• Norway's news in English
 

Norway oil riches raise state spending dilemma

AFP · 8 Sep 2013, 10:40

Published: 08 Sep 2013 10:40 GMT+02:00

The Nordic country faces an embarrassment of riches as it tries to figure out how to spend its huge pile of oil money without damaging the economy in the long run.

"All countries around us are forced to reduce their spending," said Øystein Dørum, chief economist at Norway's largest bank DNB. "Our biggest challenge is that our oil wealth is so huge we run the risk of wasting it on substandard projects that are not profitable enough."

The dilemma is all the more real because the populist right gathered in the Progress Party, which wants to abandon the cautious policies espoused by other parties, is likely to form a government with the Conservatives after the election.

Since the late 1990s, the Scandinavian country has conscientiously placed its oil revenues in a fund meant to finance the generous welfare state over the long run.

The fund invests mainly in stocks, bonds and real estate, placing the money outside Norway to avoid overheating.

In the process, it has become the largest sovereign wealth fund in the world, weighing in at $750 billion, or an average 1.25 percent of the market capitalisation of each company listed in the world.

To make sure that the fund keeps growing, the government can withdraw no more than four percent a year -- the projected annual return -- in order balance its budget, which otherwise would be in the red.

"The fact that you can have dilapidated schools and broken roads at the same time as you have a huge oil fund belonging to society is testimony to the frugality and long-term perspective of Norway's leaders," said Dørum.

Launching a lone assault on this consensus, the Progress Party wants to remove the fiscal spending rule and spend more money on education, research and infrastructure, to lay the foundation for future growth that would prove profitable for the state in the medium term.

The problem is that the Conservatives, which are likely to lead a post-election coalition with the Progress Party, actually think the current arrangement is too generous, pointing out that as the fund continues to grow, the amount of petro-money available to the government expands proportionally.

"The most important point of negotiation between the Progress Party and us is on the nature of the expenses, not on whether to exceed the four percent," said the Conservative leader Erna Solberg, Norway's likely next prime minister.

"We will not," she added, "be part of a government that carries out an irresponsible economic policy."

Even though the Norwegian economy has slowed down, excessive injection of public money could be destabilising.

In a country where there is almost full employment, the booming oil sector is pulling wages higher than they otherwise would be. This even goes for traditional industries, which are in competition to attract skilled workers.

The result is that Norwegian industrial wages are about 70 percent above those of other European countries, severely undermining the competitiveness of the nation's exporters.

Story continues below…

An influx of petrodollars could thus ultimately have catastrophic consequences for employment and public accounts.

"Everything depends on how the money is spent," said Torbjørn Eika, head of research at Statistics Norway. "If we choose to lower taxes, the negative effects on the economy are less pronounced... because it tends to stimulate savings in the short term," he said.

Labour Prime Minister Jens Stoltenberg, who looks set to lose the election, has warned that the draft 2014 budget to be presented in October -- probably his last act in government -- will limit the drain on the oil windfall to a level not much higher than three percent, compared to 3.3 percent this year.

This measure not only meets the economic recommendations of the International Monetary Fund, but will also have the political advantage of complicating the task of the likely future government, which has vowed to cut taxes while increasing spending on health and infrastructure.

Your comments about this article

Today's headlines
Norway’s climate quotas have not led to emissions cuts
Photo: Håkon Mosvold Larsen/NTB Scanpix

Norway’s climate quotas have not led to emissions cuts
4 minutes ago

Five years after fulling joining the EU quota system, there have been no real reductions in Norway's emissions.

'Mystery films’ from 1980 to be shown in Norway
The 1980 delivery went unclaimed. Photo: Kjell-Erik Ruud/Instagram

'Mystery films’ from 1980 to be shown in Norway
2 hours ago

An American man sent three films to himself at a Norwegian hotel 36 years ago but never claimed the package. On Tuesday, the mysterious films will be shown, although no one knows what to expect.

Sexual criminals prey on Norway’s asylum centres
Kripos said that known sex offenders are carrying out attacks at Norway's asylum centres. Photo: Torstein Bøe / NTB scanpix

Sexual criminals prey on Norway’s asylum centres
6 hours ago

Known sex offenders are taking advantage of "especially vulnerable" underage asylum seekers.

Norwegian who raped Irish woman in sleep faces appeal
The Criminal Courts of Justice in Dublin, Ireland. Photo: Criminal Courts of Justice

Norwegian who raped Irish woman in sleep faces appeal
3 days ago

Irish prosecutors are hoping to overturn the suspended jail sentence of a Norwegian man who admitted to raping his Irish girlfriend up to ten times while she slept.

Elderly Norwegians arrested in Thailand for playing bridge
Photo: Colourbox

Elderly Norwegians arrested in Thailand for playing bridge
3 days ago

A game of bridge had an unexpected ending for 32 club members in Pattaya, including three Norwegian pensioners.

Norway's massive wealth fund drops 73 companies
Demonstrators in Trondheim protest against "an unethical oil fund" in 2015. Photo: Ned Alley / NTB scanpix

Norway's massive wealth fund drops 73 companies
3 days ago

Norway's huge sovereign wealth fund has sold out of 73 companies last year because their social or environmental policies could hurt profitability.

Norway's windmills smash previous records

Norway's windmills smash previous records
3 days ago

Norwegian windmills produced power like never before in 2015.

Norway top donor at Syria conference
Solberg meets British PM David Cameron at 10 Downing Street prior to the conference. Photo: Anne Marte Vestbakke / NTB scanpix

Norway top donor at Syria conference
February 04, 2016

Norway on Thursday pledged 10 billion kroner in aid response to the Syrian conflict – one seventh of the entire amount pledged at an international donor's conference.

Statoil cuts investments after heavy 2015 losses
Photo: Tore Meek / NTB scanpix

Statoil cuts investments after heavy 2015 losses
February 04, 2016

Norwegian oil giant Statoil has slashed investments and stepped up a cost-cutting programme after recording a huge annual loss for 2015 in the wake of tumbling oil prices.

Russia to Norway: We’ll only take 200 of 5,000 migrants
An estimated 5,500 migrants used the Storskog border crossing in 2015. Photo: Cornelius Poppe / NTB scanpix

Russia to Norway: We’ll only take 200 of 5,000 migrants
February 03, 2016

... and we'll only take them if you fly them to Moscow.

Sponsored Article
US taxes and FATCA: 'The time for hiding is over'
National
Norway police to go back to being unarmed
Health
Norway ads use Hitler teddy bear to scare parents... about dust
National
Migrants: Norway 'sending us to death' in Russia
Norway under fire over tough new asylum plans
Health
Norway doctors push plan for 'tobacco-free generation'
National
Norway's call to remove crosses causes backlash
Politics
Norway tightens asylum policy to cut numbers
Society
The end of the expat? European cities fight for innovative 'inpats'
Education
Hiker finds 1,200-yr-old Viking sword in Norway
National
Oslo eyes ban on private cars from city centre in green push
Culture
Family shocked as The Scream appears in a freshly sawn plank
National
AS-IT-HAPPENED: Nobel Peace Prize announcement 2015
National
Norway armed forces to get organic underwear
International
Syrians cross Norway's Arctic border on bicycles
Society
Norwegians reveal the (hilariously inaccurate) origins of the Danish language
National
Norway man built secret child's room in cellar
Education
Norway starts school for Vikings
Sport
Sepp Blatter should win Nobel Peace Prize: Putin
2,201
jobs available