Press Release

AMENDED BUDGET PROPOSAL FOR 1998

The government maintains a tight fiscal stance to dampen the growth of the Norwegian economy while at the same time allowing for increased welfare expenditures.

The new Norwegian government (formed by the Christian Democratic Party, the Centre Party and the Liberal Party) presents its amended budget proposal, including an economic policy statement for 1998 and projections for the economy (see table on page 3).

The Norwegian economy is in its fifth consecutive year of steady growth, and there are still no signs of a slowdown in economic activity. Mainland GDP (GDP excluding the petroleum and shipping sectors) is estimated to grow by 3.5 per cent this year and 3 per cent in 1998. Total GDP is expected to increase by 3.9 per cent this year and by 4.6 per cent next year. These estimates are equal to those presented by the Labour government on 13 October in the National Budget 1998. The main forces expected to support growth in 1998 are a continued strong growth in private consumption and exports.

Employment growth will be exceptionally strong this year. The labour force has expanded strongly in response to high levels of demand. Unemployment is falling and is expected to average 4.2 per cent this year and to fall further, to 3.8 per cent, in 1998. Wage growth is seen to be moderate at 3¾ per cent in 1997 and 3½ per cent in 1998. Consumer prices are estimated to grow by 2½ per cent both this year and next year. The estimate for 1998 is ¼ percentage point higher than in the National Budget, due to higher excise duties next year.

The fiscal tightening (discretionary fiscal impact) in the proposed fiscal budget for 1998 is estimated at ½ per cent of Mainland GDP, compared to the ¾ per cent tightening estimated in the National Budget. When assessing the impact from economic policy on domestic demand, the downward revision in petroleum investment amounting to ¼ per cent of Mainland GDP should also be taken into consideration. Budget expenditure will grow by 2¼ per cent in real terms from 1997 to 1998, compared to the 1 per cent growth proposed by the Labour government in its budget presented in October.

The higher growth in expenditure reflects increased allocations to areas of priority, particularly pensions, family allowances and transfers to local governments. In order to avoid an overheating of the economy, measures are taken to create room for the higher growth in public expenditure. The proposal includes increased social security contributions imposed on personal income and increased excise duties.

The proposed fiscal budget for 1998 shows a surplus of NOK 69.3 billion. The surplus is allocated to the Petroleum Fund. The budget shows a non-oil deficit of NOK 17.2 billion.

General government surplus (Maastricht definition) is estimated at 8 per cent of GDP. The estimates are based on an oil price assumption of NOK 125 per barrel in 1998.

Monetary policy: The regulation on the exchange rate system is affirmed by the new government

According to the present monetary and exchange rate policy guidelines, laid down by a government regulation, Norges Bank (the central bank) shall aim at maintaining a stable krone exchange rate against European currencies. In the event of significant changes in the exchange rate, monetary policy instruments will be oriented with a view to returning the exchange rate over time to its initial range.

The Prime Minister stated in his inaugural address that monetary policy shall continue to be aimed at maintaining a stable exchange rate. This position is confirmed in the amended budget proposal.

In a letter of 3 November from Norges Bank to the Ministry of Finance the central bank presents its view on the economic situation and gives its assessment of the economic policy. Norges Bank recommends that the guidelines for monetary policy are adjusted in order to provide for increased flexibility in the operation of monetary policy, while maintaining a stable exchange rate as the operational goal for monetary policy.

Norges Bank's letter is commented in the amended budget proposal. The government points out that the present guidelines provide a certain degree of flexibility. At the same time it is important that monetary policy is conducted in a manner that contributes to stable exchange rate expectations. Furthermore, it is important that the guidelines provide a clear goal for monetary policy and are based on a clear division of responsibilities between the central bank and political authorities. In the government’s view these requirements are met by the present guidelines. The government concludes by stating that the present guidelines remain unchanged.

Key projections

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