Strong economic expansion and unemployment at a 20 year low

Growth in the Norwegian economy has been strong for the past three years, with Mainland-GDP expanding by around 4½ per cent annually. The strong growth is expected to continue in 2007. Employment has increased substantially and the unemployment rate is now the lowest in almost 20 years.  In light of this, the Government emphasises the need for fiscal policy to underpin a continued balanced development of the Norwegian economy. The Government proposes a revised Fiscal Budget for 2007 with an estimated structural, non-oil deficit somewhat lower than in the approved budget and below the expected 4 per cent real return on the Fund.

Growth in Mainland Norway (excluding petroleum and shipping) is now forecast at 3.7 per cent in 2007. This is 0.8 percentage points higher than estimated in the National Budget 2007, due to higher estimated private consumption and stronger expected growth in petroleum investments. Employment growth is expected at 2.1 per cent and the unemployment rate is estimated to decline from 3.4 per cent in 2006 to 2.5 per cent in 2007.

The guidelines for economic policy stipulate that fiscal policy shall be geared towards a gradual and sustainable use of petroleum revenues. Over time the structural non-oil deficit shall correspond to the expected real return on the Government Pension Fund - Global, estimated at 4 per cent. Long-term budget challenges, due to future increase in pension costs in the National Insurance Scheme and other age-related expenses, underline the need for a prudent fiscal policy.

Since the fiscal guidelines were established in 2001, the use of petroleum revenues has exceeded the expected real return on the Pension Fund – Global. However, newly released state accounts show that the use of petroleum revenues was on par with the 4 per cent fiscal rule in 2006. The Government proposes a revision of the Fiscal Budget 2007 with a structural, non-oil budget deficit at NOK 67.8 billion, which is NOK 3.5 billion lower than the expected 4 per cent real return on the Fund.

The Government proposes only minor changes to the tax rules in the revised Fiscal Budget for 2007.

Fiscal policy
The main features of fiscal policy in 2007 are:

• A structural, non-oil budget deficit of NOK 67.8 billion, which is NOK 3.2 billion lower than in the approved budget for 2007 and 3.5 billion lower than the expected 4 per cent real return on the Government Pension Fund - Global.
• A structural, non-oil budget deficit corresponding to 4.3 per cent of Mainland trend-GDP, which is 0.6 percentage point higher than in 2006. The increase must be seen in light of a major downward revision of the 2006 deficit in the final state accounts.
• A real underlying growth in the Fiscal Budget expenditures from 2006 to 2007 of 3¾ per cent.
• A non-oil Fiscal Budget deficit estimated at NOK 38.8 billion. The deficit will be covered by a transfer from the Government Pension Fund – Global.
• A central government net cash flow from the petroleum activities of NOK 301 billion. The estimate is based on an oil price of NOK 370 per barrel.
• A net transfer to the Government Pension Fund - Global of about NOK 263 billion.
• A consolidated surplus in the Fiscal Budget and the Government Pension Fund, including interest and dividends, estimated at NOK 338 billion.
• An estimated market value of the Government Pension Fund – Global at the end of 2007 of NOK 2 160 billion. Including the Government Pension Fund – Norway, the capital is estimated at NOK 2 273 billion. Accrued old age pension obligations under the National Insurance Scheme are estimated to increase to nearly NOK 4 200 billion by the end of 2007.
• A real increase in total revenues for local governments of 0.5 per cent from 2006 to 2007, compared to an estimated increase of 5.6 per cent in 2006.
• General government financial balance (net lending) estimated at 15.5 per cent of GDP in 2007, compared to 18.2 per cent in 2006.

Monetary policy
The monetary policy regulation of 29 March 2001 stipulates a flexible inflation targeting regime for 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 shall balance the need for low and stable inflation against the outlook for output and employment.

Norges Bank’s implementation of monetary policy is geared towards maintaining low and stable inflation. The operational target is defined as an annual increase in consumer prices of close to 2.5 per cent over time. The interest rate decisions of Norges Bank shall be forward looking and pay due attention to the uncertainty attached to macroeconomic estimates and assessments. It shall take into consideration that it may take time for the policy changes to take effect, and it should disregard disturbances of a temporary nature that are not deemed to affect underlying price and cost increases.

The key policy rate (the sight deposit rate) has been raised by 2¼ percentage points to 4 per cent since the summer of 2005. Norges Bank has advised that the key policy rate will be increased further, but gradually, in order to assess the effects of interest rate changes and other new information on economic developments. According to Norges Bank’s last published interest rate path, the central forecast for the signal rate is some 5 per cent at the end of 2007.

The Government Pension Fund
The Government Pension Fund was established 1 January 2006 and consists of two parts: “The Government Pension – Global”, which is a continuation the Petroleum Fund and the “The Government Pension Fund – Norway”, which was previously known as the National Insurance Scheme Fund.  A white paper report on the management of the Government Pension Fund was presented to the Parliament (Stortinget) on 13 April, 2007 (Report No. 24 to the Storting - On the Management of the ¬Government Pension Fund in 2006).

General outlook for the economy
The growth of the Norwegian economy has been strong for the past three years, with Mainland-GDP growth averaging 4½ per cent. Domestic demand has been fuelled by low interest rates, high income growth and strong growth in petroleum investments. Investments in the mainland business sector have also provided growth impetus to the Norwegian economy. The continued strong economic growth has led to a tight labour market and clear signs of pressure in the Norwegian economy.

Growth in Mainland Norway GDP is now estimated at 3.7 per cent in 2007, indicating the forth year running with growth well above trend and, with that, further intensifying the strong economic expansion.

The labour market has tightened significantly over the last couple of years.  The unemployment rate is now the lowest in nearly 20 years and employment growth is strong. The unemployment rate is expected to decline from an average of 3.4 per cent in 2006 to 2.5 per cent in 2007. Employment is expected to grow by 2.1 per cent in 2007. Inflow of workers from other countries has so far in this upturn helped to ease labour market pressures. However, demand for labour is still high and many companies are having difficulties in finding qualified labour.

The tightening of the labour market contributes to higher wage growth.  Based on the wage negotiations concluded so far, wage growth is estimated at 4¾ per cent in 2007.

Higher wage growth is expected to lead to higher underlying consumer price inflation in 2007. The consumer price index adjusted for changes in excise duties and excluding energy (CPI-ATE) is expected to increase from 0.8 per cent in 2006 to 1½ per cent in 2007.  Consumer price inflation (CPI) is expected to increase by ¾ per cent in 2007.

Key projections for the Norwegian economy. Per cent¹

	2006 NOK billion	2006	2007
Private consumption	873.3	4.3	4.0
Public consumption	415.0	2.2	3.1
Gross fixed investments	404.1	8.9	6.1
Petroleum	99.7	9.1	5.0
Business sector, Mainland Norway	137.3	10.5	7.5
Exports	997.0	1.5	1.5
Crude oil and natural gas	496.2	-5.4	-3.6
Traditional goods	271.7	6.5	4.8
Imports	613.9	9.1	5.9
Traditional goods	404.3	10.6	6.0
Gross domestic product	2 148.0	2.9	2.5
Mainland Norway	1563.1	4.6	3.7
Memorandum items:
Consumer price inflation (CPI)		2.3	¾
Underlying inflation (CPI-ATE)		0.8	1½
Wage growth		4.1	4¾
Employment growth		3.1	2.1
Unemployment rate (LFS)		3.4	2.5
Current account balance. Per cent of GDP		16.7	12.9

1) Constant 2004 prices
Sources: Statistics Norway and Ministry of Finance

 

Key figures for the petroleum sector

	2006	2007	2008	2011	Oil price sensitivity 2007 1
Assumptions:
Crude oil. NOK per barrel	412	370	358	307
Production. Mill. Sm3 oil equivalent	249	243	262	258
Crude oil and NGL	161	150	153	140
NOK billion:
Export value 2	509	439	455	391	7.3
Accrued taxes and royalties	222	171	181	121	6.3
Paid taxes and royalties	217	184	176	130	3.1
Net cash flow	355	301	292	233	6.0

1) Effects of an oil price increase of NOK 10 per barrel
2 ) Crude oil, natural gas, NGL and pipeline transport
Sources: Statistics Norway, Ministry of Petroleum and Energy and Ministry of Finance

 

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

		2005	2006	2007
	1. Fiscal Budget
	Total revenues	860.8	994.9	979.3
	Revenues from petroleum activities	297.0	376.6	322.7
	Revenues excl. petroleum activities	563.8	618.3	656.6
	Total expenditures	650.1	683.5	716.7
	Expenditures on petroleum activities	21.4	21.2	21.3
	Expenditures excl. petroleum activities	628.6	662.3	695.4
Surplus before transfers to the Pension Fund – Global		210.8	311.4	262.6
- Net revenues from petroleum activities		275.5	355.4	301.4
= Non-oil budget surplus		-64.8	-44.0	-38.8
	+ Transfers from the Pension Fund - Global	70.6	57.4	38.8
	= Fiscal Budget surplus	5.8	13.4	0.0
	2. Government Pension Fund
	Net revenues from petroleum activities	275.5	355.4	301.4
	- Transfers to the Fiscal Budget	70.6	57.4	38.8
	+ Dividends on the Pension Fund 1	36.9	64.1	75.7
	= Surplus in the Pension Fund 1	241.8	362.1	338.3
	3. Fiscal Budget and Government Pension Fund consolidated surplus 1	247.6	375.5	338.3

1) Excluding Government Pension Fund – Norway in 2005
Source: Ministry of Finance

 

General government financial balance.  NOK billion

	2005	2006	2007
Fiscal Budget surplus	5.8	13.4	0
+ Surplus in Government Pension Fund 1	241.8	362.1	338.3
+ Surplus in other central government and social security accounts 1	6.0	-8.9	-2.5
+ Definitional differences between Fiscal Budget and national accounts	31.4	14.4	-2.9
+ Direct investment in state enterprises	8.5	5.5	5.4
= Central government financial balance	293.6	386.5	338.3
+ Local government financial balance	2.0	4.4	-2.7
= General government financial balance	295.6	390.9	335.6
In per cent of GDP	15.2	18.2	15.5

1) For 2005, the Government Pension Fund – Norway is included in other central government accounts
Sources: Statistics Norway and Ministry of Finance