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March 27th, 2012

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Regional health services and national and local government will soon be forced to stick to strict spending limits or face sanctions, after the government this morning agreed on a new budget law with majority support.

The government introduced the law partially to address runaway spending by the councils, but predominantly to fulfil the requirements of the EU’s financial compact treaty that Denmark signed earlier in March.

The financial compact set strict regulations for how much debt countries may take on, including a provision that budget deficits amount to no more than three percent of GDP per year.

Together with a proposal to grant the government’s financial advisory board, Det Økonomiske Råd , greater power in overseeing government spending, the budget law is expected to pass in parliament by a vast majority.

“What is important about the budget legislation is that it will keep public spending to what was agreed to in the budgets,” the Socialdemokraterne's finance spokesperson, John Dyrby Paulsen, told public broadcaster DR. “So if they do not stick to the budgets, mechanisms will kick in to ensure that they do.”

According the Finance Ministry’s proposal for the law, beginning in 2014 councils and regions risk losing portions of block grants from the government if they fail to stick to the budgets. On the state level, however, the proposal has yet to finalise how the EU ‘correction mechanisms’ for encouraging countries to stick to their spending plans would kick in.

While there has been near unanimous support for the proposals to rein in spending by the regional and local councils, some MPs have voiced concern at the focus on not spending too much, rather than finding incentives for councils that manage to maintain surpluses, such as allowing them to lower taxes.

“We think that Denmark should introduce a budget law similar to the one in Sweden,” Merete Risager, the finance spokesperson for Liberal Alliance, told DR. “The Swedish model demands that there is a surplus on public finances, and that means that if we stick to our budgets we can make investments and lower taxes. If we operate with limiting deficit as a goal, then we might end up with a situation where we spend right up to what we are allowed.”

This fear was shared by the mayor of Viborg, Søren Pape Poulsen. Speaking to Jyllands-Posten newspaper, Poulsen argued that having spending limits would not encourage state-run institutions to be responsible for their finances by spending and saving when they see fit. Instead, he argued, the budget limits may breed a culture of spending up to the limits, even if it was not necessary.

“Schools and daycare institutions will use all the money they can,” Poulsen said. “It may well be that budgets will balance, but then there is no incentive to save up to buy extra things when they are needed.”

While Dansk Folkeparti has also expressed concern about incorporating the EU’s tightened budget regulations into Danish law, reports indicate that 167 out parliament's 179 MPs will vote for the law.

The first budget ceiling will last from 2014 to the end of 2017.