Textbox 3.1 The fiscal policy framework

Like most other countries, Norway has a fiscal policy framework with fiscal balance requirements. In addition, the Norwegian framework is customised for the special Norwegian context of substantial, temporary petroleum revenues and substantial Fund income.

A key purpose of the fiscal policy framework is to convert a temporary revenue stream from the extraction of petroleum resources into a lasting revenue source. This is achieved by allocating the revenues from petroleum activities to the Government Pension Fund Global (GPFG) and, over time, spending only the expected real return on the Fund via the fiscal budget.

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¹ Government revenues from petroleum activities are recognised in the fiscal budget before the net cash flow from petroleum activities is transferred to the GPFG, but this is simplified in the chart.

Source: Ministry of Finance.

How the petroleum wealth is saved in the GPFG and phased into the economy is regulated in the Government Pension Fund Act. The Act ensures that central government’s net cash flow from petroleum activities is in its entirety transferred from the fiscal budget to the GPFG, and that the Fund capital can only be transferred to the fiscal budget pursuant to a resolution of the Storting. Interest and dividend income from the investment management is recognised as income directly in the Fund. The transfer from the Fund corresponds to the non-oil fiscal deficit, which is authorised by the Storting during its deliberation of the fiscal budget; see Figure 3.21.

The fiscal guideline

The fiscal guideline has guided Fund spending since 2001:

• Fund spending shall over time be in line with the expected real return on the Government Pension Fund Global.

• A strong emphasis shall be put on smoothing out economic fluctuations to ensure sound capacity utilisation and low unemployment.

Considerations and trade-offs when applying the fiscal guideline

The fiscal guideline calls for the Fund capital to be spent in a manner that provides a fair distribution between generations and that facilitates stable development in the Norwegian economy. These considerations need to be weighed against one other when assessing Fund spending.

On the one hand, Fund spending today needs to be weighed against the consideration that this wealth should also be available for spending in the future. Although this is often referred to as a matter of intergenerational distribution of the Fund capital, it also includes the consideration that current generations should have wealth available for future spending. The fiscal guideline facilitates preservation of the real value of the Fund. Spending that preserves the real value of the Fund will balance Fund spending today and in the future. A well-balanced distribution of the capital between generations also contributes to long-term economic stability.

On the other hand, consideration for a stable economic development from one year to the next suggests that significant weight should be accorded to the prevailing economic situation in the assessment of Fund spending. It is also important to ensure that the Fund spending does not in itself become a source of instability in the economy. The latter consideration means that especially large changes in the value of the Fund should not immediately result in major changes in Fund spending, and that changes in Fund spending should instead be modified over several years to avoid creating unstable conditions and contributing to abrupt booms and busts in the economy.

The fiscal guideline links Fund spending over time to the expected real return on the Fund, which is currently projected to be 3 per cent. To achieve this, it has in recent years been noted in the national budgets that Fund spending should in normal years, which will be most years, be well below 3 per cent. This is related to the need for an extra savings buffer that can be dipped into in the event of major economic setbacks or large Fund value reductions, and we can thereby avoid difficult policy changes involving major cuts in budget expenditure or significant tax increases; see Box 3.4 for further discussion.

Application of the guideline has become more challenging as the Fund has become more important to the fiscal budget and the economy. In addition, it can in coming years no longer be expected that a Fund value decline will be offset by Fund inflows from petroleum activities.

The fiscal guideline is flexible. A considerable degree of discretionary assessment is required in the application of the fiscal guideline in order to strike the right balance between the relevant considerations and to ensure that the guideline works as intended.

The structural non-oil fiscal deficit and automatic stabilisers

Fund spending is usually measured by the structural non-oil fiscal deficit, which is the non-oil fiscal deficit adjusted for cyclical fluctuations and other random fluctuations in individual revenue and expenditure items; so-called activity adjustment. See Appendix 1 for a more detailed description.

In a boom, it is normal for tax revenues to be high and unemployment benefit expenditure to be low, while the opposite is true in a recession. The structural fiscal deficit is adjusted for such cyclical factors. By linking Fund spending to the structural deficit, fiscal policy automatically has an expansionary effect during recessions and a contractionary effect during booms. Fiscal policy thereby contributes to stabilising economic development. Such fiscal policy effects are called automatic stabilisers and can be significant in the event of major cyclical fluctuations.

Fund spending forms part of an integrated budgetary process

The Government Pension Fund Act stipulates that Fund capital can only be transferred to the fiscal budget pursuant to a resolution of the Storting. This ensures Fund spending transparency by including and identifying such spending in the fiscal budget and the fiscal accounts. This means that the Fund capital forms part of an integrated budgetary process and is not earmarked for special purposes. This prevents the Fund from becoming an alternative source of funding for expenditure that is not prioritised in the ordinary budgetary process. The Government Pension Fund Act also stipulates that any fiscal deficit shall be covered by transfers from the Fund, rather than by borrowing, provided that the Fund capital has not already been exhausted.

Textbox 3.2 Fiscal and monetary policy should work in tandem

Major fluctuations in economic activity and employment will normally impose major costs on households and complicate planning. Consequently, economic policy aims to smooth out economic fluctuations and avert major booms and busts.

In the overall stabilisation policy, responsibility for monetary policy has been delegated to Norges Bank, while the Storting makes fiscal policy decisions based on proposals from the Government. Through a well-functioning labour market and responsible wage settlements, the Norwegian model for wage formation can contribute to permanently low unemployment and high employment compared with other countries.

A key stabilisation policy focus is to maintain stable and high employment, in order to make sure that people have jobs. A prerequisite for achieving this over time is low and stable inflation.

Monetary policy is best suited for, and is given the task of, controlling inflation. By changing the policy rate, Norges Bank can influence the Norwegian kroner exchange rate and overall demand for goods and services. All else being equal, a higher interest rate will make it more attractive to buy Norwegian kroner, thereby causing Norwegian kroner to appreciate. It will also cause investment plans to be postponed or scaled back, and will reduce the disposable income and consumption of households. Over time, this will reduce inflation. As a general rule, changing the interest rate level is an effective measure, since interest rate changes can be decided at short notice, can have a broad impact and can in many cases have a relatively rapid effect on the economy.

Fiscal policy also works by influencing the demand for goods and services, but is directed to a broader set of objectives and has a more finely meshed set of policy tools. The fiscal guideline is a long-term fiscal policy guideline, but also calls for a strong emphasis to be placed on smoothing out economic fluctuations; see Box 3.1.

There are nevertheless several reasons why it can be challenging to use fiscal policy very actively in stabilisation policy:

Implementation time: It often takes a long time from a fiscal policy measure is analysed and decided until it has any discernible effect on the economy. One example would be government investment projects. However, there are exceptions, such as modification of cash transfers under existing schemes.

Consideration for stability and predictability in welfare services and the policy framework: Large parts of the fiscal budget is comprised of expenditure that is necessary for a sound and well-functioning welfare system. It is not desirable to vary service provision as a part of stabilisation policy. Besides, many economic decisions depend on the general policy framework, including the tax system. Planning is easier when this framework is predictable. Under normal circumstances, policy framework changes will rarely be an appropriate stabilisation policy component.

Asymmetry in fiscal policy: It is generally more politically expedient to implement tax cuts than tax increases and, correspondingly, more expedient to implement expenditure increases than expenditure cuts. Active use of fiscal policy for stabilisation policy purposes would require any expenditure increase that boosts demand for goods and services to be swiftly reversed when the economy rebounds. This can be difficult in practice, and there is a risk that the fiscal deficit will grow over time if fiscal policy is given a key role in stabilisation policy.

These limitations mean that it will in periods of moderate cyclical fluctuations be appropriate for monetary policy to take centre stage in stabilisation policy. The most important contribution from fiscal policy will in such case be through the automatic stabilisers, i.e. the inherent budget features that serve to smooth out economic fluctuations. These include, in particular, the tax system and unemployment benefits.

In the event of major cyclical fluctuations it may nevertheless be necessary for fiscal policy to support monetary policy with active measures. In deep recessions, the policy rate may reach its effective lower bound close to zero, thereby preventing monetary policy from being sufficiently expansionary. Moreover, it may be necessary to use active fiscal policy to stimulate activity when there is a risk of prolonged recession, both to prevent unemployment from becoming entrenched at a high level and because long periods of very low interest rates may have unfavourable effects on risk-taking and financial stability. In addition, fiscal policy can work rapidly and effectively when there is a need for boosting household incomes, as during the pandemic. Fiscal policy should in such situations seek to stimulate the economy beyond the contribution from the automatic stabilisers. Fiscal and monetary policy should work in tandem in such scenarios.

Fiscal policy and monetary policy should also work in tandem during booms or periods of very high inflation, such as now. This is also recommended by both the International Monetary Fund (IMF) and the OECD.¹ Large interest rate increases can be very challenging to handle for those with high debt, and distributional and financial stability considerations may limit what level of interest rate increases is desirable. To limit the need for sharp interest rate hikes, fiscal policy should in such situations not add to the need for interest rate increases by boosting economic activity. The Government has emphasised this consideration in its budgets for both this year and next year. Fiscal policy must nevertheless mitigate the burden of high inflation for particularly vulnerable groups. Moreover, it is important to maintain stable and predictable public welfare services, and it is not desirable to cut these as part of stabilisation policy.

Textbox 3.3 Activity effects of fiscal policy in 2022–2025

When assessing how a budget programme influences economic activity, it needs to be taken into account that different revenue and expenditure items differ in their effect on activity. The Ministry of Finance uses the macroeconomic models KVARTS and NORA for this purpose.¹

The model calculations show that the Government’s budget proposal for 2024 has a more or less neutral effect on the level of economic activity in the fiscal year; see Tables 3.10 and 3.11. The revenue side of the budget is increasing by less than trend growth in the economy, due to lower revenues from the hydro power sector, amongst other things. This serves to increase the structural non-oil fiscal deficit as a share of mainland Norway trend GDP, but does not have much of a stimulating effect on the economy. The expenditure side is in aggregate growing somewhat slower than trend growth in the economy, which has a slight contractionary impact on the economy. All in all, the measured activity effect of the budget proposal for next year is therefore close to neutral. This contrasts with the fiscal impulse, i.e. the change in the structural non-oil fiscal deficit as a share of trend growth in the economy, which is positive. The fiscal impulse is a simple way of putting the change in Fund spending into perspective, as a share of mainland Norway GDP, but it primarily measures how the structural balance of the fiscal budget develops when we adjust for activity effects and other temporary factors. The budget effect calculations take into account the effects of so-called automatic stabilisers in the budget, i.e. that unemployment benefit expenditure increases and tax revenues fall in a recession, while the reverse happens during a boom. In addition, revenue and expenditure items (accrued) are analysed for the entire public administration.

The effects of fiscal policy in a single year will be subject to a time lag, and will therefore also be carried into subsequent years. The model calculations show that fiscal policy for 2022 and 2023 will also contribute to increasing the level of activity in 2024. Overall, fiscal policy for the years 2022–2024 serves to increase the level of activity next year by 0.4–0.6 per cent.

Just as fiscal policy in previous years has effects on the economy next year, the Government’s budget proposal for 2024 will also have effects on economic activity in the years following the fiscal year. For 2025, the budget proposal for 2024 is also projected to have a more or less neutral effect on the level of activity. This is based on the technical assumption that public revenues and expenditure will grow in line with trend GDP in 2025. If the expansionary effects of fiscal policy in the two previous years (2022 and 2023) are included, the model calculations indicate that the fiscal policy contribution over the period 2022–2024 will, in itself, serve to increase mainland GDP in 2025 by 0.3–0.7 per cent.

Textbox 3.4 Asymmetric considerations in the application of the fiscal guideline

The fiscal guideline calls for Fund spending over time to be in line with the expected real return on the Government Pension Fund Global (GPFG); see Box 3.1, The fiscal policy framework.

The value of the Fund is now almost four times the annual value of production in the mainland economy. The size of the Fund and its mounting importance in financing the welfare state mean that fiscal policy is more vulnerable to long-lasting reductions in the value of the Fund than previously. It has in the national budgets in recent years been noted that in order to comply with the fiscal guideline over time, and at the same time avoid difficult policy changes involving major cuts in budget expenditure or significant tax increases following large reductions in the value of the Fund, Fund spending should in normal times be well below 3 per cent.

A similar need arises as a result of the economy periodically undergoing major and sudden downturns. These may take the form of a financial crisis, a substantial oil price slump, a pandemic, or a war or crisis in our neighbouring region that triggers a major slump. These episodes are not normally matched by correspondingly large and sudden booms. When such sharp downturns occur, it is often desirable to pursue an expansionary fiscal policy to cushion the impact on economic activity and employment. This entails a weakening of the fiscal balance that cannot be expected to be matched by any automatic strengthening when the crisis is over. Moreover, it may take time to phase out crisis expenditure, as it may not be desirable to swiftly reverse measures that have been introduced, as this may involve abrupt public sector downsizing or terminating projects prior to their completion.

Crises are asymmetric in nature. Similarly, the cost of major budget modifications is asymmetric; it is more politically challenging to implement large expenditure cuts or tax increases than to implement correspondingly large expenditure increases or tax cuts.

This box presents a simple model analysis that quantifies what level of Fund spending in normal times that will ensure compliance with the fiscal guideline over time, despite the economy being faced with such asymmetries. This “asymmetry buffer” will depend on how often crises occur, how much Fund spending is increased in times of crisis and, how challenging it is to cut expenditure or increase taxes after a period of high Fund spending. The analysis finds that Fund spending should be around 2.7 per cent in normal times, when taking into account that it is more challenging to reduce high Fund spending in the aftermath of crises or Fund value reductions than it is to increase Fund spending. The magnitude of the buffer depends on the ability and willingness to modify fiscal policy. The faster one is able to phase out temporarily large fiscal deficits, the closer Fund spending can be to the expected real return in normal times.

A model for Fund spending over time

The analysis is conducted by way of a macrofinancial model developed by the Ministry of Finance.¹ This is an empirically based model that simulates developments in, inter alia, oil and gas prices, the international stock market and the economic situation in Norway. In addition to these relationships, Fund spending needs to be specified.² To keep the model simple, specific public expenditure and tax decisions are disregarded. Instead, actual Fund spending, i.e. the non-oil fiscal deficit, is modelled directly. It is useful to break down the Fund spending in the following way:

Structural spending is comprised of underlying spending from the Fund, which is driven by the market value of the Fund, and discretionary countercyclical fiscal policy, which is driven by unemployment and crises. It is assumed that underlying spending adapts to changes in the value of the Fund over time, although it is easier to increase spending than it is to reduce it. The countercyclical spending will be asymmetric in nature, as major crises are not matched by correspondingly booms. However, this spending can also be assumed to be even more asymmetric, in that spending is swiftly increased during a recession or crisis, while it takes a fair bit of time to reduce spending when the economic situation improves.

Automatic stabilisers describe the fiscal balance effects of how tax revenue and unemployment benefits expenditure vary with the level of economic activity. This is captured in the model by letting the deficit vary with unemployment and crises. The automatic stabilisers will also be asymmetric in nature, as major crises are not matched by corresponding booms. It is assumed that expenditure increases due to the automatic stabilisers will be immediately reversed when the situation improves.

Underlying spending is gradually moving around a level of Fund spending corresponding to

In order to quantify the parameters that determine Fund spending in this model, we have looked at developments in Fund value and Fund spending in Norway over the period from 2004 to 2024. Several of the parameters can be quantified on the basis of these data, but it is difficult to obtain precise estimates with so few observations. It is also challenging to quantify how slowly spending will adapt to a Fund value decline or how quickly it will be reversed after a crisis. During both the financial crisis and the pandemic, the post-crisis Fund value was significantly higher than the pre-crisis Fund value, thus implying that spending did not necessarily have to be reversed to pre-crisis levels. In the calculations, we will therefore base the results on different sets of assumptions to highlight the importance of various channels.

Model simulations

Using simulations on this model, it can be estimated what spending percentage in normal times,

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Source: Ministry of Finance.

The simulations show how the asymmetry buffer is based on three considerations:

1. Crises are inherently asymmetric. In the model, crises occur about once a decade. It is assumed that the countercyclical policy during crises is equivalent to 4 per cent of GDP. This entails a need for an asymmetry buffer, even if we assume that Fund spending otherwise varies symmetrically around the normal spending percentage. Rare, but regular, crises increase the average spending percentage. In itself, this consideration suggests that an asymmetry buffer of around 0.1 percentage points should be assumed in normal times; see the first bar in Figure 3.22.³

2. Asymmetric adjustment to changes in Fund value. It is more difficult to reduce underlying spending than it is to increase it. This constitutes another source of asymmetry. If we add this to the effect of potential crises, the asymmetry buffer increases to around 0.2 percentage points; see the second bar in Figure 3.22.

3. Slow phaseout of countercyclical policies. It takes longer to reverse temporarily large deficits caused by crises or other cyclical fluctuations than it takes to increase deficits when a crisis occurs. This extends the policy asymmetry from the previous paragraph to include both deficits resulting from underlying spending and discretionary countercyclical policy. This consideration serves to further increase the asymmetry buffer, to 0.3 percentage points.

The effects of crisis expenditure and slow adjustment reinforce each other. The explanation is simple: Slow adjustment means less when large deficits are a rare occurrence. And crisis expenditure means less when it can be reversed quickly. If high crisis expenditure is combined with slow reversal, the impact on the asymmetry buffer may be significant.

Significance for application of the fiscal guideline

The fiscal guideline calls for Fund spending over time to be in line with the expected real return. However, asymmetric features of the economy and of fiscal policy suggest that it is in normal times necessary to aim for a level of Fund spending that entails an “asymmetry buffer” to compensate for excess expenditure that occurs during periods of large deficits. The simulations show that Fund spending should in normal times be 0.3 percentage points less than the expected real return when taking into consideration that it is difficult to quickly reduce Fund spending again after it has increased sharply. This entails aiming for a spending percentage of 2.7 per cent during normal times. The estimate depends on how the model is quantified, and other assumptions could have resulted in both a larger and a smaller buffer.

The size of the buffer depends on the ability and willingness to adjust fiscal policy. The more swiftly temporarily large fiscal deficits can be phased out, the closer to the expected real return Fund spending can be in normal times. However, it is not always a goal to reverse expenditure quickly – there may be sound reasons for avoiding, for example, abrupt public sector downsizing or the cancellation of uncompleted projects. Aiming for a spending percentage that includes an asymmetry buffer facilitates such considerations.

Textbox 3.5 Effects of a weaker Norwegian krone exchange rate on the Norwegian economy

Over the past year, Norwegian kroner have depreciated markedly against the currencies of our trading partners. We use the macroeconomic model NORA to analyse the various effects of Norwegian kroner depreciation on the Norwegian economy. The model shows that Norwegian kroner depreciation can provide a significant export stimulus, while lowering investments and private consumption. The sum total of these effects in the model is that there is little impact on the overall level of activity, but that depends on how monetary policy responds. Norwegian kroner depreciation also increases inflation and, through increased profitability in the sector exposed to international competition, wage growth. Public finances improve in the short term when Norwegian kroner depreciate. This is because the domestic purchasing power of the Government Pension Fund Global (GPFG) is temporarily increased when Norwegian kroner depreciate. In addition, tax revenues increase as a result of temporarily high profitability in the export sector.

The Norwegian kroner exchange rate influences the Norwegian economy in various ways

Over the past year, Norwegian kroner have depreciated markedly against the currencies of our trading partners. This influences the Norwegian economy in various ways, including:

• higher exports because international competitiveness is improved by making Norwegian goods and services cheaper when measured in foreign currency;

• higher consumer price inflation and thereby weaker purchasing power development and weaker private consumption development;

• higher wage growth because Norwegian kroner depreciation means an ability to pay higher wages in the manufacturing industry, which is traditionally the first sector to negotiate in the Norwegian model for wage formation;

• higher interest rates because inflation is rising and Norges Bank is pursuing an inflation target;

• increased value of the Government Pension Fund measured in Norwegian kroner, and thereby a higher trajectory for the expected return on the Fund. Norwegian kroner depreciation will also influence the fiscal room for manoeuvre through its effect on macroeconomic variables such as inflation, foreign trade, employment and wage growth, which in turn have implications for public finances.

All in all, Norwegian kroner depreciation will influence virtually all economic variables in the Norwegian economy. We have in this box used the macroeconomic model NORA¹ to shed more light on this. NORA is a general equilibrium model that pays heed to the behaviour and expectations of economic agents. In the model, the responses of economic agents depend on how permanent the Norwegian kroner depreciation is expected to be. The effects will be weak if the depreciation is expected to be transient and temporary, while the effects will be stronger if the depreciation is persistent.

In the analysis, we assume that Norwegian kroner depreciate immediately by 10 per cent as a result of an increase in the risk premium on Norwegian kroner; see Table 3.12. This may happen, for example, if increased uncertainty among international financial market investors causes them to divest Norwegian kroner. The depreciation is fairly persistent, and the exchange rate remains about 5 per cent weaker after two years.

Increased exports, but lower consumption and investments

Norwegian kroner depreciation will result in goods produced in Norway becoming cheaper relative to foreign goods. Economic activity in Norway is thus stimulated through increased exports of Norwegian goods combined with lower imports of foreign goods. On the other hand, economic activity is curtailed by lower consumption and investments. This is a result both of higher import prices and of the central bank in the model pursuing a tighter monetary policy to bring inflation back to the inflation target. All in all, Norwegian kroner depreciation will have moderate positive effects on GDP; see Table 3.12, but noticeable effects on the composition of GDP. Figure 3.23 shows the deviation from the baseline scenario for mainland GDP, decompiled into the contributions from private consumption, investments and net exports, respectively.

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Source: Ministry of Finance.

Norwegian kroner depreciation results in higher inflation. Figure 3.24 shows the deviation from the baseline scenario for consumer price inflation decompiled into the contributions from imported and domestic inflation, respectively. It shows that the initial increase in inflation is solely due to the contribution from imported inflation, while domestic inflation will also gradually contribute over time, which amplifies the increase in inflation.

An important reason why domestic inflation increases is higher wage growth. In the NORA model, wages are determined through bargaining between a trade union and representatives of the sector exposed to international competition, in line with the Norwegian model for wage formation.² The parties will take into account the macroeconomic situation, including how long the economic disruption is expected to last. When Norwegian kroner depreciation leads to higher profitability in the manufacturing industry, this serves to increase wages, although there is a time lag between profitability changes and wage growth changes. Over time, higher interest expenses will have the opposite effect on profitability, thereby resulting in lower real wages. Real wages increase by 0.3 per cent in the first year, but will after a few years be lower than in the baseline scenario, when the interest rate effect dominates and reduces profitability. In the model analysis, economic agents are assumed to have precise knowledge of the duration of the Norwegian kroner depreciation. In reality, uncertainty in this regard may result in a somewhat different and more sluggish wage growth response than described by the model.

Norwegian kroner depreciation strengthens public finances

Norwegian kroner depreciation influences public finances because the Government Pension Fund increases in value measured in Norwegian kroner, thereby shifting the expected Fund return trajectory upwards. The increase in the first year is equivalent to 0.5 per cent of mainland GDP; see Table 3.13. In subsequent years, the effect diminishes as Norwegian kroner appreciate somewhat and the domestic price level increases. Norwegian kroner depreciation improves the domestic purchasing power of the Fund capital as long as the real exchange rate is also weaker.

Higher wage and price growth also influences public revenues and expenditure. The main effect on the revenue side comes through the effect of Norwegian kroner depreciation on manufacturing industry earnings, which in the model results in higher operating income, higher dividend income for owners and higher wages for employees. In total, this will strengthen the revenue side by 0.5 per cent of mainland Norway trend GDP in the first year and by 0.4 per cent in the second year. In the long term, when all prices have been adjusted, the effect is neutral, as all revenue components have been normalised and are growing in line with mainland GDP.

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Source: Ministry of Finance.

On the expenditure side, we make the technical assumption that the real level of public expenditure remains unchanged when inflation changes.³ Consequently, higher inflation and wage growth will lead to increased public expenditure measured in current prices, primarily through higher prices of goods and services and wages that form part of consumption expenditure and investment, as well as increased transfers. Measured as a share of mainland Norway trend GDP, the expenditure side is more or less neutral since expenditure grows roughly in line with trend.

Overall, the fiscal room for manoeuvre is expanded in the short term. Whether such expanded room for manoeuvre should be used needs to be assessed on the basis of applicable fiscal policy guidance. The fiscal guideline stipulates that major changes in the value of the Fund should not immediately result in major changes in Fund spending, which should instead be adjusted over several years. In the short term, Fund spending should also be adjusted to the economic situation. This white paperhighlights the importance of fiscal policy working in tandem with monetary policy, so as not to put undue upward pressure on interest rates. This calls for fiscal policy restraint when exchange rate depreciation exerts upward pressure on price and wage growth in the economy, while the impact on activity levels and unemployment is fairly modest.

In the long term, the effect of the Norwegian kroner depreciation on the budget and expected Fund return is neutral, i.e. revenue, expenditure and expected Fund return will then be unchanged as a share of nominal mainland GDP. The long-term effect of the Norwegian kroner depreciation is an increase in nominal values measured in Norwegian kroner, but in real terms the long-term situation is the same as in the baseline scenario. This clearly illustrates how the Norwegian kroner depreciation, regardless of how persistent it is, can only have a temporary effect on the domestic purchasing power of Fund returns. In the long term, domestic prices adjust, neutralising the purchasing power improvement resulting from the Norwegian kroner depreciation.