Risk of Early Danish Elections Rises as Budget Talks Struggle

  • Prime Minister caught between competing demands from allies
  • Demands for top tax rate cut pose major obstacle to a deal

Denmark’s 16-month-old minority government faces the prospect of a snap election unless it is able to clinch an elusive double-deal on the 2017 budget and on tax cuts for the rich.

"We have until the weekend to close the budget, give or take some days," Finance Minister Claus Hjort Frederiksen said in an interview.

Prime Minister Lars Lokke Rasmussen’s Liberal Party needs the support of lawmakers from three smaller parties in order to push the budget through parliament. But disagreements over tax cuts, which the government proposed in August as part of a 2025 fiscal plan, have delayed the process. The budget needs to be nailed down by the middle of November to get the legislation in place by the start of next year.

Completing it on time may still be feasible, but one potential sticking point is represented by demands by the Danish People’s Party for tighter immigration rules. Rasmussen also needs to close a deal with the Liberal Alliance, which is demanding an agreement on future tax cuts by the end of the year.

The government was to meet its partners for another round of budget talks later on Monday after weekend negotiations failed to produce a breakthrough.

"The risks of a government collapse and snap election being called in Denmark by late 2016 have risen significantly following a dispute over tax policy," BMI Research, which is owned by Fitch, wrote in a Nov. 1 note. 

A total of six Danish governments have fallen during the Christmas period due to major disagreements over fiscal policy since 1945.

Tax Controversy

Rasmussen has been caught in the crossfire of his political allies since August, when he first proposed a 5 percent cut to "topskat," a 15 percent supplementary income tax levied on about 450,000 residents whose annual incomes exceed 459,200 kroner ($68,441).

Amid only limited public support, he stopped short of extending the cut to the approximately 50,000 taxpayers who earn more than 1 million kroner a year, angering the free-market, libertarian Liberal Alliance. Its leader, Anders Samuelson, has said he’s prepared to bring down the government unless the tax cut is extended to the country’s top earners.

Rasmussen is having to play a difficult balancing act as his biggest coalition partner, the anti-immigration Danish People’s Party, is refusing to back the Liberal Alliance’s requests. Instead, it wants more welfare spending.

One way out of the impasse is to "separate the tax talks from the budget negotiations," Danish People’s Party leader Kristian Thulesen Dahl told reporters on Thursday.

Working against the argument for early elections is the fact that Rasmussen’s Liberals and their three parliamentary allies have all lost public support since the June 2015 election.

A poll of polls published by newspaper Berlingske last week put support for the government and its allies at 48.4 percent, down almost four percentage points from last year’s election.

"Even if it survives this episode, we continue to harbor doubts that the ruling center-right Liberal Party-led minority government elected in June 2015 will last through its full four-year term to 2019," BMI Research said.

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