Revised National Budget 2009: Continued expansionary policies

The Norwegian economy is affected by the international financial crisis, but the downturn is not expected to be as severe in Norway as in many other industrial countries. To curb growth in unemployment, the Government proposes to increase the spending of oil revenues by a further NOK 9.5 billion to a total of NOK 130 billion during the 2009 fiscal year. This amounts to NOK 39 billion in excess of the estimated return on the Government Pension Fund - Global. The overall fiscal stimulus in 2009 is estimated at 3.0 per cent of non-oil GDP. Unemployment is estimated to increase to 3¾ per cent in 2009 and to 4¾ per cent in 2010.

The fiscal policy guidelines, in place since 2001, stipulate that fiscal policy shall be geared towards a gradual increase in the use of petroleum revenues. Over time, the structural non-oil central government budget deficit shall correspond to the expected real return, estimated at 4 per cent, on the Government Pension Fund - Global. However, the guidelines also allow fiscal policy to be used actively to counter fluctuations in economic activity. In a cyclical expansion, fiscal policy restraint relative to the spending rule is called for, whereas in a cyclical downturn higher spending of oil revenues is justified to stabilize the economy.

A range of fiscal and monetary measures have so far been implemented to mitigate the effects on the Norwegian economy of the international financial crisis and the global economic downturn. Norges Bank (the central bank) has reduced its key rate by total of 4.25 percentage points since October 2008 to the current level of 1.5 per cent. Norges Bank has also implemented schemes to provide extraordinary liquidity to the financial sector.

Various measures to safeguard the credit system are implemented, and there are signs of recovery and normalisation in the credit markets.

The Government proposed in January 2009 amendments to the 2009 Fiscal Budget with measures to boost growth and employment, and the amendments passed Parliament in February. The Government now proposes a further increase in the use of petroleum revenues from 2008 to 2009 by NOK 9.5 billion to NOK 130 billion. The use of petroleum revenues, as measured by the structural, non-oil budget deficit, will increase by NOK 55 billion. Overall fiscal stimulus on Mainland GDP is estimated at 3.0 per cent. This is the most expansionary fiscal budget in more than 30 years, and it is also very expansionary in an international context.

The Government proposes only minor changes to the tax rules in the revised fiscal budget.

Fiscal Policy
The main features of fiscal policy in 2009 are:

• A structural, non-oil budget deficit of about NOK 130 billion, which is NOK 39 billion more than the expected return on the Government Pension Fund - Global.
• An increase in the structural non-oil deficit of NOK 55 billion in real terms from 2008 to 2009. The structural, non-oil deficit as a per cent of Mainland trend-GDP increases by 3 percentage points.
• A real underlying growth in Fiscal Budget expenditures from 2008 to 2009 of 6¾ per cent.
• A non-oil fiscal budget deficit estimated at NOK 118 billion. The deficit is covered by a transfer from the Government Pension Fund - Global.
• A central government net cash flow from petroleum activities of about NOK 261 billion.
• A consolidated surplus in the Fiscal Budget and the Government Pension Fund, including interest and dividends, of NOK 237 billion.
• An estimated market value of Government Pension Fund, both the international and domestic part, of NOK 2 494 billion at the end of 2009. The capital in the Fund will still be considerably lower than the old age pension obligations under the National Insurance Scheme.
• An increase in total revenues for local governments of 3.3 per cent in real terms from 2008 to 2009.

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 oriented towards maintaining low and stable inflation. The operational target is defined as an annual increase in consumer prices of close to 2.5 per cent over time. 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.

Norges Bank has reduced the key rate by a total of 4.25 percentage points since October 2008 to currently 1.5 per cent.

The Government Pension Fund
The Government Pension Fund was established 1 January 2006 and consists of two parts: "The Government Pension Fund - Global", previously the Government Petroleum Fund, and "The Government Pension Fund - Norway".

A white paper report on the management of the Pension Fund was submitted to the Parliament (Storting) on 3 April 2009, cf. Report No. 20 to the Storting - On the Management of the Government Pension Fund in 2008.

General outlook
The cyclical peak was passed at the turn of the year 2007/2008, and Norway is now experiencing a downturn in economic activity. The turnaround in the Norwegian economy has been intensified by the international financial crisis and the global economic downturn. However, the impact of the crisis has not been as severe in Norway as in most other countries, and the Norwegian economy is expected to fare better also ahead. Strong demand impetus from both fiscal and monetary policy measures is expected to limit the downturn and private consumption is forecast to pick up in course of 2009. Petroleum investments are expected to remain high in 2009.

Growth in Mainland GDP is forecast to contract by 1 per cent in 2009. Mainland GDP is expected to pick up in 2010, and the growth is now forecast at ¾ per cent.

Employment is expected to fall by 1 percentage point this year and by a further 1½ per cent next year. The unemployment rate is expected to average 3¾ per cent in 2009 and 4¾ per cent in 2010.

Consumer price inflation, adjusted for changes in excise duties and excluding energy (CPI-ATE) is forecast at 2.4 per cent in 2009. Lower energy prices will contribute to a decline in headline inflation (CPI) from 3.8 per cent in 2008 to an estimated 1.8 per cent in 2009.

The projection in the Revised national budget 2009 is based on an oil price of NOK 350 per barrel in 2009.

Key projections for the Norwegian economy¹. Per cent

	2008 NOK billion2	2008	2009	2010
Private consumption	992.3	1.5	0.0
Public consumption	489.0	3.7	5.7
Gross fixed investments	527.2	3.3	-6.3
Petroleum	122.8	7.1	5.5
Business sector, Mainland Norway	201.9	6.6	-16.1
Exports	1 196.3	0.9	-5.3
Crude oil and natural gas	590.8	-2.3	-4.5
Traditional goods	324.2	4.8	-7.3
Imports	731.4	4.2	-2.4
Traditional goods	480.0	3.2	-4.0
Gross domestic product	2 537.9	2.0	-1.9
Mainland Norway	1 842.5	2.4	-1.0	¾
Memorandum items:
Consumer price inflation (CPI)		3.8	1.8
Underlying inflation (CPI-ATE)		2.6	2.4
Wage growth		6.0	4
Employment growth		3.2	-1.0	-1½
Unemployment rate (LFS)		2.6	3¾	4¾
Current account balance (pct. of GDP)		18.4	9.8

¹ Constant 2006 prices.
² Preliminary national account figures. Current prices.*
Sources: Statistics Norway and Ministry of Finance.

 

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

					2007		2008		2009
	1. Fiscal Budget
	Total revenues				1 030.1		1 182.6		1 021.9
	Revenues from petroleum activities				337.4		437.7		288.4
	Revenues excl. petroleum activities				692.7		744.9		733.5
	Total expenditures				715.1		778.6		878.1
	Expenditures on petroleum activities				21.1		21.8		27.0
	Expenditures excl. petroleum activities				694.0		756.7		851.0
Fiscal budget surplus before transfers to the Pension Fund – Global					315.0		404.1		143.8
- Net revenues from petroleum activities					316.4		415.9		261.4
= Non-oil budget surplus					-1.3		-11.8		-117.6
	+ Transfers from the Pension Fund – Global				2.8		8.4		117.6
	= Fiscal Budget surplus				1.5		-3.4		0.0
	2. Government Pension Fund
	Net transfer to the Pension Fund – Global				313.6		407.5		143.8
	+ Dividends on the Pension Fund				78.4		103.1		93.6
	= Surplus in the Pension Fund				392.0		510.6		237.4
	3. Fiscal Budget and Government Pension Fund consolidated surplus				393.5		507.2		237.4

Source: Ministry of Finance.

 

General government financial balance. NOK billion

	2007	2008	2009
Fiscal Budget surplus	1.5	-3.4	0.0
+ Surplus in Government Pension Fund	392.0	510.6	237.4
+ Surplus in other central government and social security accounts	-6.8	1.7	7.8
+ Definitional differences between Fiscal Budget and national accounts	23.4	-8.3	-62.1
+ Direct investment in state enterprises	4.1	4.2	9.1
= Central government financial balance	414.2	504.9	192.2
+ Local government financial balance	-10.3	-25.6	-17.1
= General government financial balance	403.9	479.3	175.0
In per cent of GDP	17.7	18.9	7.4

Sources: Statistics Norway and Ministry of Finance.