Denmark’s government cut its growth forecasts for this year and next as Scandinavia’s smallest economy struggles to cope with international headwinds exacerbated by Britain’s decision to leave the European Union.
Gross domestic product will expand 0.9 percent in 2016, compared with a May forecast for 1.1 percent, the government said. GDP in 2017 will grow 1.5 percent, versus the 1.7 percent predicted just three months ago.
“Overall, the growth outlook for the international economy has been downgraded slightly following the prospect of slightly slower growth in Europe in 2017 due to Brexit,” the government said. Still, the turmoil instantly following the June referendum has eased while record-low interest rates have supported growth, it said.
To deal with the economic slowdown, the minority administration of Prime Minister Lars Loekke Rasmussen is planning to cut taxes across income brackets. His program will increase employment by almost 250,000 people and add about 65 billion kroner ($9.8 billion) to the economy through 2025, equivalent to 3 percent of GDP, the government estimates. The measures will include tax cuts and create more scope for tax deductions on investments.
“It’s commendable that the government and parliament are working toward strengthening the economy, also when we’re not in a crisis,” central bank Governor Lars Rohde said in a statement. “Structural measures often work best in an economy experiencing growth. If that means a bigger labor supply and greater productivity, then the growth period will last longer and be more robust.”
The government pushed back its ambition of achieving a structural budget balance, and now estimates it may not reach that goal until as late as 2025, five years after its previous target.
Meanwhile, Denmark is cutting its forecast for how much it will borrow, and predicts a domestic financing need for next year of just 94 billion kroner, which is about 28 percent lower than 2016’s requirement.
“The reduced borrowing need can mean that the national debt office will lower the target for Danish government bond issuance in 2017,” Jan Stoerup Nielsen, a senior analyst at Nordea Markets, wrote in a note. The issuance target for 2016 is unlikely to change, he said.