Finance Minister Siv Jensen presented the government’s proposed state budget for next year on Monday, backed by the strength of a majority in Parliament for the first time. The budget aims at maintaining Norway’s still-strong economy, by reining in the use of oil revenues as the country also braces for economic restructuring and challenging years ahead.
“It’s going well in Norway,” Jensen could once again tell reporters early Monday morning. They traditionally met her outside her home as she headed into one of the finance minister’s most demanding workdays of the year.
“The most important thing we do when we put out the budget is to make sure it (the economy) will continue to go well,” Jensen stressed. After getting Norway through its biggest economic shock in years, when oil prices suddenly collapsed in 2014, Jensen and her government colleagues have moved from expansive budgets to arguably their tightest one yet.
Less oil money pumped into the budget
They’re only tapping 2.6 percent of the value of Norway’s huge sovereign wealth fund known as the Oil Fund, which has been pumped up for years by the country’s offshore oil revenues. Norwegian governments used to be able, as a rule, to tap 4 percent, which would have given Jensen lots more billions of kroner to work with. Jensen’s own conservative government, however, brought the old 4-percent rule down to 3 percent a few years ago, when the sheer size of the fund got so big and 4 percent of it could overheat the economy.
Last year Jensen justified the use of 2.9 percent to augment tax- and other revenues to the state to balance her budget. That kept the government well within the 3 percent rule, but opposition parties protested that it still amounted to too much of the country’s oil revenues. They are, in theory, supposed to be saved for future generations’ pensions when the oil runs out, or stops being pumped up for environmental reasons. Norway’s left-center opposition favours tax hikes to dipping into the country’s proverbial piggy bank.
Now Jensen is making an offensive strike at the opposition by padding her budget with just 2.6 percent, or the equivalent of NOK 243.6 billion. That’s also less than the NOK 246.2 billion actually tapped last year. Opposition politicians can thus no longer accuse her of continually using more oil money and thus “robbing” future generations of their nest egg.
Most important, according to economists, is the need to not over-stimulate Norway’s already-strong economy by adding too much money to it. It was OK when oil revenues fell, thousands of Norwegian and foreign residents lost their jobs and the economy contracted. The economy has since been growing again, with mainland GNP up 2.7 percent this year, and unemployment still at record lows (3.4 percent, down from 3.5 percent last year) despite recent indications that may rise.
Economic growth expected to decline
The budget’s key numbers show that growth of the mainland’s GNP (which excludes the offshore oil industry) is expected to decline to 2.5 percent next year. There was also a lot of media discussion in Norway Monday morning that the government’s proposed state budget delivers, for the first time, a so-called “negative budget impulse.” Norwegian Broadcasting (NRK)’s economic commentator Cecilie Langum Becker said that means that public sector spending will contribute to slightly lower activity in the Norwegian economy next year.
While the budget is formally “proposed,” and was immediately up for debate in Parliament, it’s basically assured of being approved since Prime Minister Erna Solberg managed to form a majority government coalition last January. She and her ministerial colleagues may concede to the opposition on some points, for the sake of appearing cooperative, but they have the strength of four non-socialist parties that will ultimately vote in favour of the budget when formal action is needed in December.
Economists were widely praising Jensen’s state budget, arguing that it’s important to rein in government spending at a time when the economy is strong. “Job growth is extremely healthy,” Øystein Dørum, chief economist of the national employers’ organization NHO, told newspaper Aftenposten over the weekend. Dørum pointed to the creation of 50,000 more jobs during the first half of this year, while a majority of 1,600 NHO members have reported intentions to hire more people. Employment agency Manpower has also reported the best employment outlook in eight years.
Dørum applauded how Jensen was “carefully” stepping on the budget brakes, while Roger Bjørnstad, chief economist for Norway’s largest trade union confederation LO, was also satisfied. The state budget, Bjørnstad noted, “is based on some optimistic prognoses, but well within the margin of error we have to expect. Using less oil money is good in the current economic situation.”
NRK reported that Kyrre Aamdal of DNB Markets was also “positively surprised” by the stricter use of oil revenues. “That’s very well-suited to the economic development,” Aamdal said. Dørum added that the government “deserved praise” over how it has guided the economy in recent years.
“We set ourselves apart (from the rest of the world,)” Øystein Olsen, head of Norway’s central bank, noted last month when the bank’s executive board decided to raise interest rates to maintain stability. Olsen cited the latest “boom” in the oil industry that is expected spill over into next year. Dørum also cited how oil investments are largely behind the strong economy.
All indications, however, call for an eventual decline in oil investments and in the oil industry itself in the years to come, as climate concerns and measures around the world lead to a decline in demand. The ongoing weakness of the Norwegian krone despite the country’s strong economy reflects international market and investor concerns, and NHO itself predicts that Norway’s economic growth will slacken. The search for “the new oil” to replace oil and gas’ contribution to the economy continues.