Revised National Budget 2008: Sound Fiscal Policy

The strong expansion of the Norwegian economy continues. Central government revenues have been revised upwards since the approved budget for 2008 and the room for manoeuvre in fiscal policy has increased accordingly. However, in order to underpin a continued stable development of the Norwegian economy the Government proposes that a part of the increased revenues shall be used to reduce the structural, non-oil budget deficit. The revision implies a reduction in the structural, non-oil budget deficit of about NOK 3 billion compared to the approved budget. The deficit will for the third consecutive year be lower than the expected real return on the Government Pension Fund–Global.

Growth in Mainland-GDP has averaged close to 5 per cent over the past four years, far exceeding the estimated trend growth of the Norwegian mainland economy. Growth above trend is expected also in 2008, although developments in the last few months indicate that growth is slowing. The forecast for growth in Mainland-GDP is now 3.2 per cent in 2008. Employment growth is estimated at 2.4 per cent in 2008 and the unemployment rate is expected to flatten out at 2.4 per cent.

The guidelines for economic policy, in place since 2001, stipulate that fiscal policy shall be directed towards a gradual and sustainable increase in the use of petroleum revenues. Over time, the structural non-oil central government budget deficit shall correspond to the expected real return on the Government Pension Fund – Global, estimated at 4 per cent. However, fiscal policy must take into account business cycle fluctuations around the medium term path. In a cyclical expansion, fiscal policy restraint relative to the spending rule is called for, whereas in a cyclical downturn somewhat higher spending of oil revenues can be justified. Long-term budget challenges, due to increases in pension costs and other age-related expenses, underline the importance of a continued prudent fiscal policy stance.

The Government proposes a revised Fiscal Budget for 2008 with a structural, non-oil budget deficit of NOK 73.9 billion which is NOK 2.9 billion lower than in the approved budget and NOK 7 billion lower than the expected real return on the Pension Fund. Higher tax - and excise revenues, and increased dividends have contributed to reducing the structural, non-oil budget deficit, whereas overall budget expenditures are revised up. Increased appropriations to the health sector to cover an unforeseen strong increase in pension premium, and certain climate policy initiatives are the major expenditure items.

The Government proposes only minor changes to the tax rules in the revised fiscal budget.

Fiscal policy
The main features of fiscal policy in 2008 are:

• A structural, non-oil budget deficit of NOK 73.9 billion, which is NOK 2.9 billion lower than in the approved budget for 2008 and NOK 7 billion lower than the expected return on the Government Pension Fund – Global.
• A structural, non-oil budget deficit corresponding to 4.3 per cent of Mainland trend-GDP.
• A real underlying growth in budget expenditures of 3¼ per cent from 2007 to 2008, which is 1 percentage point higher than estimated in the National Budget 2008. The increase must be seen in the context of a downward revision of budget expenditures in 2007.
• A non-oil fiscal budget deficit of NOK 13 billion, which is NOK 23.4 billion lower than in the approved budget for 2008. The deficit is covered by a transfer from the Government Pension Fund-Global.
• A central government net cash flow from petroleum activities of NOK 356 billion. This is almost NOK 54 billion higher than estimated in the approved budget.
• A net transfer to the Government Pension Fund – Global of NOK 343 billion.
• A consolidated surplus in the Fiscal Budget and the Government Pension Fund – Global of about NOK 424 billion.
• An estimated market value of Government Pension Fund of NOK 2 427 billion by the end of 2008, whereof NOK 2 316 billion in Government Pension Fund – Global. Old age pensions obligations under the National Insurance Scheme is estimated at NOK 4 551 billion (accrued) by the end of 2008.
• An increase in total revenues for local governments of 1.4 per cent from 2007 to 2008.

Monetary policy
The monetary policy regulation of 29 March 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.

Norges Bank’s implementation of monetary policy is oriented towards maintaining low and stable inflation. The operational target 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 the 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.

The key rate (the sight deposit rate) has since spring of 2005 been increased gradually by 3¾ percentage points to currently 5½ per cent. According to the Bank’s interest rate path published in March (in Monetary Policy Report 1/08), the key policy rate is forecast at 5½ per cent by the end of 2008 and 5 per cent by the end of 2009.

The Government Pension Fund 
The Government Pension Fund was established 1 January 2006 and consists of two parts: "The Government Pension Fund – Global", previously the Government Petroleum Fund, and "The Government Pension Fund – Norway".

A white paper report on the management of the Pension Fund was submitted to the Parliament (Storting) on 4 April, 2008.

General outlook for the economy
Growth in the Norwegian mainland economy has been strong for the past four years with an annual GDP growth of close to 5 per cent. This is the strongest economic expansion in a four-year period since the 1960s. Domestic demand has been fuelled by strong income growth and low interest rates. Profitability in the business sector, coupled with increasingly higher capacity utilisation has contributed to strong investment growth in the mainland business sector. Vigorous growth in the petroleum investments has also provided important growth impetus to domestic demand.

There are now signs of slowing growth in the mainland economy. Housing starts have declined in the past few months, growth in consumption has dampened and exports of traditional goods are slowing down. However, growth in petroleum investments continues to be vigorous.

Growth in Mainland - GDP is estimated at 3.2 per cent in 2008, indicating a fifth year running with growth well above trend.

Employment growth has been exceptionally strong and the unemployment rate is now at a 20 year low. Demand for labour continues to be high, and many companies are still having difficulties in finding qualified labour. However, the unemployment rate has started to flatten out, and the shortage of qualified labour has become less urgent in some sectors. The unemployment rate is forecast at 2.4 per cent in 2008.

The tightening of the labour market has resulted in higher wage growth. Based on the wage negotiations concluded so far, annual wage growth is estimated at 5½ per cent in 2008.

Higher inflation on domestically produced goods and services has contributed to an underlying price inflation that is close to the operational target for monetary policy. The consumer price index adjusted for changes in excise duties and excluding energy, (CPI-ATE), is expected to increase by 2.4 per cent in 2008, compared to 1.4 per cent in 2007. Headline inflation (CPI) is expected to increase from 0.8 per cent in 2007 to 3.2 per cent this year.

The oil price has increased significantly since the National Budget 2008 was presented in October 2007. The projection in this Report is based on an oil price of NOK 500 per barrel in 2008, which is NOK 140 per barrel higher than in the projection from October.

 

Key projections for the Norwegian economy. Per cent¹⁾

	2007 NOK billion2)	2007	2008
Private consumption	946.6	6.4	3.7
Public consumption	447.1	3.2	3.2
Gross fixed investments	474.3	9.6	4.5
Petroleum	109.0	6.6	10.0
Business sector, Mainland Norway	169.2	13.2	7.0
Exports	1 062.7	3.2	2.4
Crude oil and natural gas	498.0	-2.4	-0.2
Traditional goods	303.0	9.0	4.3
Imports	685.5	8.6	6.0
Traditional goods	451.4	8.2	6.1
Gross domestic product	2 288.7	3.5	2.4
Mainland Norway	1 708.7	6.0	3.2
Memorandum items:
Consumer price inflation (CPI)		0.8	3.2
Underlying inflation (CPI-ATE)		1.4	2.4
Wage growth		5.4	5½
Employment growth		3.8	2.4
Unemployment rate (LFS)		2.5	2.4
Current account balance. (Pct of GDP)		16.3	16.2

¹⁾ Constant 2005 prices
²⁾ Preliminary national accounts figures. Current prices
Sources: Statistics Norway and Ministry of Finance

 

Key figures for the petroleum sector

	2007	2008	2009	2012	Oil price sensitivity 2008 1)
Assumptions:
Crude oil. NOK per barrel	423	500	408	400
Production. Mill. Sm3 oil equivalent	238	240	249	251
Crude oil and NGL	148	141	140	136
NOK billion:
Export value 2)	509	600	528	502	7.3
Accrued taxes and royalties 3)	197	233	187	153	6.0
Paid taxes and royalties 3)	191	216	210	156	3.0
Net cash flow 4)	316	356	332	268	5.5
1) Effects of an oil price increase of NOK 10 per barrel 2) Crude oil, natural gas, NGL and pipeline transport 3) Income and property taxes, surtax, production tax, area tax and CO2 tax. NOX-tax in 2007 and 2008. 4) Taxes and excise duties, net revenues from SDØE (State Direct Financial Interest) and dividends from Statoil Sources: Statistics Norway, Ministry of Petroleum and Energy and Ministry of Finance

 

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

	2006	2007	2008
1. Fiscal Budget
Total revenues	994.9	1 030.1	1 119.5
Revenues from petroleum activities	376.6	337.4	381.4
Revenues excl. petroleum activities	618.3	692.7	738.1
Total expenditures	683.5	715.1	776.9
Expenditures on petroleum activities	21.2	21.1	25.7
Expenditures excl. petroleum activities	662.3	694.0	751.1
Fiscal budget surplus before transfers to the Pension Fund – Global	311.4	315.0	342.6
- Net revenues from petroleum activities	355.4	316.4	355.7
= Non-oil budget surplus	-44.0	-1.3	-13.0
+ Transfers from the Pension Fund – Global	57.4	2.8	13.0
= Fiscal Budget surplus	13.4	1.5	0.0
2. Government Pension Fund
Net transfer to the Pension Fund – Global	298.0	313.6	342.6
+ Dividends on the Pension Fund	64.1	78.4	81.6
= Surplus in the Pension Fund	362.1	392.0	424.2
3. Fiscal Budget and Government Pension Fund consolidated surplus	375.5	393.5	424.2

Source: Ministry of Finance

 

General government financial balance. NOK billion

	2006	2007	2008
Fiscal Budget surplus	13.4	1.5	0
+ Surplus in Government Pension Fund	362.1	392.0	424.2
+ Surplus in other central government and social security accounts	-10.7	-5.8	2.6
+ Definitional differences between Fiscal Budget and national accounts	28.2	14.0	23.5
+ Direct investment in state enterprises	5.5	4.1	8.0
= Central government financial balance	398.5	405.8	458.3
+ Local government financial balance	0.5	-11.7	-12.6
= General government financial balance	398.9	394.1	445.7
In per cent of GDP	18.5	17.2	17.9

Sources: Statistics Norway and Ministry of Finance