Background: Norway’s fiscal framework

Norway’s petroleum resources are a significant advantage to the economy, but also present particular challenges for fiscal policy in ensuring a stable economic development. Public sector revenues from petroleum are large, vary considerably from year to year, and will gradually decline over time. Many countries have found that temporary large revenues from natural resource exploitation can produce relatively short-lived booms that are followed by difficult adjustments as production and revenues diminish. Moreover, income from non-renewable resources like oil and gas should also benefit future generations.

The Government Pension Fund Global and the fiscal rule for the use of oil revenue address these challenges, and are designed to support a stable development of the Norwegian economy in both the short and long term. The Government Pension Fund Act stipulates the transfer of the State’s net cash flow from petroleum industry to the Government Pension Fund Global. The fiscal rule specifies that the transfers from the Fund to the central government budget shall, over time, follow the expected real return on the Fund, which is estimated at 4 per cent. The fiscal rule also puts emphasis on evening out economic fluctuations to contribute to sound capacity utilisation and low unemployment, e.g. by allowing automatic stabilisers to play out fully.

This framework delinks the earning and use of petroleum revenue, reducing the costs of future restructuring and the risk of a sharp decline in industries exposed to international competition. It also ensures that the petroleum wealth will benefit future generations.

Together, the fiscal rule and the Government Pension Fund Global comprise a fiscal framework that insulates the fiscal budget from fluctuations in petroleum revenue, stemming either from volatile oil and gas prices or from changing production or investments in the petroleum sector. Through the Fund, a large proportion of the State’s oil and gas income is invested in other countries. Investing foreign exchange earnings abroad protects the krone against the large, varying foreign exchange earnings generated by the petroleum industry. The fiscal policy framework thus supports Norway’s monetary policy, and lays a foundation for more stable expectations in the currency market.