NEWS / Foreign Exchange

Denmark: PM Fogh calls snap election

Denmark??™s prime minister, Anders Fogh Rasmussen, has just called a snap election, to be held on 13 November 2007. The announcement has, of course, put an end to the growing speculation about when an election would take place. With the date just three weeks away, there will clearly not be much time for campaigning.

From an economic perspective, the difference between the two possible future governments is a little more pronounced than was the case the last time around, when there was a high degree of consensus on economic policy.

The present government will stand on a continuation of the current tax freeze, which means, for instance, that property taxes will remain unchanged. In addition, just yesterday, tax cuts on wage income in both 2008 and 2009 were passed, while at the same time public spending looks set for relatively high growth.

Meanwhile, the Social Democrats, the largest party in a possible alternative government, propose to roll back the promised tax cuts in 2008 and 2009. Further, they would put an end to the automatic tax reduction that would come about due to a lower labour market contribution.

On the other hand, the Social Democrats are keen to increase public spending by more than the present government proposes, and to make public transport cheaper.

The tax freeze is also a target of the Social Democrats, though they emphasise that any break with this policy would require a broad majority. But how would this be defined? Would, for example, support from Denmark??™s newest party, the New Alliance, be enough to qualify? If so, a change of government might lead to increased property taxes. However, there is no reason to expect a very large hike in taxes on homeowners.

The election is being called at a time when the economy is historically strong - with record-low unemployment and record surpluses on public finances. This means there is a risk of an election campaign in which both the government and the opposition attempt to outdo each other in terms of even greater promises on welfare. This could potentially increase the risk of the Danish economy overheating.

The campaign will, furthermore, come just ahead of the general wage rounds in the public sector. Hence, there is also a risk of the parties trying to outbid each other in terms of public sector wages, particularly as public sector employees form a major group of voters. Such a scenario could increase the risk of the labour market overheating.

On the other hand, the elections being over before the wage negotiations begin may have the positive effect of providing the clarification that could help facilitate an agreement in the spring.

In our view, the general election will basically be perceived as a non-event by the financial markets. The political differences are perhaps substantial from a national perspective, but looking at the differences in economic policy from a little distance, the outlook is for an expansive fiscal policy in the coming years, irrespective of who is sitting in government - the only question is how the money will be spent. We also believe that, for example, EU issues, such as Denmark??™s participation in the single currency, will represent a very small part of the election campaign - if mentioned at all.