Press Release

No.: 66/98
Date: 05.10.98

The Government proposes a marked tightening of Fiscal policy in order to rebalance the economy

The economic situation

The Norwegian economy is in its sixth consecutive year of strong expansion. Growth in employment has been strong, resulting in a considerable decline in the unemployment. Despite the upturn, price inflation, and until this year, wage inflation has been relatively moderate.

Due to the protracted period of sharp economic growth, the economy has entered a critical phase, characterised by very high capacity utilisation. There are now clear signs of shortages of qualified labour, and the number of unfilled vacancies is still on an upward trend. As a consequence, wage inflation has increased to 6 per cent this year.

In recent months the krone has come under considerable pressure in the foreign exchange market. Since mid-August the krone has been adversely affected by the unrest in international financial markets, following the economic problems in Asia and the crisis in Russia. The pressure on the krone has necessitated a substantial increase in interest rates. Short-term money market rates are at present around 8 per cent. The Norwegian krone is about 7 per cent weaker than at the beginning of the year. To maintain stability of the Norwegian krone Norges Bank has raised its official rates seven times by a total of 4 ½ percentage points. The instruments in monetary policy are oriented to returning the Norwegian krone exchange rate back to its initial range.

Economic Policy

Fiscal restraint is central both in order to curb the growth in domestic demand and to ease the pressure on monetary policy.

The budget proposal entails a fiscal tightening of close to 1 per cent of GDP, or NOk 9 billion. The proposed measures affect both government income and expenditure. Expenditure growth will be limited to 1 per cent in real terms.

In the proposed Fiscal Budget for 1999 the Government has given special priority to the health and care sector, regional measures and the expansion of the special scheme, introduced last year, of providing additional cash grants to families with small children

According to a Royal Decree of May 6 1994, monetary policy to be conducted by Norges Bank shall be aimed at maintaining a stable krone exchange rate against European currencies.

“In the event of significant changes in the exchange rate, monetary policy instruments will be oriented with a view to returning the exchange rate over time to its initial range.”

The government will continue the co-operation with the social partners in order to restrain wage and price growth and thereby check a further loss of cost competitiveness.

These various measures should reinforce each other and contribute to rebalancing the economy. A tighter fiscal policy should counteract the recent depreciation of the krone and facilitate a gradual decline in interest rates. A stronger krone should reduce the price impulses from abroad and thereby support fiscal policy and income policy in checking wage and price growth.

Despite the capacity constraints following a long period of high economic growth, economic fundamentals are sound compared with most countries:

• Public finances are solid. The general government surplus is estimated at 4.5 per cent of GDP this year, and general government net assets are expected to reach 41 per cent of GDP by the end of 1999.
• Norway has one of the highest labour participation rates in the OECD area.
• Norway has built up net foreign assets after having run surpluses on the current account since 1990.

Economic projections

After a projected increase of 3 per cent this year, Mainland Norway GDP is expected to increase by 1.3 per cent from 1998 to 1999, mainly driven by increased private consumption. Mainland business fixed investments and investments in the petroleum sector are forecast to decrease. Total GDP is expected to increase by 2.5 per cent in 1998 and 2.6 per cent in 1999.

The forecasts are based on an oil price of NOK 100 per barrel in 1998 and NOK 110 in 1999.

Employment is expected to increase by 2,.3 per cent this year and 0,.7 per cent next year, leaving the rate of unemployment at 3.2 per cent in 1999 roughly unchanged from 1998.

The increase in consumer prices is forecast at 2.3 per cent in 1998 and 3¼ per cent in 1999. Increased indirect taxes account for about half a percentage point of the increase from 1998 to 1999.

Wages are forecast to increase by about 6 per cent this year and 5 per cent next year.

After a number of years with substantial surpluses on the current account, the surplus is expected to drop to 0.1 per cent of GDP this year, while rising to about 3 per cent of GDP in 1999.

The general government surplus is forecast to increase from 4.5 per cent of GDP in 1998 to 6.0 per cent of GDP in 1999. A net of NOK 52.2 billion is proposed transferred to the Government Petroleum Fund after the non-oil deficit has been covered.

Key projections

Contact: Anne-Sissel Skånvik, telephone 22 24 41 09