Increased equity share in the Government Pension Fund Global and adjustment to the expected rate of return in the fiscal policy guidelines

Published under: Solberg's Government

Publisher Ministry of Finance

The government has today made two decisions significant to the management of the Government Pension Fund Global (GPFG) and to fiscal policy. The government will submit to parliament a recommendation to increase the equity share in the fund to 70 per cent. The government will also propose a downwards revision of the expected real rate of return of the fund from 4 per cent to 3 per cent. This estimate is important in the fiscal policy guidelines.

– The government’s proposals will support a continued, responsible management of the considerable oil and gas resources. Norway has been fortunate, but the petroleum wealth has also been managed well. The proposed changes strengthen the fiscal framework we have for managing petroleum revenues. This will help ensure that also future generations may benefit from these revenues, says Prime Minister Erna Solberg.

The equity share increased to 70 per cent
The government proposes to increase the equity share in the strategic benchmark index of the GPFG to 70 per cent, from the current 62.5 per cent.

– The expected return on equities exceeds that of bonds, thus supporting the aim of increasing the Fund’s purchasing power. At the same time, equities carry higher risks. The proposal to increase the equity share is based on a comprehensive assessment of the recommendations received. A prerequisite for increasing the equity share is broad political support, and the ability to adhere to the chosen investment strategy also in periods of market turbulence, says Finance Minister Siv Jensen.

The government has received advice from a public commission (the Mork commission) and from Norges Bank. Several inputs have been submitted to a public consultation.

– All in all, the government considers an equity share of 70 per cent to carry acceptable risk. The downwards revision of the return estimate underpins the long investment horizon of the fund, a prerequisite for holding a high share of equities, says Finance Minister Siv Jensen.

Downward adjustment of the real return estimate to 3 per cent
The government does not propose to alter the Norwegian fiscal rule: Spending of revenues generated by petroleum activities and fund investments shall over time correspond to the expected real rate of return on the GPFG. Considerable emphasis shall be placed on stabilising economic activity to facilitate high capacity utilisation and low unemployment.   

– The estimate for the expected real return on the GPFG has been 4 per cent since the fiscal rule was introduced in 2001. Returns are likely to be lower going forward, as assessed by two separate public commissions (the Thøgersen and Mork commissions) and Norges Bank. We must adapt to this fact. We therefore propose to adjust the return estimate downwards to 3 per cent, says Finance Minister Siv Jensen.

The fiscal policy framework aims to shelter the fiscal budget and the mainland economy from fluctuations in oil and fund revenues. This also promotes stable economic conditions for industries exposed to international competition.

– In response to the decline in oil prices, the government has used fiscal policy to support economic activity and employment, and to counteract unemployment. Fiscal policy must be adapted to the economic situation also in the years to come, to help stabilise economic output and employment, says Finance Minister Siv Jensen.  

In 2001, when the Norwegian parliament endorsed the guidelines for fiscal policy, it was emphasised that the increased spending of oil revenues should be used to improve the growth capacity of the Norwegian non-oil economy. Parliament was unanimous in pointing to tax policy and spending on infrastructure, education and research as important in supporting a more well-functioning economy.

– Growth-enhancing tax reductions, as well as investments in education, research and infrastructure are key measures going forward. This will facilitate necessary structural adjustments in the Norwegian economy, given the outlook for permanently lower growth contributions from the petroleum sector, says Finance Minister Siv Jensen.  

The recommendation to increase the equity share of the GPFG will be presented to parliament on 31 March 2017, in the annual report on the management of the Government Pension Fund. Further background on the downwards revision of the estimated rate of return, as well as long term implications for government finances, will be submitted to parliament the same day in the white paper on Long-term Perspectives for the Norwegian Economy.