5. English Summary

Over the same period the tax burden, i.e. the ratio of aggregate tax revenues to GDP, is expected to decrease by almost 2 percentage points. Also interest revenues and other non-tax revenues are expected to decrease relative to GDP, which contribute to an expected decrease in the revenue burden of app. 4¼ percentage points.

The tax burden was especially high in 1999 primarily due to higher revenues from corporate taxes, pension yield taxation and excise duties from the vehicle registration fee included in other excise duties. Thus, lower revenues from these taxes constitute a major contribution to the reduction of the tax burden from 1999 to 2000.

From 2001 to 2001 the tax burden is expected to decrease by almost ½ percentage point, which is primarily due to extraordinarily low revenues from pension yield taxation in light of the adverse development of the Danish stock prices.

Only marginal changes in the tax burden are expected from 2001 to 2002. The personal income tax easing due to the Whitsun package adopted in June 1998 is thus offset by an estimated increase in revenues from pension yield taxation.

5.3 Fiscal stance

The fiscal effect is an indicator of the fiscal policy stance. It measures the impact of discretionary fiscal policy changes on economic growth – measured by the effect on GDP in the year, where the discretionary measures are implemented.

The fiscal effect is estimated at 0.2 in 2002, cf. table 5.4. Thus, the fiscal stance is estimated to be moderately easy in 2002. Additionally, continued structural effects on saving incentives due to the adjustment of income taxation adopted in June 1998 (Whitsun package) are expected to dampen activity by 0.2 per cent. Furthermore, the additional measures also include a positive impact on activity of the proposed initiatives contained in the housing investment package. The effect on activity of the investment initiatives is estimated at 0.1 percent of GDP. Thus, the first-year effect on economic activity of overall economic policy is more or less neutral in 2002.

On the revenue side the contribution to the fiscal effect is 0.1 in 2002. The easing stems from the adjustment of income taxation adopted in the Whitsun package. Growth in public consumption expenditure constitutes the most significant contribution on the expenditure side. The estimated growth in public consumption reflects the improvements in public services contained in the agreements with local governments in June, including in particular improvements in health services.

Compared to the projection in May the estimated total fiscal effect in 2001 is adjusted downwards by 0.2, which is mainly due to adjustments of expenditures. Thus, the positive contribution to activity from expenditures has been revised down due to lower expected growth in public consumption, including a reduction of the estimated growth in public employment from 7,000 to 6,000 persons. The contribution stemming from transfer incomes is also slightly reduced.

Based on Statistics Denmark's revised version of the national accounts for 2000 the fiscal effect is estimated at -0.1 in 2000, which is slightly easier than estimated in the May projection. Higher growth in public consumption expenditures in municipalities is the main reason for the revised estimate.

Measured by the fiscal effect, which only shows the first-year effect on economic activity, the fiscal policy stance is, as mentioned, estimated to be moderately easy in 2002.

Economic activity in a given year, however, is also affected by discretionary fiscal policy decisions taken in previous years. The lagged effects of fiscal policy measures since 1993 are estimated to have a more or less neutral impact on economic growth in 2002, cf. table 5.5.

Since 1996 fiscal policy measured by the cumulated activity effects has been tighter than indicated by the first-year effects (the fiscal effect). Among other things, this reflects that the lagged effects on activity of the tightening stemming from higher revenues in the previous years are larger than the expansion stemming from higher expenditures.

Note: The activity effects have been estimated using the econometric model ADAM. The italicised numbers are identical to the fiscal effect (first year effect) in the different years. Derived structural effects of fiscal policy on economic activity are not included in the numbers. Beware, that numbers are rounded, hence the components do not necessarily sum to the total.

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. The development in the structural budget balance is thus mainly determined by fiscal policy, differences between the actual and structural rate of unemployment and underlying growth in the labour force.

The general government budget balance has improved considerably during recent years. From a deficit of 2¼ per cent of GDP in 1995 the actual budget balance is expected to increase by app. 4¾ percentage points and reach 2½ per cent of GDP in 2002, cf. figure 5.3. Over the same period the structural budget balance is expected to improve by almost 4¼ percentage points. Structural budget surpluses are essential in order to achieve a reduction in public debt over the business cycles.

Figure 5.3. Actual and structural balance, 1988-2002

The improvement of the structural budget balance can mainly be attributed to the achieved reduction in the structural rate of unemployment due to improvements in labour-market policies, cf. table 5.6. The structural rate of unemployment is expected to decrease from app. 10 per cent of the labour force in 1995 to app. 5½ per cent in 2002. Also, decreasing net interest expenditures, cf. special budget items, and to a lesser extent fiscal policy have contributed to an improvement of the structural budget balance.

5.4. General government finances in a long-term perspective

It is the government's objective to reduce the public debt and thereby ensure the long-term sustainability of government finances in light of future demographic changes.

Therefore, the size of the budget surplus must be seen against the future obligations of the public sector, including expenditures for pensions and care for the elderly.

Adjusted for these obligations, the general budget surplus in 2002 is estimated to be roughly at the level, which ensures long-term sustainability of fiscal policy, cf. table 5.7. A negative adjusted budget balance reflects the strengthening of the public finances, which must be made to balance public revenues and expenditures in the long term. The strengthening can be done either through tighter fiscal policy or through sustainable higher employment in the private sector.

Compared with the May projection the adjusted budget balance is reduced by 0.3 percentage points in 2001. This is primarily due to minor methodological changes. Corrected for temporary cyclical contributions the adjusted budget balance is reduced by additionally 0.3 percentage points compared to the May projection. Hence, the reduction is not a result of an ease of fiscal policy.

Compared to 2001 the adjusted budget balance in 2002 is improved by some ½ per cent of GDP – implying balance in 2002. The improvement is primarily due to an increase in the budget balance excluding social funds. Corrected for temporary cyclical contributions the adjusted budget balance is -0.4 per cent of GDP in 2002 reflecting, that fiscal policy is roughly sustainable in the long-term.

Note: The adjusted budget balance is the actual budget balance adjusted for future demographic challenges – with unchanged tax rates and expenditure standards.

1) Includes, among other things, the effect of decisions adopted in the Whitsun package, expected lower future tax revenues from oil and gas extraction in the North Sea and an expected reduction in the future revenues from corporate taxation.

The adjustment of the general government budget balance involves five distinct steps.

First, the surplus in the labour market supplementary pension scheme (ATP) is subtracted from the general budget surplus, as is the surplus in other labour market funds. This reflects the fact that the assets held by these institutions are balanced by future spending obligations already legislated. In 2002, this adjustment reduces the surplus from 2.5 per cent of GDP to 1.2 per cent, cf. table 5.7.

Secondly, the projected future increase in outlays for public pensions, health care expenditures etc. require significant current government savings in order to forestall the need for future changes in fiscal policy. Viewed in isolation, the changing demographic structure necessitates a surplus of almost 3 per cent of GDP in 2002.

Thirdly, the public sector holds significant claims on the private sector in the form of deferred taxes associated with private pension assets. Also, future pensions will help improving general government finances due to the income-dependent scaling down of resulting transfers. Converted to a constant annual flow of net revenue, this equals 1.3 per cent of GDP in 2002.

Fourthly the budget balance is adjusted by some 0.8 per cent of GDP in 2002 due to some special factors – among other things, the revenue effects due to decisions made for the future adopted in the Whitsun package.

Fifthly the primary surplus, in per cent of GDP, required to cover interest and principal payments on public debt is reduced by the nominal GDP growth rate. Due to the latest forecasts of economic growth and prices, this adjustment amounts to about 1.1 per cent of GDP in 2002.

It should be noted that the adjusted budget balance is not the same as the structural budget balance. The sustainability of the adjusted budget balance thus requires that the achieved improvements with respect to general government budget balance are not only temporary cyclical improvements.

Also, the forecasted impact of demographic changes on the budget balance is sensitive to the detailed assumptions regarding demographic changes, the rate of interest and the long-term growth rate of the economy.

5.5. Central government finances

The draft budget bill for 2002 shows a central government CIL-surplus of DDK 19.2bn or 1.3 per cent of GDP. Thus, 2002 will be the sixth consecutive year with surplus on the central government budget. In 2001 a CIL-surplus of DKK 18bn (also 1.3 per cent of GDP) is estimated, cf. figure 5.4.

Figure 5.4. CIL-account with and without one-off measures, 1993-2002

The CIL-account has been improved considerably during the recent 8-9 years. The large deficit in 1993 of app. DKK 48.5bn (or 5.4 per cent of GDP) was turned into a surplus in 1997 – the first surplus since 1987. As from 1997 the final CIL-account has been in surplus, and surpluses are also expected in 2001 and 2002.

It should be noted, that the CIL-account is affected by one-off measures. E.g. the large surplus in 1998 reflects the central government sale of shares in TeleDanmark. Corrected for one-off measures the first CIL-account surplus was in 1999.

The underlying CIL-account, i.e. the CIL-account excluding one-off measures, has also improved considerably since 1993. This is primarily due to the development in economic activity with increasing employment and a sharp drop in unemployment. Decreasing central government interest expenditure has also contributed to the underlying improvement of central government finances.

In 2002 the underlying CIL-surplus is falling. This is partly caused by relatively modest expected growth in 2002. Besides this the tax reductions following the Whitsun package amounting to app. DKK 3½bn and the relatively high increase in Denmark's contribution to EU are contributing to the fall in underlying CIL-surplus.

Capital account

According to the draft budget bill for 2002, the net balance is expected to show a surplus of DKK 0.1bn, whereas the net balance for 2001 is expected to show a surplus of DKK 14.5bn, cf. table 5.8. More re-lending and large negative changes in stocks reduce the net balance surplus in 2002 compared to 2001.

The estimated surplus on the net balance in 2001 has been revised up by DKK ½bn compared to the expected surplus in May. The adjustment is due to an upward revision in the surplus on the CIL account of DKK 1.3bn and a downward revision in changes in stocks of DKK 0.7bn.

In 2002, the gross deficit is expected to amount to DKK 98.7bn. The gross deficit is calculated as the net balance subtracted by redemption of central government debt. In 2001, the gross deficit is expected to amount to DKK 81.8bn.

The domestic borrowing requirement equals redemption of central government domestic debt and the net financing requirement. This implies that gross foreign borrowing normally equals the redemption of central government foreign debt. In 2002, the central government's foreign borrowing requirement is expected to match the amount of redemption of foreign debt, i.e. DKK 22.5bn, cf. table 5.8.

The domestic borrowing requirement in 2002 is projected to amount to DKK 76.2bn with redemption of domestic debt amounting to DKK 76.3bn and a net placing requirement of DKK 0.1bn, cf. table 5.8. and table 5.9.

In 2001, redemption of domestic debt amounts to DKK 79.1bn and the net placing requirement is expected to amount to DKK -14.5bn. This means that the domestic borrowing requirement is projected to amount to DKK 64.6bn.

In per cent of GDP central government debt is expected to fall from 45.7 per cent in 1999 to 36.6 per cent in 2002. By the end of 2001 and 2002, central government debt is expected to amount to DKK 521.2bn and DKK 522.6bn, respectively, compared to DKK 561.7bn in 1999, cf. table 5.10.