COPENHAGEN (Reuters) - Denmark’s government proposed a fiscal policy on Thursday that it hopes will keep the economy from expanding too fast, but its parliamentary ally is pushing for increased welfare spending that could cause growth to accelerate.
The draft budget the government offered for 2018 would slow economic growth by 0.05 percentage points. But the Danish People’s Party (DF) - whose cooperation the government needs to pass laws - wants more spending, not less.
“With the signals we hear from DF, it could definitely go in that direction,” said Soren V. Kristensen, an economist at Sydbank. “It’s very important that the government stands its ground on this.”
An overheating economy, which would drive up wages and make Denmark less competitive, is the “biggest domestic risk” to the Danish economy, Kristensen said.
Denmark’s gross domestic product grew 2.7 percent in the second quarter of 2017 from a year earlier, and the government has raised its forecast for all 2017 to 2.0 percent from a previous forecast of 1.7 percent.
As the economy has grown, so has employment. It has risen by 150,000 people since 2013, and it is expected to total almost 3 million people by the end of 2018. That would put it close to its highest level ever, which was reached just before the global financial crisis erupted a decade ago.
Rising employment in turn has pushed up wages. In a forecast on Thursday, the government said it now expected disposable incomes to rise 1.8 percent this year and 2.2 percent next year, up from a May forecast of 1.2 percent each of the two years.
With employment booming, Danish companies are complaining that they are having trouble hiring enough people. In an effort to avoid labor shortages, the government has proposed tax cuts that it said would incline people to work more.
But the DF also opposes those cuts, saying it sees no reason to cut taxes for wealthy Danes.
Chief economist Jan Storup Nielsen at Nordea fears the proposed cuts will be changed in negotiations with DF, so that those intended to expand the work force the most will be left out of the final budget.
“The biggest risk is if they give tax cuts that do not increase the labor supply significantly, and still do not tighten the fiscal policy. Then we could get into overheating and a lack of labor,” Nielsen said.
Editing by Larry King