The general government budget deficit in Denmark was 1.1% of GDP in 2020. Although this is the largest deficit since 2016, it is the lowest among all the EU countries and markedly lower than the EU average of 6.9%. Moreover, it is much lower than anticipated when the crisis hit.
There are several reasons why public finances have made it through the crisis so well. A key factor is that global stock markets gained significantly during the crisis. This affects the public budget balance directly through pension return tax revenues, which in 2020 totalled DKK 48bn. This amount exceeds government revenues from property taxes in 2020 by more than 50%, and it is more than twice the average pension return tax revenues over the past 20 years.
Another reason for the low budget deficit is that the fiscal policy stimulus during the crisis was to a large extent provided through payout of frozen holiday pay. As this money represents wage-earners’ own savings and is not taxed until the time of payout, it has, contrary to traditional fiscal policy easing, channelled large one-off revenues into the state coffer. In 2020 tax revenues in this connection totalled some DKK 18bn. Without the revenues from the pension return tax and frozen holiday pay, the budget deficit would have been around 4% of GDP.
Find out more about the Danish economic outlook from the Nordea Economic Outlook: Unrestricted Growth.
Denmark's public finances have emerged from the coronavirus crisis in good shape.
Jan Størup Nielsen, Nordea Chief Analyst
A third factor that supported public finances during the crisis was that many of the stimulus measures aimed to protect companies’ liquidity – for example through deferred payments of tax and VAT. As the measures thus mainly involved timing differences in tax payments, the direct effect on the public budget balance has been limited. In addition, companies have made less use of the direct compensation schemes than expected.
We expect the general government budget balance to be restored in 2021 thanks to the strong economic upswing and expectations of new, substantial pension return tax revenues. At the same time, new one-off revenues from the payout of the remaining frozen holiday pay will also improve the general government budget balance this year.
Government’s net worth at record-high level
Public finances look in even better shape if we focus on the government’s net worth during the crisis. Although the general government budget deficit detracted almost DKK 27bn viewed in isolation, a significant gain on the government’s shareholdings in Ørstad boosted the government’s net worth by DKK 108bn in 2020 to a record-high level of about 10% of GDP.
The substantial government assets and low budget deficit in an international context naturally create a strong starting point for the financing of the gross general government debt. During the crisis government debt rose by just under 10% points of GDP to some 42.2% of GDP currently.
However, it is important to underline that much of this debt accumulation during 2020 is due to the fact that the forecasts from the Ministry of Finance assumed a significantly larger deterioration of public budgets than was realised. As debt issuance during the coronavirus crisis was based on these forecasts, the government’s account with the Danish central bank gradually swelled; it currently stands at a 3-year high.
These ample reserves also mean that the actual borrowing requirement over the remainder of the year is very limited. We believe that gross government debt measured as a percentage of GDP peaked already at the turn of the year and will steadily decline in coming years.
This article first appeared in the Nordea Economic Outlook: Unrestricted Growth, published on 11 May 2021.
Jan Størup Nielsen, Nordea Chief Analyst
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