Danish PM risks snap elections in uphill battle to trim welfare state

August 30, 2016 7:35 AM EDT

Lars Lokke Rasmussen, Prime Minister of Denmark, makes a toast during a state dinner with U.S. President Barack Obama and Nordic leaders at the White House in Washington, U.S., May 13, 2016. REUTERS/Joshua Roberts


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By Jacob Gronholt-Pedersen

COPENHAGEN (Reuters) - Denmark could be headed for snap elections this autumn as the country's minority government struggles to satisfy conflicting demands from political allies, with some insisting on more welfare and others on tax cuts for the wealthy.

Danish Prime Minister Lars Lokke Rasmussen on Tuesday announced a broad reform plan to boost Denmark's sluggish economic growth over the next ten years. Measures proposed included income tax cuts to entice people to work and raising the pensions age.

Rasmussen, of the liberal Venstre party, leads a minority government and could face strong headwinds from political allies. Some parties have warned that there could be a snap election in the autumn if their demands are not met.

In response, the prime minister, who stands to lose in the event of snap elections, launched what resembled an election campaign more than political negotiations. He presented part of his reform agenda live on his personal Facebook page, while also starting a week-long tour of the country.

Denmark is among the most affluent countries and one of only eight to hold the best possible rating - AAA - at the three main credit rating agencies.

The Danish welfare model became an unlikely feature of the U.S. presidential election campaign, when Republican candidate Bernie Sanders pointed to Denmark as a model for his vision of an ideal American future.

But Denmark's economic growth is lagging behind neighbors Norway, Sweden and Germany, and some economists and politicians partly blame the country's generous welfare system and high tax burden.

The government on Tuesday further trimmed its economic growth forecast for 2016 and 2017, crystallizing what will be another difficult economic year for the Nordic country, which has suffered a decade of lackluster growth since the 2007-08 financial crisis.

Only Spain and Italy among OECD countries have recorded slower growth than Denmark in productivity per working hour in the last 20 years.

"We risk falling behind, and risk that our children won't have the same welfare and possibilities as their peers in Germany or Sweden," Rasmussen said at a news conference to announce the plan.

The government will, with its plan, seek to send 250,000 more into employment by 2025 and improve conditions for businesses, which will boost the economy with 65 billion Danish crowns.

Under the proposal, income tax would be lowered for those earning incomes below 1 million Danish crowns ($150,000) a year by 2025, and the top marginal tax rate would be lowered to 10 percent from 15 percent.

All measures in the plan are subject to parliamentary approval, with political negotiations to take place between now and year-end.

The Liberal Alliance had made the lowering of the top marginal tax rate a key demand, threatening to withdraw support for Rasmussen's government if it was not met.

Another political ally, populist Danish People's Party, wants more welfare and tougher immigration measures, including the right to reject asylum seekers at the borders, a demand that was included in the government's plan.

"I would like to emphasize that there is no guarantee this will end with a grand agreement. It may be necessary to ask the public at a parliamentary election," party leader Kristian Thulesen Dahl said in reaction to the government's plan.

The plan also envisages raising the pension age earlier than previously planned to 67.5 years in 2025, up from 67, and to 68 years in 2030.

(Reporting by Jacob Gronholt-Pedersen, additionel reporting by Erik Matzen; Editing by Ralph Boulton)



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