Fiscal Budget 2003: Present Fiscal Policy Stance

The Government presents a budget proposal for 2003 in line with the Guidelines for Fiscal Policy. In the budget, the increase in the use of petroleum revenues from 2002 to 2003 is approximately NOK 2 billion, while the real, underlying expenditure growth is ^2 per cent. Taxes and excise duties are reduced by a total of NOK 10.6 billion, of which NOK 600 million refers to new tax measures. Growth in the mainland economy is expected to be moderate both in 2002 and 2003.

In accordance with the Guidelines for Economic Policy (confer Report no. 29 (2000-2001) which is available at http://odin.dep.no/fin/engelsk/p10003090), the main elements of the fiscal policy guidelines are the following:

• The structural, non-oil budget deficit should correspond to the expected real return on the Government Petroleum Fund, estimated at 4 per cent.
• The actual implementation of fiscal policy should take into account business cycle fluctuations around the suggested medium-term path.
• In the event of extraordinarily large changes in the Petroleum Fund’s capital or in factors influencing the structural deficit from one year to the next, the change in oil revenue spending should be smoothed over several years with a basis in the assessed return on the Petroleum Fund some years ahead.

The estimate of the size of the Petroleum Fund at year-end 2002 has been reduced significantly, as a result of the weak equity market and a substantial appreciation of the Norwegian krone. If the 4 per cent spending rule were to be applied mechanically, there would be a decline in oil revenue spending from 2002 to 2003 of about NOK 2 billion, followed by an increase of just over NOK 6 billion in 2004. Both short-term and long-term considerations suggest that a steady increase in oil revenue spending is preferable to a profile where spending fluctuates widely from one year to the next. In accordance with the guideline for fiscal policy, the unexpectedly weak return on the Fund’s capital in 2002 should not be fully reflected in the fiscal policy programme for 2003, but should instead be smoothed out over time. Based on this, the Government presents a fiscal budget proposal entailing a real increase in oil revenue spending of about NOK 2 billion from 2002 to 2003. This makes room for a similar increase in 2004.

Fiscal policy

The main features of fiscal policy in 2003 are:

• A real increase of about NOK 2 billion in the use of petroleum revenues as measured by the structural, non-oil deficit. This entails a structural, non-oil deficit in 2003 of NOK 30.7 billion. As a percentage of trend GDP for Mainland Norway, the structural deficit will increase with 0.1 percentage point from 2002 to 2003.

• A real, underlying expenditure growth of about ^2 per cent from 2002 to 2003. For 2002 and 2003 combined, real expenditure growth can be estimated at an average of 1^2 per cent per year, i.e. somewhat less than the corresponding growth in GDP for Mainland Norway.

• A reduction of about NOK 10.6 billion in direct and indirect paid taxes, of which about NOK 10 billion is a consequence of decisions made when adopting the 2002 budget. About NOK 600 million refers to new tax measures.

• The fiscal budget’s non-oil deficit in 2003 is now estimated at NOK 34.8 billion. The non-oil-deficit is covered by a corresponding transfer from the Government Petroleum Fund.

• Based on an assumed average oil price of NOK 180 per barrel in 2003, the central government’s net cash flow from petroleum activities is estimated at NOK 172.8 billion.

• Net transfers to the Government Petroleum Fund are estimated at NOK 138.0 billion. Interest and dividend on accumulated capital in the Government Petroleum Fund come in addition. The overall surplus on the fiscal budget and the Government Petroleum Fund in 2003, including interest and dividend revenues accruing in the Fund, is estimated at NOK 162.0 billion.

• Overall capital in the Government Petroleum Fund at the end of 2003 is estimated at about NOK 846 billion, compared with NOK 666 billion at the end of 2002.

• General government net lending is estimated at NOK 157 billion in 2003, equivalent to 10.0 per cent of GDP. Net lending corresponds to the surplus concept used in the Maastricht Criteria for government finances. General government net assets are estimated at about NOK 1,195 billion or 76.5 per cent of GDP at the end of 2003.

Tax policy
The Government continues its policy of a gradual reduction of the tax level, with an aim to strengthen the economy’s growth potential. The announced goal is to implement tax reductions of a total of NOK 25 billion, in addition to the removal of the investment tax, in the parliamentary period 2002-2005. A substantial portion of the tax reductions, approximately NOK 10 billion, is due to a carry-over from tax changes adopted in 2002, with full effect in 2003. Proposals for new reductions in direct and indirect taxes amount to NOK 1 billion on an accrued basis. These will reduce tax revenues by NOK 600 million in 2003.

The Government’s proposal for new tax changes for 2003 include reduced taxation of labour, a reduction in assessed tax values for residential and recreational properties, measures aimed at increasing incentives to reduce pollution, and an extension of the tax credit arrangement for R&D to include all firms.

The Government has appointed a committee to consider changes in income and wealth tax, while at the same time evaluating goals and principles for the tax system. The Government has also appointed a committee to report on solutions to ensure that the value-added-tax rules have a neutral effect on local government purchases versus own production. Both committees have been asked to deliver their reports in the course of 2002.

Monetary policy
The Government is committed to the monetary policy regulation of March 2001, confer Report no. 29 to the Storting (2000-2001). Norges Bank’s implementation of monetary policy will be geared to maintaining low and stable inflation. The operational target is defined as an annual increase in prices close to 2.5 per cent over time. Monetary policy should be forward looking, and direct effects on consumer prices stemming from changes in interest rates, taxes, excise duties and extraordinary, transient disturbances should in general not be taken into account. Consumer price inflation is as a general rule expected to remain within 1 percentage point of either side of the target.

The guidelines of 29 March 2001 assign a clear-cut role to monetary policy in stabilising economic developments. Low and stable inflation is important in ensuring stable production and employment and will also contribute to exchange rate stability over time.

So far this year, Norges Bank (Central Bank of Norway) has increased the key rate once by 0.5 percentage points to 7 per cent. At the interest rate meeting 18 September 2002, the bank stated that given an unchanged interest rate, inflation was just as likely to be higher than 2^2 per cent as lower, on a two-year timescale. The Norwegian 3-month money market rate is now slightly above 7 per cent, i.e. about 3^3 percentage points above the corresponding rates in the Euro area. This year the Norwegian krone has appreciated against most currencies. Against the euro and the US dollar the krone has strengthened by 7^2 per cent and 16 per cent respectively since year-end.

Economic outlook
The outlook for world economic growth has deteriorated in recent months. Weaker international demand and deteriorating cost competitiveness, as a result of the strong krone and high increases in wage costs, have resulted in weaker growth in Norwegian industries exposed to international competition. The number of bankruptcies showed a marked increase in the first half of the year, particularly within the ICT sector. Household consumption has weakened somewhat recently. However, a continued increase in household demand, sustained by a buoyant income growth, and higher oil investments are expected to push up growth in 2002 and 2003. The unemployment rate has risen slightly over the past year, but in general the Norwegian economy is still characterised by relatively high capacity utilisation.

GDP
Mainland GDP growth is estimated at 1.7 per cent this year and 1.8 per cent next year, following a growth rate of 1.2 per cent in 2001. These estimates imply a downward revision of approximately ^1 percentage points for 2002, and ^3 percentage points for 2003, compared to the estimates in the Revised National budget 2002, presented in May. The downward revisions are to a large extent explained by lower investments in the mainland business sector, lower consumption growth and a weaker development in the export of traditional goods. On the other hand, investments in the petroleum sector have been revised upwards both for this year and next. As a result of a stronger growth in petroleum production, growth in total GDP is estimated at 2.0 per cent in 2002 and 1.9 per cent in 2003.

Labour market
The labour market has weakened somewhat in the past year. However, while unemployment has risen in some service industries, above all the ICT sector, labour remain in short supply in several sectors, including the construction industry and the health care sector. Overall employment growth is now estimated at 0.5 per cent this year and 0.4 per cent next year. Unemployment is projected to increase somewhat from the present level of 3^3 per cent to 4 per cent of the labour force in 2003.

Prices and wages
Consumer price inflation is projected at 1^1 per cent this year and 2^1 per cent next year. In the past year a sharp increase in housing rents has been a main contributor to higher price growth, while price developments of energy and imported consumer goods have worked in the opposite direction. The marked appreciation of the krone is expected to contribute to low growth in prices of imported goods in the projection period. On the other hand, the rapid rise in wages may fuel growth in prices of domestically manufactured goods and services. Adjusted for tax changes, and excluding energy prices, consumer price inflation is projected at 2^2 per cent this year and 2^1 per cent in 2003.

Average annual wage growth is now projected at 5^2 per cent in 2002 and 5 per cent in 2003.

Current account
The current account surplus is projected at NOK 206.2 billion in 2002 and NOK 178.9 billion in 2003, against NOK 233.4 billion in 2001.

The Government Petroleum Fund
In the Revised National Budget for 2002 the value of the Petroleum Fund at the end of 2002 was estimated at NOK 776 billion. As a result of a very weak equity market and a substantial appreciation of the Norwegian krone, the Fund’s capital at year end is now estimated at about NOK 666. At the end of 2003 the market value of the Fund is estimated at NOK 846 billion.

The Pension Committee
A Pension Commission was appointed by the former Stoltenberg government in March 2001 to clarify the main objectives and principles for a unified pension system. In early September this year, the Commission presented a preliminary report, where it outlines two alternatives for the future pension system. One alternative is based on an equal, or flat rate basic pension to all pensioners. The other alternative is to modernise the National Insurance Scheme, by introducing a more proportional income related supplementary pension scheme. The final report is to be presented to the Ministry of Finance and the Ministry of Social Affairs by 1 October 2003.

The Government plans to reform the National Insurance Scheme. The Government’s main goals are:

1. The pension system must provide confidence to the future economic sustainability of the National Insurance Scheme.
2. The pension system must stimulate labour supply.
3. The pension system will still be based on a guaranteed minimum pension.

The preliminary report from the Pension Commission is available in Norwegian here.

Main figures for the Norwegian economy. Percentage change from the previous year

Source: StatisticsNorwayand Ministry of Finance

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

1) Extraordinary repayment of local government debt in connection with the state’s acquisition of the specialist health services increases the non-oil budget deficit by NOK 21.6 bn. in 2002.

Source: Ministry of Finance.