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Measures to counter the effects of the financial crisis are working – 2010 budget to support the positive economic development

The Norwegian economy has been affected by the global recession, but the downturn seems to be less severe than in most other countries. The implementation of extensive liquidity and credit policy actions, as well as expansionary fiscal and monetary policy measures, has stabilised the economy and provided stimulus to domestic demand. The economy has performed better than expected only a few months ago, and the outlook has improved.

The Norwegian economy has been affected by the global recession, but the downturn seems to be less severe than in most other countries. The implementation of extensive liquidity and credit policy actions, as well as expansionary fiscal and monetary policy measures, has stabilised the economy and provided stimulus to domestic demand. The economy has performed better than expected only a few months ago, and the outlook has improved. However, growth in Mainland GDP will be below trend, and unemployment is forecast to increase further in 2010. Against this background, the proposed 2010 Fiscal budget is designed to provide a basis for sustained recovery of the Norwegian economy. The structural, non-oil deficit is estimated at NOK 148.5 billion in 2010, or NOK 44.6 billion more than the estimated real return on the Government Pension Fund – Global. The excess spending is in accordance with the fiscal policy guideline.

More information: The National Budget - A summary

A range of expansionary fiscal and monetary measures have been implemented to mitigate the effects on the Norwegian economy of the international financial crisis and the global economic downturn. The approved 2009 Fiscal Budget is the most expansionary fiscal budget in more than 30 years, and overall fiscal stimulus in 2009 is estimated at 3 per cent of non-oil GDP. Norges Bank (the Central Bank) has reduced its key policy rate by a total of 4.50 percentage points since October 2008 to currently 1.25 per cent. Various schemes to provide extraordinary liquidity to the financial sector and various measures to safeguard the credit system have also been implemented.

The 2001 fiscal policy guideline stipulates a gradual increase in the use of petroleum revenues. Over time, the structural non-oil central government budget deficit shall correspond to the expected real return – estimated at 4 per cent – on the Government Pension Fund – Global. However, the guideline allows for fiscal policy to be used actively to counter fluctuations in economic activity. In a cyclical expansion fiscal restraint relative to the spending rule is called for, whereas in a cyclical downturn higher spending of oil revenues is justified to stabilize the economy.

The Government has over the years made use of the flexibility built into the fiscal guideline. In the first few years following the introduction of the guideline, the Norwegian economy experienced relatively low capacity utilization, and the structural, non-oil budget deficit was well above the 4 per cent path. During the cyclical boom between 2006 and 2008, spending of petroleum revenues was below the 4 per cent path. To counter the adverse effects of the global crisis, spending of petroleum revenues has in 2009 once again been brought above the long term path.

As economic growth recovers and the outlook improves, the deficit will need to be brought back to the 4 per cent path. Even though a growing Fund will allow for increased spending of petroleum revenues in the future, long term budget challenges persist due to even stronger increases in pension costs and other age-related expenses.

The budget proposal allows for some important policy measures. The role and responsibility of the public sector for key welfare provisions in such areas as health care, education and child care will be strengthened. Economic disparities will be reduced by raising minimum pension, and priority will be given to transport, climate policy initiatives, and research and development.

 

Fiscal Policy

The main features of fiscal policy in 2010 are:

  • A structural, non-oil budget deficit of about NOK 148.5 billion, which is NOK 44.6 billion more than the expected return on the Government Pension Fund – Global.
  • An increase in the structural non-oil deficit of NOK 14.6 billion in real terms from 2009 to 2010. Measured as a share of Mainland trend-GDP the structural, non-oil deficit increases by ½ percentage point. Macroeconomic model simulations indicate that the fiscal stimulus from the 2010 budget is somewhat lower than suggested by this indicator.
  • A real underlying growth in Fiscal Budget expenditures from 2009 to 2010 of 1¾ per cent.
  • A non-oil fiscal budget deficit estimated at NOK 154 billion. The deficit is covered by a transfer from the Government Pension Fund – Global.
  • A central government net cash flow from petroleum activities of about NOK 220 billion.
  • A consolidated surplus in the Fiscal Budget and the Government Pension Fund, including interest and dividends, of NOK 172 billion.
  • An estimated market value of Government Pension Fund of NOK 2.931 billion at the end of 2010. At the same time, the old age pension obligations under the National Insurance Scheme, is estimated at NOK 4.771 billion.
  • An increase in total revenues for local governments of 2.6 per cent in real terms from 2009 to 2010.

 

Tax policy

In the 2010 budget, the Government takes further steps to strengthen the tax system’s contribution to a fair income distribution and to a better environment. The overall level of taxation is not changed:

  • The tax-free allowance in the net wealth tax is increased from NOK 470 000 to NOK 700 000 (NOK 1.4 million for married couples). A new system to assess tax values of homes is introduced, aiming at tax values equal to 25 per cent of market values for owner-occupied homes and 40 per cent of market values for other dwellings that are not defined as business or recreational property.
  • The Government proposes to follow up recommendations by the Tax Evasion Committee aimed at the use of cash as a means of payment. This will ensure that a larger share of the payment flows from businesses and the private market are taking place through banks and other financial institutions. In this way, transactions will be traceable and thus harder to conceal.
  • The Government continues to change motor vehicle taxes in a “greener” direction, and a carbon tax will be introduced on domestic use of gas or heating in buildings from 1 April 2010. The exemption from the diesel tax for the proportion of bio diesel will be halved in 2010, with a view to a final phase out in 2011.
  • The Government will broaden the VAT base by introducing 8 per cent VAT rate on sporting and cultural services, with some exemptions for admission to theatres, opera, concerts etc. The aim is to limit the VAT base for sports to health clubs and the most professional part of sports. The Government will introduce specific bills at a later date, with implementation from 1 July 2010.

 

Monetary policy and financial stability

The monetary policy regulation, established in 2001, stipulates a flexible inflation targeting regime for 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 shall balance the need for low and stable inflation against the outlook for output and employment.

The operational target for Norges Bank’s (the central bank) implementation of monetary policy is defined as an annual increase in consumer prices of close to 2.5 per cent over time. The interest rate decisions of Norges Bank shall be forward looking, and pay due attention to the uncertainty attached to macroeconomic estimates and assessments. It shall take into consideration that it may take time for policy changes to take effect, and it should disregard disturbances of a temporary nature that are not deemed to affect underlying price and cost increases.

In order to mitigate the effects of the financial crisis on the Norwegian economy and to stabilise the financial market, the Norwegian government and Norges Bank have implemented several targeted measures:

  • Norges Bank has reduced the key policy rate by a total of 4.5 percentage points since October 2008, to currently 1.25 per cent. During this period, the central bank has also stepped up its supply of liquidity to banks in the form of short and long term loans.
  • As the funding situation for Norwegian banks deteriorated in September and October 2008, the Government proposed a swap facility to enhance confidence and liquidity in the financial market. The proposal was adopted by the Storting (Parliament) in November 2008, and the Ministry of Finance was authorized to swap government securities with covered bonds of a total amount of up to NOK 350 billion. The swap facility has made it easier for banks to fund their operations and has, together with lower central bank rates and measures by Norges Bank to provide liquidity, contributed to a significant decline in money market rates. Norwegian banks and mortgage companies have so far entered into swaps with a total volume of NOK 228 billion. In light of the improved market conditions the last few months, the swap facility will be phased out in 2009.
  • In order to ease access to loans for companies and households, and to contribute to stabilising the financial markets, the Storting adopted in February 2009 the Government's proposal to establish two new funds; the State Finance Fund and the State Bond Fund. Each fund has a capital of NOK 50 billion.

The objective of the State Finance Fund is to provide tier 1 capital to financially sound Norwegian banks in order to strengthen the bank’s core capital and to improve their lending capacity. The deadline for applying to the Finance Fund was 30 September, and applications have been received from 34 banks, seeking a total of NOK 6.7 billion of capital.

The objective of the State Bond Fund is to contribute to improved liquidity in the bond market by diversifying investments at fair market prices in fixed income instruments issued by Norwegian companies. The Fund invests both in the primary and secondary market, and the investments will be dominated by bonds with low to moderate credit risks. As of 17 August 2009, the Fund had invested NOK 6.2 billion in the bond market.

The actions taken by the Government and Norges Bank have helped to stabilise the Norwegian financial market and has eased the banks’ access to funding. The liquidity in the money market has improved and money market rates have fallen sharply.

The measures are temporary and when the situation in the Norwegian economy improves, the measures will be phased out.

 

The Government Pension Fund

The Government Pension Fund was established in 2006, encompassing the former Government Petroleum Fund and National Insurance Scheme Fund. The purpose of the Fund is to aid government savings to finance the pension expenditure of the National Insurance Scheme and long-term considerations in the spending of government petroleum revenues.

Ministry of Finance is responsible for managing the Government Pension Fund. The Ministry determines the general investment strategy of the Pension Fund, as well as its ethical and corporate governance principles. The operational management of the Government Pension Fund has been delegated to Norges Bank and Folketrygdfondet, which manage the Government Pension Fund – Global and the Government Pension Fund – Norway, respectively.

At the end of 2008, the market value of the Government Pension Fund – Global was NOK 2 280 billion. The value is estimated to reach NOK 2 597 billion by the end of 2009 and NOK 2 824 billion by the end of 2010.

 

General outlook

The Norwegian economy has also been affected by the financial crisis and the global recession, but to a lesser extent than in most other industrial countries. This is partly due to the fact that part of the manufacturing and service industries still benefit from high activity in the petroleum sector. Norwegian manufacturing is less concentrated on ICT-products, cars and other finished products that have been most severely hit by the global downturn. Furthermore, households’ debt ratio is high and since most borrowers have floating rate loans the rapid reduction in the interest rates has strongly spilled over into higher household demand. A large public sector and an expansionary fiscal policy have also helped to stabilise the Norwegian economy.

The performance of the economy has been somewhat better than predicted earlier this year, and the short term outlook has improved. Private consumption appears to be picking up and petroleum investment is expected to remain high both this year and next year. Mainland GDP is forecast to contract by 1 per cent in 2009 and to pick up in 2010 to an estimated 2 per cent growth rate.

The turnaround of the economy has resulted in a weakening of the labour market. Employment has fallen since a year ago, and unemployment has increased. However, in recent months the labour market has performed better than expected and the outlook has improved somewhat. The unemployment rate is now expected to average 3.2 per cent in 2009 and 3.7 per cent in 2010.

 

Key projections for the Norwegian economy1. Per cent

2008

NOK billion2

2008

2009

2010

Private consumption

991.4

1.4

0.3

4.0

Public consumption

490.2

3.8

5.6

2.1

Gross fixed investments

529.3

3.9

-5.9

-1.0

Petroleum

122.2

6.6

7.0

3.0

Business sector, Mainland Norway

202.1

6.8

-16.4

-2.6

Exports

1 225.8

1.4

-6.5

0.1

Crude oil and natural gas

620.5

-1.5

-4.4

-2.1

Traditional goods

324.2

4.8

-11.0

1.6

Imports

732.7

4.4

-4.9

2.4

Traditional goods

477.6

2.7

-7.1

1.9

Gross domestic product

2 548.3

2.1

-2.1

1.3

Mainland Norway

1 829.9

2.6

-1.1

2.1

Memorandum items:

Consumer price inflation (CPI)

3.8

Underlying inflation (CPI-ATE)

2.6

Wage growth

6.0

4

Employment growth

3.1

-0.4

-0.4

Unemployment rate (LFS)

2.6

3.2

3.7

Crude oil. NOK per barrel2

536

375

425

Current account balance (pct. of GDP)

19.5

12.0

12.2

1) Constant 2006 prices
2) Current prices
Sources: Statistics Norway and Ministry of Finance

 

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

2008

2009

2010

1. Fiscal Budget

Total revenues

1 182.6

1 022.8

974.1

Revenues from petroleum activities

437.7

290.5

244.8

Revenues excl. petroleum activities

744.9

732.3

729.3

Total expenditures

778.6

876.2

907.5

Expenditures on petroleum activities

21.8

25.8

24.4

Expenditures excl. petroleum activities

756.7

850.4

883.1

Fiscal budget surplus before transfers to the Pension Fund – Global

404.1

146.6

66.6

- Net revenues from petroleum activities

415.9

264.7

220.4

= Non-oil budget surplus

-11.8

-118.1

-153.8

+ Transfers from the Pension Fund – Global

8.4

118.1

153.8

= Fiscal Budget surplus

-3.4

0.0

0.0

2. Government Pension Fund

Net transfer to the Pension Fund – Global

407.5

146.6

66.6

+ Dividends on the Pension Fund

103.1

108.4

105.6

= Surplus in the Pension Fund

510.6

255.0

172.2

3. Fiscal Budget and Government Pension Fund consolidated surplus

507.2

255.0

172.2

 Source: Ministry of Finance.

 

General government financial balance. NOK billion

2008

2009

2010

Fiscal Budget surplus

-3 427

0

0

+ Surplus in Government Pension Fund

510 613

255 029

172 209

+ Surplus in other central government and social

security accounts

1 752

7 301

1 052

+ Definitional differences between Fiscal Budget and
national accounts1

-13 348

-80 748

-1 448

+ Direct investment in state enterprises

4 241

7 901

2 616

= Central government financial balance

499 830

189 484

174 429

+ Local government financial balance

-24 873

-15 716

-17 146

= General government financial balance

474 957

173 768

157 283

In per cent of GDP

18.6

7.4

6.5

1)Includes central government’s accrued, but not accounted for, taxes
Sources: Statistics Norway and Ministry of Finance.