Denmark Pledges Stimulus End as Economic Recovery Gains Pace

Danish Finance Minister Bjarne Corydon is preparing to scale back stimulus as consumer optimism stokes an expansion in Scandinavia’s weakest economy.

“We can slowly take the foot off the accelerator,” Corydon said last week in an interview in Copenhagen. “The economy is approaching being self-sustaining.”

Reports last week showed retail sales are at the highest in two years and consumers the most optimistic since before the financial crisis erupted in 2008. The central bank last week raised growth estimates for the $340 billion economy, home to toymaker Lego A/S, and warned it’s monitoring declining unemployment that for some professions is at the same level as when the economy was “overheating” in 2006.

The Social Democratic-led government, which faces an election before September 2015, has raised spending to the limit to drag the country out of a slump triggered by a 2007-2008 housing crash. The deficit will reach 3 percent of gross domestic product next year, testing the limit under European Union rules, the Finance Ministry said last month.

Budget talks, due to start after the summer holiday, will concern “specific target policies,” rather than the complete framework, according to Corydon.

‘Bad Idea’

The economy expanded 0.9 percent in the first three months of this year, the most since the third quarter of 2010. Danish unemployment at 3.9 percent is close to pre-crisis levels. The central bank last week raised growth forecasts, predicting an expansion of 1.5 percent in 2014, 1.8 percent in 2015 and 2 percent in 2016.

The crisis has left its mark on Denmark, which like all Nordic countries has an extensive welfare and social safety net. Providing either social benefits or tax cuts without first finding the financing is “per default a bad idea,” Corydon said this month.

The government is seeking to uphold a budget law it introduced in 2012 and keep the structural deficit within the 0.5 percent EU limit. The government in May raised its domestic borrowing need to 116 billion kroner ($21.2 billion) from a December estimate of 84 billion kroner.

Bond Sales

Increased spending prompted the country’s debt office today to raise its bond borrowing estimate for this year by 33 percent 100 billion kroner.

“The government will go very far to stay within these rules,” Jan Stoerup Nielsen, an economist at Nordea Bank AB in Copenhagen, said by phone. “It’s extremely important to stay within the rules. There’s no reason to jeopardize the credibility that’s been built by Denmark by having a healthy economy and sound public finances.”

Still, the largest Nordic lender also predicts it’s unlikely the government will pare spending too much as it faces an election. Cutting government investments to pre-crisis levels could reduce spending by as much as 10 billion kroner annually from about 40 billion kroner currently, according to Nordea.

“The only place the government can reverse spending is public investments and infrastructure projects,” said Stoerup Nielsen. “They will be very reluctant to take anything away from anyone going into an election year and investments have been very high.”

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