FISCAL CLIFFS

Everybody knows about the fiscal cliff facing the U.S. on 1 January. As part of the deal to raise the debt ceiling a year or so ago, Congress voted to take measures to reduce the budget deficit, with the twist that if no agreement could be reached, there would be huge (and automatic) spending cuts, representing several percentage points of GDP. No agreement was duly reached, so the axe became poised. The only agreement was to shift the deadline until the end of this year. With no agreement in sight, and a Presidential election due in November, the cliff is fast approaching.

Denmark has a fiscal cliff of its own. In the days before the financial crisis, unemployment fell fast, helped in large part by a property and building boom; the number without a job went down from just under 120,000 at the beginning of 2007 to just over 60,000 by the summer of 2008. The only people without a job were drug addicts, the mentally ill, others with social problems, and (crucially) immigrant women who preferred to stay at home and receive benefits.

The last may well have been a myth. The problem was that it was a myth peddled by the right-wing Danish People's Party, on whom the then Government relied in order to get a Parliamentary majority. Prodded by the DPP, the Government cut the period in which people could get the dole from four years to two. That would get those women out of the house and into work.  

Then came Lehmann Brothers and the financial crisis, and the wheels came off the economy. By the end of 2009 (i.e. within 18 months), unemployment had rocketed to 160,000, still less than in other European countries but high by Scandinavian standards. It peaked in the summer of 2010, before starting to fall, albeit very slowly. But in July it started to go up again, to stand at 165,700.

So, a policy dreamed up at a time of boom came into play at a time of bust. To their credit, the DPP were one of the first political parties to recognise this, and were calling for a relaxation of the policy almost before it started. The first cohort of 2-year unemployed were due to fall out of the dole regime on 30 June this year, but the deadline was extended by six months until 31 December. However, if nothing is done by then, an estimated 20,000 people will no longer be eligible for the dole.

This being Denmark, not being eligible for unemployment benefit is not the end of the road. There is a further safety net called kontanthjælp ("cash help"), albeit at a lower rate. There are, however, snags. If your husband or wife has an income, for instance; or if you have assets worth more than kr.10.000 (kr.20.000 per couple), a little over £1,000. Basically, it is designed for those at the very bottom of the income scale. The problem is that the Danish economic model during the boom years of the noughties was one of both parts of a couple working, and needing to work in order to service the huge mortgage they had taken out on their home. That means in turn that many, if not the vast majority, of the 20,000 will be homeowners not eligible for kontanthjælp. Which means houses being put up for sale into a very soggy housing market, more divorces, more social problems. Etc etc.

There is however one difference between the Danish and American fiscal cliffs. Here in Denmark, every political party is thinking night and day about how to solve this looming problem. Whether they will be able to do so is, of course, another matter entirely.

Walter Blotscher