Chapter 5

Government Debt and Interest Costs

In 2008, the central-government debt was reduced by DKK 52 billion as a result of the government surplus. The last 10 years have witnessed a pronounced reduction of the central-government debt, to DKK 195 billion at end-2008, equivalent to 11 per cent of GDP. The reduction of debt has been particularly strong in the last few years.

On account of the falling debt and lower market interest rates, the central government's annual interest costs have declined from DKK 44 billion in 1997 to DKK 12 billion in 2008.

Pronounced decline in government debt in recent years 5.1

The central-government debt is compiled as the nominal value of domestic and foreign debt less the balance of the central government's account at Danmarks Nationalbank and the assets of 3 government funds.

Development in the central-government debt	Chart 5.1.1

Recent years have witnessed a significant reduction of the central-government debt, from DKK 600 billion in 1997 to DKK 195 billion in 2008, corresponding to a decline from 53 per cent of GDP to 11 per cent of GDP, cf. Chart 5.1.1. At end-2008, the central-government debt was approximately DKK 35,000 per capita, compared with approximately DKK 115,000 per capita in 1997.

As a result of the government surplus in 2008, the central-government debt was reduced by DKK 52 billion to DKK 195 billion, cf. Table 5.1.1.

The central-government debt at market value was DKK 227 billion at end-2008, cf. Table 5.1.2. Compilation at market value implies that the value of the debt depends primarily on market interest rates. In a situation with falling market interest rates, as was the case in 2008, central-government debt will decline less when compiled at market value than when compiled at nominal value since the market value of the outstanding bonds increases. Compilation at market value is especially relevant if asset portfolios are being built up on a large scale, debt is bought back before maturity, or derivatives are used in government debt management.

Falling government debt has reduced interest costs 5.2

In 2008, the interest costs on the central-government debt totalled DKK 11.6 billion, which is a decline of DKK 3.6 billion from 2007, cf. Table 5.2.1.

On account of the pronounced debt reduction since 1997 and lower market interest rates, the central government's interest costs have declined from DKK 43.5 billion to DKK 11.6 billion over the same period, equivalent to a fall from 3.9 to 0.7 per cent of GDP, cf. Chart 5.2.1.

Development in interest costs	Chart 5.2.1

A breakdown of the development in interest costs shows that following a period in which the fall was predominantly driven by lower interest rates, the main underlying factor in recent years has been the reduction of the central-government debt, cf. Chart 5.2.2.

Breakdown of annual change in interest costs	Chart 5.2.2
Note: The breakdown is performed by calculating the interest costs at an unchanged level of interest rates. The difference between calculated and actual interest costs is the contribution from the change in debt. The contribution from the change in interest rates is the residual.

Other public debt measures 5.3

EMU debt increased in 2008 in spite of a government surplus
The European Commission and the Ecofin Council monitor the development in the budgetary situation of the EU member states in order to assess fiscal discipline. This assessment is based on the criteria set out in the EU Treaty and in the Stability and Growth Pact. As a general rule, the general-government deficit may not exceed 3 per cent of GDP, and the EMU debt may not exceed 60 per cent of GDP.

EMU debt is a gross debt measure solely comprising major debt items for general government compiled on a consolidated basis, cf. Box 5.1. In spite of a government surplus of 3 per cent of GDP in 2008, the EMU debt increased, cf. Chart 5.3.1. This can be attributed to the build-up of the central government's account, primarily due to issuance of 30-year government bonds, and restructuring of the assets of the Social Pension Fund from government bonds to mortgage bonds.

EMU debt is expected to be approximately DKK 530 billion at end-2008, equivalent to 30 per cent of GDP. Average euro area EMU debt is expected to be around 70 per cent.

General-government balance and EMU debt as a ratio of GDP	Chart 5.3.1
Note: For 2008, estimates from Budget Outlook 4, December 2008 (Denmark) and the European Commission's autumn forecast 2008 (euro area) have been applied. Source: Statistics Denmark, Ministry of Finance and European Commission.

Net general-government debt
At end-2007, net general-government debt was replaced by a net claim, cf. Chart 5.3.2. At end-2008, this net claim is expected to have increased further as a result of the general-government surplus. The net general-government debt is used in the Ministry of Finance analyses of fiscal sustainability, cf. Denmarks Convergence Programme 2008, December 2008.

Net general-government debt	Chart 5.3.2
Note: Year-end observations. The 2008 figure is an estimate from Budget Outlook 4, December 2008. Source: Statistics Denmark and Ministry of Finance.