The fiscal impulse of the 2004 Budget

Changes in the structural budget deficit are commonly used as a summary indicator of the fiscal stance. From 2003 to 2004 the change in the structural, non-oil budget deficit is estimated to 0.6 per cent of trend-GDP for Mainland-Norway.

However, different changes in the budget do not affect the domestic economy in the same way. For example, an increase in government consumption has a larger effect on the domestic activity level than a similar reduction in net taxes. To take account of such effects The Ministry of Finance carries out simulations on disaggregated macroeconomic model (MODAG). In these simulations, the actual budget is compared to a reference path where all income and expenditure items are assumed to grow in line with nominal mainland trend-GDP. The calculations include incomes and expenditure of both central and local government.

Simulations on the 2004 budget indicate that the development on the spending side of the budget is slightly contractionary. Total income show lower growth than the expenditure side. However, this is mainly due to slow growth in miscellaneous income (including transfers from state owned enterprises etc.). The demand effects of changes in these items are generally low. Seen as a whole, the model simulations indicate that the proposed 2004 budget reduces mainland activity (GDP in Mainland-Norway) by 0.1 per cent in 2004. Taking the uncertainty associated with such model simulations into account, the results indicate that the budget can be described as approximately neutral.