|
The following OECD assessment and recommendations summarise Chapter 2 of the Economic Survey of Norway 2005 published on 8 August 2005.
Should monetary policy tighten?
The current recovery from the 2002 slowdown is accelerating, fuelled by historically low nominal and real interest rates, a consequent private consumption and residential construction boom and rising house prices, a very rapid increase in oil investments, and high and rising spending by the oil sector on current goods and services produced by the mainland economy.
Monetary conditions
1. Deflated using the consumer price index excluding changes in duties and energy prices, from 1999, and consumer price index excluding energy prices before this date.
2. Deflated using the consumer price index.
Source: OECD, Statistics Norway.
Although nominal wage increases have been moderate, they have translated into substantial real increases because of unexpectedly low inflation; but profitability has not suffered overall because productivity and terms-of-trade gains have also been substantial. Hence both business and household incomes and sentiment are at high levels. Demand impulses from abroad are weak and the output growth has not been followed by a marked decline in unemployment. So far there are no signs of overheating in product or labour markets. A major uncertainty concerns oil investments, which could surprise on the upside, as has happened in the past. It is thus appropriate that the monetary authorities have signaled their intention to move towards a more neutral stance - although gradually and in small, not too frequent steps - in order to reduce the risk of having to take potentially disruptive measures later on.
Contribution to the decline in CPI-ATE
Percentage points
1. Agricultural products, fish products, consumer goods produced in Norway, services with wages as dominant factor.
Source: Norges Bank.
Should slippage from the fiscal rule be reversed?
The fiscal rule states that only the real return on the Petroleum Fund, assumed to be 4% of its market value, can normally be used for general budgetary purposes. Deviations are permissible if, as in the past few years, the market value suffers or the economy hits a slow patch. But the deviations in 2002-2004 were substantial, and larger than initially projected, and the 2005 budget also implies a transfer considerably exceeding 4% of the end-2004 Fund value. If the transfers from the Fund remain constant from now on, return to the trajectory of the underlying fiscal rule would not occur until 2008. By then, the economy could well be moving into a slow-growth phase. It is therefore essential that the 2006 budget eschews higher transfers from the Fund. If the economy remains very buoyant, full advantage should be taken of the automatic stabilisers to reduce such transfers. In addition, greater-than-expected tax revenues or other positive surprises in the budget should be used to reduce the deficit. Once return to the fiscal rule trajectory is achieved, it is important that the rule be applied symmetrically.
Fiscal stance over the cycle
Per cent of mainland GDP
Source: Ministry of Finance.
Oil wealth in many other countries has been used to finance colossal fortunes for the few, or bread and circuses for the many. Norway has avoided both traps. The revenue from the Petroleum Fund could help to maintain Norwegian living standards long after the oil reserves are exhausted. In addition, macroeconomic and structural policies have been used to ensure that the non-oil economy, which accounts for most of the GDP and virtually all employment, remains as viable and prosperous as possible, including in the traded sectors. But pressures to spend more of the capital of the Fund straight away are strong. The consequences of uncoordinated and unplanned fiscal slippage are clear: squandering of the oil wealth, appreciation pressure on the Krone, and damage to the traded sector. It is crucial that the Norwegian authorities explain clearly that while the Fund revenue can be spent indefinitely, its capital can be spent only once, and that its capital is being consumed every year that the fiscal rule is overridden. In order to shelter the non-oil tradable sector from the oil revenues and an appreciation of the Krone, it is also crucial to maintain the strategy of investing abroad the revenue from the petroleum sector.
Structural deficit and expected real return on GPF
Source: Ministry of Finance.
-------------------------------------------------------
Return to the Economic Survey of Norway 2005 homepage
A printer-friendly Policy Brief (pdf format) can also be downloaded. It contains the OECD assessment and recommendations, but not all of the charts included on the above pages.
To access the full version of the OECD Economic Survey of Norway:
-
Readers at subscribing institutions can go to SourceOECD, our online library.
-
Non-subscribers can purchase the PDF e-book and/or printed book at our Online Bookshop.
-
Government officials can go to OLISnet's Publication Locator.
-
For further information please contact the Norway Desk at the OECD Economics Department at webmaster@oecd.org.
_______________________
|
