Norway’s central bank boss Øystein Olsen had to make some last-minute changes in his important annual address on the economy Thursday evening. Just hours before he took the podium, government leaders announced they were finally going along with something he’s recommended for years: putting new limits on the use of Norway’s oil revenues.
Olsen, governor of Norges Bank, has long urged lowering the rule (known as handlingsregelen) that now limits use of the returns on Norway’s so-called Oil Fund from 4 percent of its total size, to 3 percent. On Thursday, the government stopped short of actually scrapping the rule but went along with tying use of oil fund returns to a more realistic level. Few still believe the fund will continue to generate an average 4 percent return on its assets over time, so the government now believes changes are needed in how Norway saves and spends its oil revenues.
Olsen wasn’t entirely satisfied, though. He called the government’s proposed reduction “a sensible adjustment” but he thinks 3 percent is still too high. Lower oil prices have reduced the flow of oil revenues into the fund, while low interest rates and volatile financial markets are lowering returns on investments in general.
Actual withdrawals from the Oil Fund ‘very high’
While the Oil Fund contines to grow, the actual amounts of money represented by a 3 percent withdrawal also remain very large. Even though the current conservative coalition government hasn’t come close to withdrawing the 4 percent that’s been allowed in recent years, and actually has taken out less than 3 percent, the Oil Fund money transferred into the state budget last year was more than the amount of fresh oil revenues flowing into it. If that were to continue, the government could deplete the fund that’s meant to help cover Norwegians’ pensions for generations to come.
“We can’t expect the fund will continue to grow, or that there will always be an increase in deposits to it,” Olsen told DN. “That period is over.”
More importantly, according to Olsen, are the billions of kroner in oil revenues now being tapped as a percentage of Norway’s gross national product (GNP). He told newspaper Dagens Næringsliv (DN) that he equated it to 8 percent of the mainland economy (excluding its huge offshore oil and gas industry) this year, up from 6.5 percent in 2015. “That’s very high,” Olsen told DN. Because the Oil Fund has grown so huge over the years, he noted that even if the government only uses 3 percent of it next year, it would roughly amount to NOK 73 billion more than what was used this year, and that, he thinks, would be way too much when countries should be able to balance their budgets based on tax revenues and other forms of income versus expenditures. With Norway’s economy due to recover, the time for the expansionary policies of the past few years should also end.
Old rule has outplayed its role
Olsen said the handlingsregel that’s disciplined Norwegian governments’ use of oil revenues since 2001 “has played a very important role,” but he thinks it’s now outplayed its role. He’d now prefer to see a new “rule” tying Oil Fund use to the country’s annual growth in wealth creation. If that were to be followed, the amount of Oil Fund money pumped into the state budget would amount to only NOK 4 billion.
Finance Minister Siv Jensen of the Progress Party has long argued in favour of using more Oil Fund money to “invest here at home” and address needed infrastructure improvements like more and better schools, transport and nursing homes, instead of investing most of the fund’s assets in foreign stock exchanges, bonds and some real estate as it does now. Such domestic investment also create wealth for Norway, she argues. It can also address complaints over why one of the richest countries in the world has quite a lot of run-down and outdated public buildings, train lines and roads, for example.
Others promote Olsen’s more restrictive views. “Not even (the government’s proposed changes in Oil Fund use) yield budget discipline that’s good enough,” editorialized Dagens Næringsliv on Friday. It won’t force politicians to set “the necessary priorities,” the paper wrote, and it can make the state budget bigger than it should be. “Oil Fund withdrawals should be closer to 2 percent (of its assets) than 3 percent,” DN wrote, “but if a tighter rule draws politicians in the right direction, it is a step towards more responsibility.”