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Monday, July 15, 2024

Finance minister raids Oil Fund after all

So much for the “tight” state budget that Finance Minister Trygve Slagsvold Vedum presented to the Norwegian Parliament last fall. After seriously under-estimating inflation and funding needs, Vedum is now dipping deeply into the nation’s piggy bank, using more money than ever before from its sovereign wealth fund fueled by oil revenues.

Finance Minister Trygve Slagsvold Vedum has had to vastly revise his state budget. PHOTO: Finansdepartementet

Some economists had thought he’d need to pull an extra NOK 20 billion out of Norway’s Oil Fund, to cover unforeseen expenses tied to higher costs for most everything and the war in Ukraine. Newspaper Aftenposten reported earlier this week that the government’s own advisers had estimated an extra NOK 25 billion would be needed to balance the budget.

On Thursday Vedum conceded that his revised state budget for 2023 needs more than double that, a whopping NOK 56 billion. He’s actually withdrawing as much money as the rules allow: 3 percent of the fund’s total assets. Fully NOK 27 billion will compensate needed domestic funding, with NOK 22 billion going to Ukraine. All told, Vedum and the Labour-Center government will withdraw NOK 372.6 billion from the Oil Fund that was set up for the benefit of future generations. It’s a far cry from the days when the opposition in Parliament (including Vedum’s Center Party) refused to release around NOK 15 billion to replace one of Norway’s five frigates that sank in an embarrassing accident five eyars ago.

It’s also a major reversal of his political rhetoric just last year, when Vedum claimed that it was “now necessary with a tighter economic policy.” No longer, he said, should the government rely on more of Norway’s “petro-kroner” to balance its budget. Instead, he and Prime Minister Jonas Gahr Støre have raised taxes substantially in a wide range of areas to boost government revenues.

Not even that was enough to cover the high costs of inflation and, not least, large allocations to support Ukraine after it was invaded by Russia early last year. The invasion has also revealed serious deficiences within Norway’s own defense, and an urgent need for improvement given the new aggression of neighbouring Russia. That means much more defense spending.

Economists seemed more sympathetic than scolding towards Vedum Thursday afternoon. Few could foresee just how expensive Russia’s war would become for everyone affected. “I can’t remember such a huge need for compensation (of the costs of higher prices and wages) in the state budget,” Harald Magnus Andreassen, the 66-year-old chief economist at Sparebank1 Markets, told Aftenposten before Vedum’s revised was released. “But this year it’s necessary to reexamine the budget the Parliament thought it approved before Christmas.”

Andreassen admitted after the revised budget came out, though, that he was surprised how much Vedum is adding to it. “Now the budget seems expansive,” Andreassen said, instead of being tight.

Vedum needs the extra NOK 56 billion to cover the higher costs of hospitals, schools, police, public sector wage negotiations to name a few. The higher cost of living has left some Norwegians struggling, creating a need to boost welfare benefits. Retirees also now stand to get a record 8 percent increase in their state pension income.

Vedum also needs much more money to cover the extraordinary costs of aid to Ukraine, new defense needs and the roughly 50,000 Ukrainian refugees in Norway, while maintaining Norway’s other foreign aid programs. He’d expected price hikes of 2.8 percent, but inflation hit 6.4 percent this week. Much higher defense spending has widespread support, on the grounds that having lots of money in reserve won’t help if Norway comes under attack itself.

Vedum’s finance ministry insists the budget remains “responsible” and will only have a “limited effect” on Norway’s mainland economy. Vedum repeated on state broadcaster NRK’s nightly national newscast that “we’re moving around large sums of money because these are very special times.”

Opposition politicians were quick to criticize the Labour-Center government for failing to set tougher priorities instead. Others fear there will still be proposed budget cuts, bound to emerge as budget negotiations with Parliament proceed over the next few weeks. Berglund



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