Steady course in a volatile environment

The Norwegian economy is performing well, with low unemployment and growth in the mainland economy along the long term trend. Low interest rates and further increase in petroleum investments suggest growth in mainland activity approximately on par with the historical average in the year ahead. Mainland GDP is forecast to grow by 2.8 per cent in 2011 and by 3.1 per cent in 2012. Unemployment is expected to remain stable at 3¼ per cent.

The Norwegian economy might be adversely affected by weaker international growth and the unrest in international financial markets. However, the economic policy guidelines lay a sound foundation for a stable development of the economy. The Government remains firmly committed to the guidelines and propose a budget for 2012 with a structural, non-oil deficit slightly below expected real return on the Government Pension Fund Global.

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 4 per cent path). The guidelines allow for fiscal policy to be used to stabilise the economy over the business cycle. Automatic stabilisers are allowed to work fully, and additional fiscal measures can be used to counter economic fluctuations. This framework has proved to be robust, and has supported economic stability.

The Government made ample use of the flexibility in the guidelines in 2009, when the use of petroleum revenues was increased rapidly to mitigate the effects of the global recession on the Norwegian economy. In 2011 the use of petroleum revenues was again brought below the 4 per cent path. For 2012, the spending of petroleum revenues increases in line with the underlying growth in the expected real return on the Fund.

Within the confines of the proposed spending of petroleum revenues and an unchanged level of taxation, the 2012 Fiscal Budget allows for some important policy measures such as strengthening of key welfare provisions in areas like health care, education and child care. Appropriations to transport and police will increase substantially. Priority has also been given to necessary measures in the aftermath of terrorist attack on 22 July.

The main features of fiscal policy in 2012:

• The spending of petroleum revenues, as measured by the structural, non-oil budget deficit, is estimated at NOK 122.2 billion, which is NOK 2.4 billion below the expected real return on the Government Pension Fund Global.
  
• An increase in the structural non-oil deficit from 2011 to 2012 corresponding to ¼ per cent of Mainland trend-GDP. The overall impact of the fiscal budget on Mainland GDP is estimated to be broadly neutral.
  
• The real underlying growth in Fiscal Budget expenditures from 2011 to 2012 is estimated at 2.1 per cent, somewhat below the average of the previous ten years.
  
• A non-oil fiscal budget deficit estimated at NOK 120.2 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 352 billion.
  
• A consolidated surplus in the Fiscal Budget and the Government Pension Fund, including interest and dividends, of about NOK 346 billion.
  
• An estimated market value of Government Pension Fund of NOK 3 685 billion at the end of 2012. The old age pension liability under the National Insurance Scheme, is estimated at NOK 5178 billion at the end of 2012.
  
• An unchanged level of taxation.

Tax policy
The overall level of taxation is kept unchanged from 2011 to 2012. This is in accordance with the Government’s commitment from 2005 of keeping total accrued taxes at the 2004 level. The evaluation of the tax reform of 2006 shows that the reform was successful and that the Norwegian tax system is generally well functioning, see Report No. 11 (2010-2011) to the Storting. Still, the evaluation demonstrates that there is room for improvement, particularly to prevent tax avoidance and to simplify the rules. In the 2012 budget, the Government follows up the evaluation by proposing some changes in corporate taxation.

No major changes are proposed for personal income tax. The rate structure of wage taxation and the tax rate on share income are to be continued, in line with the principle of the 2006 tax reform that the differences between the highest marginal tax on share income and wage income should not be too large.

The Government proposes a raise in the VAT rate on foodstuffs from 14 to 15 per cent.

To contribute to greater predictability of future fuel taxes, the Government announces a change to a more general road usage tax on all kinds of fuels. By 2020, road use taxes are to be levied on all fuels according to the energy content of the fuel. The existing exceptions from the road use taxes are to be evaluated in 2015. The Government has no plans to change the road use taxes for alternative fuels before the evaluation in 2015.

The Government proposes a further strengthening of the environmental profile in the motor vehicle registration tax in the budget for 2012. Further adjustments in the CO₂-element are proposed to provide stronger incentives for purchase of vehicles with lower CO₂-emissions. The Government also proposes to introduce a separate NOx-component into the registration tax. The tax level is kept approximately unchanged by reducing the engine effect-component.

Monetary policy
The monetary policy regulation of 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. The key rate is currently at 2.25%.

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

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

The government’s cash flow from the petroleum activities is transferred to the Government Pension Fund Global, and over time only 4 per cent of the Fund’s capital is spent in the Fiscal Budget. The capital is invested abroad in international equities, fixed-income markets and real estate. The aim is to have a diversified investment mix that will give the highest possible risk-adjusted return within the guidelines set by the Ministry.

The value of the Pension Fund Global is estimated to reach NOK 3 115 billion at the end of 2011 and NOK 3543 billion at the end of 2012.

General outlook
Mainland GDP growth has now been positive for seven consecutive quarters, fuelled by private and public consumption. Growth in consumption tapered off in the first half of 2011, but gross fixed investment both in the housing and petroleum sector has underpinned growth in the economy. High income growth, low interest rates and higher petroleum investments suggest continued high activity in the Norwegian economy. Mainland GDP is now forecast to grow by 2.8 per cent in 2011 and 3.1 per cent in 2012, which is on par with or slightly above the historical average.

The labour market regained momentum in the second half of 2010 and the unemployment rate is expected to remain stable at 3¼ per cent in 2011 and 2012.

Key figures for the Norwegian economy¹. Per cent

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

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.