A budget to promote employment, growth and structural adjustment

Lower demand from the petroleum sector is dampening growth and poses a structural challenge to the mainland economy. The 2016 Fiscal Budget promotes employment, growth and structural adjustment in the Norwegian economy through targeted tax reductions, high priority on infrastructure and emphasis on other measures to stimulate employment, productivity and competitiveness.

“The 2016 fiscal budget will help dampen the macroeconomic effects of the decrease in activity in the petroleum sector, while allowing for necessary structural adjustments. Our main challenge is to create new jobs in sectors exposed to international competition. The government aims to foster productivity growth and implement measures to increase the economy’s growth potential,” says Minister of Finance Siv Jensen.

Growth in the non-oil economy has declined so far this year while the unemployment rate has increased, particularly in the more oil-dependent southern and western regions. The increase in unemployment has principally been concentrated among engineers and other occupational groups that are employed in industries that supply the petroleum sector. Within other occupational groups and in other parts of the country unemployment has remained stable or declined. The unemployment rate currently stands at 4.3 per cent.

The Fiscal Budget for 2016 forecasts a structural non-oil deficit of NOK 194 billion, equivalent to 2.8 per cent of the value of the Government Pension Fund Global. The fiscal stance, measured as the change in the structural non-oil deficit as a share of trend GDP for Mainland Norway, is estimated at 0.7 per cent. This includes targeted fiscal measures of NOK 4 billion to stimulate employment in areas and sectors that are particularly affected by the downturn. The Fiscal Budget for 2016 provides a significant stimulus to activity and employment in the Norwegian mainland economy.

Tax proposals for 2016
Including the proposals in the Budget for 2016, the Solberg Government has introduced tax reductions totalling NOK 22 billion since it was appointed in 2013. The Government is prioritizing tax reductions that stimulate growth and transformation, with NOK 9.1 billion in tax cuts for enterprises and individuals in the following year.

Reducing the corporate tax
The Government is proposing to reduce the corporate tax rate from 27 to 25 per cent. This will encourage investment and at the same time make it less beneficial to shift profits out of Norway to low-tax jurisdictions. To further secure the tax base the Government will also tighten the rule that limits the deductibility of interest payed to associated companies.

The proposed changes in corporate taxation will give Norway a more robust tax system that is adapted to high international tax base mobility. Tax on dividends will be adjusted to keep the overall tax on distributed profits at about the same level as today.

Tax reductions for individuals
Broad tax reductions for wage earners will make it more attractive to work. With the Government’s proposal the tax rate on ordinary income is reduced by 2 percentage points, from 27 to 25 per cent. The Government will also replace the current surtax with a new progressive tax on personal income (the bracket tax) with four brackets. The tax rate within each bracket is set so that the overall marginal tax rate on personal income is reduced for most wage earners.

The Government also proposes reductions in the net wealth tax that will strengthen Norwegian private ownership and redirect investments from real estate to business activities.

A tax reform for transformation and growth
In conjunction with the 2016 budget the Government presents a white paper to the Storting outlining proposals for tax reform. The aim is to create a more effective tax system to spur productivity and growth.

Following international trends of corporate tax rate reductions, the Government proposes a tax reform that reduces the corporate tax rate further, to 22 per cent by 2018. Starting the implementation of the tax reform already in 2016 is well timed given the need to transform the economy in the face of weaker demand from the petroleum industry.

Fiscal Policy
The Government is committed to the 2001 fiscal policy guidelines. The guidelines stipulate a gradual and sustainable use of petroleum revenues over time in line with the expected real return on the Government Pension Fund Global, estimated at 4 per cent.

The Government Pension Fund Global shields the fiscal budget from fluctuations in oil and gas revenues. The state’s net cash flow from petroleum is transferred in full to the Fund. The use of petroleum revenues, or withdrawal from the Fund, fully covers the non-oil budget in line with the fiscal guidelines. A decline in the price of oil therefore has no immediate impact on the fiscal stance, but translates into reduced fiscal space over time.

The main features of fiscal policy in 2016: 

  • Spending of petroleum revenues, as measured by the structural non-oil budget deficit, is estimated at NOK 194 billion. This is equivalent to 7.1 per cent of GDP for Mainland Norway, up from 6.4 per cent in 2015. The structural non-oil budget deficit corresponds to 2.8 per cent of the value of the Government Pension Fund Global at the beginning of 2016. Given the strong growth of the Pension Fund over the last three years, of which almost one half is due to a weaker Norwegian krone, spending of petroleum revenues is held well below 4 per cent of the capital in the Fund.
  • The real underlying growth in budget expenditure from 2015 to 2016 is estimated to be 2.6 per cent. In nominal terms expenditure is estimated to increase by 5.2 per cent.
  • The non-oil fiscal budget deficit is estimated at NOK 207.8 billion. This deficit is covered by a transfer from the Government Pension Fund Global.
  • Net cash flow from petroleum activities is estimated to be NOK 204.1 billion.
  • The consolidated surplus on the Fiscal Budget and the Government Pension Fund, including NOK 209.6 billion in interest and dividends, is estimated at NOK 205.9 billion.
  • A general government financial balance of NOK 181.2 billion, equivalent to 5.6 per cent of GDP.
  • The market value of the Government Pension Fund Global is estimated at NOK 7 025 billion at the end of 2015, and NOK 7 449 billion at the end of 2016.


Monetary policy
The long term role of monetary policy is to provide the economy with a nominal anchor. In the short and medium term, monetary policy must balance the need for low and stable inflation against the outlook for production and employment. The operational target is defined as an annual increase in consumer prices of close to 2.5 per cent over time. The central bank’s (Norges Bank) key policy rate is currently 0.75 per cent.


The Government Pension Fund
The purpose of the Government Pension Fund is to facilitate government saving to finance rising public pension expenditures and support long term considerations in the spending of government petroleum revenues. The capital of the Fund is invested abroad in international equities, fixed-income securities and real estate, within guidelines set by the Ministry of Finance. The investment strategy aims to achieve high financial returns subject to a moderate level of risk.
 
Key figures for the Norwegian economy1

 

NOK billion2 3

       

 

2014

2014

2015

2016

2017

Privat consumption

1288.9

2.0

2.5

1.9

2.8

Public consumption

690.3

2.7

2.4

2.7

1.4

Gross fixed investment

747.7

0.6

-2.4

0.2

2.5

   Petroleum

216.0

-1.7

-11.3

-8.1

-5.5

   Business sector. Mainland Norway

230.2

0.2

-0.4

4.5

6.7

Exports

1207.6

2.7

2.5

1.3

2.4

   Crude oil and natural gas

537.9

1.5

0.0

-2.4

0.1

   Traditional goods

343.0

2.3

4.1

4.0

4.0

Imports

932.4

1.9

2.5

2.7

4.5

   Traditional goods

545.8

-0.3

1.8

3.3

4.6

Gross domestic product

3149.7

2.2

1.2

1.2

1.6

   Mainland Norway

2527.4

2.2

1.3

1.8

2.1

Employment growth

 

1.1

0.5

0.5

0.9

Unemployment rate (LFS)

 

3.5

4.4

4.5

4.2

Wage growth

 

3.1

2.7

2.7

3.0

Consumer price inflation (CPI)

 

2.0

2.1

2.5

2.1

Underlying inflation (CPI-JAE)

 

2.4

2.7

2.5

2.1

Crude oil per barrel. NOK3

 

621

432

440

474

1) Percentage volume change from previous year.
2) Preliminary national account figures.
3) Current prices.

Sources: Statistics Norway and Ministry of Finance.



 
 
Key figures for the Fiscal Budget and Government Pension Fund. NOK billion

 

2014

2015

2016

1. Fiscal Budget

     

Total revenues

1278.8

1228.2

1241.8

   Revenues from petroleum activities

347.0

246.9

233.1

   Revenues excl. petroleum activities

931.7

981.3

1008.8

Total expenditures

1127.1

1189.9

1245.6

   Expenditures on petroleum activities

35.4

29.0

29.0

   Expenditures excl. petroleum activities

1091.7

1160.9

1216.6

Fiscal budget surplus before transfers to the Pension Fund Global

151.7

38.3

-3.7

Net revenues from petroleum activities

311.7

217.9

204.1

= Non-oil budget surplus

-160.0

-179.6

-207.8

+ Transfers from the Pension Fund Global

156.2

179.6

207.8

= Fiscal Budget surplus

-3.8

0.0

0.0

2. Government Pension Fund

     

Net transfer to the Pension Fund Global

155.5

38.3

-3.7

+ Interest and dividends on the Pension Fund

160.1

192.9

209.6

= Surplus in the Pension Fund

311.7

231.2

205.9

3. Fiscal Budget and Government Pension Fund
consolidated surplus
 

311.7

231.2

205.9

Sources: Statistics Norway and Ministry of Finance.

  

 

General government financial balance. NOK million

 

2014

2015

2016

Central government financial balance

311 282

241 927

201 210

   Fiscal Budget surplus and Surplus in Government Pension Fund

311 743

231 193

205 878

      Non-oil budget surplus

-160 008

-179 589

-207 809

      Net revenues from petroleum activities

311 667

217 882

204 087

      Interest and dividends on the Pension Fund

160 085

192 900

209 600

   Surplus in other central government and social security accounts

-3 160

1 053

1 343

   Definitional differences between Fiscal Budget and national accounts1

2 698

9 681

-6 010

+ Local government financial balance

-25 294

-22 365

-22 282

= General government financial balance

286 773

219 509

181 229

   In per cent of GDP

9.1

7.0

5.6

1) Includes central government accrued, but not recorded taxes. Direct investments in state enterprises, including government petroleum activities, is defined as financial investments in the national accounts.

Sources: Statistics Norway and Ministry of Finance.

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