By Nick Mann | 24 January 2013
Denmark should consider increasing public spending if its ‘faltering’ recovery worsens, the International Monetary Fund said today.
According to the Fund’s latest bi-annual review of the Danish economy, its gross domestic product fell by 0.4% last year. It is now expected to grow by 0.9% in 2013, mostly as a result of private consumption and modest growth in business investment. However, risks to the economy persist through the country’s close trade and financial links to the euro – and the peg between the Danish krone and euro.
The IMF stressed that Denmark’s low public debt, currently less than 50% of its gross domestic product, as well as its strong credit rating and net creditor status meant it was ‘well-positioned’ to address the economic challenges it faces.
Increases in government spending aimed at addressing lower-than-expected economic growth had already increased Denmark’s budget deficit to an estimated 4.2% of gross domestic product last year.
In a statement, the IMF said further spending would be acceptable if growth failed to recover as expected. IMF directors ‘broadly agreed that, if growth falls significantly below current projections, the authorities should allow automatic stabilisers to operate fully and consider additional support to the economy’.
They stressed, however, that any additional spending should ensure that Denmark’s deficit for this year does not rise above 3%. The country must reduce its deficit below this level to leave the EU’s Excessive Deficit Procedure, which it entered in May 2010.
Meeting this target, and then exiting the EDP in early 2014, was important for ‘maintaining market confidence’, the IMF said. This view was shared by the Danish government, which placed ‘very high priority’ on achieving these goals, the report said.
‘In addition to complying with their EU agreements, the authorities believe that failing to meet the targets would undermine financial market confidence in Denmark’s continued willingness to take the measures necessary to maintain fiscal sustainability,’ it added.
