Amendments to the 2014 Fiscal Budget

The amendments to the 2014 Fiscal Budget are a first step of the new government towards a change of policy direction. The Government will promote growth of the Norwegian economy through targeted tax reductions, high priority on infrastructure and emphasis on other measures to stimulate productivity and competitiveness. 
 
-The Government is committed to the 2001 guidelines for fiscal policy, and will pursue a prudent fiscal policy within the confines of these guidelines, says Minister of Finance Siv Jensen.

The Government proposes an Amendment to the 2014 Fiscal Budget with a structural, non-oil deficit estimated at NOK 139 billion, which is NOK 3.9 billion higher than proposed by the previous Government (Stoltenberg II). However, the expected value of the Pension Fund has been revised upwards and the proposed structural deficit is now NOK 56 billion below the 4per cent path of the Fiscal Policy Guidelines. The spending of petroleum revenues is equivalent to 2.9 per cent of the value of the Government Pension Fund Global.

-The increased spending of petroleum revenues is targeted on measures that stimulate growth and production, says Minister of Finance Siv Jensen.

Growth in the Mainland economy seems to have slowed somewhat this year. The slowdown may well be temporary, but may also signal that high costs for businesses and high household debt are becoming a drag on growth. Growth in Mainland GDP is estimated at 2.0 per cent in 2013 and at 2.5 per cent in 2014. Both growth figures are 0.2 percentage points lower than estimated in the National Budget. The main growth drivers are fiscal policy impulses, a low interest rate and strong demand from the petroleum sector. The 2014 growth rate is close to normal, and unemployment is expected to remain at 3½ per cent.

The performance of the Norwegian economy was strong in the years before the financial crisis, and the economy has recovered after a relatively mild setback. Over the past few years, Mainland growth has been close to the historical trend. In formulating its economic policy, the Government must nevertheless consider some important challenges facing the Norwegian economy. Ten years of strong economic growth, partly driven by high oil prices, has led to an increasingly divided economy. The petroleum sector, including subcontractors, has expanded, whereas the high cost level has posed challenges for the trade exposed industries. Real wage growth has outpaced productivity growth, which has slowed down after 2005. Even if profitability has been underpinned by high product prices, the cost level now poses important challenges for exposed sectors. In addition, housing prices are very high, and household debt ratio has increased accordingly.

To address these challenges, the Government emphasises tax reductions and measures to boost the economy’s growth potential. A productivity commission will be set up to advice on how to strengthen growth in productivity.

Fiscal Policy
The Government adheres to the 2001 Fiscal Policy Guidelines that stipulate a gradual and sustainable increase in the use of petroleum revenues over the fiscal budget. The increased spending shall, over time, be in line with the expected real return on the Government Pension Fund Global, which is estimated at 4 per cent. The guidelines allow automatic stabilisers to play out fully over the business cycle, and additional fiscal measures can be used to counter economic fluctuations.

The interest rate is low and capacity utilisation in the Norwegian economy is close to trend. At the same time, the Government Pension Fund Global is growing rapidly. In order to support a stable development of the Norwegian economy, the Government proposes an Amendment to the Fiscal Budget 2014 with a non-oil deficit significantly below the 4 per cent expected real return suggested by the fiscal policy guidelines. Long-term budget challenges, due to future increases in pension costs and other age-related expenses, underline the need for a prudent fiscal policy. Uncertainty about the underlying fiscal stance and the long-term return of the Fund also implies a need for prudency.

The main features of fiscal policy in 2014:

• Spending of petroleum revenues, as measured by the structural non-oil budget deficit is estimated at NOK 139 billion, an increase of NOK 3.9 billion from the Fiscal Budget. This is NOK 56 billion below the 4 per cent path, and equivalent to 2.9 per cent of the value of the Government Pension Fund Global.
• The real underlying growth in budget expenditures from 2013 to 2014 is estimated at 2.4 per cent. In nominal terms the expenditures is estimated to increase by 5.5 per cent.
• The structural, non-oil deficit as a share of mainland trend GDP is estimated to increase by 0.5 percentage points from 2013 to 2014. As measured by its impact on Mainland GDP, the 2014 budget implies a fiscal stimulus of ¼ per cent.
• The non-oil fiscal budget deficit is estimated at NOK 137 billion. The deficit is covered by a transfer from the Government Pension Fund Global.
• Net cash flow from petroleum activities is estimated at NOK 314 billion.
• The consolidated surplus on the Fiscal Budget and the Government Pension Fund, including interest and dividends, is estimated at NOK 325 billion.
• The market value of the Government Pension Fund Global is estimated at NOK 4863 billion at the end of 2013, and NOK 5340 billion at the end of 2014.
• A reduction in paid taxes and excises from 2013 to 2014 of about NOK 4.8 billion and NOK 8.0 billion on an accrual basis. 

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 is to balance the need for low and stable inflation against the outlook for production and employment. The operational target for the implementation of monetary policy is defined as an annual increase in consumer prices of close to 2.5 per cent over time. The key policy rate has been 1.5 per cent since March 2012.

Government Pension Fund
The purpose of the Government Pension Fund is to facilitate government savings to finance rising public pension expenditures and support long term considerations in the spending of government petroleum revenues. The investment strategy of the Government Pension Fund is based on the Fund’s purpose, assumptions regarding the functioning of the financial markets, as well as the special characteristics and comparative advantages of the Fund. The strategy is premised on seeking the maximum possible return over time, given a moderate level of risk. The Ministry emphasizes the Fund’s role as a responsible investor. Good long-term financial return is assumed to depend on sustainable development in economic, environmental and social terms, and on well-functioning, efficient and legitimate markets. The market value of the Government Pension Fund is estimated at NOK 5 016 billion at the end of 2013, and NOK 5503 billion at the end of 2014. This represents the combined capital of the Government Pension Fund Global and the Government Pension Fund Norway.

 

 Key figures for the Norwegian economy¹⁾

	2012 NOK billion2)3)	2012	2013	2014
Private consumption	1 175.0	3.0	2.0	2.4
Public consumption	619.5	1.8	2.7	2.1
Gross fixed investments	598.0	8.0	5.1	4.6
Petroleum	171.8	14.5	9.0	7.5
Business sector. Mainland Norway	180.9	3.2	1.6	3.7
Exports	1 183.0	1.8	-1.6	3.3
Crude oil and natural gas	604.4	0.9	-5.5	4.2
Traditional goods	310.3	2.6	0.1	2.5
Imports	798.8	2.4	3.2	3.8
Traditional goods	486.0	2.7	2.9	2.9
Gross domestic product	2 906.8	3.1	0.8	2.6
Mainland Norway	2 200.3	3.4	2.0	2.5
Consumer price inflation (CPI)		0.8	2.1	1.9
Underlying inflation (CPI-ATE)		1.2	1.6	2.0
Wage growth		4.0	3½	3½
Employment growth		2.2	1.1	1.0
Unemployment rate (LFS)		3.2	3.5	3.6
Crude oil per barrel. NOK2)		649	623	600
Current account balance (pct. of GDP)		14.2	11.3	10.1

1) Percentage volume change from the year before.
2) Preliminary national account figures.
3) Current prices.

Sources: Statistics Norway and Ministry of Finance.

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

	2013	Amended Budget 2014
1. Fiscal Budget
Total revenues	1286.0	1292.1
Revenues from petroleum activities	373.9	344.1
Revenues excl. petroleum activities	912.0	948.0
- Total expenditures	1 058.5	1 115.4
Expenditures on petroleum activities	30.0	30.0
Expenditures excl. petroleum activities	1 028.5	1 085.4
= Fiscal budget surplus before transfers to the Pension Fund Global	227.5	176.7
- Net revenues from petroleum activities	343.9	314.1
= Non-oil budget surplus	-116.5	-137.5
+ Transfer from the Pension Fund Global	116.5	137.5
= Fiscal Budget surplus	0.0	0.0
2. Government Pension Fund
Net transfer to the Government Pension Fund Global	227.5	176.7
+ Interest and dividends on the Government Pension Fund	129.4	147.9
= Surplus in the Government Pension Fund	356.9	324.6
3. Fiscal Budget and the Government Pension Fund Consolidated surplus	356.9	324.6

Source: Ministry of Finance.