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Overview of the Economic Survey of Norway | How to obtain this publication | Additional information

Norway continues to benefit from its well managed petroleum wealth and sound macroeconomic policies, achieving levels of well-being and social cohesion that have remained high by international standards. The strength of the economy and prudent supervision have helped the financial system to weather the financial crisis well, though high household debt and elevated house prices pose a risk. In the wake of the global slowdown and the euro area turmoil, the macroeconomic policy challenge has shifted towards preserving the momentum of growth in the context of the flexible inflation target and the well established fiscal framework. Public expenditure rose during the crisis and income redistribution remains extensive, in line with Norway’s tradition. Ensuring that public spending is delivered in economically efficient ways remains a priority.

The fiscal policy stimulus was reined back a little in 2011 after the expansion in 2009-10. In 2012 the structural non-petroleum deficit, which is set to rise to just under 4% of the value of the Government Pension Fund Global, will have at most a small expansionary effect. There would be room within the fiscal guidelines to go for stronger expansion should economic activity turn out to be significantly weaker than projected. However, monetary policy should remain the first line of defence if the global outlook worsens, especially in the case of an intensification of the euro area crisis.

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Monetary policy had begun to return to normality in the first half of 2011, as foreseen in the 2010 Economic Survey. Since then activity has slowed, international financial markets have again become turbulent, and annual consumer price inflation has remained well below the target of 2.5%. In these circumstances, the central bank was right to suspend the tightening cycle and then cut rates in December. It should resume tightening once there are risks of inflationary pressure, but there is also room for further easing in the event that economic conditions worsen. 

Labour market performance is good overall with low unemployment and high participation. Average hours worked are low, due mainly to voluntary part time work but also to high levels of sickness absence. The incidence of long term sickness benefit and disability benefit to which it often leads may be reduced by measures taken in July 2011. Stronger steps to change incentives may well be needed. The recent private sector pension reforms need to be extended to the public sector.

Public expenditure occupies an important place in the economy, responding to Norwegians’ desire for redistribution and a fair society through provision of public services. Careful attention to planning and efficiency is nonetheless required. An “efficiency unit” should be created to audit cost-benefit analyses and impact assessments carried out in spending ministries. A procedure for spending reviews, to assess the efficiency of major programmes and policies, should be established. Competitive outsourcing of the provision of public services to the private sector should be expanded where this improves cost efficiency.

Norway’s tax system achieves a high level of collection of receipts and revenue redistribution without overly undermining economic performance and while paying increasing attention to environmental externalities. The system is generally well structured with some innovative characteristics, but the taxation of capital still imposes distortions on savings. This is due to low taxation of residential property and uneven treatment of assets in the wealth tax, as theoretical calculations appear to show very high tax rates on some capital income. Greater tax neutrality could be achieved, equalising tax rates across different forms of capital income, while maintaining overall progressivity.

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