Regionally Differentiated Social Security Contributions in Norway

Dear Commissioner,

I refer to our upcoming meeting on 18 February concerning the Norwegian system of differentiated social security contributions. I would like to submit some short comments which may form a starting point for our discussions.

We acknowledge that the Commission’s and the ESA’s National Guidelines on Regional Aid are not designed to allow directly for a regionally differentiated social security tax measure. In 1999, the Norwegian tax scheme was approved as indirect transport aid to sparsely populated areas.

It is well known that parts of Norway and some of the other Nordic countries are characterised by sparse population settlement, long distances and harsh climate, to a greater extent than what applies for most EEA states. Depopulation due to the lack of employment opportunities is a major problem in many of these areas.

This particularly applies for the northernmost parts of Norway which constitute zone 5 in the regionally differentiated social security tax system and presently enjoy a zero-rate. Between 1995 and 2000 Finnmark County lost, on average, more than 1.2 per cent of its population each year due to migration. During this period, comparable losses of population are only found in three regions within the European Union, and that is in the New German Länder.

The population density in Finnmark and Nord-Troms (zone 5) with 95 000 inhabitants is below 1.7 per km ²> (compared to the overall average in Norway of 14.5 per km ²> and the
EU15 average of 117.4 per km ²>). The accessibility to central markets is very low. Even the travel distance from zone 5 to other small markets (villages) in northern Finland and Sweden is long. Harsh weather conditions, combined with a challenging topography, increases the distance related costs. These high distance costs also reduce the possibility for potential competition across the border for a substantial part of the service sector.

Figures produced by Statistics Norway and based on companies' annual reports for 2001, indicate that profitability for companies situated in zone 5 and 4 are particularly low. The return on total assets for companies registered in zone 5 was 3.7 per cent compared to a national average of 7.4 per cent. Since 2001, the situation has deteriorated.

The system of regionally differentiated social security contributions is the single most important instrument in Norwegian regional policy. The aim of the system is to promote employment in peripheral regions with low accessibility in the least distorting way. Therefore, the tax concession is applied automatically to all firms employing persons resident in the disadvantaged areas. The tax concession is directly linked to gross salary payments to these employees and is available to all kinds of businesses, irrespective of trade, profitability, location or size. The decisive factor is solely the residence of the employee. The variations of tax rates are proportional to the actual problems the regions face. In addition the regionally differentiated social security tax is transparent, predictable and has a clear incentive structure. Being in place since 1975, firms have come to rely on the scheme when deciding their location and business expansion. Thus, the measure is not a defensive one like other operating aid may be. The effect of this instrument may be one factor that explains why the unemployment rate in the assisted areas has not differed substantially from the overall average in the country.

Our intention is not to open up for a more liberal granting of aid. On the contrary, we fully acknowledge the need to reduce state aid. The Norwegian aid to the manufacturing sector has been reduced during the last years. As regards regional investment aid, the maximum aid levels allowed by the ESA are not fully made use of.

We recognize the possibility of granting operating aid in the form of direct transport aid in these areas. However, aid directly linked to the transportation costs of each firm may increase the use of transportation. The adverse incentive structure produced by aid to transportation, may favour firms and industries that have the largest disadvantages for production in the areas and is an inefficient measure in order to stimulate employment.

The indirect nature of the regionally differentiated social security scheme implies that it hardly meets a strict interpretation of the documentation criteria of the Regional Guidelines. We also acknowledge that the state aid rules should apply equivalently throughout the EEA area. However, the very rationale of the regional aid rules, allowing for aid in order to facilitate the development of certain areas where such aid does not adversely affect trading conditions to an extent contrary to common interests, calls for a more flexible interpretation in this case.

Yours sincerely,

Per-Kristian Foss