COPENHAGEN (Reuters) - Compensating low-income and elderly Danes with cash handouts to ease the impact of higher consumer prices could worsen inflationary pressure on an economy already running on all cylinders, the central bank warned on Thursday.
Denmark has proposed handouts to soften the blow from rising inflation, exacerbated by soaring energy prices in the wake of Russia's invasion of Ukraine.
Lawmakers had already agreed in February to give tax-free handouts worth 3,750 crowns ($534) to around 320,000 households to help with heating.
The Social Democratic government, led by Prime Minister Mette Frederiksen, was elected in 2019 following two decades of economic reform that had cut many welfare services.
But government efforts to alleviate pressure on household finances could end up causing even more inflation, according to an assistant governor at Denmark's central bank, Signe Krogstrup.
"If compensation schemes are adopted that aren't matched by public savings or higher taxes, it will intensify the pressure on the economy and thus push further wage increases and inflation," Krogstrup said in a column published on Thursday by newspaper Berlingske.
The government, currently in negotiations with parliament, has suggested giving elderly people with low incomes an additional tax-free handout of 5,000 crowns as well as increasing transport allowances for those with longer commutes by car.
"It's not desirable to throw more wood on the fire," Krogstrup said, adding that if several countries lowered taxes on energy, it could cause world market prices to rise further.
"Hence, a reduction in energy taxes will ultimately not benefit consumers, but instead act as a transfer to the energy-producing countries," Krogstrup said.
The central bank predicts the Danish economy will grow 1.6% this year in a medium scenario where inflation rises to as high as 4.5%.