VZCZCXRO0121
RR RUEHIK
DE RUEHCP #0046/01 0280907
ZNR UUUUU ZZH
R 280907Z JAN 10
FM AMEMBASSY COPENHAGEN
TO RUEHC/SECSTATE WASHDC 5450
INFO RUCNMEM/EU MEMBER STATES COLLECTIVE
RUEATRS/DEPT OF TREASURY WASHDC
RUCPDOC/DEPT OF COMMERCE WASHDC

UNCLAS SECTION 01 OF 02 COPENHAGEN 000046 
 
SIPDIS 
 
STATE FOR EUR/NB 
TREASURY FOR THOMAS TORGERSON 
COMMERCE FOR 4212/MAC/OECA/JDERSTINE 
 
E.O. 12958: N/A 
TAGS: ECON EFIN PGOV DA
SUBJECT: PM WARNS OF FISCAL TIGHTENING 
 
COPENHAGEN 00000046  001.2 OF 002 
 
 
¶1. SUMMARY:  Danish PM Rasmussen announced that the government is 
revising budget plans in 2011-2013 to address growing public budget 
deficits.  The plan, which will extend to 2020, will be released in 
February and form the basis of the Government's efforts for fiscal 
consolidation.  Though details are sparse, the PM announced that 
part of the plan will likely be zero real growth in municipal 
budgets from 2011, which will likely lead to spending cuts.  The 
Government will likely propose its 2011 budget in August.  Many 
local observers worry that talk of reducing government spending may 
endanger Denmark's relatively weak economic growth.  The Government 
is also suggesting that an increasing share of public government 
services (child and elder care, in particular) be outsourced to cut 
costs.  END SUMMARY. 
GROWING BUDGET DEFICITS PROMPT PM TO RECOMMEND BELT TIGHTENING 
--------------------------------------------- ---------- 
¶2.  Danish PM Lars Loekke Rasmussen (Liberal Party) and Vice PM Lene 
Espersen (Conservative People's Party) warned Danes that the 
Government will soon need to tighten its belt to address growing 
budget deficits.  The announcement came during a January 15 press 
conference at the end of the annual two-day government seminar to 
assess the political situation at the mid-point of the parliamentary 
year. 
¶3.  During his statement, the Prime Minister gave a summary of the 
state of the Danish economy and warned that there will be a bill to 
pay for the expansionary economic policy in 2010.  He had briefly 
mentioned this during his New Year's speech, but the Government had 
not otherwise addressed the growing budget deficits or the need for 
fiscal tightening.  According to Rasmussen, the Government is doing 
all in its power to curb the effects of the crisis and will continue 
to do so with a special emphasis on battling long-term and youth 
unemployment (Danish unemployment has more than doubled since the 
beginning of the international economic crisis).  The sound economic 
policies of the Government in the good years (bringing down foreign 
debt and running a public budget surplus) allowed Denmark to respond 
to the crisis with expansionary fiscal policies, he claimed. 
However, this has resulted in a swing from a budget surplus to a 
deficit projected at 5.5% to 6% of GDP in 2010 and left the 
Government's existing 2011-2015 budget plan in need of serious 
revision. 
¶4.  These deficits also put the Danish economy outside the limits of 
the European Monetary Union (EMU) requirements as stipulated by the 
Stability and Growth Pact, precluding any option of holding a 
referendum on joining the EMU in the near future (this is one of the 
very few campaign pledges the Liberals made when they gained power 
that they have not yet fulfilled).  The Government will release its 
EU Convergence Program in February outlining how it will get the 
public deficit back under the 3% EMU limit, but the PM warned that 
this will include serious budget cuts for 2011, 2012, and 2013 as 
compared to what was in the previous 2011-2015 plan.  He cautioned 
that growth will continue to be fragile through 2010 and may require 
additional stimulus to take hold, which is why he proposes budget 
cuts from 2011 forward. 
MUNICIPALITY BUDGETS TO BE FOCUS 
-------------------------------- 
¶5.  The PM also quoted a statement from the Minister of Finance, 
saying that the municipalities are to have zero real budget growth 
starting in 2011 as part of the convergence program.  This statement 
led to energized debate among local observers, with several Danish 
CEO's warning that a contraction in public spending could crush 
Denmark's fragile recovery.  Furthermore many local observers 
predict that talk of local governments tightening the belt and tough 
economic times ahead would curtail private spending.  Danish private 
consumption has contracted by 4.7% from Q3 2008 to Q3 2009; the 
Government's stimulus measures have been aimed at stimulating 
private spending.  Finally, many commentators pointed out that the 
municipalities have never been able to sustain zero real budget 
growth.  To require them to do so would imply that further cuts in 
core welfare benefits like education or health care would follow; 
commentators point out that such cuts are never popular with voters 
and, therefore, probably not politically viable. 
PLANS STILL UNDER REVIEW 
------------------------ 
¶6.  The debate had the PM defending his statements at his weekly 
press briefing on Tuesday January 19, specifying that the government 
is well aware that reining in the deficit has to be done cautiously 
so as not to harm a modest recovery.  The PM noted that he did not 
accept the press projections of an austere economic policy in coming 
years, saying that he had merely pointed out that the government 
would begin to rein in budget deficits and reduce the debt in 2011. 
 
¶7.  On January 26, the PM stated in his weekly press briefing that 
the 2015 fiscal plan had been disrupted by economic developments and 
would be replaced by a modified version projecting forward to 2020. 
He said the Ministry of Finance is currently working on 
understanding the nature and scale of the challenges posed by the 
global economic crisis and will factor that into the convergence 
program. 
 
COPENHAGEN 00000046  002.2 OF 002 
 
 
¶8.  Following the convergence program announcement in February, the 
central government will enter into the annual negotiations with the 
municipalities in May and then propose the 2011 public budget in 
August (NOTE: the proposed budget is usually negotiated and then 
finalized in November).  Though pressed on the point several times, 
the PM declined to be more specific on what cuts he foresees, saying 
only that they likely will be significant.  He did state that the 
government does not see the time as right for reform of the labor 
market or the early retirement scheme (which allows employees to 
retire at sixty) as possible responses to the challenges of the 
economic crisis.  Vice PM Espersen's Conservatives recently called 
for reform of the early retirement scheme. 
TALK OF OUTSOURCING SOME SERVICES 
--------------------------------- 
¶9.  The Government is also exploring outsourcing some public 
services as a possible path to cutting budgets.  A government agency 
report released January 25 found that several billion Danish Kroner 
(DKK, approx. five to the US Dollar) could be saved if the 
municipalities were more adept at outsourcing eldercare, childcare 
and education to private companies.  Vice PM Espersen suggested an 
annual increase over the next three years of 1% in the share of 
tasks outsourced by municipalities from the current 25%.  The Danish 
People's Party, on whose support the ruling coalition depends, 
quickly criticized any such steps, claiming it would lead to 
degradation in government services Danes rely on. 
FULTON