Denmark’s weekend budget accord is provoking a backlash among business groups and economists who warn the measures agreed on risk depriving the flagging economy of future growth drivers.
“Denmark is on the edge of a recession,” Steen Bocian, head of economic research at Danske Bank A/S in Copenhagen, said yesterday in a phone interview. “This is not a budget that will help Denmark boost growth.” Instead, “there’s a risk that the measures agreed on will weaken incentives for people to work and therefore will be negative for the economy in the long run,” he said.
The accord aims to soften the fallout of economic decline on the unemployed and instead push more costs on to the private sector. While the government is seeking to galvanize growth through long-term infrastructure investments, those measures may not stimulate the areas of the economy that are most likely to fuel a recovery here and now, the International Monetary Fund said last week. The Washington-based fund urged more “direct” stimulus to target growth.
The IMF’s advice has been rejected by Economy Minister Margrethe Vestager, who in an interview last week said there’s no room for further adjustment in the government’s budget. The Social Democrat-led coalition of Prime Minister Helle Thorning- Schmidt and the Red Green Alliance agreed yesterday to give the unemployed six months extra access to benefits provided they accept vocational training during the period.
Denmark pays about about 23 basis points less than Germany to borrow over 10 years, and the country’s 3 percent note due November 2021 yielded 1.116 percent today. The government charges investors to hold its two-year debt, which yielded minus 0.126 percent as of 3:12 p.m. in Copenhagen.
The weekend accord will also push the cost of business training programs over to companies from the state, a step the Confederation of Danish Employers called “deeply worrying.” Measures designed to counter so-called social dumping, or what the government characterizes as international employers’ preference for cheap labor, will also be enforced.
“Given the challenges facing Denmark, it’s a huge disappointment that the government and parliament spent their time on an accord that in no way creates the foundation for welfare and growth,” Joern Neergaard Larsen, head of the confederation, said in a statement. “The bottom line is that the total package doesn’t take stock of the fact that Danish companies are losing market share every day and Denmark is losing its grip on future growth.”
The agreement follows the government’s budget proposal, unveiled in August, that targeted 0.9 percent economic growth this year and 1.7 percent expansion in 2013, forecasts that Fitch Ratings in September labeled as “optimistic.” The opposition Liberal and Conservative parties abandoned the budget talks after disagreeing with the government over taxes.
The ruling coalition will remove a levy on unhealthy foods and instead raise the tax rate for the lowest income tax bracket. The combined effect will be neutral for household incomes, while the consumer price index will grow 1.5 percent next year, versus an estimate for 1.9 percent had the so-called fat tax stayed in place, according to Danske Bank economist Las Olsen. Consumer prices fell 0.1 percent last month from September and rose a smaller-than-estimated 2.3 percent on the year, Statistics Denmark said today.
Denmark’s gross domestic product contracted 0.4 percent in the second quarter from the first, the statistics agency estimates. According to the Confederation of Danish Industry, the nation is probably in the grip of its second recession in less than a year.
Trade data suggest Danish exporters are losing business, as companies including turbine maker Vestas Wind Systems A/S (VWS) and dry bulk transporter Torm A/S struggle to generate a profit. Exports fell 5.3 percent in September from the previous month, the statistics agency said last week.
“Export had more or less kept the Danish economy on its feet,” the Confederation of Danish Industry said in a statement last week. “But now exports are falling too and that’s a warning signal that growth will remain sluggish in 2013.”
Yet Danish bonds have served as a haven from the euro zone’s debt crisis as the government keeps its debt load at less than half the average for Europe’s 17-member currency bloc. Vestager said last week the government’s main priority is to keep down its borrowing costs, based on an assumption that low rates will ultimately boost employment and restore growth.
Denmark, which pegs its krone to the euro, will post a 3.9 percent budget deficit of GDP this year, narrowing to 2 percent next year and 1.7 percent by 2014, the European Commission said Nov. 7. The krone traded at 7.4581 per euro at the end of last week, versus 7.4595 a week earlier.
The 17-member euro zone will run a combined deficit of 3.3 percent of GDP this year, improving to 2.6 percent next year and 2.5 percent in 2014, according to the commission. The European Union sets a deficit limit of 3 percent of GDP.
“We need to remember that trust in the economy translates into low rates and low rates keep people in jobs,” Vestager said Nov. 9. Unemployment, including people in vocational training, rose to 6.3 percent in September, from 6.2 percent a month earlier.
Though the “mildly contractionary” budget accord won’t contribute to economic growth, it will “make it more likely that Denmark will be able to meet EU’s criteria,” Bocian at Danske said.
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