Revised National Budget 2010

The Norwegian economy has performed better than most other industrial countries during the financial crisis and global recession. Expansionary monetary and fiscal policies, along with extensive credit and liquidity measures, have helped to mitigate the effects of the crisis on the Norwegian economy. In the revision of the Fiscal Budget 2010 the Government proposes to reduce the use of petroleum revenue, as measured by the structural, non-oil budget deficit, by NOK 17 billion compared to the approved budget, bringing the use of petroleum revenues significantly closer to the 4 per cent path of the Fiscal Policy Guideline. The structural, non-oil budget deficit is estimated at NOK 131.5 billion in 2010.

The main task of economic policy in 2009 and 2010 has been to keep employment high and unemployment low. During the past six months, employment growth has shown signs of recovery and the unemployment rate has remained low, at 3¼ -3 ½ per cent. Unemployment is lower now than the average over the past 20 years, and far below the level of most other industrial countries.

The 2001 fiscal policy guidelines stipulate that fiscal policy shall be geared towards a gradual increase in the use of petroleum revenues. Over time, non-oil structural budget deficit shall correspond to the expected real return on the Government Pension Fund Global (GPFG), estimated at 4 per cent. The guidelines allow for fiscal policy to be used actively to counter fluctuations in economic activity and the government has over the years made use of this flexibility in the guidelines.

The expansionary fiscal policy in 2009 and 2010 has brought the use of petroleum revenues to a high level, even if state accounts show that spending of petroleum revenues in excess of 4 per cent of GPFG was 20 billion NOK lower in 2009 than projected in the National Budget 2010. Economic activity has picked up, and the outlook for the labour market has improved. In this situation, the Government proposes to maintain the cautious fiscal policy stance decided when the 2010-budget was approved. As the figures stand, this allows for a substantial step towards a return to the 4 per cent path. Furthermore, the revision of the fiscal budget allows for some policy initiatives, such as strengthening labour market measures, implementing measures aimed at the shipyard industry and increasing approbations for railways and roads.

The Government proposes only minor changes to the tax rules in the Revised National Budget.

Fiscal Policy

The main features of fiscal policy in 2010 are:

• A spending of petroleum revenues, as measured by the structural, non-oil budget deficit, of about NOK 131.5 billion, which is NOK 17 billion lower than in the approved budget. The use of petroleum revenues is NOK 26 billion higher than the expected return on the Government Pension Fund Global, compared to close to NOK 45 billion in the approved budget.
• An increase of 0.8 per cent in the structural non-oil deficit as a share Mainland trend-GDP from 2009 to 2010. This is slightly higher than in the approved budget, and must be seen in connection with a large downward revision of the budget deficit in 2009. The combined fiscal stimulus from both the 2009 and the 2010 budgets are reduced from 3.6 per cent of Mainland trend-GDP to 2.9 per cent.
• A real underlying growth in Fiscal Budget expenditures from 2009 to 2010 of 2½ per cent.
• A non-oil fiscal budget deficit estimated at NOK 140 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 262 billion.
• A consolidated surplus in the Fiscal Budget and the Government Pension Fund, including interest and dividends, of NOK 230 billion.
• An estimated market value of Government Pension Fund of NOK 3 090 billion at the end of 2010. At the same time, the old age pension obligations under the National Insurance Scheme, is estimated at NOK 4 770 billion by the end of 2010.
• An increase in total revenues for local governments of 2.2 per cent in real terms from 2009 to 2010.

Monetary policy and financial stability

The monetary policy regulation, established in 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.

The operational target for Norges Bank’s (the central bank) implementation of monetary policy 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 reduced the key rate by a total of 4.5 percentage points from October 2008 to the summer of 2009 to a historical low of 1.25 per cent. In light of positive economic developments, the key rate has since been raised to the current level of 2.0 per cent.

Extensive liquidity and credit policy actions, as well as expansionary monetary policy, contributed significantly to the improvement of the situation in the financial markets during 2009. Risk premiums in the Norwegian monetary and credit market have more or less come down to levels seen before the financial crisis, and the supply of credit for banks, households and enterprises/businesses has largely been normalized. The extraordinary liquidity and credit policy actions were to a large degree phased out in the course of 2009.

The Government Pension Fund

The Government Pension Fund was established in 2006, encompassing the former Government Petroleum Fund and National Insurance Scheme Fund. The purpose of the Fund is to aid government savings to finance the pension expenditure of the National Insurance Scheme and long-term considerations in the spending of government petroleum revenues.

The Ministry of Finance is responsible for managing the Government Pension Fund. The Ministry determines the general investment strategy of the Pension Fund, as well as its ethical and corporate governance principles. The operational management of the Government Pension Fund has been delegated to Norges Bank and Folketrygdfondet, which manage the Government Pension Fund Global and the Government Pension Fund Norway, respectively.

At the end of 2009, the market value of the Government Pension Fund was NOK 2 759 billion. The value is estimated to reach NOK 3090 billion by the end of 2010.

General outlook

The Norwegian economy has performed better than most other industrial countries during the global crisis. Following a decline in the second half of 2008 and into 2009, economic activity started recovering in the second quarter of last year. Growth in private and public consumption and exports of traditional goods has been the main driving forces in the recovery.

Mainland GDP contracted by 1.5 per cent in 2009, but is expected to pick up to a growth of a good 2 per cent in 2010 and 2¾ per cent in 2011. Private consumption is expected to be an important driving force behind the upswing, fuelled by continued low unemployment and low interest rates. Export of traditional goods is expected to pick up as the outlook for the global economy continues to improve. However, the crisis in Greece and high levels of government debt in several other countries add a significant element of uncertainty to the economic prospects in Europe.

The economic downturn in 2009 resulted in a weakening of the Norwegian labour market. The decline seems to have been replaced by a modest recovery in the last two quarters. Employment has shown some signs of recovery, and the seasonally adjusted unemployment rate as measured in the Labour Force Survey (LFS) has remained at 3¼ -3½ percent of the labour force since the third quarter of 2009. Developments in recent months and the economic outlook, suggests that unemployment in 2010 and 2011 can be expected to stabilize at around 3½ per cent, which is well below the average for the past 20 years.

Key figures for the Norwegian economy¹. Per cent

	2009 NOK billion2	2009	2010
Private consumption	1012.3	0.0	4.3
Public consumption	534.9	5.2	2.4
Gross fixed investments	515.4	-7.9	-3.6
Petroleum	136.5	6.4	-2.5
Business sector, Mainland Norway	199.1	-14.5	-7.8
Exports	1005.5	-4.3	0.8
Crude oil and natural gas	463.6	-1.3	-3.0
Traditional goods	278.4	-7.8	4.7
Imports	657.8	-9.7	3.7
Traditional goods	409.2	-13.1	4.7
Gross domestic product	2408.3	-1.5	0.9
Mainland Norway	1 853.8	-1.5	2.1
Memorandum items:
Consumer price inflation (CPI)		2.1	2.2
Underlying inflation (CPI-ATE)		2.6	1.3
Wage growth		4.1	3¼
Employment growth		-0.4	-0.1
Unemployment rate (LFS)		3.2	3.5
Crude oil per barrel, NOK2		388	475
Current account balance (pct. of GDP)		13.8	15.0

¹ Constant 2007 prices.
² Current prices.

Sources: Statistics Norway and Ministry of Finance

 

 

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

	2008	2009	2010
1. Fiscal Budget
Total revenues	1182.6	1051.9	1027.0
Revenues from petroleum activities	437.7	304.5	287.2
Revenues excl. petroleum activities	744.9	747.4	739.8
Total expenditures	778.6	868.7	905.1
Expenditures on petroleum activities	21.8	24.7	25.7
Expenditures excl. petroleum activities	756.7	843.9	879.4
Fiscal budget surplus before transfers to the Pension Fund – Global	404.1	183.2	121.9
- Net revenues from petroleum activities	415.9	279.8	261.5
= Non-oil budget surplus	-11.8	-96.6	-139.6
+ Transfers from the Pension Fund – Global	8.4	107.2	139.6
= Fiscal Budget surplus	-3.4	10.7	0.0
2. Government Pension Fund
Net transfer to the Pension Fund – Global	407.5	172.6	121.9
+ Dividends on the Pension Fund	103.1	91.3	108.2
= Surplus in the Pension Fund	510.6	263.8	230.1
3. Fiscal Budget and Government Pension Fund consolidated surplus	507.2	274.5	230.1

Source: Ministry of Finance.

 

General government financial balance. NOK billion

	2008	2009	2010
Fiscal Budget surplus	-3.4	10.7	0.0
+ Surplus in Government Pension Fund	510.6	263.8	230.1
+ Surplus in other central government and social security accounts	-1.3	2.4	2.9
+ Definitional differences between Fiscal Budget and national accounts 1)	10.5	-21.5	48.6
= Central government financial balance	516.3	255.4	281.6
+ Local government financial balance	-31.7	-23.3	-23.4
= General government financial balance	484.7	232.1	258.2
In per cent of GDP	19.1	9.6	10.2

1) Includes central government accrued, but not recorded taxes. Direct investments in state enterprises, including government petroleum activities, is defined as financial investments in the national accounts.

Sources: Statistics Norway and Ministry of Finance.