A budget to promote employment, growth and structural adjustment

Developments in the Norwegian economy are diverse. Unemployment has increased, principally in oil-dependent southern and western regions. However, employment continues to grow in large parts of the country. Mainland GDP is projected to grow in 2016, although at a slower pace than forecast in October.

The Norwegian policy framework helps dampen the impact of the oil price shock on the mainland economy. The central bank’s key policy rate is at a record low and the Norwegian krone has depreciated sharply. The weak krone has improved export-oriented firms’ competitiveness, while low interest rates have reduced the cost of financing. Low wage growth is also supporting growth in sectors exposed to international competition.

Fiscal policy is used actively to support employment, aggregate demand and necessary structural adjustments in the economy. The budget for 2016 is among the most expansionary since the fiscal guidelines were introduced in 2001, and includes measures to support employment and activity in particularly affected regions.

“A key priority for the Government in the current situation is to support growth and employment in sectors exposed to international competition. Tax reform with lower taxes and increased spending on education and infrastructure, is essential in this respect,” says Finance Minister Siv Jensen.

The Revised National Budget for 2016 forecasts a structural non-oil deficit of NOK 205.6 billion, equivalent to 2.8 per cent of the value of the Government Pension Fund Global. The fiscal stance, measured as the change in the structural non-oil deficit as a share of trend GDP for Mainland Norway, is estimated at 1.1 percentage points, up from 0.7 percentage points in the Approved Fiscal Budget for 2016.

Fiscal Policy
The Norwegian policy framework shields the fiscal budget from fluctuations in oil and gas revenues. The state’s net cash flow from petroleum is transferred in full to the Government Pension Fund Global. The use of petroleum revenues, i.e. the withdrawal from the Fund, fully covers the non-oil budget deficit. The fiscal guidelines stipulate a gradual and sustainable use of petroleum revenues over time in line with the expected real return on the Government Pension Fund Global, estimated at 4 per cent. A decline in the price of oil therefore has no immediate impact on the fiscal stance, but translates into reduced fiscal space over time.

The main features of the revised budget for 2016:

• Spending of petroleum revenues, as measured by the structural non-oil budget deficit, is estimated to be NOK 205.6 billion. This is equivalent to 7.5 per cent of GDP for Mainland Norway, up from 6.4 per cent in 2015. The structural non-oil budget deficit corresponds to 2.8 per cent of the value of the Government Pension Fund Global. Given the strong growth of the Fund over the past three years, of which about one half is due to a weaker Norwegian krone, spending of petroleum revenues is held well below 4 per cent of the capital in the Fund.
• The real underlying growth in budget expenditures from 2015 to 2016 is 3.5 per cent. In nominal terms expenditures increase by 6.0 per cent.
• The non-oil fiscal budget deficit is estimated to be NOK 215.9 billion. This deficit is covered by a transfer from the Government Pension Fund Global.
• Net cash flow from petroleum activities is estimated at NOK 131.7 billion.
• The consolidated surplus on the Fiscal Budget and the Government Pension Fund, including NOK 201.5 billion in interest and dividends, is NOK 117.2 billion.
• A general government financial balance of NOK 102.9 billion, equivalent to
  3.3 per cent of GDP.
• The market value of the Government Pension Fund Global is estimated to be
  NOK 7 150 billion at the end of 2016.

Tax policy
Within the confines of a stable tax system, there are only minor changes proposed to the tax system. The implementation of the Air Passenger Tax is postponed from 1 April to 1 June. Furthermore, the Government will allow for a temporary net wealth tax deferral for owners of businesses which are running a deficit in their financial statements. A proposal will be presented to the Parliament this autumn.

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 must balance the need for low and stable inflation against the outlook for production and employment. The operational target is defined as an annual increase in consumer prices of close to 2.5 per cent over time. The central bank’s (Norges Bank) key policy rate is currently 0.5 per cent.

The Government Pension Fund
The purpose of the Government Pension Fund is to facilitate government saving to finance rising public pension expenditures and support long term considerations in the spending of government petroleum revenues. The capital of the Fund is invested abroad in international equities, fixed-income securities and real estate, within guidelines set by the Ministry of Finance. The investment strategy aims to achieve high financial returns subject to a moderate level of risk.

Key figures for the Norwegian economy¹

	NOK billion2 3
	2015	2015	2016	2017
Privat consumption	1335.6	2.0	1.0	1.7
Public consumption	727.3	1.8	3.0	2.0
Gross fixed investment	728.8	-4.0	-1.8	1.9
Petroleum	190.4	-14.7	-14.0	-8.0
Business sector. Mainland Norway	225.7	-2.8	0.3	4.9
Exports	1162.8	2.3	-0.9	1.2
Crude oil and natural gas	450.0	0.9	-4.0	-1.4
Traditional goods	374.4	5.5	3.1	4.2
Imports	982.0	0.6	0.8	3.0
Traditional goods	583.9	1.7	1.5	3.3
Gross domestic product	3140.8	1.6	0.1	1.1
Mainland Norway	2610.7	1.0	1.0	1.7
Employment growth		0.6	0.2	0.7
Unemployment rate (LFS)		4.4	4.7	4.6
Wage growth		2.8	2.4	2.8
Consumer price inflation (CPI)		2.1	2.8	2.1
Underlying inflation (CPI-ATE)		2.7	2.8	2.2
Crude oil per barrel. NOK3		430	346	396

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

Sources: Statistics Norway and Ministry of Finance.

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

	2014	2015	2016
1. Fiscal Budget
Total revenues	1278.8	1227.4	1174.9
Revenues from petroleum activities	347.0	247.2	161.7
Revenues excl. petroleum activities	931.7	980.2	1013.2
Total expenditures	1127.1	1194.5	1259.1
Expenditures on petroleum activities	35.4	29.0	30.0
Expenditures excl. petroleum activities	1091.7	1165.5	1229.1
Fiscal budget surplus before transfers to the Pension Fund Global	151.7	32.9	-84.2
Net revenues from petroleum activities	311.7	218.3	131.7
= Non-oil budget surplus	-160.0	-185.3	-215.9
+ Transfers from the Pension Fund Global	156.2	186.1	215.9
= Fiscal Budget surplus	-3.8	0.8	0.0
2. Government Pension Fund
Net transfer to the Pension Fund Global	155.5	32.2	-84.2
+ Interest and dividends on the Pension Fund	160.1	192.0	201.5
= Surplus in the Pension Fund	315.6	224.2	117.2
3. Fiscal Budget and Government Pension Fund consolidated surplus	311.7	225.0	117.2

Source: Ministry of Finance.

 

 

General government financial balance. NOK million

	2014	2015	2016
Central government financial balance	298 451	201 311	116 908
Fiscal Budget surplus and Surplus in Government Pension Fund	311 743	224 953	117 226
Non-oil budget surplus	-160 008	-185 312	-215 911
Net revenues from petroleum activities	311 667	218 256	131 687
Interest and dividends on the Pension Fund	160 085	192 008	201 450
Surplus in other central government and social security accounts	- 1 602	238	-141
Definitional differences between Fiscal Budget and national accounts1	-11 691	-23 880	-177
+ Local government financial balance	-23 176	-19 849	-13 993
= General government financial balance	275 275	181 462	102 916
In per cent of GDP	8.7	5.8	3.3

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.