Fiscal Measures to Limit the Economic Downturn

In a proposition to the Storting (Parliament) the Norwegian Government proposes amendments to the 2009 Fiscal Budget. The proposed measures amount to NOK 20 billion, of which NOK 16¾ billion is an increase in budget expenditures and NOK 3¼ billion is targeted tax relief for the business sector. The structural non-oil deficit will increase by an additional NOK 7 billion as a consequence of revised estimates for some budget items. The use of petroleum revenues, as measured by the structural, non-oil budget deficit, will increase by NOK 27 billion compared to the 2009 Fiscal Budget. The overall domestic demand stimulus from 2008 to 2009 is estimated at 2.3 per cent of Mainland GDP. The Government also proposes widening various loan and guarantee schemes, including increased lending from the Norwegian State Housing Bank. These measures amount to NOK 8 billion.

- This is the most ambitious fiscal stimulus proposed in more than 30 years to boost growth and employment, and a strong stimulus also when compared with measures introduced in other countries. The Government aims at mitigating the negative effects of the international financial crisis on the Norwegian economy. The measures are aimed at addressing the emerging problems in the Norwegian labour market. It is vital to ensure that the measures we implement are targeted, temporary and will contribute to sustainable growth, says finance minister Kristin Halvorsen.

- Following several years of very strong economic growth in Norway, a slowdown was predicted. However, the financial crisis and the global economic downturn have intensified the turnaround. A wide range of businesses is now hit by weaker domestic and international demand. Economic policy cannot prevent such an economic setback, but the proposed fiscal stimulus package will dampen the increase in unemployment, says finance minister Kristin Halvorsen.

The Government and Norges Bank (the Central Bank) has so far implemented several measures aimed at maintaining an appropriate level of lending to the business and household sectors:

• The approved 2009 Fiscal Budget was estimated to give a demand stimulus equal to 0.7 per cent of mainland GDP.
• A NOK 350 billion facility to provide liquidity to the banks, in which Government Bonds are swapped for covered bonds.
• The export guarantee scheme of GIEK (Guarantee Institute for Export Credits) is increased by NOK 50 billion.
• A special lending program of NOK 30 billion to Eksportfinans to facilitate continued financing of contracts that qualify for the use of supported export credits (so called CIRR-loans).

Norges Bank has reduced its key interest rate by 2.75 percentage points since October 2008 to currently 3 per cent. The Bank has also taken actions to provide liquidity to the financial sector.

The Government will on 9 February propose new measures to strengthen the supply of credit from the banking sector to the business and household sectors.

The international financial crisis has led to a significant deterioration in the outlook for the global economy. The GDP of Norway’s main trading partners is expected to fall by 1½ per cent in 2009. The Norwegian economy is also affected by the financial crisis. Despite the ambitious monetary and credit policy measures and the expansionary 2009 Fiscal Budget, several sectors of the Norwegian economy are now facing lower demand from both domestic and international markets. The outlook for the Norwegian economy is therefore bleak. Employment is expected to decline during the first half of this year, and the unemployment rate is expected to rise.

The Government now forecasts zero growth in Mainland GDP in 2009, compared to an estimate of 2 per cent in the 2009 Fiscal Budget presented in October 2008. Employment is expected to decline by 1 per cent from 2008 to 2009, and unemployment is expected to increase from approximately 2½ per cent in 2008 to 3½ per cent in 2009.

The proposed fiscal stimulus package implies a very expansionary budget for 2009, both in a historical and an international context:

• The overall domestic demand stimulus, as measured by the increase in the structural, non-oil deficit, is estimated at 2.3 per cent of Mainland GDP, of which one half stems from the proposed stimulus package. This is the most expansionary budget in more than 30 years.
• With the proposed stimulus package, the budget for 2009 also seems to be expansionary compared to fiscal policy in most other countries. The European Commission has estimated that adopted or announced measures so far in the EU-countries amount to about 1 per cent of GDP for 2009.
• The use of petroleum revenues, as measured by the structural, non-oil budget deficit, is estimated at NOK 119 billion. This is NOK 28 billion higher than the expected return on the Government Petroleum Fund – Global. The 2001 fiscal policy guidelines stipulate that the structural non-oil central government budget deficit shall correspond to the expected real return on the Pension Fund – Global, estimated at 4 per cent of the capital. However, the guidelines also allow fiscal policy to be used actively to stabilise the economy and counter fluctuations in production and employment.
• The underlying growth in Fiscal Budget expenditures from 2008 to 2009 is now estimated at 6¼ per cent.
• The non-oil budget deficit is estimated at NOK 96.7 billion. Taking petroleum revenue into account, the Fiscal Budget is estimated to run a surplus of about NOK 179.2 billion. The consolidated surplus in the Fiscal Budget and the Government Pension Fund is estimated at NOK 270.5 billion in 2009, or approximately 11 per cent of GDP.

Strong demand impetus from both fiscal and monetary policy measures is expected to limit the economic downturn. The proposed fiscal stimulus package is expected to mitigate the effects of weaker export and private sector demand, and thus dampen the decline in employment, especially in the building and construction industries. The proposed measures are estimated to increase Mainland GDP by ¾ percentage points in 2009. The effects of the interest rate cuts, and the other monetary and liquidity policy measures, are not included in this estimate.

Key figures for the Fiscal Budget and Government Pension Fund. NOK billion

		2007	2008	2009
	1. Fiscal Budget
	Total revenues	1 030.1	1 182.1	1 049.4
	Revenues from petroleum activities	337.4	437.3	303.9
	Revenues excl. petroleum activities	692.7	744.8	745.5
	Total expenditures	715.1	777.6	870.2
	Expenditures on petroleum activities	21.2	24.4	28.0
	Expenditures excl. petroleum activities	694.0	753.2	842.2
Fiscal budget surplus before transfers to the Pension Fund – Global		315.0	404.5	179.2
- Net revenues from petroleum activities		316.4	412.9	275.9
= Non-oil budget surplus		-1.3	-8.4	-96.7
	+ Transfers from the Pension Fund – Global	2.8	8.4	96.7
	= Fiscal Budget surplus	1.5	0.0	0.0
	2. Government Pension Fund
	Net transfer to the Pension Fund – Global	313.6	404.5	179.2
	+ Dividends on the Pension Fund	78.4	96.1	91.3
	= Surplus in the Pension Fund	392.0	500.6	270.5
	3. Fiscal Budget and Government Pension Fund consolidated surplus	393.5	500.6	270.5

Key projections for the Norwegian economy. Per cent¹

		2008		2009
	20074	NB092	TP093	NB092	TP093
Private consumption	6.0	2.3	1¼	2.5	0
Public consumption	3.4	3.8	3.8	3.4	5¼
Gross fixed investment	8.4	4.6	3½	-0.3	-3½
Petroleum	5.5	11.0	5	5.0	7¾
Business sector, Mainland Norway	12.2	7.9	8½	-2.4	-12½
Housing investment	5.3	-8.5	-9	-2.0	-12
Public investment	7.9	6.2	4.4	2.7	12
Demand from Mainland Norway	6.0	2.7	2	2.0	0
Exports	2.5	2.2	1¾	2.5	-2½
Crude oil and natural gas	-2.6	-1.5	-¾	2.6	-2¾
Traditional goods	8.7	5.9	5¼	1.8	-3
Imports	7.5	5.3	3¾	1.8	-½
Traditional goods	6.7	5.5	3½	1.9	-1¾
Gross Domestic Product	3.1	2.0	1¾	2.3	-½
Mainland Norway	6.1	3.1	2¼	1.9	0
Memorandum items:
Employment growth	4.1	2.8	3	0.4	-1
Unemployment rate (LFS)	2.5	2½	2½	2¾	3½
Wage growth	5.4	6	5¾	5	4¼
Consumer price inflation (CPI)	0.8	3¾	3.8	3	2
Underlying inflation (CPI-ATE)	1.4	2½	2.6	2¾	2½
Crude oil, NOK per barrel …………	423	585	527	500	350
Current account balance (% of GDP) …………	15.9	20.5	19½	16.6	11

1) Constant 2005 prices.
2) Estimates in Fiscal Budget 2009, October 2008.
3) Revised estimates, January 2009.
4) Preliminary national accounts figures. Current prices.

Sources: Statistics Norway and the Ministry of Finance.