Labour markets, human capital and inequality

Economic Survey of Norway 2010: Addressing the long-term challenges of fiscal policy

 

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The following OECD assessment and recommendations summarise chapter 2 of the Economic Survey of Norway published on 8 March 2010.

 

Contents

Current fiscal policy must also be seen in the context of longer-term objectives, as overspending today widens the long-term fiscal gap. Filling this  gap, estimated by the Finance Ministry at an excess of spending over revenue of 6% of GDP in 2060 (the pre-crisis estimate was 3.5%), despite expected revenue from the GPFG, will require the completion of the pension reform, both to reduce expenditure and to encourage higher labour participation. The latter is one of the most effective ways to reduce the long-run gap. In this regard, a key piece of the reform will be to harmonise the actuarial adjustment in disability benefits with those already implemented in old age pensions.


Fiscal consolidation should include measures to reduce sick leave and disability spending and also focus on low-efficiency spending

Reforming sick leave and disability benefits would be doubly beneficial for public finances, by on the one hand allowing sizeable expenditure savings and, on the other, increasing participation and hours worked, thereby boosting tax revenue. As recommended by the previous Survey and by the 2006 OECD Sickness, Disability and Work Review, it is necessary to tighten the access to sickness and disability benefits. In addition, employers should co-finance sickness and disability benefits and a reduction in the rate of long–term sickness benefit should be considered.


The share of public spending in mainland GDP is one of the highest in the OECD and there is evidence of spending inefficiencies, for example in education, which was the subject of a special chapter in the 2008 Economic Survey, and health care, which was reviewed in the 2005 Economic Survey. Comparisons of outcomes (such as pupil performance for education, or life expectancy for health) and expenditure across countries, controlling for factors such as socioeconomic conditions and income levels, show that Norway is not getting as much as it could from its public expenditure.


Norway spends a large share of mainland GDP on public expenditure

 

Source: OECD Economic Outlook


In education, closing cost-ineffective schools should lead to resource savings and the government could consider funding incentives to encourage municipalities to pursue this faster. In higher education too, there are too many institutions for economies of scale to be pursued effectively and some of these could be closed. Significant savings could be made from reducing the subsidy to students in higher education, some of which could be diverted to early childhood education where the impact on improving equity would be greater. Other reforms, such as giving teachers outcome-based targets, and merit-based salary policies, could improve results and, later, make room for improved utilisation of resources.


In the health care sector, there were reforms some time ago designed to improve efficiency, notably the centralization of hospital responsibility and the organization of hospitals as enterprises, and moves towards fee-for-service financing. Though some measures of efficiency have improved over the last decade or so, overall spending climbed rapidly partly because of the fee structures themselves, partly because of the lack of hard budget constraints imposed on hospitals; the number of doctors and nurses relative to the size of population is at present significantly above OECD average, for example. Restructuring and merging of cost-ineffective healthcare institutions must be pursued, including through more effective cost control. Co-payments should be introduced or increased where there is evidence of excessive consumption, compared with assessed care needs, and demand is price-sensitive; this may be the case in physiotherapy and care for the elderly, for example. Co-ordination between municipalities and hospitals also needs to be improved.


Spending efficiency should be improved further, including at the local government level

This and previous Surveys highlight the need to increase the efficiency of public spending. The growth of public employment, especially at local level, must be better controlled. Existing tools, such as regulatory impact analysis and cost-benefit analysis, should be used systematically and given more weight in policymaking. Wide dissemination of information on performance of schools, hospitals and other public services can also be useful in securing support for expenditure rationalisation.


Efficiency and neutrality of the tax system can be improved

The already high level of taxation should not be increased. Tax expenditures in Norway are not especially high but are growing fast, especially in housing. Generous tax treatment of housing, for which there is no obvious economic justification, is likely to distort investment decisions and may have contributed to the house price boom. Reform of housing taxation should include measures to phase out the asymmetries resulting from the deductibility of interest payments on owner-occupied dwellings without taxing imputed rent, and from the remaining substantial discount applied to housing for the wealth tax. Marginal tax rates at high income levels could be reduced, partly to reduce the incentive to misreport labour income as more favourably treated capital income. Reducing progressivity could also increase returns to education, and thus provide stronger incentives to undertake higher education studies. Revenues losses from such measures could be fully compensated by the increases in housing taxation. 

 

 

How to obtain this publication

 

The Policy Brief (pdf format) can be downloaded in English. It contains the OECD assessment and recommendations. The complete edition of the Economic Survey of Norway is available from:

 

Additional information

For further information please contact the Norway Desk at the OECD Economics Department at eco.survey@oecd.org.

The OECD Secretariat's report was prepared by Paul O'Brien, Romina Boarini and Robert Price under the supervision of  Patrick Lenain. Research assistance was provided by Steinar Juel, Annette Panzera, Valery Dugain and Liliana Suchodolska.

 

 

 

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