Revised National Budget 2009: Continued expansionary policies

May 18, 2009

Minister of Finance Kristin Halvorsen. Photo: Regjeringen.no

The Norwegian economy is affected by the international financial crisis, but the downturn is not expected to be as severe in Norway as in many other industrial countries.

To curb growth in unemployment, the Government proposes to increase the spending of oil revenues by a further NOK 9.5 billion to a total of NOK 130 billion during the 2009 fiscal year. This amounts to NOK 39 billion in excess of the estimated return on the Government Pension Fund – Global. The overall fiscal stimulus in 2009 is estimated at 3.0 per cent of non-oil GDP. Unemployment is estimated to increase to 3¾ per cent in 2009 and to 4¾ per cent in 2010.

The fiscal policy guidelines, in place since 2001, stipulate that fiscal policy shall be geared towards a gradual increase in the use of petroleum revenues. Over time, the structural non-oil central government budget deficit shall correspond to the expected real return, estimated at 4 per cent, on the Government Pension Fund – Global. However, the guidelines also allow fiscal policy to be used actively to counter fluctuations in economic activity. In a cyclical expansion, fiscal policy restraint relative to the spending rule is called for, whereas in a cyclical downturn higher spending of oil revenues is justified to stabilize the economy.

A range of fiscal and monetary measures have so far been implemented to mitigate the effects on the Norwegian economy of the international financial crisis and the global economic downturn. Norges Bank (the central bank) has reduced its key rate by total of 4.25 percentage points since October 2008 to the current level of 1.5 per cent. Norges Bank has also implemented schemes to provide extraordinary liquidity to the financial sector.

Various measures to safeguard the credit system are implemented, and there are signs of recovery and normalisation in the credit markets.

The Government proposed in January 2009 amendments to the 2009 Fiscal Budget with measures to boost growth and employment, and the amendments passed Parliament in February. The Government now proposes a further increase in the use of petroleum revenues from 2008 to 2009 by NOK 9.5 billion to NOK 130 billion. The use of petroleum revenues, as measured by the structural, non-oil budget deficit, will increase by NOK 55 billion. Overall fiscal stimulus on Mainland GDP is estimated at 3.0 per cent. This is the most expansionary fiscal budget in more than 30 years, and it is also very expansionary in an international context.

The Government proposes only minor changes to the tax rules in the revised fiscal budget.