Growth of the Norwegian mainland economy is well above trend. The labour market is improving. Against this background, a broadly neutral fiscal stance will be maintained limiting the growth impetus to the mainland economy from the use of petroleum revenues.

Growth in Mainland Norway GDP (i.e. excluding petroleum and shipping) is forecast at 3½ per cent in 2005 and 2 per cent in 2006. Employment growth has picked up and is estimated at 0.8 per cent in 2005. Labour force growth has so far dampened the decline in unemployment. The unemployment rate is expected to average 4.3 per cent in 2005, down 0.2 percentage points from the 2004 average. The number of persons on sick leave, which has increased substantially in recent years to a very high level, has decreased appreciably through the last year.

The guidelines for economic policy stipulate that fiscal policy shall be geared towards a gradual and sustainable increase in the use of petroleum revenues. Over time, the structural, non-oil central government budget deficit shall correspond to the real return on the Government Petroleum Fund, estimated at 4 per cent. However, the actual implementation of fiscal policy must take into account business cycle fluctuations around the suggested medium term path. In the current phase of the business cycle, the gap between the use of petroleum revenues and the real return on the Government Petroleum Fund should be narrowed. Long-term budget considerations point in the same direction. The Government therefore proposes a revision of the fiscal budget for 2005 implying a structural budget deficit of NOK 65.3 billion, which is NOK 1.1 billion lower than in the approved budget of 2005. The Government has nevertheless made room in the budget for important policy measures, such as measures against poverty, drug addiction and measures for disabled persons. Priority is also given to regional health enterprises, maintenance and investments in highways and railways and to education.

Fiscal policy

The main features of fiscal policy in 2005 are:

• A structural, non-oil fiscal deficit of NOK 65.3 billion. This constitutes a decline in the use of petroleum revenues of NOK 1.1 billion compared to the approved budget for 2005. The excess spending compared to the expected return of the Petroleum Fund is estimated to NOK 25 billion.
• A real underlying growth in Fiscal Budget expenditures of 1¾ per cent.
• As a share of Mainland Norway trend-GDP, the non-oil fiscal deficit increases by ¼ percentage points from 2004 to 2005.
• A non-oil budget deficit estimated at NOK 74.2 billion. This deficit is covered by a transfer from the Government Petroleum Fund.
• A central government net cash flow from the petroleum activities of NOK 260 billion. This is NOK 56 billion higher than estimated in the National Budget 2005, largely due to an upward revision of the assumed oil price by NOK 70 per barrel to NOK 300 per barrel.
• A consolidated surplus in the Fiscal Budget and the Government Petroleum Fund, including interest and dividends, of NOK 229 billion. The capital in the Fund at the end of 2005 is estimated at NOK 1 300 billion.
• A real growth in the revenues of local governments from 2004 to 2005 of 2 per cent, or NOK 4 billion.

Monetary policy

The monetary policy regulation of 29 March 2001 stipulates a flexible inflation targeting regime for monetary policy. The long-term role of monetary policy is to provide the economy with a nominal anchor. In the short and medium term, monetary policy shall balance the need for low and stable inflation against the outlook for output and employment.

Norges Bank’s implementation of monetary policy is geared towards maintaining low and stable inflation (confer Report no. 29 to Stortinget (2000-2001)). The operational target is defined as an annual increase in consumer prices of close to 2.5 per cent over time. As a general rule, it is expected that consumer price increases will fall within an interval of +/- 1 percentage point from the inflation target. The interest rate decisions of Norges Bank shall be forward looking, and pay due attention to the uncertainty attached to macroeconomic estimates and assessments. It shall take into consideration that it may take time for the policy changes to take effect, and it should disregard disturbances of a temporary nature that are not deemed to affect underlying price and cost increases.

The key rate (the sight deposit rate) has been unchanged since March 2004, and is currently 1.75 per cent.

The Government Petroleum Fund

At the end of 2004, the market value of the Government Petroleum Fund was NOK 1 011.5 billion, about NOK 42 billion lower than estimated in the National Budget 2005. An increase to about NOK 1 300 billion by the end of 2005 is now estimated.

Effective from 1 December 2004, the Ministry of Finance issued ethical guidelines for the Fund. On 15 December 2004, Norges Bank decided upon a set of principles for corporate governance in accordance with the ethical guidelines.

The Ministry of Finance is responsible for decisions regarding ethical constraints on the Fund’s investment universe. An independent council, which gives advice to the Ministry on exclusion of companies, was established on 1 December 2004.

General outlook

Growth in the mainland economy is expected to continue well above trend this year. The labour market is improving, albeit more slowly than expected. Household demand, housing starts and investments in the petroleum sector are the main driving forces in the expansion. The upswing has gradually become more broadly based, with a more positive outlook for both the export sector and the manufacturing industries. Growth in mainland fixed business investment is also stronger than expected.

Mainland GDP is now expected to increase by 3½ per cent in 2005 and by 2 per cent in 2006.

Labour market
Employment is picking up. However, an increase in labour supply has dampened the decline in unemployment. According to the Labour Force Survey (LFS), the seasonally adjusted unemployment rate was 4.5 per cent in the first quarter of this year. Strong economic growth is expected to result in a gradual decline in the unemployment rate this year. On an annual basis, the unemployment rate is expected to decline from 4.5 per cent last year to 4.3 per cent in 2005 and to 4.1 per cent in 2006.

Prices and wages
The majority of the wage settlements this year are concluded, indicating a somewhat lower wage growth in 2005 than assumed in the National Budget 2005. The wage growth is now estimated at 3¼ per cent in 2005.

Consumer price inflation continues to be low. Increased competition in certain retail markets such as air travel and telecommunication and increased imports from low cost countries have contributed to the low inflation rate. The consumer price index (CPI) is expected to increase by 1¼ per cent in 2005 and by 1¾ per cent in 2006. Adjusted for changes in excise duties and excluding energy prices, consumer price inflation (CPI-ATE) is expected to pick up from 1 per cent in 2005 to 1½ per cent next year.

Key projections for the Norwegian economy. Volume change from previous year.Per cent

Sources: Statistics Norway and Ministry of Finance

Key figures for the Petroleum sector

Sources: Statistics Norway, Ministry of Petroleum and Energy and Ministry of Finance

Key figures for the fiscal budget (incl. social security) and Government Petroleum Fund before loan transactions. NOK billion

Source: Ministry of Finance

Central government net lending (surplus). NOK billion

Sources: Statistics Norway and Ministry of Finance