Denmark's government on Tuesday presented a plan to cap public spending and introduce controversial pension reforms in a bid to balance the budget by 2020.

"We have chosen the way of reform, which will ensure work for more people and greater prosperity and balance in the public finances," the government said in a statement.

Parliament's approval of the plan, which includes hiking the official retirement age, is crucial for Prime Minister Lars Loekke Rasmussen who has staked his credibility on achieving a healthy Danish economy.

He must call an election before the end of this year. If parliament rejects his plan, observers expect to see a significant political backlash that could influence the timing and outcome of the vote.

The government said its measures will generate an additional 47 billion kroner (6.3 billion euros, $9.1 billion) by 2020 to balance public finances.

"We will introduce a new law on spending promises and sanctions so that everyone in the public sector will need to balance their budgets," the government statement said.

The plan calls for reforms to Denmark's generous pension scheme which the government says will create 125,000 private sector jobs by 2020.

The reforms include boosting the official retirement age from 65 to 67 in 2019 and, most controversially, gradually doing away with early retirement, which today is possible starting at the age of 60.

Other reforms include changing or abolishing different long-term sick leave and disability schemes that today make it possible for people with often different levels of disability to permanently leave the workforce, even at a young age.

According to official statistics presented earlier this month, Denmark's deficit last year stood at 47.4 billion kroner or 2.7 percent of Gross Domestic Product, below the EU three percent limit.