Identifier
Created
Classification
Origin
10COPENHAGEN46
2010-01-28 09:07:00
UNCLASSIFIED
Embassy Copenhagen
Cable title:  

PM WARNS OF FISCAL TIGHTENING

Tags:  ECON EFIN PGOV DA 
pdf how-to read a cable
VZCZCXRO0121
RR RUEHIK
DE RUEHCP #0046/01 0280907
ZNR UUUUU ZZH
R 280907Z JAN 10
FM AMEMBASSY COPENHAGEN
TO RUEHC/SECSTATE WASHDC 5450
INFO RUCNMEM/EU MEMBER STATES COLLECTIVE
RUEATRS/DEPT OF TREASURY WASHDC
RUCPDOC/DEPT OF COMMERCE WASHDC
UNCLAS SECTION 01 OF 02 COPENHAGEN 000046 

SIPDIS

STATE FOR EUR/NB
TREASURY FOR THOMAS TORGERSON
COMMERCE FOR 4212/MAC/OECA/JDERSTINE

E.O. 12958: N/A
TAGS: ECON EFIN PGOV DA
SUBJECT: PM WARNS OF FISCAL TIGHTENING

COPENHAGEN 00000046 001.2 OF 002


UNCLAS SECTION 01 OF 02 COPENHAGEN 000046

SIPDIS

STATE FOR EUR/NB
TREASURY FOR THOMAS TORGERSON
COMMERCE FOR 4212/MAC/OECA/JDERSTINE

E.O. 12958: N/A
TAGS: ECON EFIN PGOV DA
SUBJECT: PM WARNS OF FISCAL TIGHTENING

COPENHAGEN 00000046 001.2 OF 002



1. SUMMARY: Danish PM Rasmussen announced that the government is
revising budget plans in 2011-2013 to address growing public budget
deficits. The plan, which will extend to 2020, will be released in
February and form the basis of the Government's efforts for fiscal
consolidation. Though details are sparse, the PM announced that
part of the plan will likely be zero real growth in municipal
budgets from 2011, which will likely lead to spending cuts. The
Government will likely propose its 2011 budget in August. Many
local observers worry that talk of reducing government spending may
endanger Denmark's relatively weak economic growth. The Government
is also suggesting that an increasing share of public government
services (child and elder care, in particular) be outsourced to cut
costs. END SUMMARY.
GROWING BUDGET DEFICITS PROMPT PM TO RECOMMEND BELT TIGHTENING
-------------- --------------

2. Danish PM Lars Loekke Rasmussen (Liberal Party) and Vice PM Lene
Espersen (Conservative People's Party) warned Danes that the
Government will soon need to tighten its belt to address growing
budget deficits. The announcement came during a January 15 press
conference at the end of the annual two-day government seminar to
assess the political situation at the mid-point of the parliamentary
year.

3. During his statement, the Prime Minister gave a summary of the
state of the Danish economy and warned that there will be a bill to
pay for the expansionary economic policy in 2010. He had briefly
mentioned this during his New Year's speech, but the Government had
not otherwise addressed the growing budget deficits or the need for
fiscal tightening. According to Rasmussen, the Government is doing
all in its power to curb the effects of the crisis and will continue
to do so with a special emphasis on battling long-term and youth
unemployment (Danish unemployment has more than doubled since the
beginning of the international economic crisis). The sound economic
policies of the Government in the good years (bringing down foreign
debt and running a public budget surplus) allowed Denmark to respond
to the crisis with expansionary fiscal policies, he claimed.

However, this has resulted in a swing from a budget surplus to a
deficit projected at 5.5% to 6% of GDP in 2010 and left the
Government's existing 2011-2015 budget plan in need of serious
revision.

4. These deficits also put the Danish economy outside the limits of
the European Monetary Union (EMU) requirements as stipulated by the
Stability and Growth Pact, precluding any option of holding a
referendum on joining the EMU in the near future (this is one of the
very few campaign pledges the Liberals made when they gained power
that they have not yet fulfilled). The Government will release its
EU Convergence Program in February outlining how it will get the
public deficit back under the 3% EMU limit, but the PM warned that
this will include serious budget cuts for 2011, 2012, and 2013 as
compared to what was in the previous 2011-2015 plan. He cautioned
that growth will continue to be fragile through 2010 and may require
additional stimulus to take hold, which is why he proposes budget
cuts from 2011 forward.
MUNICIPALITY BUDGETS TO BE FOCUS
--------------

5. The PM also quoted a statement from the Minister of Finance,
saying that the municipalities are to have zero real budget growth
starting in 2011 as part of the convergence program. This statement
led to energized debate among local observers, with several Danish
CEO's warning that a contraction in public spending could crush
Denmark's fragile recovery. Furthermore many local observers
predict that talk of local governments tightening the belt and tough
economic times ahead would curtail private spending. Danish private
consumption has contracted by 4.7% from Q3 2008 to Q3 2009; the
Government's stimulus measures have been aimed at stimulating
private spending. Finally, many commentators pointed out that the
municipalities have never been able to sustain zero real budget
growth. To require them to do so would imply that further cuts in
core welfare benefits like education or health care would follow;
commentators point out that such cuts are never popular with voters
and, therefore, probably not politically viable.
PLANS STILL UNDER REVIEW
--------------

6. The debate had the PM defending his statements at his weekly
press briefing on Tuesday January 19, specifying that the government
is well aware that reining in the deficit has to be done cautiously
so as not to harm a modest recovery. The PM noted that he did not
accept the press projections of an austere economic policy in coming
years, saying that he had merely pointed out that the government
would begin to rein in budget deficits and reduce the debt in 2011.


7. On January 26, the PM stated in his weekly press briefing that
the 2015 fiscal plan had been disrupted by economic developments and
would be replaced by a modified version projecting forward to 2020.
He said the Ministry of Finance is currently working on
understanding the nature and scale of the challenges posed by the
global economic crisis and will factor that into the convergence
program.

COPENHAGEN 00000046 002.2 OF 002



8. Following the convergence program announcement in February, the
central government will enter into the annual negotiations with the
municipalities in May and then propose the 2011 public budget in
August (NOTE: the proposed budget is usually negotiated and then
finalized in November). Though pressed on the point several times,
the PM declined to be more specific on what cuts he foresees, saying
only that they likely will be significant. He did state that the
government does not see the time as right for reform of the labor
market or the early retirement scheme (which allows employees to
retire at sixty) as possible responses to the challenges of the
economic crisis. Vice PM Espersen's Conservatives recently called
for reform of the early retirement scheme.
TALK OF OUTSOURCING SOME SERVICES
--------------

9. The Government is also exploring outsourcing some public
services as a possible path to cutting budgets. A government agency
report released January 25 found that several billion Danish Kroner
(DKK, approx. five to the US Dollar) could be saved if the
municipalities were more adept at outsourcing eldercare, childcare
and education to private companies. Vice PM Espersen suggested an
annual increase over the next three years of 1% in the share of
tasks outsourced by municipalities from the current 25%. The Danish
People's Party, on whose support the ruling coalition depends,
quickly criticized any such steps, claiming it would lead to
degradation in government services Danes rely on.
FULTON