The Revised National Budget 2008

The Revised National Budget 2008

These pages contain information in English about Norway's Revised National Budget for 2008, presented to the Storting as Report no. 2 (2007-2008) on 15 May 2008. The National Budget presents the Government's programme for the implementation of economic policy and projections for the Revised Norwegian Economy.

Royal Norwegian Ministry of Finance

Kristin Halvorsen
Minister of Finance
May 2008

Press Release

No.:

24/2008

Date:

15.05.2008

Contact:

Nina Bjerkedal , Telephone 22 24 45 00 , Mobile 480 99 684
Knut Moum , Telephone 22 24 45 00 , Mobile 480 99 712
Press telephone , Telephone +47 22 24 44 11

Revised National Budget 2008: Sound Fiscal Policy

Read the white paper to the Storting (Parliament), presented as Report no. 2 (2007-2008)

The strong expansion of the Norwegian economy continues. Central government revenues have been revised upwards since the approved budget for 2008 and the room for manoeuvre in fiscal policy has increased accordingly. However, in order to underpin a continued stable development of the Norwegian economy the Government proposes that a part of the increased revenues shall be used to reduce the structural, non-oil budget deficit. The revision implies a reduction in the structural, non-oil budget deficit of about NOK 3 billion compared to the approved budget. The deficit will for the third consecutive year be lower than the expected real return on the Government Pension Fund–Global.

Growth in Mainland-GDP has averaged close to 5 per cent over the past four years, far exceeding the estimated trend growth of the Norwegian mainland economy. Growth above trend is expected also in 2008, although developments in the last few months indicate that growth is slowing. The forecast for growth in Mainland-GDP is now 3.2 per cent in 2008. Employment growth is estimated at 2.4 per cent in 2008 and the unemployment rate is expected to flatten out at 2.4 per cent.

The guidelines for economic policy, in place since 2001, stipulate that fiscal policy shall be directed towards a gradual and sustainable increase in the use of petroleum revenues. Over time, the structural non-oil central government budget deficit shall correspond to the expected real return on the Government Pension Fund – Global, estimated at 4 per cent. However, fiscal policy must take into account business cycle fluctuations around the medium term path. In a cyclical expansion, fiscal policy restraint relative to the spending rule is called for, whereas in a cyclical downturn somewhat higher spending of oil revenues can be justified. Long-term budget challenges, due to increases in pension costs and other age-related expenses, underline the importance of a continued prudent fiscal policy stance.

The Government proposes a revised Fiscal Budget for 2008 with a structural, non-oil budget deficit of NOK 73.9 billion which is NOK 2.9 billion lower than in the approved budget and NOK 7 billion lower than the expected real return on the Pension Fund. Higher tax - and excise revenues, and increased dividends have contributed to reducing the structural, non-oil budget deficit, whereas overall budget expenditures are revised up. Increased appropriations to the health sector to cover an unforeseen strong increase in pension premium, and certain climate policy initiatives are the major expenditure items.

The Government proposes only minor changes to the tax rules in the revised fiscal budget.

Fiscal policy
The main features of fiscal policy in 2008 are:

  • A structural, non-oil budget deficit of NOK 73.9 billion, which is NOK 2.9 billion lower than in the approved budget for 2008 and NOK 7 billion lower than the expected return on the Government Pension Fund – Global.
  • A structural, non-oil budget deficit corresponding to 4.3 per cent of Mainland trend-GDP.
  • A real underlying growth in budget expenditures of 3¼ per cent from 2007 to 2008, which is 1 percentage point higher than estimated in the National Budget 2008. The increase must be seen in the context of a downward revision of budget expenditures in 2007.
  • A non-oil fiscal budget deficit of NOK 13 billion, which is NOK 23.4 billion lower than in the approved budget for 2008. The deficit is covered by a transfer from the Government Pension Fund-Global.
  • A central government net cash flow from petroleum activities of NOK 356 billion. This is almost NOK 54 billion higher than estimated in the approved budget.
  • A net transfer to the Government Pension Fund – Global of NOK 343 billion.
  • A consolidated surplus in the Fiscal Budget and the Government Pension Fund – Global of about NOK 424 billion.
  • An estimated market value of Government Pension Fund of NOK 2 427 billion by the end of 2008, whereof NOK 2 316 billion in Government Pension Fund – Global. Old age pensions obligations under the National Insurance Scheme is estimated at NOK 4 551 billion (accrued) by the end of 2008.
  • An increase in total revenues for local governments of 1.4 per cent from 2007 to 2008.

Monetary policy
The monetary policy regulation of 29 March 2001 stipulates a flexible inflation targeting regime for monetary policy. The long-term role of monetary policy is to provide the economy with a nominal anchor. In the short- and medium-term, monetary policy shall balance the need for low and stable inflation against the outlook for output and employment.

Norges Bank’s implementation of monetary policy is oriented towards maintaining low and stable inflation. The operational target is defined as an annual increase in consumer prices of close to 2.5 per cent over time. The interest rate decisions of Norges Bank shall be forward looking, and pay due attention to the uncertainty attached to macroeconomic estimates and assessments. It shall take into consideration that it may take time for the policy changes to take effect, and it should disregard disturbances of a temporary nature that are not deemed to affect underlying price and cost increases.

The key rate (the sight deposit rate) has since spring of 2005 been increased gradually by 3¾ percentage points to currently 5½ per cent. According to the Bank’s interest rate path published in March (in Monetary Policy Report 1/08), the key policy rate is forecast at 5½ per cent by the end of 2008 and 5 per cent by the end of 2009.

The Government Pension Fund 
The Government Pension Fund was established 1 January 2006 and consists of two parts: "The Government Pension Fund – Global", previously the Government Petroleum Fund, and "The Government Pension Fund – Norway".

A white paper report on the management of the Pension Fund was submitted to the Parliament (Storting) on 4 April, 2008.

General outlook for the economy
Growth in the Norwegian mainland economy has been strong for the past four years with an annual GDP growth of close to 5 per cent. This is the strongest economic expansion in a four-year period since the 1960s. Domestic demand has been fuelled by strong income growth and low interest rates. Profitability in the business sector, coupled with increasingly higher capacity utilisation has contributed to strong investment growth in the mainland business sector. Vigorous growth in the petroleum investments has also provided important growth impetus to domestic demand.

There are now signs of slowing growth in the mainland economy. Housing starts have declined in the past few months, growth in consumption has dampened and exports of traditional goods are slowing down. However, growth in petroleum investments continues to be vigorous.

Growth in Mainland - GDP is estimated at 3.2 per cent in 2008, indicating a fifth year running with growth well above trend.

Employment growth has been exceptionally strong and the unemployment rate is now at a 20 year low. Demand for labour continues to be high, and many companies are still having difficulties in finding qualified labour. However, the unemployment rate has started to flatten out, and the shortage of qualified labour has become less urgent in some sectors. The unemployment rate is forecast at 2.4 per cent in 2008.

The tightening of the labour market has resulted in higher wage growth. Based on the wage negotiations concluded so far, annual wage growth is estimated at 5½ per cent in 2008.

Higher inflation on domestically produced goods and services has contributed to an underlying price inflation that is close to the operational target for monetary policy. The consumer price index adjusted for changes in excise duties and excluding energy, (CPI-ATE), is expected to increase by 2.4 per cent in 2008, compared to 1.4 per cent in 2007. Headline inflation (CPI) is expected to increase from 0.8 per cent in 2007 to 3.2 per cent this year.

The oil price has increased significantly since the National Budget 2008 was presented in October 2007. The projection in this Report is based on an oil price of NOK 500 per barrel in 2008, which is NOK 140 per barrel higher than in the projection from October.


 

Key projections for the Norwegian economy. Per cent1)

2007

NOK billion2)

2007

2008

Private consumption

946.6

6.4

3.7

Public consumption

447.1

3.2

3.2

Gross fixed investments

474.3

9.6

4.5

Petroleum

109.0

6.6

10.0

Business sector, Mainland Norway

169.2

13.2

7.0

Exports

1 062.7

3.2

2.4

Crude oil and natural gas

498.0

-2.4

-0.2

Traditional goods

303.0

9.0

4.3

Imports

685.5

8.6

6.0

Traditional goods

451.4

8.2

6.1

Gross domestic product

2 288.7

3.5

2.4

Mainland Norway

1 708.7

6.0

3.2

Memorandum items:

Consumer price inflation (CPI)

0.8

3.2

Underlying inflation (CPI-ATE)

1.4

2.4

Wage growth

5.4

Employment growth

3.8

2.4

Unemployment rate (LFS)

2.5

2.4

Current account balance. (Pct of GDP)

16.3

16.2

1) Constant 2005 prices
2) Preliminary national accounts figures. Current prices
Sources: Statistics Norway and Ministry of Finance

 

Key figures for the petroleum sector

2007

2008

2009

2012

Oil price sensitivity 2008 1)

Assumptions:

Crude oil. NOK per barrel

423

500

408

400

Production. Mill. Sm3 oil equivalent

238

240

249

251

Crude oil and NGL

148

141

140

136

NOK billion:

Export value 2)

509

600

528

502

7.3

Accrued taxes and royalties 3)

197

233

187

153

6.0

Paid taxes and royalties 3)

191

216

210

156

3.0

Net cash flow 4)

316

356

332

268

5.5

1) Effects of an oil price increase of NOK 10 per barrel

2) Crude oil, natural gas, NGL and pipeline transport

3) Income and property taxes, surtax, production tax, area tax and CO2 tax. NOX-tax in 2007 and 2008.

4) Taxes and excise duties, net revenues from SDØE (State Direct Financial Interest) and dividends from Statoil

Sources: Statistics Norway, Ministry of Petroleum and Energy and Ministry of Finance

 

Key figures for the Fiscal Budget and Government Pension Fund NOK billion

2006

2007

2008

1. Fiscal Budget

Total revenues

994.9

1 030.1

1 119.5

Revenues from petroleum activities

376.6

337.4

381.4

Revenues excl. petroleum activities

618.3

692.7

738.1

Total expenditures

683.5

715.1

776.9

Expenditures on petroleum activities

21.2

21.1

25.7

Expenditures excl. petroleum activities

662.3

694.0

751.1

Fiscal budget surplus before transfers to the Pension Fund – Global

311.4

315.0

342.6

- Net revenues from petroleum activities

355.4

316.4

355.7

= Non-oil budget surplus

-44.0

-1.3

-13.0

+ Transfers from the Pension Fund – Global

57.4

2.8

13.0

= Fiscal Budget surplus

13.4

1.5

0.0

2. Government Pension Fund

Net transfer to the Pension Fund – Global

298.0

313.6

342.6

+ Dividends on the Pension Fund

64.1

78.4

81.6

= Surplus in the Pension Fund

362.1

392.0

424.2

3. Fiscal Budget and Government Pension Fund
consolidated surplus

375.5

393.5

424.2

Source: Ministry of Finance

 

General government financial balance. NOK billion

2006

2007

2008

Fiscal Budget surplus

13.4

1.5

0

+ Surplus in Government Pension Fund

362.1

392.0

424.2

+ Surplus in other central government and social security accounts

-10.7

-5.8

2.6

+ Definitional differences between Fiscal Budget and national accounts

28.2

14.0

23.5

+ Direct investment in state enterprises

5.5

4.1

8.0

= Central government financial balance

398.5

405.8

458.3

+ Local government financial balance

0.5

-11.7

-12.6

= General government financial balance

398.9

394.1

445.7

In per cent of GDP

18.5

17.2

17.9

Sources: Statistics Norway and Ministry of Finance