach a surplus of 2½ percent in 2005. The expenditure burden drops by 8½ percentage points of GDP during 1995-2005. This is mainly due to lower interest payments, owing to lower government debt, and transfer payments, reflecting the assumed decline in unemployment. Government consumption also declines relative to GDP, reflecting that under the conventions adopted by the authorities, a neutral fiscal stance entails no growth in government employment or the volume of spending on goods. The revenue burden declines by 4½ percentage points of GDP, of which 2½ percentage points reflects taxes, with the remainder split between interest receipts and other non tax revenues.
Declines in government and external debt are important features of the scenario. The gross debt of the general government falls by 15 percentage points of GDP by 2005. At the same time, the current account balance widens to about 3 percent of GDP by 2005 and net external debt declines to zero.
Unless otherwise stated, references are to the official measure of the general government balance, which includes asset sales and loans to public enterprises above the line. The staff has produced also a preliminary measure of the general government balance that excludes asset transactions (Chart III-1). The official data will be brought fully into line with national accounts practices in 1997. The staffs measure of the structural balance is based on the adjusted data.
Subsidies to enterprises in the business sector are a relatively small part of general government expenditure (½ percent of GDP) and stayed roughly constant in relation to GDP over the time period in question.
See Appendix III in Denmark - Recent Economic Developments, (SM/94/15, 1/18/94) for a description of the tax reform measures passed by Parliament in June 1993 to take effect in January 1994. It is noteworthy that cuts in income tax rates were not fully funded in the initial years to provide stimulus to growth. It was planned that the lower revenues would not be recovered until the reform was fully implemented in 1998.
Conforming with EU-definitions of gross debt, excluding trade credits would reduce these ratios to 76 and 70 percent, in 1994 and 1996 respectively.
The uncertainties are illustrated by considering the complicated fiscal effects of the leave schemes. The government must pay transfers to those participating in the leave schemes, but to the extent that the positions are filled by unemployed persons it will save on unemployment transfers. If the person going on leave is employed by the government and the position is not filled, this also provides an offset. Other problems relate to gauging the effects of the labor market measures on structural unemployment.
Other differences relate to the definition of a neutral stance. For example, the staff calculation of the structural balance considers a neutral spending stance to be that spending other than unemployment benefits rises at the same rate as potential output. For the authorities’ estimate of the fiscal effect, a neutral stance entails, inter alia, government employment and real spending on goods remaining constant.
