Published on 8 August 2005
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The OECD assessment and recommendations on the main economic challenges faced by Norway are available by clicking on each chapter heading below. Chapter 1 identifies the challenges for which the subsequent chapters provide in-depth analysis and policy recommendations.
Chapter 1. Economic performance and policy challenges
Norway has very high per capita income and low income inequality. Good policy fundamentals and strong institutions have allowed the transformation of natural resource assets into high growth rather than into destructive rent-seeking. Still, policies need to address future risks to good performance and act to contain them. One such challenge is adapting to a major hike of the oil price without fuelling excessive domestic demand pressure, real exchange rate appreciation, and further crowding out of the exposed sector. So far, Norway has successfully avoided such a scenario by adherence to a prudent macro policy framework and pro-growth structural policy reforms, though there are pressures to spend more of the oil money on social programmes and investment. Another key challenge is to cope with the threat to fiscal sustainability from population ageing. The accumulation of oil receipts in the State Petroleum Fund implies a pre-funding of future old-age pension liabilities, but only partially. A pension reform is needed, and has been proposed. Inflows into early retirements and disability are reducing the average retirement age, increasingly impeding labour supply and amplifying the future financing gap. Health and long-term care spending may also exert significant fiscal pressure as the population ages.
Chapter 2. Macroeconomic policies for a balanced and a competitive economy
Appropriate monetary and fiscal policy settings are important to ensure sustained low-inflation growth and the prudent management of large natural resource wealth. The economy has climbed out of recession, and the present recovery is becoming more self-sustained and broadly-based. Inflation is significantly below the Norges Bank target, reflecting low imported consumer goods inflation and wage moderation. Monetary policy faces the dilemma of allowing inflation to rise without triggering overheating and wage push, while households’ debt has risen sharply in response to prolonged low interest rates. The structural non-oil deficit is now moving closer to the fiscal rule, though still overshooting it by some 1¾ per cent of mainland GDP despite higher oil prices and strong growth, possibly adding to pro-cyclicality of policies. Fiscal laxity could lead to renewed upward pressure on the real exchange rate. The 2006 Budget will send an important signal about fiscal credibility. Tax cuts underway to reduce distortions may be an efficient way of spending the oil wealth but, in view of the deficit slippage, should be balanced by expenditure tightening, notably in social benefits.
Chapter 3. Long term sustainability of the pension and welfare system
Norway will face a fast maturing old age pension scheme over the 30 next years whereas oil revenues will supply only a small part of implicit liabilities related to the present generation. The Norwegian government has recently proposed new measures to strengthen long term fiscal sustainability. They aim at raising the effective retirement age and promote a shift to a more actuarially fair pension system. The main objective was the creation of a system of contributions to notional accounts that give rights to actuarially fair and longevity-adjusted benefits at any age after 62. The notional contribution rate is 17½ per cent of earnings for all, irrespective of taxes actually paid. Benefits would be indexed to the average of prices and wages, instead of wages as at present. Estimated savings arising from strengthened work incentives introducing a longevity coefficient, and less generous indexation are three percentage points of GDP over the long term. For the proposals to have maximum impact, public subsidies to existing early retirement schemes should be removed and eligibility for disability pensions and long sick leaves tightened. A broad agreement was reached in the Norwegian parliament on the proposed principles of pension reform in May 2005, but crucial elements are still under discussion, among these the decision on a flexible retirement age and the strength of the link between income and benefits.
Read also ECO Working Paper 480 The ageing challenge in Norway: ensuring a sustainable pension and welfare system
Chapter 4. How important is pension reform?
Since the mid-1990’s, Norway has implemented a series of reforms with the objective of improving health care quality and responsiveness. Reforms have increased the quantity of services supplied and improved their quality in both primary and specialised care. Waiting times are being reduced. Efficiency of public hospitals has improved. The availability of pharmacies has risen. Human resource shortages are not a major matter of concern anymore. The cost of health services delivery, however, has risen faster than expected. The current financing system falls short of aligning incentives of health care providers and patients with social objectives. Downward pressure on prices and costs from greater competition is a missed opportunity in the hospital and pharmaceutical sectors.
Read also ECO Working Paper 481 Balancing health care quality and cost containment: the case of Norway
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.
See the Norwegian Ministry of Finance press release and the video of the press conference for the launch of OECD Economic Survey of Norway.
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For further information please contact the Norway Desk at the OECD Economics Department at email@example.com. The OECD Secretariat's report was prepared by Alexandra Bibbee, Benoît Bellone and Flavio Padrini under the supervision of Nick Vanston.