National Budget 2004

National Budget 2004

These pages contain information in English about Norway's National Budget for 2004, presented to the Storting as Report no. 1 (2003-2004) on 8 October 2003. The National Budget presents the Government's program for the implementation of economic policy and projections for the Norwegian Economy.

Royal Norwegian Ministry of Finance

Per-Kristian Foss
Minister of Finance
October 2003

Fiscal Budget 2004 – a basis for balanced growth

A neutral fiscal stance has facilitated an aggressive monetary policy, which is expected to give a boost to the private sector of the economy. Real growth in fiscal budget (central government) expenditures is estimated at 2 per cent in 2004. Growth in Mainland Norway GDP (i.e. excluding petroleum and shipping) is forecast at 2.6 per cent in 2004, up from 0.5 per cent in 2003. Labour market development is weak, but is expected to improve in 2004 due to resumed economic growth. Still, the unemployment rate is estimated to average 4.7 per cent in 2004, up 0.2 percentage points from the present year.

In accordance with the guidelines for economic policy (Report no 29 (2000-2001), available at http:odin.dep.no/fin/engelsk/p10003090) fiscal policy shall be geared towards a gradual and sustainable increase in the use of petroleum revenues: Over time, the structural, non-oil budget deficit shall correspond to the real return of the Petroleum Fund, estimated at 4 per cent. This rule should not be used mechanically, and the actual implementation should take into account business cycles fluctuations around the suggested medium term growth path. As a consequence of lower estimates on the capital in the Petroleum Fund and a higher estimate on the structural budget deficit, the room for manoeuvre in fiscal policy is significantly reduced compared to previous projections.

In the present phase of the cycle, with unemployment increasing particularly in the manufacturing sector, the appropriate policy mix should primarily rely on an expansionary monetary policy. At the same time, automatic stabilisers should be allowed to work, and fiscal policy should in general support growth in overall production and employment.

The fiscal budget proposal for 2004 implies a structural, non-oil deficit of NOK 50.7 billion. This implies an excess spending of NOK 16½ billion compared to a mechanical application of the fiscal guidelines. The budget is considered to imply an approximately neutral fiscal stance, as measured by its impact on Mainland GDP.

Fiscal policy
The main features of the fiscal policy in 2004 are:

- A structural, non-oil budget deficit in 2004 estimated at NOK 50.7 billion. This is an increase of NOK 9 billion from 2003 to 2004, corresponding to an increase of 0.6 per cent of Mainland Norway trend-GDP. On a broader basis, the proposed budget is deemed to have a neutral effect on the overall activity level of the economy(see here for a discussion of the fiscal impulse of the 2004 Budget).

- A real underlying growth in Fiscal Budget expenditures of about 2 per cent from 2003 to 2004

- A reduction in paid taxes and excises of about NOK 2 billion from 2003 to 2004, of which nearly NOK 1.5 billion is a consequence of previous resolutions and about NOK 550 million stems from new tax measures

- A non-oil budget deficit estimated at NOK 67.8 billion in 2004. This deficit is covered by a transfer from the Government Petroleum Fund

- Based on an oil price of NOK 170 per barrel, the central governments net cash flow from the petroleum activities is estimated at NOK 143.5 billion in 2004

- Net transfers to the Government Petroleum Fund, excluding transfers to the fiscal budget, are estimated at NOK 75.7 billion. In addition, interests and dividends on the accumulated capital in the fund are estimated at NOK 30.2 billion. The consolidated surplus in the Fiscal Budget and the Government Petroleum Fund, including interests and dividends, is thus estimated at NOK 105.9 billion in 2004

- General government net lending is estimated at NOK 107 billion in 2004, equivalent to 6.7 per cent of GDP. General government net assets are estimated at about NOK 1320 billion or 82 per cent of GDP at the end of 2004

Tax policy
A key aspect of the Governments economic policy is to reduce the tax level, with an aim to strengthen the economy's growth potential. The goal is a reduction in taxes of NOK 31 billion during the current parliamentary term ending in 2005. So far, reductions of NOK 19.4 billion have been implemented. In the Budget for 2004, the Government has found limited room for new tax cuts. Proposals for net reductions in direct and indirect taxes amount to approximately NOK 510 million, on an accrued basis. This will reduce tax revenues by approximately NOK 550 million in 2004.

Main tax proposals for 2004 include:

- In order to comply with the obligations under the EEA agreement, the system of differentiated social security contributions will be changed, except for areas in the northern part of Norway (Finnmark and the Northern part of Troms (zone 5)). Furthermore, the current scheme will be maintained for the agriculture, forestry and fishing sectors.

- The Government proposes a temporary exemption from the electricity tax system for all production sectors from 1 January 2004. A new electricity tax system for industries will be implemented from 1 July 2004.

- A new, low VAT-rate of 6 per cent on public transportation is proposed from 1 March 2004. This will lead to an estimated yearly tax relief for the public transportation sector of approximately NOK 500 million.

- The VAT-rate for the public broadcasting company (NRK) will be reduced from 12 per cent to 6 per cent. Simultaneously, the transfer of public funds to the NRK is reduced.

- The tax on spirits-based alcoholic beverages is brought in line with the taxes on spirits with an alcoholic content of more than 22 volume percentage. The increased revenue will be used to an general reduction in the surtaxes on alcoholic and non-alcoholic beverages.

- The Government proposes to raise the tax on smoking tobacco, to equalise this tax rate with the taxes on cigarettes. This will increases accrued tax revenues by NOK 645 million in 2004.

- The tax on imputed income from owner-occupied housing is reduced, increasing the threshold for assessed housing value from NOK 80000 to NOK 90000.

Monetary policy
The government is committed to the monetary policy regulation of March 2001 (confer Report no. 29 to the Storting (2000-2001)). Norges Bank’s implementation of monetary policy is geared to maintaining low and stable inflation. The operational target is defined as an annual increase in prices close to 2.5 per cent over time. The monetary policy should be forward looking, and direct effects on consumer prices stemming from changes in interest rates, taxes, excise duties and extraordinary, transient disturbances should in general not be taken into account. Consumer price inflation is as a general rule expected to remain within 1 percentage point of either side of the target.

The rate of increase in consumer prices adjusted for tax changes and excluding energy products, CPI-ATE, is now at a very low level. Core inflation (CPI-ATE) has since May been more than 1 percentage point lower than the inflation target. The year-on-year rise in CPI-ATE was 0.9 per cent in August.

Norges Bank has reduced its key rate (deposit rate) by 4.5 percentage points since December last year. The key deposit rate is now 2.5 per cent.

As part of an assessment of the conduct of the monetary policy, the Ministry of Finance has asked Norges Bank to provide a review of the monetary policy in 2002 and in the first eight months of 2003. Norges Bank submitted its report to the Ministry on 17 September.

According to Norges Bank, the low core inflation in 2003 has in particular been due to a decline in prices on imported consumer goods. The fall in prices on imports must be seen in context of the appreciation of the krone through 2002 and low inflation internationally. Norges Bank expects the core inflation to increase gradually to around 2½ per cent within a two-year period.

A pick-up in inflation is in line with the Ministry’s forecasts in the National Budget 2004. The Ministry emphasises the uncertainty as to when the CPI-ATE inflation will reach 2½ per cent. In the National Budget 2004, the Ministry stresses that it may be appropriate to use a shorter or a longer time horizon than two years to reach the inflation target, and that the conduct of monetary policy should also contribute to stabilise developments in output and employment.

In accordance with the regulation, monetary policy shall also contribute to stable expectations concerning exchange rate developments. In its report, Norges Bank calls attention to the strong reversion mechanism in the exchange rate. Based on the experiences so far, Norges Banks does not see any evidence indicating that the reversion mechanism in the exchange rate has been weakened by the introduction of an inflation target. The Ministry of Finance agrees with these assessments. The Ministry also emphasises that analysis and communication from Norges Bank about such a mechanism may contribute to stabilising exchange rate expectations.

The Government Petroleum Fund
By the end of the second quarter 2003, the market value of the Government Petroleum Fund was NOK 775 billion. The market value is now estimated to grow to NOK 857 billion by the end of 2003 and to NOK 966 billion at the end of 2004

In the National Budget 2004 there is a broad review of the Fund’s investment strategy, including an evaluation of the current mix of equities and fixed income investments and a discussion of new investment alternatives. The review is based on reports from Norges Bank and Mercer Investment Consulting. The Ministry concludes that the overall investment policy should remain unchanged. It suggests, however, some changes in the list of eligible countries, i.e. to include thirteen new countries for equity investments and eight new countries for fixed income investments. The Fund’s equity “benchmark portfolio” will also be amended to include South-Africa and to exclude Turkey (for reasons relating to technical aspects of the Turkish market). There will be no change in relation to the countries of the benchmark portfolio for fixed income investments.

A public commission appointed to propose ethical guidelines for the Petroleum Fund submitted its report in June. The report is now subject to public hearing. The Government will present a proposal on ethical guidelines for the Petroleum Fund to the Parliament in the Revised National Budget in May 2004.

Outlook for the Norwegian economy
Economic growth internationally seems to pick up, but the outlook is mixed. GDP-growth for Norway’s main trading partners is expected to increase from 1¼ per cent in 2003 to 2¼ in 2004.

The easing of monetary policy in Norway has been both quicker and larger than projected in the Revised National Budget 2003. Lower interest rates have contributed to the upswing in private demand during the last few months. The weakening of the krone exchange rate has improved the competitive situation for the exposed industries. Strong growth in private consumption and marked increases in petroleum investments will contribute to an upswing in economic growth next year. Mainland GDP is estimated to increase by ½ per cent in 2003 and 2½ per cent in 2004.

Labour market

The weak development in the mainland economy over the last 1½ years is reflected in the labour market. In particular, employment in manufacturing has fallen in past year, and total employment is expected to decline by 20000 persons this year. Unemployment has continued to increase over the last months, but the growth rate seems to be slowing down. In the three-month period to end-August, unemployment (Labour Force Survey) was 4.5 per cent, seasonally adjusted.

Unemployment is expected to stabilize towards the end of this year, and to decline somewhat during next year. On an annual basis, unemployment is expected to increase from 4.5 per cent in 2003 to 4.7 per cent in 2004.

Prices and wages

Consumer price inflation has declined substantially this year, due to the decline in the prices on imported goods and lower electricity prices. The consumer price index (CPI) is expected to increase by 2½ per cent this year. With electricity prices at more normal levels, CPI growth is set to decline to 1¼ per cent next year. Excluding changes in excise duties and energy prices, consumer price inflation is expected to pick up from 1¼ this year to 1¾ per cent in 2004.

Key projections for the Norwegian economy. Volume change from previous year, per cent

 

2002

NOK billion

2003

2004

Private consumption

685.2

3.0

3.8

Public consumption

332.5

0.7

2.0

Gross fixed investments

259.3

2.0

2.9

Petroleum

53.4

22.3

11.5

Business sector, Mainland Norway

99.4

-4.3

0.2

Exports

630.5

0.0

1.7

Crude oil and natural gas

264.8

-0.7

0.5

Traditional goods

199.8

0.4

3.3

Imports

415.1

2.4

3.6

Traditional goods

272.8

3.5

4.2

Gross domestic product

1520.7

0.6

2.3

Mainland Norway

1207.1

0.5

2.6

Memorandum items:

Consumer price inflation

1.3

Core inflation (CPI-ATE)

2.3

Wage growth

5.7

4

Employment growth

0.2

-0.9

0.0

Unemployment rate

3.9

4.5

4.7

Household savings rate. per cent of net disposable income

7.1

5.4

5.1

Current account balance NOK billion

200.6

202.3

162.9

Source: Statistics Norway and Ministry of Finance

Central government net lending (surplus). NOK billion

 

2003

2004

Fiscal budget surplus

0.0

0.0

+ surplus in Government Petroleum Fund

136.4

105.9

+ surplus in other Central Government and social security accounts

6.6

9.1

+ definitional differences between Fiscal Budget and national accounts

5.3

-4.7

+ direct investments in state enterprises

3.1

4.0

= Central government net lending

151.4

114.3

+ Local government surplus, accrued value

-6.0

-7.4

= General government net lending

145.4

106.9

In per cent of GDP

9.2

6.7

Source: Statistics Norway and Ministry of Finance.

Key figures for the Fiscal Budget (incl. social security) and the Government Petroleum Fund before loan transactions. NOK billion.

2002

2003

2004

1. Fiscal Budget

Total revenues

691.1

695.0

696.2

Revenues from petroleum activities

185.3

185.9

164.5

Revenues excl. petroleum activities

505.8

509.1

531.7

Total expenditures

584.2

588.1

620.5

Expenditures on petroleum activities

16.1

20.0

21.1

Expenditures excl. petroleum activities

568.2

568.0

599.4

Surplus before transfers to the Petroleum Fund

106.8

106.9

75.7

- Revenues from petroleum activities

169.2

165.9

143.5

= Non-oil budget surplus

-62.4

-59.0

-67.8

+ Transfers from the Petroleum Fund

53.4

59.0

67.8

= Fiscal budget surplus

-9.0

0.0

0.0

2. Government Petroleum Fund

Revenues from petroleum activities

169.2

165.9

143.5

- Transfers to the Fiscal Budget

53.4

59.0

67.8

+ Dividends on the Petroleum Fund

22.6

29.5

30.2

= Surplus in the Petroleum Fund

138.4

136.4

105.9

3. Fiscal Budget and Petroleum Fund surplus

129.4

136.4

105.9

Key figures for the petroleum sector

 

2003

2004

2007

Oil price
sensitivity 2004

Assumptions:

Crude oil. NOK per barrel

200

170

147

Production. Mill. sm3 oil equivalent

260

262

267

Crude oil and NGL

188

187

169

NOK billion:

Export value

283.7

250.3

217.6

12.1

Accrued taxes and royalties

93.1

75.8

60.3

7.7

Paid taxes and royalties

95.1

84.3

60.8

3.8

Net cash flow

165.9

143.5

110.5

7.7

Source: Statistics Norway, Ministry of Petroleum and Energy and Ministry of Finance.