A main challenge for economic policy in the present situation is to bring price and wage inflation down in line with our trading partners. With economic growth picking up and pressures in the labour market, fiscal policy should be geared towards avoiding an excessive increase in domestic demand. Hence, the Government proposes to maintain a neutral fiscal stance.

Economic outlook

After several years of strong economic growth, the Norwegian economy slowed markedly towards the end of 1998 and in the beginning of 1999. However, employment continued to grow last year, although at a slower pace, and the unemployment rate remained unchanged at 3.2 per cent. Higher energy prices contributed to a pick-up in consumer prices towards the end of 1999 and the beginning of this year.

The short-term growth projections have been revised upwards compared to the Budget 2000 which was presented in October 1999. Growth in Mainland GDP is now expected to increase from 0.8 per cent in 1999 to 1^3 per cent in 2000 and 2 per cent in 2001, due to stronger growth in both domestic demand and exports. Total GDP (including petroleum and shipping) is estimated to increase by about 3 per cent this year and 2^3 per cent next year.

With employment growth slowing, unemployment is expected to increase somewhat this year. Consumer price inflation is expected to slow from an estimated 2.6 per cent this year to 2.3 per cent next year as the effect of higher energy prices wears out.

Reflecting higher oil prices, the current account balance is projected to show a surplus this year of close to NOK 153 bn. The forecasts are based on an oil price assumption of NOK 190 per barrel this year and NOK 145 next year.

Fiscal policy

The main features of fiscal policy in 2000 as presented in the Revised National Budget are:

• A broadly neutral fiscal stance, as measured by the change in the non-oil, cyclically adjusted budget surplus net of interest.
• A real underlying growth in Fiscal Budget expenditure of around 2 per cent from 1999 to 2000.
• An increase in real terms in tax and excise payments of around NOK 3.9 bn from 1999 to 2000, compared to an increase of 3.5 bn in the budget passed in December.
• A non-oil Fiscal Budget deficit of NOK 13.8 billion this year. This deficit will be covered through a transfer from the Government Petroleum Fund.
• Central Government net cash flow from petroleum activities is estimated at NOK 138.1 bn in 2000. Total surplus, including interest and dividends on accumulated capital in the Petroleum Fund, is estimated at NOK 133.1 bn in 2000. The total capital of the Fund is estimated at NOK 360 bn, or 27 per cent of GDP, by the end of 2000.

General Government surplus (net lending) in 2000 is estimated to 11.6 per cent of GDP. General Government gross debt is estimated at 22 per cent of GDP at the end of 2000.

Monetary policy

Monetary policy is aimed at stabilizing the krone exchange rate against European currencies. In the event of significant changes in the exchange rate, monetary policy instruments shall be oriented with the view of returning the exchange rate over time to its initial range. At the same time, there are limitations on Norges Bank’s use of monetary policy instruments to maintain a stable exchange rate. This must be seen in light of the experience of the fixed exchange rate regimes in Norway and other countries in the early 1990s. Perceptions that the use of monetary policy instruments in the form of interventions and the level of interest rates cannot be sustained, will undermine monetary policy credibility and may trigger speculative capital movements.

An inflation rate in line with the inflation rate of our trading partners is a basic condition for maintaining a stable exchange rate. A main challenge in the economic policy at present is to bring down prices and cost inflation in line with that of Norway’s trading partners. Fiscal policy has the primary responsibility for ensuring that changes in the total demand for goods and services are compatible with a balanced development of the Norwegian economy. Norges Bank must continuously evaluate which use of monetary policy instruments that the Bank deems appropriate in the light of conditions in the exchange market and the situation in the Norwegian economy.

After having reduced its key deposit rates five times last year, by altogether 250 basis points, Norges Bank raised its key deposit rates by 25 basis points in April, and Norges Bank’s deposit and lending rates are 5.75 and 7.75 per cent, respectively. The money market rate (3 months) for NOK is now at about 6^2 per cent, i.e. 2^1 per cent above the corresponding rates of the Euro area.

General outlook

Macroeconomic projections for 2000 point to increased growth in the Norwegian economy:

• Mainland GDP is estimated to grow by 1^3 per cent in 2000. Total GDP, which includes petroleum and shipping, is expected to increase by about 3 per cent in 2000.
• Private consumption is projected to increase by nearly 3 per cent in 2000, broadly in line with income growth.
• Increased real estate prices and lower interest rates during 1999 contributed to a sharp increase in housing starts towards the end of 1999. Residential investment is estimated to increase by 5^2 per cent from 1999 to 2000.
• Mainland business fixed investment fell by 3.3 per cent in 1999, and is projected to increase by ^1 per cent this year.
• Petroleum investment is estimated to decline by 23^2 per cent in 2000, following a 13 per cent drop last year.
• Traditional merchandise exports are projected to grow by 5^2 per cent in 2000, reflecting increased world demand. The current account balance is expected to reach a surplus of NOK 153 bn, corresponding to 11 per cent of GDP.
• Employment growth is expected to be weak this year, and the unemployment rate is estimated to increase from 3.2 to 3^2 per cent.
• The growth in consumer prices is estimated at 2.6 per cent from 1999 to 2000. Average growth in annual wages is estimated at 3^3 per cent in 2000.

The projections are based on an estimated oil price of NOK 190 per barrel in 2000.

Main economic indicators

Key projections for the Norwegian economy. Volume change from previous year, pct.

Sources: Statistics Norway and Ministry of Finance

Key figures for the petroleum sector

¹> Crude oil, natural gas and pipeline transport.

²> Sum of accrued taxes, royalties, area fees and CO ₂ tax.

³> Sum of paid taxes and royalties incl. CO ₂ tax, dividends from Statoil and net payments from direct government participation in petroleum activities.

⁴> The price of natural gas is unchanged.

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

⁵> Including central government accrued, unrecorded taxes.

Sources: Statistics Norway 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