Revised National Budget 2012

- Economic activity in Norway has held up well in 2012, despite the global economic slowdown. Unemployment is expected to remain at the current low level. In the revision of the 2012 Budget, the Government emphasizes the need for fiscal constraint to reduce the pressure on the exchange rate and exposed mainland industries. Increasing interest rates with widening spreads could lead to a stronger krone exchange rate. That would be most unfortunate for industries exposed to international competition, says Finance Minister Sigbjørn Johnsen.

Mainland-GDP in 2012 is forecast to grow by 2¾ per cent, on par with the average for the last 40 years. Next year a further pick up is expected, to 3 per cent. Growth in private consumption is high. Activity in the business sector is high, especially in the petroleum subcontracting sector. Significant growth in petroleum sector investments is expected also this year. Employment has increased since the spring of 2010, and is expected to climb further both this year and next. Unemployment is forecast to remain at 3¼ per cent of the labour force this year.

In the revision of the 2012 Fiscal Budget the Government propose a strengthening of the budget balance compared to the approved 2012 budget. Tax revenues are estimated to be higher and expenditures somewhat lower than last autumn. Also, the capital in the Government Pension Fund Global is estimated to be higher. Thus, the use of petroleum revenues, as measured by the structural, non-oil budget deficit, has been brought further below the 4 per cent path of the Fiscal Policy Guidelines.

Fiscal Policy

As stated in the 2001 Fiscal Policy Guidelines, 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. The guidelines allow for fiscal policy to be used actively to counter fluctuations in economic activity.

The structural non-oil budget deficit is estimated at NOK 116 billion, which is NOK 6 billion lower than in the approved 2012 budget, and NOK 16 billion below the 4 per cent path.

Also the structural, non-oil deficit for 2011 has been revised downwards. As a consequence, the 2012 budget appears to be somewhat more expansionary now than last autumn. Fiscal policy for 2011 and 2012 seen as a whole is nevertheless slightly less expansionary than estimated last autumn.

The main features of fiscal policy in 2012:

• Measured by the structural, non-oil budget deficit, spending of petroleum revenues is estimated at NOK 116 billion. This is NOK 6 billion lower than in the approved budget and NOK 16 billion lower than the expected real return on the Government Pension Fund Global.
• An increase in the structural, non-oil deficit from 2011 to 2012 of NOK 19 billion, corresponding to ¾ per cent of Mainland trend-GDP.
• The real underlying growth in Fiscal Budget expenditures from 2011 to 2012 is estimated at 3.1 per cent. Nominally, spending is estimated to increase by 6.2 per cent.
• A non-oil fiscal budget deficit estimated at NOK 112 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 378 billion.
• A consolidated surplus in the Fiscal Budget and the Government Pension Fund, including interest and dividends, of NOK 381 billion.
• An estimated market value of Government Pension Fund of NOK 3971 billion at the end of 2012. The present value of old age pension obligations under the National Insurance Scheme is estimated at NOK 5 176 billion by the end of 2011.

Monetary policy and financial stability

The monetary policy regulation of 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% over time. The key rate is currently at 1.5 per cent.

The Government Pension Fund

The Government Pension Fund comprises the Government Pension Fund Global and the Government Pension Fund Norway. The two parts of the Fund are managed by

Norges Bank and Folketrygdfondet, respectively, under mandates set by the Ministry of Finance.

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.

A white paper report on the management of the Pension Fund was submitted to the Parliament (Storting) on 30 March 2012, cf, Report No. 17 to the Storting.

Key figures for the Norwegian economy¹. Per cent

1) Constant 2009 prices
2) Current prices
3) Preliminary national accounts figures
Sources: Statistics Norway and Ministry of Finance.

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

Source: Ministry of Finance.

General government financial balance. NOK billion

1) Includes central government accrued, but not recorded taxes. Direct investments in state enterprises, including government petroleum activities, is defined as financial investments in the national accounts.

Sources: Statistics Norway and Ministry of Finance.