In the Long-Term Programme, the Government proposes a strategy for the use of petroleum revenues. At the same time, new guidelines for monetary policy have been established as of today. The operational target of Norges Bank is an inflation rate of 2.5 per cent over time.

In the Long-Term Programme 2002-2005 and in a white paper on the guidelines for economic policy, which are presented today, the Government emphasises the importance of a continued sustainability of fiscal policy, as well as maintaining fiscal policy’s role in stabilising demand. With a large and rapidly growing Petroleum Fund, a clear, long-term strategy for the use of petroleum revenues is needed.

In this situation, the Government is of the view that there is a need to anchor more formally the role of monetary policy in securing low inflation and a stable exchange rate. A new regulation on monetary policy has been established, replacing the regulation of 6 May 1994. The operational target of Norges Bank is an inflation rate of 2.5 per cent over time. While the new guidelines represent a different mandate for Norges Bank, they do not themselves imply a significant change in the conduct of monetary policy. The new guidelines for fiscal policy and monetary policy provide a good basis for maintaining a stable exchange rate.

Solid government finances - New guidelines for fiscal policy

High oil prices, large surpluses on the government budget and high allocations to the Government Petroleum Fund, have led the Government to propose a fiscal policy strategy that involves a modest and gradual increase in the use of petroleum revenues.

The Government has drawn up the following guidelines for fiscal policy:

• emphasis must still be given to stabilise economic fluctuations
• the use of petroleum revenues over the Government budget is to be increased moderately and gradually, approximately in line with an estimated 4 per cent real return on the capital of the Petroleum Fund

This fiscal policy rule implies a modest increase in the use of petroleum revenues, at the same time as fiscal balances and economic developments are sustainable. Based on this rule, the central government structural non-oil budget deficit is presently estimated to rise from nearly 2 per cent of Mainland GDP in 2001 to around 5.5 per cent in 2010. This translates to an increase of around 0.4 per cent of Mainland GDP a year, or around NOK 4bn, compared with a scenario of neutral fiscal policy. The fiscal policy rule of spending a 4 per cent real return on the Petroleum Fund nonetheless suggests a Government budget surplus of around 6 per cent of GDP in 2010, and the capital in the Petroleum Fund rising to nearly 130 per cent of GDP.

The actual implementation of fiscal policy will take into account business cycle fluctuations around the suggested medium-term path. Thus, fiscal policy will continue to have a main responsibility for stabilising output and employment, ensuring that growth in overall demand for goods and services is consistent with balanced growth in the Norwegian economy.

In the Long-Term Programme, it is emphasised that it is the economic performance of the mainland economy that is key in determining overall economic prosperity in the long term, not the revenues from the petroleum sector. The Government therefore attaches great importance to enhancing the economy’s growth potential. Thus, the increased room for manoeuvre in fiscal policy will partly be directed towards improving infrastructure and strengthening efforts within research and development, and partly to lower taxes in the years ahead.

New guidelines for monetary policy

In a period where fiscal policy also is to allow for a gradual and sustainable increase in the use of petroleum revenues, the Government wants to anchor the role of monetary policy in securing low inflation and a stable exchange rate. As a consequence, a new regulation on monetary policy has been established with immediate effect, replacing the former regulation of 6 May 1994.

The new guidelines stipulate that monetary policy shall aim at stability in the internal and external value of the krone, contributing to a stable exchange rate. Monetary policy shall also underpin fiscal policy by contributing to stable developments in output and employment.

In accordance with this, Norges Bank’s implementation of monetary policy shall be aimed at maintaining low and stable inflation. The operational target is defined as an annual increase in consumer prices close to 2.5 per cent over time. Monetary policy shall be forward-looking, and direct effects on consumer prices stemming from changes in interest rates, taxes, excise duties and extraordinary, temporary disturbances, shall in general not be taken into consideration. It is expected that consumer price inflation, as a general rule, will be within a 1 percentage point deviation of either side of the target.

While the new regulation on monetary policy represents a different mandate for Norges Bank, it does not in itself suggest a significant change in the implementation of monetary policy. The new guidelines represent continuity in the conduct of monetary policy, and lay a good basis for Norges Bank to continue to pursue a monetary policy with a high degree of credibility both in the financial markets and in the economy as a whole. The new guidelines for fiscal policy and monetary policy provide a good basis for maintaining a stable exchange rate.

There are no changes to the constitutional framework for monetary policy. The Government remains responsible for overall economic policy, and sets guidelines for Norges Bank’s conduct of monetary policy.

The regulation on monetary policy is enclosed.

A technical description of the central government structural non-oil budget balance is enclosed.

APPENDIX

Regulation On Monetary Policy

Established by Royal Decree of 29 March 2001 pursuant to Section 2, third paragraph, and Section 4, second paragraph, of the Act of 24 May 1985 no 28 on Norges Bank and the Monetary System

I

§ 1.

Monetary policy shall be aimed at stability in the Norwegian krone’s national and international value, contributing to stable expectations concerning exchange rate developments. At the same time, monetary policy shall underpin fiscal policy by contributing to stable developments in output and employment.

Norges Bank is responsible for the implementation of monetary policy.

Norges Bank’s implementation of monetary policy shall, in accordance with the first paragraph, be oriented towards low and stable inflation. The operational target of monetary policy shall be annual consumer price inflation of approximately 2.5 per cent over time.

In general, the direct effects on consumer prices resulting from changes in interest rates, taxes, excise duties and extraordinary temporary disturbances shall not be taken into account.

§ 2.

Norges Bank shall regularly publish the assessments that form the basis for the implementation of monetary policy.

§ 3.

The international value of the Norwegian krone is determined by the exchange rates in the foreign exchange market.

§ 4.

On behalf of the State, Norges Bank communicates the information concerning the exchange rate system ensuing from its participation in the International Monetary Fund, cf. Section 25, first paragraph, of the Act on Norges Bank and the Monetary System.

II

This regulation comes into force immediately. Regulation no. 0331 of 6 May 1994 on the exchange rate system for the Norwegian krone is repealed from the same date.

The central government structural non-oil budget balance

The Ministry of Finance has for many years used the "change in the fiscal budget non-oil cyclically adjusted surplus net of interest payments" as an indicator of the fiscal policy stance. This indicator excludes revenues and expenditures that are assumed not to have an effect on the Norwegian economy.

In order to assess how much petroleum revenues that are used over the Government budget, two alterations have been made to these calculations (relating to transfers between central government and Norges Bank, and between central government and abroad). These modifications affect the level of the adjusted budget surplus, but not the year to year changes. The new adjusted budget surplus – "the fiscal budget structural non-oil budget balance" – can be interpreted as the amount of petroleum revenues that are used over the Government budget. This structural non-oil budget balance has been calculated to around 1.9 per cent of trend-GDP for Mainland-Norway in 2000 and 2001.