Norway’s economic party of the past decade is over, declares a government-appointed commission charged with finding ways to boost productivity. Without a more efficient public sector and economic reorganization, warns the leader of the commission itself, tax rates may need to be boosted to 65 percent of income, to preserve the country’s social welfare state.
Jørn Rattsø, the economics professor who heads the commission, has been leading the work to “make Norway’s economy smarter” for the past two years. He was appointed by the then-new finance minister, Siv Jensen from the conservative Progress Party, at a time when oil prices were still high and the economy still strong.
Since then, oil prices have taken a dive, Norway has seen major cutbacks in its important oil and offshore industry, the country’s currency has weakened and unemployment has risen. At the same time, record numbers of Norwegians are reaching retirement age and the country is dealing with a refugee influx that’s also putting demands on state and local budgets.
New report handed over
The commission delivered its first report with tax reform proposals last year and not all of them were well-received. Rattsø, who was presenting his commission’s second report on Thursday, wrote in newspaper Dagens Næringsliv (DN) that unless productivity rises, Norway will face stagnation and national debt. He clearly hopes his commission’s recommendations will be taken more seriously this time around.
Growth rates of less than 1 percent since 2005, he wrote, were mostly masked by high oil prices that fueled affluence and public services. With the revenue contribution from oil dramatically lower, “the consequences will become visible, even though we have money stashed away (in Norway’s huge sovereign wealth fund known as the oil fund),” Rattsø wrote.
His commission, he noted, “has looked at scenarios” for development with the currently low rate of productivity growth, low employment growth and rising needs for health and welfare services. “The results show a dramatic shift from the income growth and abundance of money we’ve been accustomed to,” Rattsø wrote. That in turn means taxes would need to increase dramatically to offset the lack of money flowing into state coffers from oil and rising incomes.
How to avoid sky-high tax rates
Since someone must pay for health and welfare services, newspaper Aftenposten reported Thursday that Rattsø’s expert group warns of households needing to carry a much greater share of the tax burden unless steps are taken to avoid it. The commission’s fine print reveals that household tax burdens may rise from today’s level of around 37 percent of income to around 65 percent by 2060 if productivity doesn’t improve in the meantime.
He warns against such high tax rates, saying they would ultimately damage the economy. To avoid long-term development with little if any income growth and sky-high tax burdens, productivity growth must rise, Rattsø argues. The best way to achieve that, the commission believes, is through education and knowledge to restructure the economy.
“We shouldn’t base our economy on new gifts from the nature,” he contends. Instead of relying on more oil or minerals or other natural resources, smarter delivery of services and reorganization is critical: “Only through more knowledge, adaptability and better organization of the public sector can we boost productivity and, as a result, income growth rates,” told Aftenposten.
Opposition looms, to protect ‘old ways’
Discarding “old” systems and ways of doing things will be “demanding,” he conceded, but necessary to start fresh. Pushing them through won’t be easy. Finance Minister Jensen has already experienced defeat in some initial attempts: Her proposal last year to transfer all tax collection from the local level to 33 offices within the state was aimed at cutting 430 local public sector jobs and saving NOK 360 million, but it was blocked by powerful local government lobbying efforts. The rural-oriented Center Party was among Jensen’s major opponents, as it champions employment in outlying districts around Norway, instead of favouring the economies of scale that come with consolidation in urban areas.
“The interests that defend the ‘old’ way of doing things are strong everywhere,” Rattsø told Aftenposten. “The politicians will have to cut through them, to secure long-term benefits and renewal.” As he argues in favour of fewer and stronger regions and stronger regional cities, he’s sure to face more opposition from outlying areas that have come to depend on the public sector, at great cost.