The government’s plan to invest massively in public infrastructure to help pull Denmark out of the economic crisis will likely break EU guidelines according to the think-tank Kraka.
The 10 billion kroner ‘kickstart’ program was announced during the election to get the Danish economy moving again by bringing forward public investments in roads and railways and through the renovation of schools and social housing.
“We cannot sit and passively wait for the Danish economy to grow by itself,” the government wrote about the kickstart their common policy manifesto. “This is an essential project to get Denmark out of the crisis.”
The problem is that Denmark has pledged to keep a lid on its spending after the EU expressed concern in 2010 that the Danish budget deficit would exceed three percent of its GDP. The government then pledged to cut its spending by 1.5 percent of GDP, or 0.5 percent a year between 2011 and 2013, and keep its budget deficit below three percent from then on.
During this period, Denmark is not technically allowed to ease its fiscal policy but the the kickstart programme would do precisely that. Kraka also stated in an article published in Berlingske newspaper today that the kickstart programme would violate the EU fiscal compact treaty that Denmark signed earlier this month.
This is because the programme will likely worsen Denmark’s structural deficit – the country’s long-term debt – that already stands at 0.8 percent of GDP, while the treaty states that it should not be more than 0.5 percent of GDP.
In order to meet the guidelines set by the EU for 2013, Denmark would have to cut its spending by 0.9 percent of GDP in 2013, or about 16 billion kroner. This would be achieved by both tax hikes and cuts to investment in public infrastructure.
“The kickstart will be quickly replaced by a kickstop,” Kraka's report stated.
Writing in Berlingske, Kraka’s CEO Jakob Hald and its chief economist Jens Hauch said that Denmark has actually introduced tighter fiscal reforms than were stipulated in the treaty.
The government is currently preparing its medium-term budgetary strategy for submission to the EU in April and while the finance minister, Bjarne Corydon, admits that the Danish structural deficit is expected to grow by 0.1 percent in 2012, the EU is unlikely to take issue with Denmark’s economic plans
“I have full faith that the EU will judge that we fulfil the recommendations when we present our convergence plan,” Corydon told Berlingske.
Far-left political party Enhedslisten has been particularly critical of the fiscal compact treaty, arguing that it prevents countries from taking on budget deficits to make large public investments at times of stagnant economic growth. In doing so, the EU forces the member states who have signed up to implement fiscal policies of austerity, rather than investment.