As a result of a further weakening in world economic growth, the Norwegian economy has experienced a more pronounced slowdown since the presentation of the National Budget by the previous Labour Government. However, capacity utilisation is still high and the labour market remains tight, although some easing can be seen. The Government’s Amendment to the Budget for 2002 is designed to contribute to a stable economic development in production and employment. The Budget proposal also underlines the Government’s commitment to reduce the tax level, which will contribute to increase the growth potential of the economy.

The Government’s Budget proposal is based on full commitment to the guidelines for a responsible management of the petroleum revenues, as stated in Report no. 29 (2000-2001) Guidelines for Economic Policy and as supported in the Parliament’s discussions on the Report:

• The structural, non-oil budget deficit shall generally correspond to the expected real return on the Government Petroleum Fund, which is estimated at 4 per cent.
• The actual implementation of fiscal policy shall take into account business cycle fluctuations around the suggested medium-term path.

In accordance with the said Guidelines for economic policy, the use of petroleum revenues over the Fiscal Budget for 2002 is increased by NOK 6 billion from 2001 to 2002, which is unchanged from the Labour Government Budget proposal. This leeway is used to finance a reduction in direct and indirect taxes of NOK 7.2 billion. The shift towards reduced taxation rather than increased expenditures underlines the Government’s focus on tax cuts as a means for increasing the growth potential in the economy.

Fiscal Policy

The main features of the Fiscal Budget proposal for 2002 can be summarised as follows:

• A structural, non-oil budget deficit of NOK 26 billion, corresponding to 2.3 per cent of trend-GDP for the mainland economy. This is the same level as in the National Budget, and implies a deficit equal to the expected real return on the Petroleum Fund, in accordance with the guidelines for fiscal policy. For 2001, the deficit is now estimated at NOK 19 billion.
• A reduction in real terms of direct and indirect paid taxes of approximately NOK 7.2 billion from 2001 to 2002. Thus, the tax reduction is NOK 3.4 billion higher than the proposal put forward by the Labour Government. In accrued terms, direct and indirect taxes are reduced by NOK 11.8 billion, i.e. NOK 4.2 billion more than proposed by the Labour Government.

• A real underlying growth in Fiscal Budget expenditures of 1^1 per cent between 2001 and 2002, corresponding to roughly NOK 6 billion measured in 2001-prices. The growth in social security expenditures alone accounts for more than half of this amount. In total, the expenditures are reduced by NOK 2 billion compared with the proposal from the Labour Government.

• An increase in real total local government revenues of roughly NOK 3^3 billion, or about 2 per cent, compared with the revenue level in 2001 as estimated in the Proposition on Local Government Finances.
• The non-oil Fiscal Budget deficit in 2002 is now estimated at NOK 36.9 billion, an increase of approximately NOK 0.8 billion compared to the proposal of the Labour Government. The deficit is covered by a transfer from the Government Petroleum Fund. The increase in the non-oil deficit from 2001 to 2002 must be seen in light of extraordinary repayments of local debt of approximately NOK 18.7 billion in connection with the state acquisition of the specialist health services (hospitals etc).
• Based on an average oil price estimate in 2002 of 185 kroner per barrel, the state's net cash flow from petroleum activities is estimated at NOK 186.8 billion in 2002.
• Net transfers to the Government Petroleum Fund, i.e. after transfers to the state budget of NOK 36.9 billion, is estimated at NOK 149.9 billion. The overall surplus of the Fiscal Budget and the Government Petroleum Fund, including interest and dividend income of the Fund, is estimated at NOK 173.5 billion in 2002.

• General government net lending (the surplus concept used in the Maastricht criteria) is estimated at NOK 186 billion in 2002, or 12.6 per cent of GDP. General government net assets are estimated at about NOK 1160 billion, or 79 per cent of GDP, at the end of 2002.

Tax policy

The Government aims at a gradual reduction of the tax level over the 4-year parliamentary term. It is the Government's assessment that a lower tax level will contribute to a strengthening of the economy's growth potential. The Government also intends to create a more stable framework for the business sector with a more predictable tax policy. Several tax changes in this year's budget will benefit the business sector, whereof the most important are mentioned below.

A tax on dividends received by shareholders was introduced as a temporary measure last year. The Labour Government wished to prolong the measure, but this Government has proposed to abolish the tax since it represents a certain degree of "double taxation" of dividends and discriminates against share capital financing. Also, the Government upholds the increases in depreciation rates for tax purposes proposed by the previous Government. The Government proposes to offer the possibility for small businesses to offset a proportion of investments in R&D against taxes to a wider range of businesses than proposed by the previous Government.

The passenger tax on air travels is abolished in the Government's proposal. With the aim of increasing the supply of labour, the marginal tax rate for large income groups is lowered and the standard deduction in wage and pension income is increased in the proposal. Property taxes are reduced in contrast to a proposal for increases made by the Labour Government. Furthermore, the Government proposes a reduction of duties on alcoholic beverages.

Monetary Policy

The Government is committed to the monetary policy regulation of March 2001, confer Report no. 29 (2000-2001). Norwegian monetary policy shall aim at stability in the internal and external value of the krone. It shall contribute to stable expectations concerning exchange rate developments, but 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 oriented towards low and stable inflation. The operational target for monetary policy shall be annual consumer price inflation of approximately 2^2 per cent over time. As a main rule, consumer price inflation is expected to remain within an interval of +/-1 percentage point around the inflation target. Norges Bank's interest rate setting shall be forward-looking and take due account of the uncertainty associated with macroeconomic estimates and assessments. It shall disregard direct effects on inflation due to changes in interest rates, taxes, excise duties and extraordinary, temporary disturbances that are not considered to have an effect on underlying price and cost inflation.

After the introduction of the new guidelines, Norges Bank signalled that these would not result in significant changes in the conduct of monetary policy. So far this year, the bank has left its key deposit rate unchanged at 7 per cent. The Norwegian 3-month money market rates are now at slightly below 7 per cent, i.e. about 3^2 percentage points above the corresponding rates in the Euro area.

Economic Outlook

There has been a further deterioration in world economic growth during the last months. The terrorist attacks on the US in September 2001 have intensified the negative economic developments and increased the risk of a more pronounced international setback. Lower international growth has also resulted in weaker growth in Norwegian industries exposed to international competition. There are also signs of a slowdown in domestic demand. A marked downturn in credit growth to the business sector points to a weaker development in investments. The risk of a pronounced downturn in Norway during the next year nevertheless remains limited. In general, the Norwegian economy is characterised by high capacity utilisation and labour shortages in many sectors. Furthermore, the financial situation of Norwegian households is solid.

GDP

Following a growth rate at 1.8 per cent in 2000, mainland GDP growth is now projected at 0.8 per cent in 2001 and 1.6 per cent in 2002. These estimates imply a downward revision of approximately ^2 percentage point for 2001, and ^1 percentage points for 2002 compared to the estimates of the National budget 2002. The downward revisions are to a large extent explained by lower estimates for exports of traditional goods and somewhat lower investments in the Mainland business sector as a result of weaker international developments. The estimates are also influenced by developments in electricity production as a result of heavy rainfall in 2000. Total GDP (including petroleum and shipping) is expected to grow by 1.6 per cent this year and 2.7 per cent in 2002.

Labour market

During recent months there has been some sign of easing in the labour market. Employment is now expected to grow by about ^1 per cent both in 2001 and 2002, against growth rates of ^2 and ^1 per cent respectively in the National Budget 2002. The unemployment rate is expected to increase moderately to 3.5 per cent and 3.6 per cent in 2001 and 2002 respectively, while unemployment was estimated to remain at 3.4 per cent in the National Budget.

Prices and wages

While the estimate on consumer price inflation this year is unchanged at 3.1 per cent as assessed in the National Budget, CPI is revised downwards by almost ^2 percentage point for 2002, to 1.5 per cent. This is generally explained by the proposed changes in indirect taxes. Developments in consumer prices this year have to a large degree been determined by changes in indirect taxes and rising electricity prices. Excluding changes in excise duties and energy prices, consumer price inflation is projected at approximately 2^2 per cent both in 2001 and 2002.

Average annual wage growth is estimated to decline slightly from 4^2 to 4^1 per cent from 2001 to 2002, in line with the forecast in the National Budget.

Current account

The current account surplus is projected at NOK 189.1 billion in 2001 and NOK 159.4 billion in 2002, against NOK 193 billion in 2000. This implies a downward revision from the National Budget, in particular for 2002, mainly explained by a lower oil price assumption.

The Petroleum Fund

In the National Budget presented by the Labour Government, the year-end value of the Government Petroleum Fund was estimated at NOK 650 billion for 2001 and NOK 861 billion for 2002. In line with the budget proposal, the value of the Fund at the end of 2001 and 2002 is now estimated to NOK 647 billion and NOK 838 billion respectively. As a result of recent developments in international securities markets, the actual real return of the Fund in 2001 may be lower than assessed. Between the beginning of 1998 and June 2001, the average annual real return on the Fund has been 4.7 per cent.

The Environmental Fund

An Environmental Fund was established on 31 January 2001 with a capital of NOK 1 billion. The Fund is to be invested in companies considered to have little negative impact on the environment and in companies that satisfy defined criteria with respect to environmental reporting and certification. The Government will increase the capital in the Environmental Fund with NOK 1 billion as of early 2002.

State ownership

The Government will conduct a critical review of state ownership in the business sector. The review will focus on both the size and the organisation of the ownership. The issues will be presented to the Parliament this spring. In the Budget the Government asks for expanded parliamentary authorisation to sell out parts of ownership positions in several companies.

Table 1 Key figures. Percentage volume changes from previous year ¹⁾>>

1) 1997-prices.
2) Including stockbuilding.
3) National Budget 2002.
4) Amendment to the Budget.

Source: Statistics Norway and the Ministry of Finance.

Table 2 Key figures for the Fiscal Budget (incl. Social Security) and Government Petroleum Fund. NOK billion

1) In connection with the state acquisition of the specialist health service there will be extraordinary repayments of local debt. State allocations for this purpose increase the non-oil deficit in 2002 by approximately NOK 18.7 billion.

Source: Ministry of Finance.