Denmark: The 2015 budget stays within the limits

• The government and its supporting parties have reached an agreement on the 2015 budget that is very close to the government’s original proposal from August.

• In the agreement, there are new initiatives for DKK3.6bn in 2015 compared with the original budget proposal, due mainly to new healthcare initiatives, a new temporary unemployment benefit scheme and expectations of a higher number of asylum seekers next year but these are financed within the proposal’s framework.

• Overall, the budget is very mildly contractionary. We expect the government deficit to end up close to, but below, 3% of GDP, supported by the advanced taxation of pensions as agreed at the beginning of October.

The government and its two left-wing supporting parties have reached an agreement on the 2015 budget that is very close to the original proposal from August. In 2015, there are new initiatives for DKK 3.568bn (equivalent to 0.2% of GDP), which are financed by ‘central reserves’ (money set aside in the government’s budget proposal) (DKK2.7bn) and a lower EU contribution (DKK0.7bn).

The biggest new expenditures are for healthcare initiatives (DKK0.950bn) and income support (DKK0.956bn). As part of this, a new temporary unemployment benefit scheme is being introduced for those without the right to any other form of benefit. The new scheme is due to expire in 2017. Also, expenditure on asylum seekers is being increased due to the increasing number of refugees in the wake of geopolitical crises, mainly that in Syria.

Overall, the budget is very mildly contractionary. We expect the government deficit to end up close to, but below, 3% of GDP. In the original budget proposal from August, the government expected the deficit to be exactly 3% of GDP next year. However, much has happened since then, as both the growth and oil price outlooks have deteriorated further. Consequently, a political agreement was reached last month to allow advanced taxation of pensions again in 2015. The government expects this to raise DKK15bn next year, which should be enough to ensure that the deficit stays within the 3% limit. This said, there are many uncertainties surrounding the forecast of the government deficit next year, e.g. the growth outlook, oil price developments in 2015, investment returns in the pensions sector and the number of refugees. One thing to keep in mind is that the government has systematically overestimated the deficits: the average forecast error has been DKK37bn over the past 10 years, despite growth having disappointed repeatedly. The agreement on the 2015 budget does not change our view that the Danish public finances are sound and will stay within the limits of the EU’s Growth and Stability Pact. There has not been any major market reaction to the budget agreement following the press release.