P r e s s r e l e a s e
The norwegian ministry of finance

1. december 1995

Final Budget Bill:

Strong economic growth

The currrent situation and outlook is broadly in line with the picture presented in the National Budget in October. New information gives further evidence of a strong and relatively broad upturn through the first three quarters of 1995. Even though growth in domestic demand has slowed somewhat in recent months, GDP for the mainland economy is projected to grow by almost 3 1/4 per cent this year, while total GDP is expected to increase by 4 per cent.

The broadly based expansion is expected to continue in 1996, albeit at a slower pace. GDP for the mainland economy is expected to grow by 2 3/4 per cent, while total GDP is projected to grow by

4 1/4 per cent.

Inflation remains subdued. The year on year rate of consumer price inflation is estimated at 2 1/2 per cent this year and about 2 per cent in 1996.

The labour market is improving significantly. Employment is expected to increase by 2 per cent this year and 1 1/2 per cent next year, resulting in a reduction in the unemployment level from 5 1/2 per cent to 4 1/2 per cent in the 1994 - 1996 period, a somewhat more favourable development than projected in the National Budget.

Tight fiscal policy

The main short term challenge in economic policy is to prevent the economy from overheating and to lay the foundations for sustainable non-inflationary growth that will allow for a further reduction in unemployment over the medium term.

A central element in this strategy is a continued tight fiscal stance . The contractionary demand impact of the proposed budget is calculated to 1/2 per cent of GDP. Budget consolidation in a situation of strong economic growth is also important in order to maintain room for manoeuvre in fiscal policy.

The final budget proposal includes compensationary measures which largely offset the weakening of budget balance caused by the budget negotiations in the Storting. The proposed Fiscal Budget shows a surplus of NOK 12.6 billion in 1996, compared to an estimated deficit of NOK 3.4 billion this year. This is an improvement of the budget balance in 1996 of NOK 2.0 billion compared to the National Budget, caused by an upward revison of tax revenues. The Budget is based on unchanged tax levels and an unchanged level of real expenditures.

NOK 12.6 billion to the petroleum fund

The budget surplus in 1996 of NOK 12.6 billion is allocated to the Government petroleum fund. The fund will ease the required long run economic adjustments in face of declining oil income and an ageing population in the beginning of the next century.

The general government balance is expected to show a surplus (net lending) of 2.4 per cent of GDP in 1996, marginally higher than projected in the National Budget. This can be compared with the Maastricht criterion of a ceiling on deficits (net borrowing) of 3 per cent of GDP. General government gross debt, which was 41 per cent of GDP in 1994, will decline somewhat in 1995 and 1996.

The implementation of monetary policy shall continue to be oriententated towards maintaining a stable krone exchange rate against other European currencies.

In order to improve cost competitiveness of Norwegian industries, the Government will continue to co- operate with social partners on income policies.

The Government proposes a reduction in the reserve fund of Norges Kommunalbank

Norges Kommunalbank (The Norwegian Municipalities' Bank) has a higher equity capital than necessary for its current operations. At the end of 1994, a tier I capital of 4 269 million kroner gave the bank a risk weighted capital ratio of 80 pct. The bank's funding through the issuing of bonds and certificates is guaranteed by the state. This unconditional guarantee is the basis for the bank's credit rating.

The Government proposes to reduce the reserve fund of Norges Kommunalbank by 1 100 million kroner. This will strengthen the government budget by the same amount. The bank will still be well capitalised after such an operation, with a capital ratio of about 60 pct. Lower equity capital is expected to increase the bank's return on capital. In connection with the reduction in the reserve fund, the Government will later assess whether it is necessary to change the relationship between the bank's capital and its total indebtness.

A reduction of the bank's capital should not be seen in the context of a possible change of ownership of the bank, since such a reduction does not preclude any of the possible alternatives of ownership (including a continuation of the present model) discussed in the National Budget 1996. The Government's irrevocable and unconditional guarantee on the bank's current issuance of bonds and certificates remains firmly established. The Government will later return to the Storting on the issue of the ownership of Norges Kommunalbank.

Key projections. Volume change from previous year, pct.

1) Estimates.

2) Positive figure implies a worsening of relative UCL.

Source: Statistics Norway and Ministry of Finance.

Senior Information Officer Janne-Gro Rygg, tlf. (+47) 22 34 41 09