Speech/statement | Date: 09/09/2014
"I am very glad to be here because European cooperation is so important to us, both economically and politically. The EU and EU member countries are among our closest partners. The geopolitical crisis in Ukraine has reminded us how important it is to stay together and defend our values", said Minister of Finance, Siv Jensen.
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Dear Excellences, dear Ambassador Helen Campbell,
I will start by thanking Ambassador Campbell for inviting me to this meeting.
I am very glad to be here because European cooperation is so important to us, both economically and politically. The EU and EU member countries are among our closest partners. The geopolitical crisis in Ukraine has reminded us how important it is to stay together and defend our values.
I would also congratulate you with the new Commission that is underway; with Jean-Claude Junker as the new Commission President, and Federica Mogherini as the new High Representative for Foreign Affairs and Security Policy.
I will start my introduction with a few words on the Norwegian economy, before I turn to my Government’s economic policy agenda. At the end I will comment on important financial market issues in relation to our close cooperation with the EU.
The Norwegian economy
Norway has managed relatively well in recent years despite the troubled waters internationally. Significant terms of trade gains since 2000 and strong demand from the petroleum sector have supported economic growth.
Large petroleum revenues has allowed for a gradual increase in government spending year by year, at the same time as the biggest part of these government revenues have been saved in the Government Pension Fund Global.
The activity in the Mainland economy has in recent years also been underpinned by low interest rates and high borrowing by households and local governments.
In 2013, growth in the Mainland economy fell to 2 per cent, which is lower than the average of the last 40 years. We expect a similar growth rate this year. Several factors indicate that we might go into a period when economic growth will be somewhat below the pace we have experienced over the last decades.
Firstly, for several years the building up of the petroleum sector has underpinned economic growth in our Mainland economy. However, oil and gas are non-renewable resources, and we know for sure that they at some point in time will be exhausted. From being an engine for economic growth in Norway, a declining petroleum sector will then become a drag on the economy. In fact, reports from oil companies suggest that we are close to a peak, and oil investment will decrease markedly as early as next year.
Another factor that will dampen economic growth is that the proportion of elderly in the population is growing. This is a challenge that we share with several European countries. The workforce will decline, the burden on people working will increase, and so will the burden on public finances.
A third challenge I will point to is the slowdown in productivity growth we have experienced in recent years. This is not specific to Norway, but a phenomenon we share with most economies in the OECD. But still, it worries me. The fundamental basis for a sustainable welfare society is a robust, productive and growing economy.
We must act now in order to meet these challenges :
- We must pave the way for making Norway as an attractive place for doing business. This is crucial so that other industries can take over when petroleum becomes less important.
- We must keep public finances sustainable for the long run, taking into account that the population gets older.
- And we must facilitate good use of resources and high productivity growth.
The Government’s economic policy
The new government has already started to address these challenges. Our work is focused around the following five themes:
- We will stimulate to effective competition in the economy, both domestically and cross border, and work for less bureaucracy and regulation.
- We will develop a better tax system.
- We will make sure to get a public sector that is able to provide services more efficiently and with as high quality as possible.
- We will emphasize results.
- We will make clear priorities for public spending.
To achieve this, we must be willing to implement structural reforms.
We must also underpin a stable development of the economy; to which fiscal and monetary policies are key instruments.
We need sound banks and a well-supervised financial market.
And we must manage the Government Pension Fund in a manner that provides the highest possible return, and that is consistent with a framework for risk and responsibility that we can live with.
Fiscal policy and productivity
Let me expand a bit on fiscal policy, the use of petroleum revenues and productivity:
- The fiscal rule that was established in 2001 specifies that the expected real return of the Pension Fund Global, estimated at 4 per cent, over time shall be transferred to the central government’s budget. The aim of the rule is to secure a sustainable management of the oil and gas wealth, which gains both present and future generations. The Fund will help to meet the challenge of an aging population.
- In addition to being concerned of how much oil money we should spend each year, we should also be concerned about how the money we take into the economy are used.
- This government believes that oil revenues should be spent in a way that boosts productivity growth.
- Let me illustrate why this is so important to us: If we can increase productivity by as little as 0.2 per cent each year, it will mean more to our current income some 40-50 years ahead than the expected return of the Government Pension Fund. In our amendments to the 2014 budget last autumn, we took a first step towards redirecting the use of oil money towards productivity-enhancing measures. We reduced taxes and increased investments in infrastructure and knowledge. We will continue on this road.
A fast changing business environment
A well-functioning and productive economy must be able to adapt to a world that is changing fast, as new technologies are developed and new markets arise.
The Norwegian economy has proved good adaptability during the rise of the oil industry over the last 40 years.
However, to handle a situation where the oil industry is growing is one thing. To adapt to a situation when the same industry winds down will probably be far more demanding. The high labour costs in Norway may make such a transition even more demanding.
New businesses and industries must be developed, while others will disappear. The politicians are not able to deem which industries will be tomorrow's winners. That has unsuccessfully been tried before.
This means that we do not know which of our resources will be particularly important in the future, which industries will be particularly profitable or what knowledge will be most relevant. Instead of telling businesses and households what to do, political authorities should give them the freedom to choose.
We need to let the market work, both domestically and internationally. In order to ensure that markets function effectively, we must help develop a good infrastructure – in the broadest sense. In a society with ever increasing demands for knowledge, the government must also help develop our human capital.
We know that much of the productivity growth in an economy has to do with new and more efficient businesses that are established, while existing and less efficient businesses are shut down. Similarly, transfer of labour from less efficient to more efficient enterprises contributes to increased productivity.
For this to happen smoothly, it is important to have clear and simple procedures for the establishment of new companies.
Equally important, but perhaps more challenging, is to accept that profitable companies has to close down because others are more profitable. Over time, however, such processes are crucial for productivity and economic growth.
Competition and trade
I think it is quite clear that an important driving force for productivity is competition, both in the private and public sector, and both within the country and cross border.
Sectors that are exposed to tough international competition tend to have higher productivity growth than other industries. This is because these industries are exposed to a continuous pressure to find new solutions and be more efficient.
Being part of a big international marked opens up for economies of scale and specialisation. This particularly important for small countries like Norway. Trade openness is crucial.
But we also need an effective competition policy domestically. And we must look into how more competition in our big public sector can contribute to increased productivity.
Tax cuts and reforms
A centrepiece of this Government’s economic policy is to improve the tax system so that it becomes more profitable to work, save and invest. Such a change will generate higher economic growth in the future.
As I mentioned earlier, we started on this task already in the 2014 budget, where we reduced the tax rate on net income for both corporations and persons by 1 percentage point, reduced the wealth tax and abolished the inheritance tax.
Lower tax rates for companies make investments in Norway more profitable and will therefore stimulate investment. Lower taxes for individuals stimulate employment and saving.
Reduced wealth tax improves the incentives for saving and investment, thus increasing the supply of capital from Norwegian owners.
The Government will propose further growth-enhancing tax cuts.
The Stoltenberg government appointed a tax commission last year headed by Hans Henrik Scheel, with the task to propose revenue neutral improvements to the Norwegian tax system. We have changed its mandate and asked the Commission to make suggestions which provide net tax cuts.
Labour market and migration
Labour markets also play an important role for productivity and economic growth. Labour markets should be flexible and function in such a way that labour easily moves on to the businesses and sectors where the return on labour is highest.
One step towards a more flexible workplace will be to ease slightly on the very strict rules we have for temporary employment. For that reason, we have announced that we would soften the working hour provisions of the Working Environment Act.
Taking part in the common labour market in Europe increases the flexibility of the Norwegian economy. In the short term labour immigration can offset labour shortages, as we have experienced in Norway in recent years
At the same time immigration implies population growth and a need for more infrastructure and public services. It may therefore be appropriate to recall that the level of prosperity is not determined by the number of employees, but by the total labour input per capita and labour productivity.
We can get a high labour input if many have jobs and each employee works sufficient hours. Although the participation rate in Norway is high, the share on sick leave and disability benefits is high. Reducing this share is a demanding but important challenge.
Public sector reforms
The Government has announced several reforms in the public sector that are important for the economy.
We will lay the foundation for a local government reform which ensures good services for the benefit of citizens. We will facilitate strong and robust communities that are poised for bigger tasks and more responsibility.
Strong and robust municipalities are municipalities with adequate resources, both financially and professionally, to provide good welfare services. They are municipalities that can help to develop their communities, where local democracy is meaningful and where people want to live.
The Government want a more effective justice sector and to turn the police into a dynamic and modern organisation that effectively prevents and combats crime. This will be achieved through the merger of police forces to fewer and more robust police regions.
To provide businesses with access to well-qualified workforce, we must improve our education system.
Education and research can enhance productivity of the economy by raising the quality of the workforce, developing new technologies and especially increasing the economy's capacity to absorb new technologies. The quality of higher education and vocational training are therefore essential. And a prerequisite for both is good, basic skills in reading, mathematics and information and communication technology.
The Government is also well underway with other, less comprehensive organisational changes in the public sector, with the view to increase efficiency and reduce. To renew, simplify and improve public sector is a major project, which consists of many small measures.
Clear budget priorities
The last of my five points earlier concerns the necessity of making clear budgetary priorities.
We need to look critically at how budget means are allocated in Norway. The most important needs must be given the highest priority. This also means that we must dare to cut, also in priority areas, if we see that the money could be better used elsewhere.
One example of clear priority-setting in the 2014 budget is our commitment to in-service training for teachers, rather than fruit and vegetables in schools.
Generally, basic infrastructure in Norway is good. But there is an important exception for road and rail. Company executives are reporting this as one of the main barriers to entry and growth of businesses in Norway.
The government has big ambitions for the transport sector. We will prioritise the construction of profitable infrastructure projects. And we will seek solutions to build faster and cheaper, including establishing a separate infrastructure company. This will give lower transportation costs. Less time in traffic jams and less waiting for a delayed train also mean higher productivity.
We have found the productivity issue in general so important that we have appointed an independent Commission for productivity, headed by Professor Jørn Rattsø.
The Productivity Commission’s main task is to come up with specific suggestions on how we can improve productivity and growth potential in the Norwegian economy, both in the exposed, sheltered and public sector.
The government will listen carefully to the advices that come from the Commission. And I hope the Commission also will contribute to a public debate.
Financial market issues and the EEA
Finally, let me give a few remarks on financial market issues. As you know, this is a sector where Norway takes fully part in the European internal market through the Agreement on the European Economic Area – the EEA Agreement.
In fact, this year marked the 20th anniversary of the entry into force of the EEA Agreement. This agreement has provided predictability and a level playing field for business, economic operators and citizens across the EEA.
Both Norwegian financial institutions and financial institutions from EU member states benefit from active Norwegian participation in the European internal market.
My ministry is often asked about our views on the Banking Union. Let me first point out the obvious, the Banking Union is mandatory for the euro area member states, and also open to participation for other EU member states. But as an EEA EFTA state, Norway may not participate.
The Banking Union establishes common supervision and common crisis resolution for those who participate. Generally, we welcome all developments that may improve the functioning of financial markets in the EU, improve economic development and reduce risk for future financial crises.
We follow this deepening of integration in the financial market area with interest. We have also pointed out that supervision within the EEA could be strengthened by increased powers for host supervisor’s ability to supervise branches from abroad, and by allowing requiring separate legal entities in each jurisdiction.
European Financial Supervisory Authorities
We recognise the importance of EU establishing a supranational financial supervisory system [the EBA, EIOPA and ESMA], in order to strengthen the financial supervisions as a response to the financial crisis.
We are currently working actively together with the EU side to find an EEA solution to the EU supervisory system. EEA participation is important in order to ensure homogeneity and consistent application of legislation in the financial services sector.
The supranationality in the supervisory structure exposes however the key difference between the cooperation within the EU and the cooperation between the EU and the EEA EFTA states in the EEA Agreement: The EEA is cooperation between states.
There is a separate supervisor and a separate court in the “EFTA pillar”. With the two-pillar structure established by the EEA Agreement, it is not foreseen that competence to take formal decisions in cases concerning EEA -EFTA States may be transferred to an EU body.
Furthermore, the ESAs [EBA, EIOPA and ESMA] have powers to take decisions directly addressed to national private entities. As you know, the question of transfer of such competence to a supranational body is politically extremely sensitive for us.
We are willing to include measures which will de facto eliminate any risk of differences in the legal framework related to the role and authority of the ESAs, as well as in the substance and timing of the implementation of decisions taken by the ESAs
Until a solution is agreed upon, new acquis which make use of the supranational powers over market participants in the new supervisory system may not be taken into the EEA Agreement. This creates a backlog in the financial market acquis [kort for “acquis communautaire” = EUs regelverk].
We have a good process with our EFTA partners and the EEAS and DG Markt, and hope to find a good EEA solution before the mandate for this Commission expires.
It is important for me to convey that we do address the interim situation – the backlog until new financial market acquis may be taken into the EEA Agreement – in order to maintain the legal homogeneity which is a main function of the EEA Agreement.
Although we, in the interim until a solution is found, are not bound by new EEA obligations corresponding to the new EU acquis, we are developing Norwegian legislation in line with the requirements for the EU Member States in important fields, for instance capital requirements for banks and insurers.
Norway has been a strong supporter of the Basel III reforms for increased capital requirements and improved quality of capital for credit institutions and for improvements in banking regulations in general.
New Norwegian legislation has been adopted reflecting CRR/CRD IV, with minimum capital requirements for Norwegian banks being implemented ahead of the schedule required within the EU. For national financial stability considerations, Norwegian authorities have also used the national flexibility in the new framework to impose somewhat stricter requirements.
Norwegian authorities are also preparing implementation of the new Solvency II framework, with risk-based capital requirements for insurance companies. A proposal for a comprehensive new act which, inter alia, establishes the new capital framework for insurers, is currently in the Storting. Our supervisor has already, for some time, worked on the development of secondary legislation, and we expect to be able to have new legislation in place by 2016.
Let me round off my introduction by admitting that this government has big ambitions. I have given an indication of some important areas where we want to make progress. We will build on what already exists, and improve it order to give more room in our society for visions, creativity and willingness to take risks.
We give high priority to Norway´s relations with Europe and the EU. I hope and believe that we together will be able to address the outstanding issues within reasonable time. By all parties being pragmatic and showing the necessary flexibility, satisfactory solutions should be within reach.
Thank you for your attention.