Rich Danes Face Benefit Cuts as Universal Welfare Abandoned

Denmark’s richest citizens are finding themselves cut off from some welfare benefits as Scandinavia’s weakest nation reviews state-paid services once considered a universal right.

“We’ll see a welfare state that is gradually optimized to work under the conditions of globalization and global competition,” Danish Finance Minister Bjarne Corydon said yesterday in an interview in Copenhagen. “We continually alter priorities and financing to optimize the model.”

Denmark is the Scandinavian nation that has fared worst during the global financial crisis after a housing boom that peaked in 2007 burst a year later. Though Danish households are the world’s most indebted, the AAA-rated government has kept its borrowings at half the euro area average, in part after refusing to bail out insolvent banks and instead pushing losses onto creditors.

Alongside those measures are efforts to ensure state spending doesn’t grow unmanageable. Danes, who carry the world’s highest tax burden, have punished the Social Democrat-led government of Prime Minister Helle Thorning-Schmidt for their lost benefits and most polls show her coalition trails behind the opposition ahead of elections due November 2015 at the latest.

Paradigm Shift

Since coming into office in 2011, the government has cut state aid for the unemployed and raised the retirement age. College and university students are means tested before gaining access to study grants. As of this year, families earning more than $130,000 a year won’t have the same access to child support as poorer households as the government ensures funds target those who need them most.

The decision marks a departure from the principle of welfare for all, regardless of income level, that had dominated Danish politics before the financial crisis.

“This is a paradigm shift,” Peter Kurrild-Klitgaard, a professor of political science at the University of Copenhagen, said in a phone interview. “Danes probably got used to consuming welfare services more than they strictly needed to.”

Nobel Laureate Paul Krugman questioned Denmark’s decision to cut some of its social benefits, arguing Scandinavia’s welfare model has proved its worth during the past five years.

‘Wildest Dreams’

“It’s not clear that the crisis required these actions,” Krugman said today in an interview in Oslo. Still, even after such adjustments, “the Scandinavian welfare systems are beyond the wildest dreams of liberals in the United States,” he said.

According to Corydon, universal welfare will remain a goal for key areas, including education and health care.

“There will be a continuing debate of priorities,” Corydon said. “More differentiated policy steps will have to be decided along the way.”

Though Thorning-Schmidt in a Jan. 1 speech signaled her government was ready to provide more support for the economy in 2014, those measures are unlikely to include direct stimulus, Corydon signaled.

“Given the EU budget constraints, we’ve delivered the stimulus that there’s room for,” he said. “It’s too soon to say what we plan to do.” Measures will focus on “working systematically with our structural ability to grow.”

Tax Burden

Denmark’s gross domestic product contracted 0.4 percent in 2012 and grew just 0.4 percent last year, the government said last month. It estimates the economy will expand 1.6 percent in 2014 and 1.9 percent in 2015.

The government estimates that tax cuts financed by capping public spending would create more jobs, business daily Borsen reported today, citing a Finance Ministry memorandum.

Denmark’s government collects more revenue relative to economic output than any other nation, according to the Paris-based Organization for Economic Cooperation and Development. As of 2011, Danish tax revenue relative to GDP was 48.1 percent, followed by 44.5 percent in Sweden. In the U.S., the ratio is 25.1 percent, according to the OECD.

“What is needed now is to consolidate the economic and political strategy, which is starting to work,” Corydon said. “I see a lot of evidence that mixing a high level of investments and stimulus, not exceeding our policy obligations, in combination with ambitious structural reforms, is working.”

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