6 October 2004
Øystein Olsen, telephone +47 22 24 45 00 / mobile phone +47 91 82 79 44, Sigrid Russwurm, telephone 22 24 45 55 / mobile phone +47 99 16 89 14
Fiscal Budget 2005 – A Good Basis for Continued Growth
The growth of the Norwegian economy is robust, and employment has picked up. A broadly neutral fiscal stance has over the past couple of years facilitated an expansionary monetary policy, and the krone exchange rate is now more in line with its level prior to the strengthening starting in 2000. As a result, the outlook for the exposed sectors is improved. Low interest rates have fuelled the growth in domestic demand. The proposed budget for 2005 provides a good basis for continued growth in the mainland economy. With a modest net tax relief, and a real spending growth of 1¾ per cent, the Fiscal Budget for 2005 provides an overall neutral stance.
Growth in Mainland Norway GDP (i.e. excluding petroleum and shipping) is forecast at slightly above 3 per cent both in 2004 and 2005. Employment growth has picked up and is estimated at 0.8 per cent in 2005. Labour force growth has so far dampened the decline in unemployment. The unemployment rate is estimated to average 4.1 per cent in 2005, down 0.3 percentage points from 2004 average.
As set out in the guidelines for economic policy (Report 29 (2001-2002)) fiscal policy shall be geared towards a gradual and sustainable increase in the use of petroleum revenues. Over time, the structural, non-oil budget deficit shall correspond to the real return on the Government Petroleum Fund. However, the actual implementation of fiscal policy must take into account business cycle fluctuations around the suggested medium term path. A pension reform is an important element in securing fiscal sustainability in the long run. As a follow-up of the Pension Committee’s report delivered earlier this year, the Government plans to present a report on a pension reform to the Parliament during the present year. Moreover, the implementation of a tax reform aims at stimulating labour supply, and strengthening the business sector.
Economic policy aims at stabilizing developments in production and employment. In the present phase of the business cycle, where the growth of the Norwegian economy is about to become more balanced, an expansionary fiscal policy could trigger a renewed strengthening of the Norwegian krone and a weakening of the exposed sector. This would be unfortunate. Measured by its impact on Mainland GDP, however, the 2005 budget implies an approximately neutral fiscal stance.
The main features of fiscal policy in 2005 are:
In March of this year, the Government passed a report to the Storting on tax reform (Report no. 29 (2003-2004)). The main objectives are to achieve a more fair taxation of labour income and to stimulate labour force participation. The tax proposals in the 2005 budget include a first step of the reform. The main proposals pertaining to the tax reform are:
Further tax changes in the 2005 budget proposal, not directly linked to the tax reform, include, inter alia:
In sum, the Government’s proposals on direct and indirect taxation involve a certain shift of the total tax burden away from income taxes towards consumption. The proposed changes imply a net reduction in taxes paid of NOK 1.65 billion from 2004 to 2005. New tax measures entail net tax reductions amounting to about NOK 3.3 billion on an accrued basis.
During this parliamentary period and including proposals in the 2005 budget, the overall net tax relief amounts to some NOK 21.6 billion.
More detailed information in English on the tax proposals contained in the 2005 budget is available here.
Norges Bank’s implementation of monetary policy is geared to maintaining low and stable inflation (confer Report no. 29 to the Storting (2000-2001)). The operational target is defined as an annual increase in consumer prices of close to 2.5 per cent over time. As a main rule, it is expected that consumer price increases will fall within an interval of +/- 1 percentage point from the inflation target. 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 costs increases.
The regulation 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 must balance the need for low and stable inflation against the outlook for output and employment.
Since December 2002, Norges Bank has reduced its key interest rate (the sight deposit rate) by 5.25 percentage points. The sight deposit rate now stands at 1.75 per cent.
The Government Petroleum Fund
At the end of the second quarter 2004, the market value of the Government Petroleum Fund was NOK 942.4 billion. The market value is now estimated to grow to NOK 1 053 billion at the end of 2004 and to reach NOK 1 244 billion at the end of 2005.
In the Revised National Budget 2004 the Government proposed a set of ethical guidelines for the Petroleum Fund, which was endorsed by the Parliament. The Government will in late 2004 appoint an Ethical Council for the Petroleum Fund. The Council will, in accordance with the ethical guidelines, advice the Ministry of Finance on specific companies that should be excluded from the Petroleum Fund.
Outlook for the Norwegian Economy
After two years of weak growth, the mainland economy picked up from the second half of 2003. Low interest rates and high real income growth have stimulated domestic demand, and the growth in private consumption and housing investment have been strong. Household demand remains the main driving force for growth both in 2004 and 2005. Weaker krone exchange rate and stronger growth internationally have improved the outlook for the exposed industries. Growth in exports of traditional goods has been moderate, but will be somewhat stronger next year, according to revised estimates. Mainland GDP is estimated to increase by slightly over 3 per cent both in 2004 and 2005.
The upswing in the mainland economy is reflected in the labour market. Employment has picked up and the number of vacancies has increased. However, an increase in the labour force has so far dampened the decline in the unemployment rate. According to the Labour Force Survey, the seasonally adjusted unemployment rate was 4.5 per cent in the second quarter of this year, 0.2 percentage point lower than one year earlier. On an annual basis, the unemployment rate (Labour Force Survey) is now estimated to decline from 4.4 per cent in 2004 to 4.1 per cent in 2005.
Consumer price inflation has been low so far this year, due to weak growth in housing rents, falling import prices and increased competition in some domestic sectors. The growth in the consumer price index (CPI) is expected to pick up from ½ per cent this year to 2¼ per cent next year. The pick-up in CPI growth is partly due to increasing prices on imported consumer goods and an increase in VAT of 1 percentage point from 1 January 2005. Adjusted for changes in excise duties and excluding energy prices, consumer price inflation (CPI-ATE) is expected to pick up from ¼ per cent in 2004 to 1¾ per cent in 2005.
Wage growth has decreased since 2002 and is estimated to average 3¾ per cent in 2004. Due to a higher wage carry-over, wage growth is forecast at 4 per cent in 2005.
Key projections for the Norwegian economy. Volume change from previous year. Per cent
Gross fixed investments
Business sector, Mainland Norway
Crude oil and natural gas
Gross domestic product
Consumer price inflation (CPI)
Core inflation (CPI-ATE)
Household savings rate. Per cent of net disposable income
Current account balance, NOK billion
Source: Statistics Norway and Ministry of Finance
Key figures for the Petroleum sector
Crude oil. NOK per barrel
Production. Mill. sm3 oil equivalent
Crude oil and NGL
Accrued taxes and royalties
Paid taxes and royalties
Net cash flow
Source: Ministry of Petroleum and Energy and Ministry of Finance.
Central government net lending (surplus). NOK billion
Fiscal Budget surplus
+ Surplus in Government Petroleum Fund
+ Surplus in other central government and social security accounts
+ Definitional differences between Fiscal Budget and national accounts
+ Direct investment in state enterprises
= Central government net lending
+ Local government surplus, accrued value
= General government net lending
In per cent of GDP.
Source: Statistics Norway and Ministry of Finance.
Key figures for the Fiscal Budget (incl. social security) and the Government Petroleum Fund before loan transactions. NOK billion.
1. The Fiscal Budget
Revenues from petroleum activities
Revenues excl. petroleum activities
Expenditures on petroleum activities
Expenditures excl. petroleum activities
Surplus before transfers to the Petroleum Fund
- Revenues from petroleum activities
= Non-oil budget surplus
+ Transfers from the Petroleum Fund
= Fiscal Budget surplus
2. Government Petroleum Fund
Revenues from petroleum activities
- Transfers to the Fiscal Budget
+ Dividends on the Petroleum Fund
= Surplus in the Petroleum Fund
3. Fiscal Budget and Petroleum Fund surplus
Source: Ministry of Finance.