Danish central bank wants tighter fiscal policy, a challenge for new government

Denmark's central bank on Monday said a new government should impose tighter fiscal policy and remain open to immigration, proposals that put it at odds with centre-right parties that won an election last week and are trying to form a cabinet.
Lars Lokke Rasmussen, the Liberals leader and former prime minister, is trying to form a new government under his leadership, after the centre-right parties won a slim majority in the parliamentary election. The central bank said on Monday that private-sector growth is so strong now that fiscal policy should be tightened to reduce the risk of overheating.
This could be done by bringing down public investment and spending or by raising taxes and fees, the central bank said. Lokke's party has pledged to lower taxes on low-income jobs, and he depends on the Danish People's Party (DF) which has called for an expansion of the public sector, already one of the world's largest as a share of GDP.
"In short, that is probably not very much in harmony," with his recommendations, central bank Governor Lars Rohde said at a press meeting when asked if the election promises from the two parties tallied with his call for a tighter fiscal policy. The central bank, which kept its 2015 and 2016 growth forecasts unchanged in a new report on Monday, also said it saw a need for more foreign labour in the coming years, touching on a hot topic in the election campaign.
"Foreign labour force, especially from Eastern Europe, fills an important spot in the Danish labour market today, and the challenge will be to attract additional qualified work force from abroad," the central bank said. The comment was an unusual direct input into the immigration debate from the central bank, said Nykredit chief economist Tore Stramer. DF, whose support rose to 21 percent at Thursday's election from 12 percent at a 2011 election, wants to curb immigration. It does welcome people who can work, but it also decries "social dumping", where foreign workers undercut Danes.
Rohde also criticised a lid on property taxes which was introduced by a centre-right government in 2001 and which the three largest political parties have said in recent weeks should remain at least until 2025. The lid prevents property taxes from rising at the same pace as house prices, so it counteracts the dampening effect the taxes have on house-price bubbles, Rohde said. A burst property bubble in 2008 left many households indebted and wary of spending.
Rohde repeated that Danish banks would benefit from lower capital requirements if the country, which is not in the euro zone, joined the European banking union. The question of Danish participation in the banking union may come to a referendum. The parties that have favoured a referendum gained enough parliamentary seats at Thursday's election to demand it.