Statement by Governor Jens Thomsen at the meeting of the Danish Economic Council on 22 October 2009

The recession that has hit the industrialised economies over the past year has had a strong impact on the Danish economy. In Q2 2009, Denmark's output was 7.4 per cent lower than in Q4 2007, when GDP peaked.

At the same time, the rate of wage increase has been stronger in Denmark than abroad for a long period – without a compensating improvement in productivity.

Moreover, it requires considerable effort to maintain fiscal sustainability. This situation poses great challenges to economic policy, but the challenges are interrelated.

It is a prerequisite that an activist fiscal policy is symmetrical. Expansion during a crisis must be matched by tightening during a boom.

Earlier policy measures have been taken to smooth out cyclical fluctuations but during the most recent boom tightening measures has not been sustained. Fiscal policy contributed to increasing pressures on the labour market.

The Chairmanship's proposal to bring forward public investments totalling kr. 10 billion in 2010 and possibly 2011 should be viewed against the background of the difficulties in conducting symmetrical fiscal policy and the need for a lower rate of wage increase than abroad. The proposal will postpone the adjustment and prolong the period of relatively high unemployment envisaged, quite rightly, by the Chairmanship itself. In addition, it is by no means certain that reducing unemployment by 10,000 people will lower structural unemployment to any significant degree.

At the same time, a further increase in public expenditure entails a greater need for consolidation in the coming years.

There is thus every reason not to increase public expenditure. As mentioned in the chapter on health, the healthcare sector will already exert strong pressure to increase public expenditure.

The mounting government debt emphasises the need for a new medium-term plan, as mentioned by the Chairmanship. The plan should describe the measures required to ensure fiscal sustainability. Any additional spending should be included in the plan.