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Budgeting in Norway

Working party of Senior Budget Officials, OECD Morten Baltzersen

June 2006

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Finansdepartementet

Norway has a strong economy

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GDP per capita. 2003adjusted for purchasing power. USD

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Finansdepartementet

GDP

• Average growth in GDP 1995-2005:

• 3,3 % US• 2,0 % Euro-area

• Average growth in GDP 1995-2005 in Norway:

• 2,8 % GDP• 3,1 % mainland GDP 0

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GDP growth in Norway

GDP

Mainland GDP

Mainland average

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Finansdepartementet

Strong growth in labour productivity

Labour productivity of the total economy, year 2000 equals 100

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NorwayUSAEuro-area

Average growth in labour productivity 1994-2004:

• Norway 1,8 %

• US 2,0 %

• Euro-area 0,9 %

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High labour market participation rate

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USAEuro-areaOECDNorway

Labour participation rateLabour market participation rate for population between 15-64 years in 2004:

• Norway 79,2 %

• US 75,4 %

• OECD 70,1 %

• Euro-area 71,4 %

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Finansdepartementet

..and low unemployment

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Unemployment rate

Unemployment rates in 2005:• Norway 4,6 %

• US 5,1 %

• OECD 6,5 %

• Euro-area 8,7 %

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Finansdepartementet

High financial investments

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USAEuro-areaOECDNorway

General government’s net lending, pct. of GDP

General government’s net lending as share of GDP in 2005:

• Norway 15,9 %

• US -3,7 %

• OECD -3,2 %

• Euro-area -2,9 %

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Finansdepartementet

Negative net financial liabilities

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USAEuro-areaOECDNorway

General government’s net financial liabilities, pct. of GDP

General government’s net financial liabilities share of GDP in 2005:

• Norway -89,3 %

• USA 45,7 %

• OECD 46,5 %

• Euro-area 57,2 %

The Government Pension Fund – Global• 250 bill. US$ (01.01.06)• 81,7 % of net financial wealth

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Finansdepartementet

Public sector

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Government’s expenditures, pct. of GDP

Government’s expenditures share of GDP in 2005:

• Norway 39,9 %

• Industrial countries 40,9 %

• EU-15 47,3 %

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Finansdepartementet

Future pensions

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Pension expenses under the National Insurance Scheme and net oil and gas revenues, as share of mainland GDP

Pensions

Net oil and gas revenues

•Effective retirement age has decreased.

•Share of elderly is growing.

•Expenditure on pensions will increase substantially.

•The petroleum revenues do not cover future pension liabilities.

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Finansdepartementet

Fiscal policy rule

• Petroleum income should be phased into the economy on par with the development in expected return on the Petroleum fund (Government Pension Fund - Global)

• Considerably emphasis must be put on stabilising the economy

In practice:• Over time, the structural, non-oil budget deficit shall correspond to the

real return on the Government Petroleum Fund, estimated at 4 per cent. • Calculation of expected real return is based on the value of the Fund at

the beginning of the year. This way we avoid uncertainty about oil prices during the year, but fluctuations in exchange rates and the stock market can influence the real return and value of the fund considerably.

• This underpins why the rule should not be used mechanically, and considerable emphasis should be placed on stabilising economic fluctuations.

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Finansdepartementet

Medium-term budgetary framework

• The fiscal rule anchors fiscal policy in the medium and long term: Frame for total spending of oil revenues. Comparable to multi annual aggregated spending

ceilings by limiting non-oil budget deficits.• Multi annual appropriations:

Would reduce the fiscal flexibility by “protecting” expenditure programs from budget cuts.

Multi year appropriations would easily form a floor in the future budget negotiations rather than a ceiling.

• Remedy to avoid cost overruns: Better planning and estimates. Consistent policy priorities. Thorough quality check of the total cost frame on large

investment projects.

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Finansdepartementet

Pressure to increase mandatory spending programs

• About 50% of total expenditure on mandatory spending programs.

• Pressure for more mandatory spending programs through: Earmarked activity based grants to local

governments. Vouchers in health care and other state level

provided services. Performance based budgeting for state

agencies.

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Finansdepartementet

Off budget spending

Pressure to circumvent budget constraints by off budget financing:• Earmarking oil revenus for off budget spending.• Earmarked off budget funds.• Cash budgeting under pressure:

Loan financing (under the line) of investments Public-private partnerships Government enterprises for public services with borrowing facilities.

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Finansdepartementet

Local government (municipalities and counties)

• Important provider of welfare services: Primary education, secondary education, health care,

care of elderly, kindergarten and social security. Local production gives room for local priorities and

adjustments within fixed budgets. Minimum national standards in important areas as

education. • Growing pressure for centralization e.g. the health

sector.• Important principles for financing local government:

An overall governmental financing consisting of taxes and transfers (block grants and some earmarked grants).

Grants based on income equalization due to large regional differences in tax base and costs.

• Local tax autonomy would undermine this system.