Fiscal Budget 2011: A modest fiscal tightening

 

Several targeted policy measures helped mitigating the effects of the international financial crisis on the Norwegian economy. Following a decline in mainland output of 1.4 per cent in 2009, growth in the Mainland economy is now forecast at 1.7 per cent in 2010 and 3.1 per cent in 2011, the latter about half a percentage point above trend growth. Unemployment has been kept at low levels throughout the downturn and is forecast at 3½ per cent both in 2010 and 2011.

 

With the prospect of growth above trend in the mainland economy in 2011 and a stabilization of unemployment, the Government proposes a budget for 2011 with a structural, non-oil deficit of NOK 128 billion - on par with the 2010 deficit in real terms. The use of petroleum revenues is brought closer to the 4 per cent path of the fiscal policy guidelines, with an estimated excess spending of NOK 7.4 billion, down from more than NOK 19 billion in 2010. The proposed budget implies a fiscal tightening of 0.2 per cent of Mainland Norway trend-GDP from 2010 to 2011.

Fiscal Policy

As stated in the 2001 fiscal policy guidelines, fiscal policy shall be directed towards a gradual and sustainable increase in the use of petroleum revenues. Over time, the structural, non-oil central government budget deficit shall correspond to the expected real return on the Government Pension Fund Global, estimated at 4 per cent. The guidelines allow for fiscal policy to be used actively to counter fluctuations in economic activity. The Government made ample use of this flexibility in 2009 and 2010.

The expansionary fiscal policy of 2009 and 2010 has brought the use of petroleum revenues well above the 4 per cent path. As the economy recovers, the Government is committed to bringing spending of petroleum revenues back to the long term 4 per cent path. The proposed 2011-budget reduces the excess spending of petroleum revenues, as measured by the structural, non-oil budget deficit, to NOK 7.4 billion in 2011.

Within the confines of the proposed spending of petroleum revenues, the 2011 Fiscal Budget allows for some important policy measures, such as a strengthening of key public welfare provisions in areas like health care, education and child care. Priority is given to reducing economic and social disparities and to deal with key climate policy measures. Budget appropriations to transport, police and culture will increase substantially.

Main features of fiscal policy in 2011:

• The spending of petroleum revenues, as measured by the structural, non-oil budget deficit, is estimated at NOK 128.1 billion, NOK 7.4 billion above the expected real return on the Government Pension Fund Global.
• The structural non-oil deficit in 2011 is estimated on par with the 2010 deficit in real terms. This implies a fiscal tightening of 0.2 per cent of Mainland trend-GDP from 2010 to 2011.
• Taxes are kept at the same level as in 2010.
• The real underlying growth in Fiscal Budget expenditures from 2010 to 2011 is estimated at 2¼ per cent, slightly below the average for the last 25 years.
• A non-oil fiscal budget deficit estimated at NOK 135 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 288 billion.
• A consolidated surplus in the Fiscal Budget and the Government Pension Fund, including interest and dividends, of NOK 266 billion.
• An estimated market value of Government Pension Fund of NOK 3 481 billion at the end of 2011. The old age pension obligations under the National Insurance Scheme, is estimated at NOK 5 087 billion by the end of 2011.

Tax policy

In accordance with the Government’s commitment from 2005 of keeping total accrued taxes at the 2004 level, the overall level of taxation is kept unchanged from 2010 to 2011.

In the 2011 budget, the Government proposes changes to the tax system to provide elderly with better incentives to combine pension and work. The current tax rules are tailored to the old pension system which was designed to people generally either working or receiving a full pension. The new pension system, which enters into force on 1 January 2011, is designed to encourage longer working careers and to facilitate a combination of pension and work. In the 2011 budget, the Government proposes amendments to the tax rules to support this aim. The proposals will provide pensioners with NOK 1.35 billion in relief (accrued) in 2011 and have beneficial effects on the income distributio.

Monetary policy and financial stability

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. 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.

In order to mitigate the effects of the international financial crisis and the subsequent weakened economic outlook, 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 of the Norwegian economy, the key rate has subsequently been raised to 2.0 per cent.

Norwegian financial institutions have generally performed better during the recent financial crisis than institutions in many other countries. Lessons learned from the Norwegian banking crisis in the early 1990's have made Norway well prepared for new crises in the financial markets. Moreover, Norway has a body of rules and supervision that covers the entire financial market. The “same risk, same regulation” principle has governed Norway’s approach to regulation and supervision. The financial institutions in Norway had low exposure to toxic assets at the beginning of the recent crisis.

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 2011, the market value of the Government Pension Fund is estimated to reach NOK 3 481 billion, of which 3 360 billion in the Government Pension Fund Global.

 

General outlook

The Norwegian economy has performed better than most other industrialised countries during the financial crisis. Following a downturn in the second half of 2008 and into 2009, economic activity picked up in the second quarter of 2009. The performance of the economy so far this year has been somewhat weaker than expected, but several indicators suggest that growth will pick up ahead. Increased consumer confidence, low interest rates and low unemployment point to higher private consumption. Improved outlook for our main trading partners suggests higher exports of traditional goods both this year and next. Gross fixed investments, both in the mainland economy and in the petroleum sector, are also expected to pick up next year.

Mainland economy is forecast to grow by 1.7 per cent in 2010 and by 3.1 per cent in 2011, the latter about half a percentage point above trend growth.

The outlook for the labour market has improved, and developments in the past few months, along with the positive outlook for the economy suggest an unemployment rate of 3½ per cent both in 2010 and 2011. This is lower than the average of the past 20 years which is 4¼ per cent, and also very low in an international context.

 

Key figures for the Norwegian economy¹. Per cent

	2009 NOK billion2	2009	2010	2011
Private consumption	1015.3	0.2	2.8	3.5
Public consumption	533.1	4.7	2.7	2.1
Gross fixed investments	510.0	-9.1	-3.4	4.6
Petroleum	134.4	5.7	-3.8	6.0
Business sector. Mainland Norway	190.1	-15.4	-4.0	3.3
Exports	1 008.8	-4.0	0.8	1.8
Crude oil and natural gas	465.1	-1.2	-3.6	-2.8
Traditional goods	278.1	-8.2	5.1	4.9
Imports	656.3	-11.4	4.2	5.6
Traditional goods	409.1	-13.1	5.7	5.1
Gross domestic product	2 380.7	-1.4	0.5	2.1
Mainland Norway	1 846.4	-1.4	1.7	3.1
Consumer price inflation (CPI)		2.1	2.5	1.8
Underlying inflation (CPI-ATE)		2.6	1.5	1.9
Wage growth		4.2	3¼	3¼
Employment growth		-0.4	-0.2	0.6
Unemployment rate (LFS)		3.2	3.5	3.6
Crude oil per barrel. NOK2		388	475	485
Current account balance (pct. of GDP)		13.1	16.3	15.3

 

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

	2009	2010	2011
1. Fiscal Budget
Total revenues	1 051.9	1 041.8	1 113.1
Revenues from petroleum activities	304.5	287.9	313.0
Revenues excl. petroleum activities	747.4	753.9	800.1
Total expenditures	868.7	898.6	960.1
Expenditures on petroleum activities	24.7	23.2	25.0
Expenditures excl. petroleum activities	843.9	875.4	935.1
Fiscal budget surplus before transfers to the Pension Fund – Global	183.2	143.2	153.0
- Net revenues from petroleum activities	279.8	264.7	288.0
= Non-oil budget surplus	-96.6	-121.5	-135.0
+ Transfers from the Pension Fund – Global	107.2	121.5	135.0
= Fiscal Budget surplus	10.7	0.0	0.0
2. Government Pension Fund
Net transfer to the Pension Fund – Global	172.6	143.2	153.0
+ Dividends on the Pension Fund	91.3	84.4	113.1
= Surplus in the Pension Fund	263.9	227.6	266.1
3. Fiscal Budget and Government Pension Fund consolidated surplus	274.5	227.6	266.1

Source: Ministry of Finance.

 

 

General government financial balance. NOK billion

 

	2009	2010	2011
A. Central government financial balance Fiscal Budget surplus and Surplus in Government Pension Fund	268.3 274.5	267.8 227.6	277.6 266.1
Non-oil budget surplus Net revenues from petroleum activities Dividends on the Pension Fund	-96.6 279.8 91.3	-121.5 264.7 84.4	-135.0 288.0 113.1
Surplus in other central government and social security accounts	2.4	2.8	2.8
Definitional differences between Fiscal Budget and national accounts 1)	-8.6	37.4	8.7
B. Local government financial balance	-23.0	-26.3	-27.8
C. General government financial balance (A+B)	245.3	241.4	249.7
In per cent of GDP	10.3	9.7	9.6

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.

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