Norway Unveils 2008 Budget

By Ulrika Lomas, for LawAndTax-News.com, Brussels

21 May 2008

The Norwegian Government last week unveiled the country's 2008 Budget, stating that there has been a continuation of the recent strength in economic growth, and highlighting a rise in Government revenues.

According to the Norwegian authorities, growth in Mainland-GDP has averaged close to 5% over the past four years, far exceeding the estimated trend growth of the Norwegian mainland economy.

Growth above trend is expected also in 2008, although developments in the last few months indicate that growth is slowing. The forecast for growth in Mainland-GDP is now 3.2% in 2008. Employment growth is estimated at 2.4% in 2008 and the unemployment rate is expected to flatten out at 2.4%.

The guidelines for economic policy, in place since 2001, stipulate that fiscal policy shall be directed towards a gradual and sustainable increase in the use of petroleum revenues, and the Government has estimated that over time, the structural non-oil central government budget deficit shall correspond to the expected real return on the Government Pension Fund – Global, estimated at 4%.

However, it has been stipulated that fiscal policy must take into account business cycle fluctuations around the medium term path. In a cyclical expansion, fiscal policy restraint relative to the spending rule is called for, whereas in a cyclical downturn somewhat higher spending of oil revenues can be justified.

Long-term budget challenges, due to increases in pension costs and other age-related expenses, underline the importance of a continued prudent fiscal policy stance.

The Government proposes a revised Fiscal Budget for 2008 with a structural, non-oil budget deficit of NOK73.9bn which is NOK2.9bn lower than in the approved budget, and NOK7bn lower than the expected real return on the Pension Fund.

Higher tax and excise revenues, and increased dividends have contributed to reducing the structural, non-oil budget deficit, whereas overall budget expenditures are revised up.

Increased appropriations to the health sector to cover an unforeseen strong increase in pension premium, and certain climate policy initiatives are the major expenditure items.

The Government proposes only minor changes to the tax rules in the revised fiscal budget.

The main features of fiscal policy in 2008 are:

• A structural, non-oil budget deficit of NOK73.9bn, which is NOK2.9bn lower than in the approved budget for 2008 and NOK7bn lower than the expected return on the Government Pension Fund – Global.
• A structural, non-oil budget deficit corresponding to 4.3% of Mainland trend-GDP.
• A real underlying growth in budget expenditures of 3.25% from 2007 to 2008, which is 1 percentage point higher than estimated in the National Budget 2008. The increase must be seen in the context of a downward revision of budget expenditures in 2007.
• A non-oil fiscal budget deficit of NOK13bn, which is NOK23.4bn lower than in the approved budget for 2008. The deficit is covered by a transfer from the Government Pension Fund-Global.
• A central government net cash flow from petroleum activities of NOK356bn. This is almost NOK54bn higher than estimated in the approved budget.
• A net transfer to the Government Pension Fund – Global of NOK343bn.
• A consolidated surplus in the Fiscal Budget and the Government Pension Fund – Global of about NOK424bn.
• An estimated market value of Government Pension Fund of NOK2,427bn by the end of 2008, whereof NOK2,316bn in Government Pension Fund – Global. Old age pensions obligations under the National Insurance Scheme is estimated at NOK4,551bn (accrued) by the end of 2008.
• An increase in total revenues for local governments of 1.4% from 2007 to 2008.
  

The government further observed that in general, growth in the Norwegian mainland economy has been strong for the past four years, with an annual GDP growth of close to 5%.

This is the strongest economic expansion in a four-year period since the 1960s. Domestic demand has been fuelled by strong income growth and low interest rates. Profitability in the business sector, coupled with increasingly higher capacity utilisation has contributed to strong investment growth in the mainland business sector.

Vigorous growth in the petroleum investments has also provided important growth impetus to domestic demand.

There are now signs of slowing growth in the mainland economy. Housing starts have declined in the past few months, growth in consumption has dampened and exports of traditional goods are slowing down.

However, growth in petroleum investments continues to be vigorous.

Growth in Mainland - GDP is estimated at 3.2% in 2008, indicating a fifth year running with growth well above trend.

Employment growth has been exceptionally strong and the unemployment rate is now at a 20 year low. Demand for labour continues to be high, and many companies are still having difficulties in finding qualified labour.

However, the unemployment rate has started to flatten out, and the shortage of qualified labour has become less urgent in some sectors. The unemployment rate is forecast at 2.4% in 2008.

The tightening of the labour market has resulted in higher wage growth. Based on the wage negotiations concluded so far, annual wage growth is estimated at 5.5% in 2008.

Higher inflation on domestically produced goods and services has contributed to an underlying price inflation that is close to the operational target for monetary policy. The consumer price index adjusted for changes in excise duties and excluding energy, (CPI-ATE), is expected to increase by 2.4% in 2008, compared to 1.4% in 2007.

Looking to the future, headline inflation (CPI) is expected to increase from 0.8% in 2007 to 3.2% this year, the Budget report suggested.

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