The Fiscal Budget is aimed at enhancing the economy’s growth potential and further development of the welfare state.A main challenge for economic policy in the present situation is to bring price and wage inflation down in line with our main trading partners.

With economic growth picking up, against the background of a tight labour market, fiscal policy should avoid boosting domestic demand. Hence, the Government proposes to maintain a neutral fiscal stance in the budget for 2001.

The Economic Outlook

Economic growth has rebounded after a short growth pause towards the end of 1998 and early 1999. The pick-up in activity is reflected in higher employment, while unemployment has remained broadly unchanged since last year. Tight labour market conditions have fuelled wage cost inflation, which together with higher energy prices have led to a pick-up in consumer price inflation.

The growth projections for 2000 are revised upwards compared to the Revised Budget 2000 presented in May. Growth in Mainland GDP is now expected to increase from 0.8 per cent in 1999 to 2^1 per cent in 2000, slowing to 1^3 per cent in 2001. Activity is mainly driven by growth in private consumption and exports. Total GDP (including petroleum and shipping) is estimated to increase by about 3^2 per cent this year and 2^2 per cent next year.

The outlook in more detail can be summarised as follows:

• Private consumption is projected to increase by around 3 per cent this year, broadly in line with household disposable income. Recent rises in interest rates will dampen consumer spending growth somewhat next year.
• From a very high level, petroleum investments are estimated to decline by 23 per cent in 2000 and 16 per cent in 2001.
• Strong international growth has given a boost to exports this year. Traditional merchandise exports are projected to grow by 6 per cent (in volume terms) this year, while slowing somewhat next year.
• Reflecting high oil prices, the current account surplus is now projected to reach 14^2 per cent of GDP in 2000 and 11^1 per cent in 2001.
• Employment is seen to increase moderately in the short term, while the unemployment rate is forecast to remain broadly unchanged at 3^1 per cent in both 2000 and 2001.
• Consumer price inflation is estimated at 3 per cent in 2000, moderating to 2^3 per cent in 2001.
• Average growth in yearly wages is assumed to decline from 4^1 per cent in 2000 to 4 per cent in 2001. However, due to the increase in the number of holidays, the increase in wages per man-hour will exceed the increase in yearly wages.

The projections are based on an estimated oil price of NOK 235 and 180 in 2000 and 2001, respectively.

Fiscal Policy

Fiscal policy has a primary responsibility for ensuring that growth in the total demand for goods and services are compatible with a balanced development of the Norwegian economy. The main features of fiscal policy in 2001 are:

• A neutral fiscal stance, as measured by the change in the non-oil, cyclically adjusted budget surplus net of interest payments.
• A real underlying growth in Fiscal Budget expenditure of 2^2 per cent from 2000 to 2001.
• An increase in tax and excise payments by NOK 8.9 billion in real terms from 2000 to 2001. Accrued taxes are estimated to increase by NOK 12 billion, of which NOK 9.3 billion can be attributed to a supplementary payroll tax. The public sector will be compensated for the increased costs of the supplementary tax. The overall increases in tax and excise payments, net of compensation, is estimated at NOK 6.4 billion.
• A non-oil Fiscal Budget deficit of NOK 12 billion. This deficit will be covered through a transfer from the Government Petroleum Fund. The central government net cash flow from petroleum activities is estimated at NOK 189 billion in 2001. The total budget surplus, including interest and dividends on accumulated capital in the Petroleum Fund, is estimated at NOK 192.2 billion in 2001. The total capital of the Petroleum Fund is estimated to reach NOK 590 billion by the end of 2001.
• The general government budget surplus (net lending) is estimated at NOK 176.3 billion, or 12.5 per cent of GDP, in 2001.

Key priorities in the Budget for 2001 include, inter alia, increased spending on local government, a strengthening of the national health services, and extra spending on education and research.

Tax policy

To make room for increased spending within a prudent budget framework, the Government proposes a supplementary payroll tax of 1.5 per cent of wage costs. The public sector will be compensated for the increased costs of this tax. Net of compensation, the supplementary payroll tax increases public income by NOK 6.8 billion.

The Government proposes to introduce a 14 per cent tax on dividends received by Norwegian personal taxpayers, mainly to enhance the distributional profile of the tax system. A new system of business taxation, where only the return in excess of a specified share of a company´s capital stock will be subject to a higher tax rate, will be proposed implemented from 2002.

The Government also proposes to introduce a general value added tax on services as from 1 July 2001, with some exceptions and with a reduced rate for some services. Tax proposals also include a reduction in gasoline and alcohol duties and an increase in the excise duty on electricity.

Monetary Policy

Monetary policy is aimed at maintaining a stable 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.

Balanced growth, with low price and cost inflation, is a precondition for achieving exchange rate stability over time. Monetary policy instruments must thus be oriented, together with the other parts of economic policy, towards fulfilling this precondition. With this aim, Norges Bank assesses its use of instruments in the light of the developments in the foreign exchange market and the situation in the Norwegian economy.

Norges Bank has so far this year increased its key deposit rate four times, by altogether 150 basis points, leaving the deposit rates at 7 per cent. The Norwegian 3-month money market rates are now at about 7^1 per cent, i.e. 250 basis points above the corresponding rates in the Euro area.

The petroleum sector

Total petroleum production on the Norwegian continental shelf is expected to increase by about 6 per cent in 2001. Over the period 1999-2002 the increase is estimated to be more than 20 per cent, implying more than a doubling of Norwegian petroleum production since 1990. After 2002, petroleum production is expected to decrease due to lower crude oil production. Increased production of natural gas is expected to dampen somewhat the reduction in total petroleum production.

Investments in the petroleum sector reached historically high levels in the 1990s. After peaking at approximately 75 billion 1997-NOK in 1998, investments dropped by some 12 per cent in 1999. A further reduction is expected in 2000 and 2001. From 2001 and onwards, investments in oil activities are expected to be in the range of 30 and 45 billion 1997-NOK. The lower levels reflect fewer major developments on the Norwegian continental shelf.

The Petroleum Fund

Greece will be included in the investment universe for bonds. The Ministry of Finance has today changed the Regulation on the Government Petroleum Fund to this effect.

An Environmental Fund of NOK 1 billion will be established in connection with the last transfer to the Petroleum Fund this year, as indicated in the Revised National Budget in May. The Fund will be invested in equities in 22 developed markets of the Petroleum Fund. The Environmental Fund may be invested in companies assumed to have low negative impact on the environment. The Fund may also be invested in other companies, provided that such companies have issued an environmental report of a certain quality or have a satisfactory environmental management system. The requirements for environmental reports and management systems are based on the analysis provided by the Ethical Investment Research Service (EIRIS). Approximately 80 per cent of the market value in the relevant countries will be included in the investment universe of the Environmental Fund.

Table 1 Key figures

Source: Statistics Norway and Ministry of Finance.

Table 2 Central and general government net lending. NOK million

1) Including consolidated and central government accrued, unrecorded taxes.
Source: Statistics Norway and Ministry of Finance.

Table 3 Key figures for the Fiscal Budget (incl. Social Security) and Government Petroleum Fund. NOK billion. Accrued values