Press release | Date: 08/10/2014| No: 47/2014
“The Government has decided to appoint two expert commissions to strengthen the fiscal policy framework and to contribute to a more efficient use of public funds,” says Minister of Finance Siv Jensen.
“The Government’s fiscal policy is prudent and based on the fiscal rule for spending of petroleum revenue, ensuring that also future generations can benefit from Norway’s income from oil and gas. Public funds must be spent efficiently to provide as much welfare as possible, and in a way that shows respect for taxpayers’ money,” says Minister of Finance Siv Jensen.
Commission to consider how to apply the fiscal rule in a situation when the Fund is large and fluctuates widely in value
The capital in the Government Pension Fund Global is now significantly larger than foreseen a few years ago. In 2013 alone the Fund grew by NOK 1200 billion, and its value is now twice that of Norway’s mainland economy. As a result, fluctuations in the value of the Fund and in the Fund’s expected real return – estimated to be 4 per cent – can become large when compared to the size of the fiscal budget and Norwegian economy, in particular when seen against the underlying growth in the mainland economy from one year to the next. The market values of stocks, bonds, and foreign exchange can be highly volatile, due to the nature of financial markets, and they may not fluctuate in sync with Norway’s business cycles. Potentially large fluctuations in the path for the expected real return from the Fund make it less appropriate as an operational target for fiscal policy in the short term. The current situation is a case in point: a swift return to a level of spending corresponding to 4 per cent of the Fund’s value would entail a large and unwarranted fiscal expansion.
Against this background, the Government will appoint a commission to consider how to apply the fiscal rule. The commission will consider the need to supplement the fiscal policy guidelines with additional rules or by identifying certain considerations that should be emphasised in the setting of fiscal policy. The commission will also consider whether more weight should be given to underpinning the growth capacity of the Norwegian economy.
The commission must also take into account the interests of future generations and the various challenges facing the Norwegian economy in the short and long term. These include Norway’s high cost level, lower demand from Norway’s petroleum industry, high house prices and debt levels in households and municipalities, labour migration, lower productivity growth, aging and the long-term fiscal sustainability, and the outlook for lower returns in international capital markets. In its work, the commission may also consider how other countries have used fiscal rules and how these have been implemented.
The commission will be chaired by Professor Øystein Thøgersen (NHH – Norwegian School of Economics) and is asked to deliver its report by the end of June 2015.
Commission to consider the need for multi-year budgeting in selected areas and a clearer divide between operations and investments in the fiscal budget
The public sector lays claim to a significant share of the economy’s resources. Budget decisions must be based on solid information and a predictable financing of investments, within the confines of a comprehensive budget process where different measures are weighed against each other, to ensure that they are implemented rationally and lead to the desired result. The Government will appoint a commission to consider the need for multi-year budgeting in selected areas and a clearer divide between operations and investments in the fiscal budget. The recommendations from the commission must aim to give better information for decision-making and promote an efficient use of public funds. The commission will be chaired by Director Øystein Børmer (Norwegian Government Agency for Financial Management), and is asked to deliver its report by the end of November 2015.
Background: Norway’s fiscal framework
Norway’s petroleum resources are a significant advantage to the economy, but also present particular challenges for fiscal policy in ensuring a stable economic development. Public sector revenues from petroleum are large, vary considerably from year to year, and will gradually decline over time. Many countries have found that temporary large revenues from natural resource exploitation can produce relatively short-lived booms that are followed by difficult adjustments as production and revenues diminish. Moreover, income from non-renewable resources like oil and gas should also benefit future generations.
The Government Pension Fund Global and the fiscal rule for the use of oil revenue address these challenges, and are designed to support a stable development of the Norwegian economy in both the short and long term. The Government Pension Fund Act stipulates the transfer of the State’s net cash flow from petroleum industry to the Government Pension Fund Global. The fiscal rule specifies that the transfers from the Fund to the central government budget shall, over time, follow the expected real return on the Fund, which is estimated at 4 per cent. The fiscal rule also puts emphasis on evening out economic fluctuations to contribute to sound capacity utilisation and low unemployment, e.g. by allowing automatic stabilisers to play out fully.
This framework delinks the earning and use of petroleum revenue, reducing the costs of future restructuring and the risk of a sharp decline in industries exposed to international competition. It also ensures that the petroleum wealth will benefit future generations.
Together, the fiscal rule and the Government Pension Fund Global comprise a fiscal framework that insulates the fiscal budget from fluctuations in petroleum revenue, stemming either from volatile oil and gas prices or from changing production or investments in the petroleum sector. Through the Fund, a large proportion of the State’s oil and gas income is invested in other countries. Investing foreign exchange earnings abroad protects the krone against the large, varying foreign exchange earnings generated by the petroleum industry. The fiscal policy framework thus supports Norway’s monetary policy, and lays a foundation for more stable expectations in the currency market.
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