Danish government proposes tight spending to fight inflation

COPENHAGEN (Reuters) -Denmark’s government on Thursday proposed tightening public spending to try to ease inflation as it predicted prices would rise 3.9% this year.

“The most important aim of this finance bill is to ensure that we fight inflation and don’t add fuel to the fire,” Finance Minister Nicolai Wammen told reporters at a presentation of the government’s budget proposal for 2023.

Inflation, which reached a 40-year high of 7.7% last year, is expected to fall to 2.8% next year, according to a finance ministry report published on Thursday.

“The fiscal policy we are planning for this year will generally take activity out of the economy. That is necessary,” Wammen said. The bill would have a negative effect of 0.9% on the Danish economy, he said.

The government expects the economy to grow by 0.2% this year, down from an August forecast of 0.8%, it added. By contrast, the central bank has said it expects the economy to grow by 0.9% this year.

“The scope of possibility for the economy is extraordinarily large at the moment, as we are potentially standing on the edge of a recession,” Arbejdernes Landsbank chief economist Jeppe Borre said in a note.

The relatively weak growth forecast follows two years of strong economic growth in Denmark characterised by low unemployment and high industrial activity.

Last week, the central bank raised its key interest rate to 2.6%, the sixth rate hike since July last year, closely tracking other central banks across the globe that are tightening monetary policy to combat inflation.

In February, the government agreed to spend 2.4 billion Danish crowns ($346.12 million) on an aid package aimed at easing the blow from higher prices on vulnerable Danes.

(Reporting by Jacob Gronholt-Pedersen, Nikolaj Skydsgaard and Louise Rasmussen; Editing by Anna Ringstrom, Clarence Fernandez and Grant McCool)