Proposed Changes in the Fiscal Budget 2006 - the Stoltenberg Government

Continued upswing in the Norwegian economy next year is expected to contribute to an improvement in the labour market. A broadly neutral fiscal policy stance is therefore maintained. The Government´s Amendment to the Budget for 2006 implies no change in the use of petroleum revenues, measured by the structural non-oil central government budget deficit, compared to the budget proposal by the previous government (Bondevik II). However, some tax increases are proposed to finance improvements in public sector services.

The Government has committed itself to the guidelines for fiscal policy which were established in 2001. The guidelines stipulate that fiscal policy shall be geared 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 real return on the Government Petroleum Fund, estimated at 4 per cent.

Increased government expenditure is financed by increases in tax and excises. New tax and excise measures imply a net increase in revenues of NOK 6.4 billion in 2006 compared to the budget proposal of the previous government. The overall net tax increases from 2005 to 2006 amounts to NOK 2.2 billion (booked value). The increased government expenditure is directed i.e. towards local governments in order to strengthen their economic situation and improve the provision of welfare. Priority has also been given to reduce parents’ payments for child care. Further, the proposed budget amendments involve increased focus on measures against poverty, strengthened labour market measures, and increased approbations for i.e. transport and culture. Local government non-earmarked revenues will increase by NOK 5.7 billion in real term in 2006, equivalent to 3½ per cent. This is NOK 3.8 billion more than proposed by the former government.

There are only small changes in the forecast for the Norwegian economy compared to the National Budget 2006. Growth in Mainland GDP (excluding petroleum and shipping) is forecast at 3.6 per cent in 2005 and 2.5 per cent in 2006. The growth rate in 2005 has been revised downward by 0.1 percentage points, while the growth rate in 2006 has been revised upwards by 0.1 percentage points. Growth in private consumption is expected somewhat lower than projected in the National Budget 2006, whereas growth in public consumption and investments is expected somewhat stronger. Employment is now expected to increase by 22 000 persons next year, compared to an estimated 18 000 persons in the National Budget. On an annual basis, the unemployment rate (Labour Force Survey) is expected to fall from 4.6 per cent in 2005 to 4.1 per cent in 2006. The unemployment rate this year is estimated 0.1 percentage points higher than in the National Budget.

Fiscal Policy

The main features of fiscal policy in 2006 are:

• A structural, non-oil budget deficit of NOK 65.9 billion , which is unchanged from the estimates in the National Budget 2006. The excess spending compared to the expected 4 per cent real return on the Fund is estimated at NOK 13 billion in 2006, compared to NOK 22 billion in 2005.
• The budget will have a broadly neutral effect on the overall activity level of the economy.
• A real underlying growth in the in Fiscal Budget expenditures from 2005 to 2006 of 1½ per cent. This is an increase of ¾ percentage point compared to the National Budget 2006.
• Tax changes which increases taxes and excises by NOK 3.0 billion on an accrued basis and NOK 2.2 billion on a cash basis, compared to a continuation of the 2005 tax regime.
• A non-oil fiscal budget deficit estimated at NOK 70.8 billion.
• A central government net cash flow from the petroleum activities of NOK 328 billion.
• A consolidated surplus in the Fiscal Budget and the Petroleum Fund, including interest and dividends, estimated at NOK 316 billion.
• The capital in the Fund at the end of 2006 is estimated at NOK 1 657 billion.

Tax policy

The Government aims at bringing the overall level of taxation back to the 2004 level. This is estimated to entail an increase in the tax level by some NOK 5 billion compared to 2005, of which NOK 3 billion (accrued) is included in the Government’s proposal for 2006. Compared to the former government’s tax proposals, total tax revenue is estimated to be NOK 9.7 billon higher in 2006 on an accrued basis, of which NOK 3.6 billion stems from tax on labour income, NOK 2.9 billon from wealth and inheritance tax, and NOK 1.9 billon from tax on business income.

The Government will implement the main remaining features of the tax reform, which was presented to the Storting in March 2004 by the previous government (Report no. 29 (2003-2004)) and endorsed by a majority in the parliament. The main objective of the reform is to achieve a more efficient and fair tax system. In line with the proposal for 2006 from the previous government, the maximum marginal tax rate (including employer’s social security contribution) will be reduced from 61.5 per cent to 54.3 per cent. Combined with the approved tax on returns on shares above the risk-free interest rate and on corresponding income for self-employed, which implies a 48.2 per cent marginal tax rate on returns to individuals, it is possible to abolish the prevailing splitting of business income of self-employed into capital and labour income (the split model).

Key figures for the fiscal budget (incl. social security) and Government Petroleum Fund.
Billion NOK

* Amendment to the Budget.
*** National Budget 2006.
Sources: Statistics Norway and the Ministry of Finance.

General outlook for the economy

Activity in the Norwegian economy is high. Employment is increasing and the unemployment rate is declining. Growth in household demand, fuelled by low interest rates and a significant increase in income has been the main driving force behind the mainland economic expansion. Profitability in the business sector has improved, and mainland fixed business investment has also picked up. Strong growth in petroleum investment and healthy international growth have further stimulated growth in the mainland economy. Thus, the upswing has gradually become more broadly based.

Economic growth is expected to continue above trend also in 2006. The outlook for the mainland business sector is positive. High prices on export goods imply sound profitability for the mainland business sector. High capacity utilisation indicates further increases in mainland business fixed investment. The outlook for the exposed sectors, however, is now more uncertain due to the strengthening of the krone exchange rate and the weaker growth in Europe.

Mainland GDP is expected to increase by 3.6 per cent in 2005 and by 2.5 per cent in 2006. The dampening of the growth in 2006 is partly due to an expected normalisation of electricity production and a levelling off of petroleum investments. Moreover, a gradual increase in interest rates will dampen growth in private consumption somewhat.

The situation in the labour market is improving. Continued economic growth is expected to result in an increase in the level of employment by 1 per cent in 2006. This is higher than estimated in the National Budget 2006, partly because of increased revenues for local governments. On an annual basis, unemployment rate (LSF) is estimated at 4.1 per cent in 2006. There have so far been few signs of shortage of labour. Next year, however, the unemployment rate may approach a level where in previous upswings there has been an increased pressure in the economy.

Since the beginning of the year the oil price has increased by NOK 130 per barrel, to close to NOK 390 by the end of October. An oil price of NOK 350 per barrel in both 2005 and 2006 is assumed.

Key projections for the Norwegian economy. Percentage change from previous year

Sources: Statistics Norway and Ministry of Finance.