Norway’s huge sovereign wealth fund known as the “Oil Fund” is far too vulnerable to swings in the financial markets, argue critics. They claim a lack of buffers to reduce the impact of swings that can cut into market value is a glaring omission on the part of the state government responsible for the fund.
The “buffer issue” came up last week during Finance Minister Siv Jensen’s presentation of the government’s state budget proposal for 2018. Once again, the budget was supplemented by the use of money generated by Norway’s oil industry, most of which is stashed away in the Oil Fund for future generations. The fund is officially a pension fund, built up over the past 20 years and invested mostly in stock markets and some real estate around the world.
Although Jensen won a generally positive reception to her less-expansive budget, several economists worry that the actual value of the fund can be at risk in the years ahead. On Monday, the chief economist for Norway’s national employers’ organization NHO, Øystein Dørum, claimed current state pension obligations are already bigger than the value of the state’s two pension funds.
Newspaper Dagens Næringsliv (DN) also took up the debate, editorializing that the government “still doesn’t seem to have any concrete thoughts on how withdrawals (from the fund) today can take into consideration unforeseen but probable movement in the value of the fund in the future.” DN called that “a sin of omission.”
Jensen and her ministry, noting that the Norwegian economy is recovering from the oil price collapse of 2014, expect economic growth of around 2.5 percent next year. Since Norway’s economic downturn is widely viewed as being over, Jensen thus presented a tighter budget described as “neutral:” It contained no major changes and is literally oiled with a relatively modest increase in money (NOK 6 billion, according to Jensen) generated by the oil industry and Norway’s own direct ownership of oil fields.
‘Abiding by the rule’
All told, though, DN reported that the budget contains around NOK 231 billion (USD 29 billion) in oil money to help fund Norway’s social welfare state, up from NOK 225 billion last year. Newspaper Aftenposten reported the state’s total revenues in the 2018 budget as amounting to NOK 1,253 billion while expenditures amount to NOK 1,325 billion. To balance the budget, the finance ministry will basically withdraw NOK 72 billion from the Oil Fund.
Jensen was quick to stress that total use of oil money will amount to less than what’s allowed through Norway’s so-called handlingsregel, which is the rule limiting how much can be included in the budget, and spent, each year. The rule used to be 4 percent of the size of the Oil Fund. When the Oil Fund got bigger than Norwegian politicians ever imagined, Jensen and Prime Minister Erna Solberg adjusted the rule to just 3 percent of the size of the fund, on the theory that lower interest rates and returns suggest that average annual earnings on the fund would also dip to 3 percent. The idea is that no more than the amount of the fund’s earnings should be withdrawn, to preserve its capital.
Jensen, whose budget uses oil money amounting to 2.9 percent of the fund, also commented after presenting the budget that such a limit is a “buffer” in itself. Wrong, claimed some economists and DN. “What should have been a temporary increase in the use of oil money to offset a decline has become a permanent increase in oil money use,” Ragnar Torvik, a professor of economics at the Norwegian University of Science and Technology (NTNU) in Trondheim, told DN. “That should be avoided.”
DN stressed that realistic future returns on the Oil Fund are likely “to lie well under 3 percent.” The paper editorialized that current capital balances are inflated by low interest rates and and a weak Norwegian krone. In addition, 70 percent of the Oil Fund’s assets are now invested in shares, which can generate larger returns than expected but also bigger swings in the fund’s value. The handlingsregel alone isn’t enough of a buffer to offset that risk, wrote DN.
Jensen said at a press conference after presenting her budget that a financial buffer “may well come in the years ahead” but in the meantime, she doesn’t seem to see much urgency. She stressed that the current spending rule “means we can use more in bad times and less in good times,” which is what she’s doing.
“It’s still our intention that we will phase oil money into the economy every year,” Jensen told DN. “The question is over the tempo. It’s a tempo we adapt to the economic situation. Now we’re tightening up because things are going better.”
She also hinted at some weariness over the constant debate in Norway over how or even whether to tap into the country’s oil wealth. She noted that in the current budget proposal, the amount of money raised through taxes on income and net worth alone is more (NOK 247 billion) than what comes from oil. The amount raised by VAT is even more than that (NOK 291.5 billion), and then comes the fees paid for pension insurance, employers’ contribution to social welfare expenses on behalf of employees (14.5 percent of their salaries) and a host of other taxes and fees in Norway.
“The big amounts we raise and spend are completely different sources of money,” Jensen told DN, adding that the Oil Fund so far keeps growing every year. Many also have argued that prudence prevails among Norwegian politicians regarding use of Norway’s oil wealth, also among those running the current conservative government.
“We must not make every debate over the state budget a debate over oil money,” Jensen said. “We have continued to save money and set aside oil revenues also in bad times.”