Populist Drift Poses Risks to Danish Economy as Election Looms

(Bloomberg) -- Increasingly restrictive immigration policies and a potential rise in public spending ahead of next year’s general election risk overheating Denmark’s economy by exacerbating labor shortages, according to experts.

Such warnings are intensifying just as the center-right government prepares to unveil its final budget before Danes are due to head to the polls, some time during the first half of 2019.

Finance Minister Kristian Jensen said last month that the government would drop its target of zero spending growth in the public sector due to higher demand for health care services and to invest more in the police and the military. Spending will increase at a “moderate” pace over the next 10 years, Jensen said.

That doesn’t sit too well with many of the nation’s economists. "The economy really needs less public spending, not more," Jes Asmussen, chief economist at Handelsbanken, said in a telephone interview.

Labor Bottlenecks

After expanding for 17 out of the last 21 quarters, the Danish economy is starting to meet bottlenecks in the labor market, with unemployment reaching a nine-year low of 3.9 percent in May.

Populist Drift Poses Risks to Danish Economy as Election Looms

According to Asmussen, the current rate of Denmark’s economic expansion requires around 3,500 new jobs each month. However, the government has not done enough to increase the labor supply, for instance by making work more attractive for people on benefits.

At the same time, the influx of foreigners -- both from within and from outside the EU -- has fallen dramatically, adding to the bottlenecks.

Fitch Solutions blames the pivotal role of the nationalist Danish People’s Party (DPP) in Danish politics for years of "increasingly populist leanings in government policy."

Burqa Ban

The DPP is seen as the main driving force behind the government’s progressive crackdown on refugees, many of whom have been fleeing conflict in the Middle East. The latest headline-grabbing policy was a "burqa ban" that came into force on August 1.

Fitch Solutions also blames the DPP, on whose support the current government relies on for a majority in parliament, for possible increases in budget spending.

"The fact that the main center-right party is abandoning fiscally conservative principles reinforces that the DPP’s influence in moving overall policy in a populist direction," Fitch Solutions wrote in a note.

The DPP’s influence is likely to continue into the next legislature. The opposition Social Democrats, which are currently leading in the opinion polls, have hinted they may explore a possible coalition with the nationalists after the 2019 election. This kind of untested alliance has been boosted by the words of their leader, Mette Frederiksen, who has talked about building on the incumbent government’s immigration policies to "take back control."

Although Denmark posted a budget surplus of 1 percent of gross domestic product last year, Nordea economist Helge Pedersen has another reason for advocating fiscal prudence: a possible global trade war and the looming end to years of ultra-loose monetary policy -- both risk impacting tax receipts from pension savings and stock market trading.

As if to reinforce that point, Fitch Solutions on Wednesday cut its growth estimates for the Danish economy, citing in addition the departure from the European Union of one of its biggest trading partners, the U.K.

With the Economy Ministry having already said it expects a budget deficit over the next two years, "saving now would give us something to spend in case of a sudden slowdown,’’ Pedersen said.

©2018 Bloomberg L.P.