The Fiscal Budget 2002: Long-term, sustainable use of petroleum revenues

Despite the last years' slowdown, capacity utilisation in the Norwegian economy is still high, and the labour market remains tight. The Government's budget proposal for 2002 is adapted to the current cyclical situation and a long-term, sustainable phasing-in of petroleum revenues in the Norwegian economy.

 

The budget proposal is based on the guidelines for economic policy presented in the Government's Long-Term Programme and in Guidelines for economic policy:

  • The structural, non-oil budget deficit shall approximately correspond to the expected real return on the Government Petroleum Fund, which is estimated at 4 per cent.
  • The actual implementation of fiscal policy shall take into account business cycle fluctuations around the suggested medium-term path.

The budget proposal for 2002 implies an increase in the real use of petroleum revenues over the fiscal budget of NOK 6 billion from 2001 to 2002. A good half of the increased fiscal leeway is used to reduce direct and indirect taxes. Furthermore, the Government has emphasised developing welfare services and improving productivity and the employment of available resources.

Fiscal Policy
The main features of the Fiscal Budget proposal for 2002 can be summarised as follows:

  • A structural, non-oil budget deficit equal to the expected real return on the Petroleum Fund of about NOK 26 billion. The resulting real increase in the use of petroleum revenues over the Fiscal budget of about NOK 6 billion from 2001 to 2002 is NOK 2 billion more than estimated in the Revised National Budget 2001. The structural, non-oil deficit on the Fiscal budget in 2001 is revised downwards by NOK 1.5 billion compared to the Revised National Budget. In addition, the inclusion of revenues from the partial privatisation of Statoil and the disposal of the SDØE (State Direct Financial Interest) units to Statoil has contributed to an upward adjustment of the estimate of the capital in the Government Petroleum Fund at the beginning of next year.
  • A real reduction in direct and indirect tax payments of about NOK 3.5 billion between 2001 and 2002. In accrued terms, direct and indirect taxes are reduced by close to NOK 7.7 billion.
  • A real underlying growth in Fiscal Budget expenditures of 2 per cent between 2001 and 2002, corresponding to roughly NOK 9 billion in 2001-prices. The growth in social security expenditures alone accounts for about half of this amount.
  • Total local government revenues, excluding transfers to the specialist health service, increase in real terms by about NOK 3½ billion, or almost 2 per cent, compared with the revenue level in 2001 as estimated in the Proposition on Local Government Finances. Compared with the estimates for the accounts for 2001, growth in local government revenues is about NOK 1¾ billion, or about 1 per cent.
  • The non-oil Fiscal Budget deficit in 2002 is estimated at NOK 36.1 billion. The increase from 2001 must be seen in the light of extraordinary repayments of local government debt of close to NOK 19 billion in connection with the state acquisition of the specialist health service. The state's net cash flow from petroleum activities is estimated at NOK 205.5 billion in 2002, which implies net transfers to the Government Petroleum Fund of NOK 169.4 billion. The overall surplus on the Fiscal Budget and the Government Petroleum Fund, including interest and dividend income in the Fund, is estimated at NOK 193.4 billion in 2002.
  • General government net lending (the surplus concept used in the Maastricht criteria) is estimated at NOK 210.8 billion in 2002, or 14.0 per cent of GDP. General government net assets are estimated at about NOK 1180 billion, or 78 per cent of GDP, at the end of 2002.

On the expenditure side, the Government has placed particular emphasis on maintaining and expanding welfare services. The Government has also given priority to measures that can improve economic efficiency, including a reduction in taxes and measures to improve infrastructure, enhance the knowledge base and foster technological advances.

Tax policy
The Government proposes to use a good half of the increase in the non-oil, structural deficit in 2002 to reduce direct and indirect taxes, including reduced taxes on labour. This should have favourable effects on the growth potential of the economy. The tax proposal will contribute to rising household purchasing power, providing a relief for all income levels. Increased standard allowance and threshold for the surtax on higher income will reduce marginal taxes for persons in low- and middle-income brackets. Accordingly, employees with an average wage income will not pay the surtax. The reduced taxes further include a reduction of 1 øre per kWh in electricity taxes effective from 1 July 2002. The investment tax will be removed from 1 October 2002. In addition, the Government intends to present a report to the Storting on business and capital taxation, preferable during this autumn.

Monetary Policy
The new guidelines for economic policy imply that fiscal policy shall accommodate a gradual and sustainable increase in the use of petroleum revenues in the Norwegian economy. It was thus necessary to establish a clearer anchoring of monetary policy's role in underpinning economic stability. On this basis, a new regulation on monetary policy was drawn up in Report no. 29 to the Storting (2000-2001) in March 2001. Norwegian monetary policy shall aim at stability in the internal and external value of the krone. It shall contribute to stable expectations concerning exchange rate developments, but also underpin fiscal policy by contributing to stable developments in output and employment. In accordance with this, Norges Bank's implementation of monetary policy shall be oriented towards low and stable inflation. The operational target of monetary policy shall be annual consumer price inflation of approximately 2.5 per cent over time. As a main rule, consumer price inflation is expected to remain within an interval of +/-1 percentage point around the inflation target. Norges Bank's interest rate setting shall be forward-looking and take due account of the uncertainty associated with macroeconomic estimates and assessments. It shall disregard direct effects on inflation due to changes in interest rates, taxes, excise duties and extraordinary temporary disturbances that are not considered to have an effect on underlying price and cost inflation. After the introduction of the new guidelines, Norges Bank signalled that their application would not result in significant changes in the conduct of monetary policy. So far this year, the bank has left its key deposit rate unchanged at 7 per cent. The Norwegian 3-month money market rates are now at about 7 per cent, i.e. about 3½ percentage points above the corresponding rates in the Euro area.

Economic Outlook
World economic growth has slowed markedly over the past year, and the terrorist attacks on the US in September 2001 have increased the risk of a more pronounced international setback. Lower international growth has resulted in weaker growth in Norwegian industries exposed to international competition, which may have spillover effects on domestic demand. The strongest effects of the international slowdown will probably be felt if oil prices fall and remain at a low level. The risk of a pronounced downturn in Norway during the next year nevertheless remains limited. The Norwegian economy is still characterised by high capacity utilisation and labour shortages in many sectors. Private consumption is projected to increase by around 2 per cent in 2001, while lower price inflation and relatively stable household saving is expected to give 2.7 per cent consumption growth in 2002. The high capasity utilisation is also reflected in the high interest rate level.

GDP
Mainland GDP growth is now projected at 1.2 per cent in 2001 and 1.9 per cent in 2002, compared against 1.8 per cent in 2000. These estimates are strongly influenced by developments in electricity production as a result of heavy rainfall in 2000. Excluding electricity, the growth figures for 2001 and 2002 are about 1.7 and 2.0 per cent, respectively. Total GDP (including petroleum and shipping) is expected to grow by 1.7 per cent this year and 3.2 per cent in 2002.

Labour market
The labour force participation rate is historically and internationally very high. Employment is expected to grow by about ½ per cent both in 2001 and 2002, leaving unemployment stable at 3.4 per cent in 2001 and 2002.

Prices, wages
Consumer price inflation is projected at 3.1 per cent in 2001 and 1.9 per cent in 2002. Electricity prices have contributed substantially to pushing up consumer price inflation this year. Changes in indirect taxes during 2001 will have a limited impact on average inflation from 2000 to 2001, but contribute to higher rates of inflation in the first half and lower rates in the second half of the year. Excluding changes in excise duties and energy prices, consumer price inflation is projected at 2½ per cent both in 2001 and 2002, i.e. in line with the inflation target. Average annual wage growth is estimated to decline slightly from 4½ to 4¼ per cent from 2001 to 2002. The increase in enterprises' labour costs will be higher than growth in annual wages in both 2001 and 2002, mainly because of an increase in the number of vacation days.

Petroleum sector, current account
Total petroleum production on the Norwegian continental shelf is expected to increase by about 5 per cent from 2000 to 2001 and by just under 10 per cent from 2001 to 2002. This implies that Norwegian petroleum production will have more than doubled since 1990. Crude oil production is expected to peak in 2002. Total petroleum production is however expected to remain relatively stable until 2005 due to increased production of natural gas.

After peaking in 1998, investments in the petroleum sector dropped by one third during the next two years. A moderate reduction is expected in 2001 and 2002.

The crude oil price is assumed to average NOK 230 per barrel in 2001 and NOK 200 in 2002, compared to NOK 251 in 2000.

Current account surplus is projected at 13.3 per cent of GDP in 2001 and 12.0 per cent in 2002, against 14.3 per cent in 2000. The impact of increases in petroleum production is more than offset by the impact of assumed lower oil prices in 2001 and 2002 than in 2000.

The Petroleum Fund
The value of the Government Petroleum Fund is estimated to reach NOK 650 billion at the end of 2001 and increase to NOK 861 billion at the end of 2002. From the beginning of 1998 until June 2001, the average annual real return on the Fund has been 4.7 per cent.

An Environmental Fund was established on 31 January 2001 with a capital of NOK 1 billion. The Fund should be invested in companies considered to have little negative impact on the environment and in companies that satisfy defined criteria with respect to environmental reporting and certification.

The Government will establish an exclusion mechanism for the Petroleum fund, which gives the Ministry of Finance the right to exclude companies from the Fund's investment universe if investments in such companies are contrary to Norway's commitments under international law.

Table 1 Key figures

 

NOK billion

Volume change from previous year, pct.

 

2000

2001

2002

Private consumption

608.0

2.0

02.7

Public consumption

271.0

02.1

01.5

Gross fixed capital formation

282.1

-1.0

01.4

Oil activities

58.9

-5.9

-5.0

Shipping

16.9

09.3

04.7

5nland Norway

206.3

-0.5

02.8

Of which: 5nland business sector

128.8

-2.5

02.8

Residential construction

37.1

07.6

0.8

Public sector

40.4

-1.6

04.8

Total domestic demand, incl. stockbuilding

1193.8

01.1

02.1

Exports

663.6

04.4

05.4

Of which: Traditional goods

212.1

4.0

03.6

Imports

433.5

03.3

3.0

Of which: Traditional goods

274.4

04.5

03.4

Gross Domestic Product

1423.9

01.7

03.2

Of which: 5nland Norway

1054.5

01.2

01.9

Memorandum items:

Gross product manufacturing and mining

132.5

01.2

01.1

Consumer price inflation

..

03.1

01.9

Wage growth

..

41/2

41/4

Employment (persons)

..

0.5

0.6

Unemployment rate

..

03.4

03.4

Current account surplus, NOK billion

203.6

196.3

180.7

Per cent of GDP

14.3

13.3

12.0

Net external assets, NOK billion

327.6

510.1

690.9

Per cent of GDP

23.0

34.6

45.8

Source: Statistics Norway and Ministry of Finance.

Table 2 Central and general government net lending. NOK million

 

2000

2001

2002

Fiscal Budget surplus

1 525

0

0

+ Surplus in Government Petroleum Fund

162 825

259 486

193 370

+ Surplus in other central government and social security accounts

-591

3 728

8 230

+ Definitional differences between central government accounts and national accounts1)

51 354

8 486

2 437

+ Direct investments in state enterprises

4 101

-38 628

-2 570

= Consolidated central government net lending

219 214

233 072

201 467

+ Local government surplus

-6 507

-2 972

9 286

= General government net lending

212 707

230 100

210 753

Per cent of GDP

14.9

15.6

14.0

1) Including consolidated and central government accrued, unrecorded taxes.
Source: Statistics Norway and Ministry of Finance.

Table 3 Key figures for the Fiscal Budget (incl. Social Security) and Government Petroleum Fund. NOK billion. Accrued values

 

2000

2001

2002

Total revenues

643.6

746.1

738.3

Revenues excl. petroleum activities

459.0

484.0

516.4

Taxes and excises, Mainland Norway

406.7

426.9

465.5

Other revenues

52.4

57.2

50.9

Revenues from petroleum activities

184.6

262.0

221.9

Total expenditures

490.2

505.0

568.9

Expenditures excl. petroleum activities

467.0

487.8

552.5

Purchases of goods and services

106.1

101.4

102.4

Transfers

360.9

386.4

450.1

Expenditures on petroleum activities

23.3

17.2

16.4

Surplus before transfer to the Government Petroleum Fund

153.4

241.1

169.4

- Revenues from petroleum activities

161.4

244.9

205.5

= Non-oil budget surplus

-7.9

-3.8

-36.1

+ Transfer from the Government Petroleum Fund

09.5

03.8

36.1

= Fiscal budget surplus

01.5

0.0

0.0

+ Net transfer to the Government Petroleum Fund

151.9

241.1

169.4

+ Dividend and interest on the Government Petroleum Fund

10.9

18.4

24.0

= Fiscal budget surplus and the Government Petroleum Fund

164.3

259.5

193.4

A summary of The National Budget 2002 can be found here.