Revised National Budget 2011

The Norwegian economy continues to perform well and is estimated to grow noticeably above trend in 2011. Employment is rising and unemployment is low. In the Revised National Budget the Government lays a foundation for the continuation of this favourable development.

Mainland-GDP is now forecast to grow by 3¼ and 3½ per cent in 2011 and 2012 respectively, well above trend. General optimism, low unemployment, relatively low interest rates, growing real estate prices and a high level of household saving suggest high growth in private consumption in the years ahead. Furthermore, significant growth in petroleum sector investments in 2011 and 2012, after the drop in 2010, will underpin GDP-growth. Also mainland business investments are expected to increase. Unemployment has remained low and currently stands at just above 3 per cent, which is markedly lower than the average for the past 20 years. Higher wage growth and a strong krone exchange rate may pose a challenge for the competitive position of industries exposed to international competition.

In the revision of the Fiscal Budget 2011 the Government proposes a strengthening of the budget balance, as measured by the structural, non-oil budget deficit, by NOK 15.2 billion compared to the approved budget for 2011. The structural non-oil budget deficit is now estimated at NOK 112.9 billion in 2011, bringing the use of petroleum revenues well below the expected 4 per cent path of the Fiscal Policy Guidelines. Higher tax revenues and higher dividends from state own enterprises explain a major part of the budget improvement. Measured in real terms, the structural non-oil deficit is reduced by NOK 3.3 billion from 2010 to 2011. This corresponds to a fiscal tightening of 0.3 per cent of Mainland trend-GDP.

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 use of petroleum revenues increased rapidly in 2009 and 2010 due to expansionary fiscal policy. Higher structural tax revenues and higher dividends from state own enterprises suggest a significant improvement in the budget balance. In the revision of the 2011 budget, the use of petroleum revenues is reduced from a level which was NOK 7.4 billion above the 4 per cent path in the approved budget to a level which is NOK 10.3 billion below this path.

The 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 112.9 billion, which is NOK 15.2 billion lower than in the approved budget. The use of petroleum revenues is NOK 10.3 billion lower than the expected real return on the Government Pension Fund Global.
  
• A reduction in the structural non-oil deficit from 2010 to 2011 by NOK 3.3 billion in real terms. This corresponds to a fiscal tightening of 0.3 per cent of Mainland trend-GDP.
  
• The real underlying growth in Fiscal Budget expenditures from 2010 to 2011 is estimated at 2.8 per cent.
  
• A non-oil fiscal budget deficit estimated at NOK 115.8 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 311 billion.
  
• A consolidated surplus in the Fiscal Budget and the Government Pension Fund, including interest and dividends, of NOK 313 billion.
  
• An estimated market value of Government Pension Fund of NOK 3 492 billion at the end of 2011. The old age pension obligations under the National Insurance Scheme, is estimated at NOK 5 143 billion by the end of 2011.
  
• The overall level of taxation is kept unchanged.

Monetary policy and financial stability

The monetary policy regulation of March 29, 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% over time.

In order to mitigate the effects of the financial crisis and the subsequent international economic down turn, 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 2.25 per cent.

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.

By the end of 2011, the market value of the Government Pension Fund is estimated to reach NOK 3 492 billion. The Government Pension Fund Global is estimated to reach NOK 3 350 by the end of 2011.

Key figures for the Norwegian economy¹. Per cent

1) Constant 2007 prices.
2) Current prices.
3) Preliminary national accounts figures

Sources: Statistics Norway and Ministry of Finance.

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

Source: Ministry of Finance.

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.