Country Report Denmark March 2009

Summary

The minority Liberal-Conservative government's main short-term policy priorities will be to ensure the stability of Denmark's financial institutions and to alleviate the effects of a sharp economic downturn.
There is a possibility that the prime minister, Anders Fogh Rasmussen, will step down in mid-2009 to take up an international post. His most likely successor would be the minister of finance, Lars Lokke Rasmussen.
The government has raised the possibility of holding a referendum on whether to join the euro area. A vote in 2010 is possible, providing the government can persuade all the main pro-EU parties to back its campaign.
Fiscal policy will be expansionary. Public investment is set to rise. Personal income taxes will be reduced in 2010-11, paid for by higher environmental taxes, although the reform will be under-financed during the downturn.
The Nationalbank (the central bank) will reduce interest rates during 2009, although it will maintain a positive differential with comparable euro area rates if this is necessary to protect the krone's peg to the euro.
The Danish economy is heading for a severe contraction. Real GDP is forecast to shrink by a revised 3.5% in 2009, with growth stagnant in 2010.

On March 1st the government secured the support of the Danish People's Party (DF) to approve a reform of personal income taxes.
The main change in the tax reform will be the abolition of the middle bracket for income tax, paid for by increases in existing "green" taxes and the introduction of some new environmental levies.
The government estimates that the reform will increase the full-time labour supply in Denmark by 19,000 people and improve public finances by Dkr5.5bn (US$1bn, or 0.3% of GDP) by 2019.
The agreement with the DF also included a number of measures aimed at boosting private consumption in the short term, such as granting households temporary access to savings held in the special pension fund.
The banking crisis has claimed another victim in Denmark with the news that a small regional lender, Fionia Bank, has been forced to seek financial assistance from the state.
Full-year national accounts reveal that real GDP contracted by 1.3% in 2008. GDP plummeted by a seasonally adjusted 2% quarter on quarter in the final three months of the year, and by 1.3% year on year.