National Budget 2003

National Budget 2003

Economic Policy - Fiscal Policy

Guidelines for Fiscal Policy


According to the guidelines drawn up in White Paper No. 29 (2000-2001), fiscal policy must:

  • make for a steady and sustainable increase in the use of petroleum revenues, approximately in line with expected real return on the Petroleum Fund.
  • contribute to smoothing fluctuations in the economy to ensure sound capacity utilisation and low unemployment.

The current adoption of the fiscal policy guidelines is based on the following:

  • For each fiscal year the structural, non-oil budget deficit should approximately correspond to the expected real return on the Petroleum Fund at the start of the fiscal year. The expected real rate of return is estimated at 4 per cent.
  • The point of reference for the spending rule for oil revenues is a normal cyclical situation. In a situation of particularly high capacity utilisation in the economy, fiscal policy restraint should be shown, whereas in a cyclical downturn somewhat higher spending of oil revenues may be needed.
  • In the event of extraordinarily large changes in the Petroleum Fund's capital or in factors influencing the structural deficit from one year to the next, any change in oil revenue spending should be smoothed over several years with a basis in the projected return on the Petroleum Fund some years ahead.

Chart 2.1 Government net cash-flow from petroleum activities and old-age and disability pensions. Per cent of GDP

Source: Statistics Norway and Ministry of Finance.

Oil and gas are non-renewable resources. Hence the current high receipts from the oil sector are to a large extent rents from the oil and gas resources. In order to benefit from the oil revenues in the long run, the use of these revenues must be separated from the oil revenue payments to the State. The fiscal policy guidelines serve this purpose. The net cash flow from petroleum activities is transferred to the Government Petroleum Fund, while only the real return on the Fund is actually spent. By adopting this strategy, the State will maintain a substantial level of saving in the years ahead. This is necessary in order to meet sizeable future expenditures on pensions, health etc.

Given the projected development of the Petroleum Fund, the spending rule implies that oil revenue spending will rise in the next few years. However, as the petroleum reserves are depleted, the growth in the Government Petroleum Fund will come to a halt, and oil revenue spending will level off. At the same time expenditures on pensions, health and care provision will rise substantially over the next few decades. Calculations of the fiscal balance up to 2050 show that some years from now it will be necessary to curb the growth in spending or increase revenues. This will be necessary even if oil revenue spending is kept within the limits imposed by the spending rule. In light of the long-term challenges to fiscal policy, a central policy objective for the Government is to adhere to the guidelines established for spending the oil revenues and for management of the Petroleum Fund. Moreover, a responsible fiscal policy is crucial to stability in the money and foreign exchange markets.

Increased oil revenue spending will over time lead to adjustments and resource transfers from the exposed sector to sheltered industries. Hence, consideration for a balanced development of the economy, in which the exposed sector is maintained to a sufficient degree, also calls for a smooth and gradual introduction of oil revenues in keeping with the fiscal policy guidelines

Box 1 The structural budget balance
Under the fiscal policy guidelines, the use of petroleum revenues as measured by the structural, non-oil budget deficit equals the expected real return on the Government Petroleum Fund. An important rationale for linking the use of petroleum revenues to the structural, non-oil budget deficit rather than to the actual, non-oil deficit is to avoid a destabilising fiscal policy.

The non-oil budget deficit is affected the cyclical situation, other random factors and accounting changes. For example a cyclical downturn will tend to increase the non-oil budget deficit, while a cyclical upturn will reduce it. As a consequence, linking the non-oil budget deficit to the expected return on the Petroleum Fund would intensify the cyclical fluctuations in the economy. By gearing fiscal policy to a desired trend in the structural budget deficit, this type of detrimental effect is avoided by ensuring that the automatic stabilisers are allowed to work.

To move from the actual, non-oil deficit to the structural, non oil budget balance, corrections are made for the following, cf. table 3.3:

  • Budget effects of tax-base divergences from trend levels and cyclical variations in unemployment.
  • Transfers from Norges Bank and central government's net interest revenues in excess of trend levels.
  • Accounting changes which do not affect the trend in the underlying budget balance.

Table 2.1 The Structural Budget Balance. NOK billion

 

2002

2003

Non-oil fiscal budget surplus

-42.3

-34.8

- Transfers from NorgesBank1)

4.4

-4.3

- Net interest payments from Norges Bank and abroad1)

-0.7

-1.1

- Extraordinary transfers

-21.8

0.0

- Cyclical corrections

3.4

1.3

= Structural budget balance

-27.6

-30.7

Memo
In per cent of Trend GDPfor Mainland Norway

-2,3

-2,5

Change from previous yearin percentage points2)

-0.4

-0.1

1) In excess of trend.
2) Negative numbers indicate an expansionary budget.
Source: Statistics Norway and Ministry of Finance.

Fiscal Policy in 2003
In the Revised National Budget for 2002 the value of the Petroleum Fund at the end of 2002 was estimated at NOK 776 billion. A very weak equity market and a substantial appreciation of the Norwegian krone implied that the change in the capital of the Petroleum Fund in krone terms in the first seven months of the year was negligible, despite the addition of NOK 93 billion from the Treasury. The Fund's size at year-end is now estimated at about NOK 666 billion, i.e. about NOK 110 billion less than in the Revised National Budget for 2002. The appreciation of the krone explains more than half of this shortfall. However, although the value of the Petroleum Fund in krone terms is reduced when the krone appreciates, the Fund's international purchasing power is not affected. The expected return on the Government Petroleum Fund in 2003, calculated as 4 per cent of the capital in the Fund at the start of the fiscal year, is estimated at about NOK 26.6 billion, just over NOK 4 billion less than previously projected. By way of comparison, the structural deficit in 2002 is now put at NOK 28.7 billion, converted to 2003 prices. As these figures show, a mechanical application of the 4 per cent spending rule would have produced a decline in oil revenue spending from 2002 to 2003 of about NOK 2 billion, following an increase of more than NOK 5 billion in the current year. The expected increase in oil revenue spending in 2004 would have come to just over NOK 6 billion. Thereafter the annual increase in the use of petroleum revenues is projected to gradually decline to a level of about NOK 3 billion towards the end of this decade.

Chart 2.2 The room for manoeuvre in fiscal policy. NOK billion

Source: Statistics Norway and Ministry of Finance.

The possibility of wide variations in equity prices, oil prices and exchange rates was one of the reasons why White Paper No. 29 (2000-2001) underscored the necessity of spreading major changes in the phasing-in of petroleum revenues over time, based on the projected size of the real return on the Petroleum Fund some years ahead (cf. above). The aim was to move gradually to a long-term, sustainable level of oil revenue spending. Both short-term and long-term stabilisation needs suggest that a steady increase in oil revenue spending is preferable to a policy in which expansionary impetuses fluctuate widely from year to year. The guideline for fiscal policy accordingly indicates that the unexpectedly weak trend in the Fund's capital in 2002 should not be fully reflected in the fiscal policy programme for 2003, but should instead be smoothed out over time.

An overall assessment of the economic situation and of the prospects for the Norwegian economy does not argue against such a smoothing out on stabilisation policy grounds. Mechanically applying a rule to spend 4 per cent of the Petroleum Fund each year, would have produced a tighter budget in 2003, but followed by a correspondingly more expansionary budget in 2004. Since monetary policy is intended to be forward-looking and to aim for an annual rise in consumer prices close to 2½ per cent over time, interest rate setting has to take account of the overall increase in oil revenue spending in the years immediately ahead. Nevertheless, the present high interest rate and the strong krone exchange rate along with the associated impairment of competitiveness underscore the importance of curbing spending growth and of adhering to the Government's objective of a gradual reduction in overall tax level, within the room for manoeuvre provided by a steady phasing in of oil revenues into the economy.

Against this background, the Government presents a fiscal budget proposal entailing a real increase in oil revenue spending of about NOK 2 billion from 2002 to 2003. This makes room for a similar increase in 2004. The fiscal impulse is clearly lower than in the current year and lower than the projected increase in the use of oil revenues in the years 2005-2010.

The main features of the budget can be summarised as follows:

  • A real increase of about NOK 2 billion in the use of petroleum revenues as measured by the structural, non-oil budget deficit. This entails a structural deficit of NOK 30.7 billion in 2003. In terms of trend GDP for Mainland Norway, the structural deficit will rise from just over 2.3 per cent in 2002 to close to 2.5 per cent in 2003, i.e. by a good 0.1 per cent of mainland trend GDP.
  • A real, underlying growth of about ½ per cent in fiscal budget expenditure from the 2002 accounts. With the approved budget for 2002 as a point of reference, the real, underlying expenditure growth is about 2 per cent, corresponding to about NOK 10 billion. For 2002 and 2003 combined, real expenditure growth can be estimated at an average of 1½ per cent per year, i.e. somewhat less than the real growth in mainland-GDP.
  • A reduction of about NOK 10.6 billion in direct and indirect taxes compared with a prolongation of the rules for 2002. Of this figure, about NOK 10 billion is a consequence of decisions made in the 2002 budget, while about NOK 600 million refers to new tax measures.
  • The fiscal budget's non-oil deficit in 2003 is estimated at NOK 34.8 billion. The non-oil deficit is met by a corresponding transfer from the Government Petroleum Fund.
  • Assuming an average oil price of NOK 180 per barrel in 2003, the central government's net cash flow from petroleum activities is projected at NOK 172.8 billion.
  • Net transfers to the Government Petroleum Fund, excluding transfers to the fiscal budget, are estimated at NOK 138.0 billion. Interest payments and dividends on accumulated capital in the Government Petroleum Fund come in addition. The overall surplus on the fiscal budget and the Government Petroleum Fund in 2003, including interest and dividend revenues accruing to the Fund, are accordingly estimated at NOK 162.0 billion.
  • Overall capital in the Government Petroleum Fund at the end of 2003 is estimated at about NOK 846 billion, compared with NOK 666 billion at the end of 2002.
  • General government net lending is estimated at NOK 157 billion in 2003, equivalent to 10 per cent of GDP. Net lending corresponds to the surplus concept used in the Maastricht Criteria for government finances. General government net assets are estimated at about NOK 1195 billion or 76.5 per cent of GDP at the end of 2003.

Table 2.2 Key figures for the Fiscal Budget (incl. Social Security) and the Government Petroleum Fund. NOK Billion.

 

 

 

 

2001 

2002 1)

2003 

Total revenues

758.4

709.9

717.6

1 Revenues from petroleum activities

268.9

189.6

188.9

1.1 Taxes and excises

112.1

89.5

106.6

1.2 Other revenues

156.8

100.1

82.3

2 Revenues excl. petroleum activities

489.5

520.3

528.7

2.1 Taxes and excises, Mainland Norway

429.6

467.8

482.1

2.2 Other revenues

60.0

52.5

46.6

Total expenditures

516.8

582.6

579.6

1 Expenditures on petroleum activities

25.7

20.0

16.2

2 Expenditures excl. petroleum activities

491.2

562.6

563.5

Surplus before transfers to the Government Petroleum Fund

241.6

127.3

138.0

- Net cash flow from petroleum activities

243.2

169.6

172.8

= Non-oil budget surplus

-1.6

-42.3

-34.8

+ Transfer from the Government Petroleum Fund

0.4

42.3

34.8

= Fiscal Budget surplus

-1.2

0.0

0.0

+ Net transfer to the Government Petroleum Fund

242.8

127.3

138.0

+ Dividends and interest payments on the Government Petroleum Fund

17.2

22.3

24.0

= Fiscal Budget surplus and the Government Petroleum Fund

258.8

149.6

162.0

Memo:Market value of the Government Petroleum Fund at the end of the year

619.3

666.0

846.0

In per cent of GDP

41.0

43.7

54.2

1) Extraordinary repayment of local government debt in connection with the state's acquisition of the specialist health services increases the non-oil budget deficit by NOK 21.6 bn. in 2002.

Source: Ministry of Finance.

Table 2.3 Central and general government net lending. NOK million

 

2001

2002

2003

A Consolidated central government net lending

231 263

178 079

159 830

Fiscal Budget surplus

-1 231

0

0

Surplus in Government Petroleum Fund

260 055

149 582

161 964

Surplus in other central government and social security accounts

4 936

6 978

6 271

Definitional differences between central government accounts and national accounts1)

8 266

30 679

-7 337

Direct investments in state enterprises

-40 763

-9 160

-1068

B Local government surplus

-5 157

10 546

-2 815

C General government net lending (=A+B)

226 106

188 624

157 016

Per cent of GDP

15.0

12.4

10.1

1) Including consolidated and central government accrued, unrecorded taxes.

Source: Statistics Norway and Ministry of Finance.

Fiscal Policy in the Medium Term

Chart 2.4 The non-oil budget balance and the structural budget balance. Change from previous year in per cent of trend-GDP for Mainland-Norway

Source: Statistics Norway and Ministry of Finance.

The guidelines for fiscal policy draw up a path for the budget balance in the years ahead in which the use of oil revenues is equal to the expected return on the Government Petroleum Fund. Calculations of the trend in the structural, non-oil budget balance and of the corresponding development in the capital in the Government Petroleum Fund for the period 2001-2010 are shown in Table 2.3. These calculations are based on two main assumptions:
  • Lower oil prices together with declining crude oil production will reduce the state's net cash flow from petroleum activities from an estimated level of NOK 243.2 billion in 2001 to about NOK 119 billion in 2005 and about NOK 105 billion in 2010.
  • A gradual increase in the use of petroleum revenues over the Fiscal Budget in line with the expected real return on the Petroleum Fund.

For the coming three years, these assumptions imply an average increase in the petroleum revenue spending of around NOK 3.5 billion per year, measured in 2003 prices. This is approximately on par with the projected average annual increase in the use of petroleum revenues in the following years up to 2010. The table shows that petroleum revenue spending will produce an annual demand stimulus equivalent to about 0.2 per cent of mainland trend GDP for the rest of this decade. In the longer term, the annual increase in the use of petroleum revenues will decrease further as the growth in the Petroleum Fund's capital gradually comes to a halt.

Table 2.4 Medium-term implications of the fiscal rule

 

Structural budget deficit in 2003 prices. NOK billion

Structural budget deficit. Per cent of trend-GDP for Mainland Norway

Market value of the Government Petroleum Fund. Per cent of GDP

2001

23.4

1.9

41.0

2002

28.7

2.3

43.7

2003

30.7

2.5

54.2

2004

32.8

2.6

62.8

2005

37.7

2.9

69.2

2006

41.8

3.2

74.4

2007

45.5

3.4

79.7

2008

48.9

3.6

84.8

2009

52.2

3.8

89.4

2010

55.3

3.9

93.2

Source: Ministry of Finance.