Øystein Olsen, chief of Norway’s central bank, used his closely watched annual address on Thursday to warn politicians against tapping into more of the country’s oil revenues. Low oil prices mean less oil revenue will flow into the state treasury, Olsen said, and cuts in oil fund spending now can make future cuts less painful.
“The era of spending more oil money may be behind us,” Olsen told his audience of the most powerful government, business and community leaders in Norway on Thursday evening.
For years, government politicians have allowed themselves to spend oil revenues equivalent to 4 percent of the value of the so-called “oil fund,” Norway’s sovereign wealth and pension fund that consists of oil revenues set aside for future generations and invested abroad. The fund’s annual return on investment was conservatively set at 4 percent, so spending that much has generally been allowed over the past 15 years.
The oil fund itself, however, has grown so enormously that even just spending 4 percent of it spurred warnings that such expenditure would set off inflation. Norway’s conservative coalition government used less than 4 percent in its first state budget for this year, despite Finance Minister Siv Jensen’s advocacy of tapping into the fund to make needed infrastructure investments. Even so, Olsen warned that the amount now being spent is nearly as much as the vastly reduced amount of oil revenues flowing into the fund on an annual basis, because of lower oil prices. That suggests the fund won’t grow, while investment returns on the fund may decline as well, meaning the fund itself may have topped out.
‘Served its purpose’
Olsen thinks the 4-percent rule governing expenditure from the fund “has served its purpose,” become too liberal and must be tightened. He noted that it’s unlikely oil prices will soon return to their levels of more than USD 100 a barrel in recent years. Transfers of money to the oil fund will decline markedly if oil prices stay low, he noted, and the return on the fund’s investment will probably be lower in the future, perhaps less than 3 percent.
“With oil prices where they are now (less than half their levels of last summer), the fund may have topped out already,” Olsen said. There will be a need to reduce use of oil money as a percentage of gross national product, in order to avoid spending more than the fund is earning.
“This doesn’t mean the oil age is over … but the Norwegian economy must adjust to lower demand for oil,” Olsen said, stressing that Norway faces a period of economic restructuring.
He also warned that with many jobs tied to the oil industry in Norway, a downturn will hit households hard. “High oil revenues and ripple effects from the oil sector have driven up housing prices and household debt,” Olsen said. “Debt has grown much faster than income. Today’s 30-year-olds have average debt equal to three times their disposable income. That’s much more than the same age group had 10 years ago.”
Olsen worried that debt levels will be “uncomfortable for many” if unemployment rises. “If housing prices fall at the same time, the discomfort will be greater,” he said, adding that if housing prices fall by 30 percent, every fourth household in Norway will end up with mortgages that exceed the value of the homes.
Olsen warned, though, against increased state spending to lessen such discomfort, because that can hinder Norway’s need to wean itself off oil and seek economic growth in other sectors. “It’s the ability to restructure that’s the key to economic growth,” Olsen said.
The central bank chief’s annual address always attracts top decision makers who then all adjourn to a banquet at Oslo’s Grand Hotel. Finance Minister Siv Jensen and Prime Minister Erna Solberg were among those in attendance and Jensen, who already used less oil money than she could have this year, said she thinks the Norwegian market is also already well-regulated enough to tackle, for example, debt issues.
She received unusual support from Labour leader Jonas Gahr Støre for her belief that the best way to lower housing prices is to build more housing. Solberg also stressed that banks “must do a good job” of qualifying mortgage customers and taking current economic uncertainty into consideration when evaluating loan applications.