Chapter 2

Fiscal Policy

2.4 Long-term Fiscal Policy Challenges

Expectations of substantial general government budget surpluses over the next ten years may create an impression that the issue of the long-term sustainability of fiscal policy is hardly relevant for Norway. However, the large current general government surpluses give a misleading picture of fiscal policy leeway, primarily because of the long-term outlook for petroleum revenues and social security expenditures:

Chart 6. Government net cash-flow from petroleum activities and old age and disability pensions

Per cent of GDP

Source: Statistics Norway and Ministry of Finance.

Substantial petroleum revenues still provide Norway with a more solid basis than many other countries for addressing the challenges associated with the ageing of the population. However, petroleum revenues are assumed to fall later this century. In periods with high petroleum revenues, substantial capital must be set aside, which is the primary objective of the accumulation of capital in the Government Petroleum Fund.

Since 1995, generational accounting estimates have been presented regularly based on the proposed budget. In the National Budget for 2000, the calculations showed a need for tightening in the order of NOK 5-20 billion, while in the National Budget for 2001 and the Revised National Budget for 2001 it was indicated that the budget balance was approximately of an order necessary to avoid passing on burdens to future generations. The calculations were based, among other things, on the assumption that the tax level in 2001 would be maintained. After the Revised National Budget for 2001 was presented, developments have contributed to weakening the generational balance. First and foremost, the new guidelines for fiscal policy result in a real increase in the use of petroleum revenues for the fiscal year 2002 of a good NOK 6 billion. At the same time the petroleum wealth has been revised downwards.

Overall, the generational balance has been weakened by about NOK 10 billion. Updated estimates of the generational accounts now indicate a need for tightening of about NOK 0-20 billion. Still, the generational accounts show that the need for tightening in Norway is moderate compared with that of other European countries (see the Long-Term Programme 2002-2005).

Chart 7. Pensioners and labour force

Source: Statistics Norway and Ministry of Finance.