• Norway edition
 
Norway oil riches raise state spending dilemma
Photo: NTB Scanpix

Norway oil riches raise state spending dilemma

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

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.

Don't miss...X
Left Right

Your comments about this article

Today's headlines
Second man arrested in imam attack
Police guard the Central Jamaat Ahle-Sunnat mosque in Oslo. Photo: Fredrik Hove / NTB scanpix

Second man arrested in imam attack

Norwegian police have arrested on Thursday a second suspect in the case of the attempted murder of the imam of Oslo's main mosque in mid-June. READ  

Israel appoints new Norway ambassador
Naim Araidi, Israel's former ambassador to Norway, is to be replaced. Photo: Stian Lysberg Solum / NTB scanpix

Israel appoints new Norway ambassador

Israel has chosen Raphael Schutz as new Norway ambassador to replace Naim Araidi, who was called home earlier this year amid controversy. READ  

Norway's Deila suffers Champions League woe
Ronny Deila's Celtic endured a humiliating defeat against Legia Warsaw. Photo: Leszek Szymañski / NTB scanpix

Norway's Deila suffers Champions League woe

Celtic lost 4-1 against Legia Warsaw in a nightmare Champion League result under Norwegian boss Ronny Deila on Wednesday. READ  

Circus camel escapes again
Ali the camel believes the grass is greener on the other side of the fence. Photo: Knut Jegersen / NTB scanpix.

Circus camel escapes again

For the second time in 24 hours, a camel has taken the hump and fled a travelling circus in Norway. On Wednesday Ali the camel was again seen by locals grazing on a public roadside in Stjørdal. READ  

'Still a specific attack threat': terror expert
Kjetil Stormark, journalist and terrorism expert. Photo: Erlend Aas / NTB scanpix

'Still a specific attack threat': terror expert

Norwegian police were right to call a national alert after they learnt a terror group from Syria had fake ID documents and were set to enter Norway, claims a terrorism expert on Wednesday. READ  

Norway continues to downgrade terror alert
Bjørvika, central Oslo: The security level of several ports was increased as the threat level went up. Photo: Heiko Junge / NTB scanpix

Norway continues to downgrade terror alert

Norway further returns to normal after the terror alert, as Norwegian ports relax their security levels at less exposed coastal facilities. READ  

Mother and son die in motorcycle crash tragedy
Mother and son hit a mobile caravan on E6 in Norway. Photo: Motorcycle helmet on a wet street

Mother and son die in motorcycle crash tragedy

A mother and her 16-year-old son died when the motorcycle they were riding hit a camper van in Gudbrandsdalen on Tuesday. READ  

Norwegian boy stung by scorpion on ferry
Eight-year-old survives potentially deadly insect bite. Photo: Scorpion crawling Shutterstock

Norwegian boy stung by scorpion on ferry

The scorpion caused havoc on a ferry trip between Denmark and Norway after the creature bit an eight-year-old boy and forced the vessel to head for emergency aid on Tuesday. READ  

Beach cleaners find polar bear stuck in net
Polar bear gets caught up in an Arctic cleaning project in Norway. Photo: Polar bear paw Shutterstock

Beach cleaners find polar bear stuck in net

A polar bear trapped in a net was one of the stranger discoveries found by volunteers in Northern Norway, working on a beach cleaning project this year. READ  

Camel goes walkabout on Norway roundabout
Police rescued an escaped circus camel in Trøndelag. Photo: Tor Aage Hansen / NTB scanpix

Camel goes walkabout on Norway roundabout

A circus camel had to be rescued after it escaped its owners and went for a walk around a Norwegian town on Tuesday. READ  

RECEIVE OUR NEWSLETTER AND ALERTS
National
Swiss bus driver charged with careless driving in fatal Norway crash
Society
Brit's charity tractor trek heads for Norway
Travel
Plans unveiled for bike trail along former Iron Curtain
National
Norway lifts Segway ban
Culture
GALLERY: Ten great songs about Norway
Society
Høie promises to reform sex change law
Education
Norway fjord invaded by monster jellyfish
Culture
VIDEO: Norwegian anti-Facebook film goes viral
Culture
Norway pop duo hits number 4 on US charts
Sport
Norway fan wins big on Suarez bite bet
National
Solberg 'most chatty' leader on Twitter
Culture
British Airways takes 'Slow TV' to the skies
International
Top Norway lawyers back Snowden Nobel
Society
Buy your own Viking warship for just €160,000
Politics
Norway PM beats Candy Crush level 300
Culture
Norway sticks with fårikål as national dish
International
Cold bathing craze leads to teen death
Society
Sweden threatens to 'annex' the ostehøvel
National
Baby squirrels survive cat attack
Society
Norway's 'cushy' prisons spurring foreign cons
National
Half Norwegians overweight: Gates study
International
VIDEO: Jagland doing press-ups in Donetsk
Business & Money
Striking Norway barbers: 'Let your hair grow'
Latest news from The Local in Austria

More news from Austria at thelocal.at

Latest news from The Local in Switzerland

More news from Switzerland at thelocal.ch

Latest news from The Local in Germany

More news from Germany at thelocal.de

Latest news from The Local in Denmark

More news from Denmark at thelocal.dk

Latest news from The Local in Spain

More news from Spain at thelocal.es

Latest news from The Local in France

More news from France at thelocal.fr

Latest news from The Local in Italy

More news from Italy at thelocal.it

Latest news from The Local in Sweden

More news from Sweden at thelocal.se

343
jobs available