Chapter 2

Fiscal Policy

2.1 Main Features of Fiscal Policy

The primary objective of fiscal policy is to allocate resources for public consumption, public investment and transfers to achieve the highest possible welfare over time. Fiscal policy shall also contribute to a stable and sustainable economic development. The fiscal policy for 2002 is based on the new guidelines for economic policy presented in the Government's Long-Term Programme 2002-2005 and in Report no. 29 to the Storting (2000-2001).

Report no. 29 introduced the following guidelines for fiscal policy:

Chart 3. The non-oil fiscal budget surplus and the structural, non-oil budget surplus

Change from previous year. Per cent of trend-GDP for Mainland-Norway

Source: Statistics Norway and Ministry of Finance.
 

The central government structural, non-oil budget balance

The Ministry of Finance has for many years used the change in the non-oil cyclically adjusted budget surplus net of interest payments as an indicator of the fiscal policy stance. In order to assess the use of petroleum revenues over the Government budget, some adjustments have been made to these calculations. These modifications affect the level of the adjusted budget surplus, but not the year to year changes. The new adjusted budget surplus – the structural, non-oil budget balance – can be interpreted as the amount of petroleum revenues that are used over the Government budget. The relation between the non-oil fiscal budget surplus and the structural, non-oil budget balance is shown in table 2.

 

Table 2. The structural non-oil budget balance. NOK mill.
2001
2002
Non-oil fiscal budget surplus
-3 766
-36 100
-Transfers from Norges Bank2)
5 473
3 770
-Net interest payments from Norges Bank and abroad2)
208
-267
-Extraordinary transfers
2 586
-18 705
-Cyclical corrections
6 709
5 077
=The structural, non- oil budget balance
-18 742
-25 975
In per cent of trend-GDP for Mainland-Norway
-1.7
-2.3
Change from previous year in percentage points1)
-0.1
-0.6

1) Equivalent to the former budget indicator.
1) In excess of trend.

Source: Ministry of Finance.

The capital in the Petroleum Fund at the beginning of 2002 is estimated at about NOK 650 billion. With an expected real rate of return of 4 per cent, the guidelines imply a use of petroleum revenues of about NOK 26 billion in 2002, as measured by the structural, non-oil budget deficit. The deficit in 2001 is now estimated at NOK 18.7 billion. Overall, these estimates imply that the guidelines for fiscal policy provide room for a real increase in the use of petroleum revenues of about NOK 6 billion from 2001 to 2002, compared with a neutral fiscal stance. This figure is around NOK 2 billion higher than the estimate in the Revised National Budget 2001.

According to the guidelines for fiscal policy, changes in the return on the Petroleum Fund from one year to the next that are attributable to extraordinary large changes in the Fund's capital shall be phased in over several years. In general, the use of oil revenues shall be based on estimates for changes in the expected real return on the Petroleum Fund over a period of years. The revenues from the partial privatisation of Statoil and the disposal of the SDØE (State Direct Financial Interest) units in 2001 are examples of such extraordinary large changes. The expected real return on the Fund is now estimated to increase by about NOK 6 billion on average per year during the period 2003-2005, measured in 2001 prices. This is in line with the estimated room for the increased use of petroleum revenues in 2002.

In keeping with the guidelines, the use of petroleum revenues over the Fiscal Budget must also be considered in the light of the economic outlook. The outlook for the next few years suggests that the labour market may remain relatively tight. Caution should therefore be made with regard to increased spending of petroleum revenues. Should the increased use of petroleum revenues fuel high price and cost inflation in the years ahead, there is a risk that monetary policy will be tightened. This will have a dampening effect on domestic demand, but could also lead to an appreciation of the Norwegian krone. Such a policy could weaken the basis for the exposed industries.

The proposed Fiscal Budget for 2002 implies a structural, non-oil deficit equal to the expected real return on the Petroleum Fund of NOK 26 billion. This implies a real increase in the use of petroleum revenues over the Fiscal Budget of about NOK 6 billion from 2001 to 2002. The Government proposes that a good half of the increased use of petroleum revenues be used to reduce direct and indirect taxes, with a view to stimulating the supply of labour. This is in line with the assumptions in Report no. 29 to the Storting, which was presented at the end of March. 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 direct and indirect taxes and measures to improve infrastructure, enhance the knowledge base and foster technological advances.

Chart 4. The structural, non-oil budget surplus

Change from previous year. Per cent of trend-GDP for Mainland-Norway

Source: Statistics Norway and Ministry of Finance.
 

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

The budget proposals and estimates in this report imply an overall surplus on the Fiscal Budget and the Petroleum Fund of NOK 193.4 billion in 2002, i.e. a reduction of NOK 66 billion compared to the estimates for 2001. The reduction is ascribable to an increase in the non-oil budget deficit of NOK 32.3 billion and an estimated decrease in the state's net cash flow from petroleum activities of NOK 39.4 billion. The decline in net cash flow partly reflects extraordinary income from the sale of SDØE (State Direct Financial Interest) units to Statoil in 2001. In addition, the oil price is assumed to fall from an estimated NOK 230 per barrel in 2001 to an average of NOK 200 per barrel in 2002. Interest and dividend income in the Petroleum Fund is estimated to rise by NOK 5.6 billion to NOK 24.0 billion in 2002. The capital in the Petroleum Fund is estimated at NOK 861 billion at the beginning of 2003, or 57 per cent of GDP.

Table 3. Key figures for the Fiscal Budget (incl. Social Security) and
Government Petroleum Fund. NOK billion.
2000
2001
2002
Total revenues 643.6 746.1 738,3
1. Revenues excl. petroleum activities
459.0 484.0 516.4
   1.1 Taxes and excises, Mainland Norway
406.7 426.9 465.5
   1.2 Other revenues
52.4 57.2 50.9
2. Revenues from petroleum activities
184.6 262.0 221.9
Total expenditures 490.2 505.0 568.9
1. Expenditures excl. petroleum activities
467.0 487.8 552.5
   2.1 Purchases of goods and services
106.0 101.4 102.4
   2.2 Transfers
360.9 386.4 450.1
2. 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
9.5 3.8 36.1
=  Fiscal budget surplus
1.5 0.0 0,0
+  Net transfer to the Government Petroleum Fund
151.9 241.1 169.4
+  Dividends and interest payments 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

Source: Ministry of Finance.