DNB-DK Governor cautions against overconfidence in fiscal space
Danmarks Nationalbank Governor Christian Kettel Thomsen warned against overconfidence in Denmark's fiscal space, citing uncertain economic projections. He emphasized that future large defense expenditures will necessitate difficult prioritizations in public spending.
Fiscal strength meets defense demands
Danmarks Nationalbank Governor Christian Kettel Thomsen noted that Denmark's strong public finances have been a great advantage during recent turbulent economic conditions, allowing the country to prioritize new tasks without deprioritizing other areas.
However, Thomsen highlighted that the expansion of military capacity is a huge task requiring permanent expenditures for an extensive period.
Even with a currently greater fiscal space, large defense spending will eventually impact other prioritizations.
Thomsen cautioned against overconfidence in fiscal projections: 'It's important to keep in mind that the fiscal space is an estimate based on a projection of the Danish economy that comes from a number of uncertain assumptions. This means that there may also be downward revisions, and there may be new crises that we do not yet know about, as we experienced with the pandemic and Russia's war in Ukraine. Hence, it is important that we do not become overconfident when it comes to using the fiscal space for higher public spending.'
This highlights the need for cautious fiscal management due to inherent uncertainties.
Credibility and future spending choices
Governor Thomsen further emphasized Denmark's status as a small, open economy, which critically relies on the credibility built from its sound public finances over many years.
This fiscal strength is a cornerstone for economic stability and international standing.
Consequently, Thomsen expressed concern over current political intentions to prioritize higher additional public spending and introduce new policy initiatives that would reduce state revenues.
Such actions risk undermining the fiscal prudence that has been a hallmark of Danish economic policy.
Preserving sound public finances is paramount for a country deeply integrated into the global economic system, ensuring its capacity to withstand future shocks and maintain investor confidence.
Any departure from this established path could have significant long-term repercussions.
Fiscal discipline under pressure
Governor Thomsen's speech delivers a crucial reminder: Denmark's robust fiscal position, while advantageous, is not limitless.
The significant defense spending and political intentions for increased outlays will inevitably force difficult prioritizations for policymakers.
This underscores the paramount importance of maintaining fiscal credibility for a small, open economy to ensure long-term stability.