A responsible budget to underpin continued stable developments

The Norwegian economy continues to perform well, with economic growth near trend and low unemployment. However, a high cost level poses challenges for the trade exposed industries.

- In such a situation the Government stresses the need for fiscal prudence to support a continued stable development of the Norwegian economy, says Minister of Finance Sigbjørn Johnsen.

The Government proposes a Fiscal Budget for 2014 with a demand impetus of ¼per cent of Mainland GDP. The structural non-oil deficit is estimated at NOK135billion, equivalent to 2.9 per cent of the value of the Pension Fund Global and NOK 54 billion below the estimated real return on the fund, referred to as the 4 per cent path of the Fiscal Policy Guidelines. Taking account of the composition of the revenue and expenditure side, the budget is estimated to have a close to neutral effect on employment and production.

- Within the overall balance, the main priorities in the budget are to strengthen key welfare provisions and increase investments in transportation, says Minister of Finance Sigbjørn Johnsen.

Growth in Mainland-GDP is now forecast at 2.2 per cent in 2013 and 2.7 per cent in 2014, compared to an average annual growth of 2.6 per cent over the last 40 years. This year, growth is being slowed by 0.3percentage point due to a decline in hydropower generation, which represents the main source of electricity in Norway. The main underlying driving forces are household demand and petroleum sector investments. The labour market remains strong, with employment growth close to trend and an unemployment rate at around 3½ per cent. Employment is now 85,000 higher than at the peak before the financial crisis, supported by immigration.

 
Fiscal Policy
The Government is committed to the 2001 Fiscal Policy Guidelines. The guidelines stipulate a gradual and sustainable use of petroleum revenues in step with the expected real return on the Government Pension Fund Global, estimated at 4 per cent. Automatic stabilisers are allowed to work fully over the business cycle. Monetary policy is the first line of defence if the economy is exposed to shocks, but the guidelines also allows for countercyclical fiscal policy.

The government made ample use of this flexibility in 2009, when the spending of petroleum revenues was rapidly increased in order to mitigate the effects of the global recession on production and unemployment. However, since 2010 the spending of petroleum revenues has been kept below the 4 per cent path. This strategy underpins a continued balanced development of the Norwegian economy in a situation with growth around trend and rapidly increasing Fund capital. In such a situation, spending of oil revenues in line with the expected return on the Fund (the 4‑percent path) would have provided the economy with too strong a boost, contrary to the objective of stable economic development.

The main features of fiscal policy in 2014:

• Spending of petroleum revenues, as measured by the structural non-oil budget deficit is estimated at NOK 135.1 billion. This is NOK 54 billion below the 4 per cent path, and equivalent to 2.9 per cent of the value of the Pension Fund Global.
• The real underlying growth in budget expenditures from 2013 to 2014 is estimated at 2.5 per cent, of which more than one third stems from growth in pensions. In nominal terms the expenditures is estimated to increase by 5.5 per cent.
• The non-oil fiscal budget deficit is estimated at NOK 133 billion. The deficit is covered by a transfer from the Pension Fund Global.
• Net cash flow from petroleum activities is estimated at NOK 314 billion.
• The consolidated surplus on the Fiscal Budget and the Government Pension Fund, including NOK 147 billion in interest and dividends, is estimated at NOK 328 billion (corresponding to 10.6 of GDP).
• Unchanged level of taxation.

 

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 is to balance the need for low and stable inflation against the outlook for production and employment. The operational target for the implementation of monetary policy is defined as an annual increase in consumer prices of close to 2.5per cent over time. The key policy rate has been 1.5per cent since March 2012.

Government Pension Fund
The purpose of the Government Pension Fund is to facilitate government savings to finance rising public pension expenditures and support long term consideration in the spending of government petroleum revenues.

The government cash flow from the petroleum activities is transferred to the Government Pension Fund Global. Over time, the transfer back to budget should equal the estimated real return on the Fund. The capital of the Fund is invested abroad in international equities, fixed-income and real estate, within guidelines set by the Ministry of Finance. The investment strategy is to achieve high financial returns subject to a moderate level of risk.

The market value of the Government Pension Fund is now estimated at NOK 5 366 billion at the end of 2014, of which 5203 billion in the Government Pension Fund Global.

 Key figures for the Norwegian economy¹⁾

	2012 NOK billion2)3)	2012	2013	2014
Private consumption	1175.0	3.0	2.3	2.7
Public consumption	619.5	1.8	2.6	2.2
Gross fixed investments	598.0	8.0	5.1	5.1
Petroleum	171.8	14.5	9.0	7.5
Business sector. Mainland Norway	180.9	3.2	1.6	5.5
Exports	1183.0	1.8	-1.6	3.2
Crude oil and natural gas	604.4	0.9	-5.5	4.2
Traditional goods	310.3	2.6	0.1	2.6
Imports	798.8	2.4	3.3	4.3
Traditional goods	486.0	2.7	3.2	3.5
Gross domestic product	2906.8	3.1	0.9	2.7
Mainland Norway	2200.3	3.4	2.2	2.7
Consumer price inflation (CPI)		0.8	1.9	1.6
Underlying inflation (CPI-ATE)		1.2	1.5	1.8
Wage growth		4.0	3½	3½
Employment growth		2.2	1.1	1.0
Unemployment rate (LFS)		3.2	3.4	3.5
Crude oil per barrel. NOK2		649	623	600
Current account balance (pct. of GDP)		14.2	11.1	10.5

1) Percentage volume change from the year before.
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

	2012	2013	2014
1. Fiscal Budget
Total revenues	1 290.7	1286.0	1295.0
Revenues from petroleum activities	421.1	373.9	344.1
Revenues excl. petroleum activities	869.6	912.0	950.9
Total expenditures	996.1	1058.5	1114.0
Expenditures on petroleum activities	25.6	30.0	30.0
Expenditures excl. petroleum activities	970.5	1028.5	1084.0
Fiscal budget surplus before transfers to the Pension Fund Global	294.6	227.5	181.0
Net revenues from petroleum activities	395.5	343.9	314.1
= Non-oil budget surplus	-100.9	-116.5	-133.1
+ Transfers from the Pension Fund Global	104.6	116.5	133.1
= Fiscal Budget surplus	3.7	0.0	0.0
2. Government Pension Fund
Net transfer to the Pension Fund Global	290.9	227.5	181.0
+ Interest and dividends on the Pension Fund	115.3	129.4	146.6
= Surplus in the Pension Fund	406.2	356.9	327.6
3. Fiscal Budget and Government Pension Fund consolidated surplus	409.9	356.9	327.6

Source: Ministry of Finance.

 

General government financial balance. NOK billion

	2012	2013	2014
A. Central government financial balance    Fiscal Budget surplus and Surplus in Government Pension Fund	440.2 410.0	366.4 356.9	338.8 327.6
Non-oil budget surplus       Net revenues from petroleum activities       Interest and dividends on the Pension Fund	-100.9 395.5 115.3	-116.5 343.9 129.4	-133.1 314.1 146.6
Surplus in other central government and social security accounts	1.3	3.1	3.1
Definitional differences between Fiscal Budget and    national accounts1	29.1	6.5	8.0
B. Local government financial balance	-22.2	-23.7	-23.5
C. General government financial balance (A+B)	418.0	342.7	315.3
In per cent of GDP	14.4	11.5	10.2

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.