Welfare Icon Now Wants People to Take Care of Themselves

(Bloomberg) -- When a European government raises the pension age and makes cuts to welfare programs, it's usually because of dire finances. In Denmark's case, it's because of ideology.

Greece, Italy and other highly-indebted countries are regularly urged by officials in Brussels to find ways of reducing public spending or making their labor markets more efficient. But of Denmark, the European Union's commission said in its most recent report: Competitiveness indicators “don't point to major challenges;” employment has “remained strong;” and the “risks to Denmark's fiscal sustainability are low in the short, medium and long term.”

So why is the Scandinavian nation finding it necessary to make cuts to its fabled welfare programs? Driving the new government's push is a desire to finance a major round of income tax cuts.

“We want to promote a society in which it is easier to support yourself and your family before you hand over a large share of your income to fund the costs of society,” the government of Prime Minister Lars Lokke Rasmussen wrote in its manifesto.

It's all part of a Danish drift toward the political right heralded at the start of the millennium by another Liberal Party premier named Rasmussen, Anders Fogh. The push to reduce levies in one of the most taxed societies in the world received new impetus in November, when two free-market groups joined the Liberals' minority government.

Rasmussen hasn't yet presented any detailed proposals, but much of the preparatory work has already been done. The above chart shows fiscal projections based on last year's plan to cut the top rate of income tax by 5 percentage points and boost the salaries of the lowest earners by an average of 7 percent. On that basis, balancing the budget would have been delayed by five years, with the deficit as a percentage of gross domestic product still at manageable levels.

The original proposal was eventually dropped after becoming a victim of a power struggle between the government and its biggest backer in parliament, the anti-immigration Danish People's Party. A reconfigured cabinet is now hard at work on a new one, due to be unveiled by the summer.

Generating the resources needed to fund the tax cuts requires higher revenues, lower spending, or a combination of both. The government believes that the best way to achieve its objective is to get more people into the workforce.

Since Denmark is already close to full employment (the unemployment rate came in at 3.4 percent in December) and attracting more migrant workers is a political no-go area (the government imposed border controls and tightened the rules in the wake of the refugee crisis of 2015), the obvious solution is to encourage more youngsters and the elderly to work.

Reforms introduced by successive governments over the years have already ensured that Denmark's expensive welfare state is sustainable for years to come, says Torben M. Andersen, a professor of economics at the University of Aarhus and a former government adviser. These include raising the retirement age to 67 years from 65 years by 2025.

The government now wants to raise the retirement age even further, to 67.5, and get students more quickly into the workforce by increasing the use of loans at the expense of grants.

The opposition has already said it plans to fight any tax cuts amid voters' concerns over the future of the country's cherished social model.

“The government has engaged in an ideological crusade away from the Nordic welfare state,” said Benny Engelbrecht, the finance spokesman of the Social Democrats, the country's biggest opposition party.

To contact the author of this story: Peter Levring in Kobenhavn at plevring1@bloomberg.net.

To contact the editor responsible for this story: Nicholas Rigillo at nrigillo@bloomberg.net, Jonas O Bergman