$Unique_ID{COW02689} $Pretitle{436} $Title{Norway Chapter 1. Medium-Term Economic Strategy and Economic Plans for 1991} $Subtitle{} $Author{Royal Norwegian Ministry of Finance} $Affiliation{Norway Information Service, New York} $Subject{budget policy government economy fiscal per billion cent nok norwegian} $Date{1991} $Log{Table 2*0268901.tab Table 3*0268902.tab } Country: Norway Book: The National Budget 1991 Author: Royal Norwegian Ministry of Finance Affiliation: Norway Information Service, New York Date: 1991 Chapter 1. Medium-Term Economic Strategy and Economic Plans for 1991 1.1 Introduction The National Budget 1991 discusses the Government's economic strategy and policies for 1991 (Chapter 1), the short and medium-term prospects for the Norwegian economy (Chapter 2), the implementation of the Government's structural policy program (Chapter 3), and the effects of an EES agreement on the Norwegian economy (Chapter 4). The Norwegian economy is showing a number of favourable trends. Price and cost inflation is now lower than among our trading partners (Diagram 6), and the interest rate level is roughly the same (Diagram 4). The current account of the balance of payments has returned to a surplus position. We are seeing the beginning of a moderate but increasingly broadly-based economic upturn, with traditional merchandise exports and investments in exposed industries as major driving forces. The implementation of the Fiscal Budget for 1990 is proceeding according to Government plans, with additional appropriations through 1990 being kept within the total expenditure budget adopted by the Storting (the legislative assembly). However, much remain to be done. In economies as open and exposed to competition as Norway's, price and cost levels are decisive for the level of employment. With international economies rapidly becoming more integrated, employment in a growing number of sectors in the norwegian economy is becoming dependent on cost-competitiveness. The wage level in Norwegian manufacturing industry is a good 20 per cent higher in Norway than among our competitors (Diagram 1). However, following two decades of relatively slow productivity growth, the productivity level in Norwegian manufacturing industry is probably not sufficiently high to counter the effect of the high level of wage costs. An economic policy which aims at secure and continuing high employment without increasing our dependence on oil or renewal of borrowing abroad must therefore aim in particular at lower price and cost inflation than in the countries we compete with, and more rapid improvements in productivity in all public and private sectors of the economy. Increased economic growth will have to be achieved through an up-turn in the private sectors of the Mainland economy. Continuing low cost inflation, satisfactory levels of productivity growth, and slower growth in public expenditure are the main prerequisites for bringing this about. This will provide a favourable enterprise climate, thus contributing to the creation of expectations that it will be profitable to invest in Norway by expanding established activities and by starting new ones in those industries which are most exposed to foreign competition. Higher investment will increase the productive capacity of those industries, enabling them to increase their market shares abroad and putting them in a better position to maintain them at home. Rapid increases in output and productivity are also necessary conditions for real wages to begin rising again and for higher employment. Increases in real wages and higher employment will in their turn stimulate private consumption and thus contribute to increased production and investment in consumer goods industries. This will lead to a more broadly-based upturn in the industries which manufacture investment goods. Service industries will also be stimulated by an upturn in consumption and investment. Satisfactory growth in the private sectors of the economy is a prerequisite for greater central and local government activity without any increase in taxation levels. Of the income generated in the Norwegian economy, a high share is channelled through government budgets. There has been a strong increase in public sector expenditure as a percentage of Mainland Norway's GDP, from 56.9 per cent in 1986 to 64.7 per cent in 1990. This reflects the very slow growth of the Mainland economy over the same period and the rapid growth of public expenditure, with particularly sharp increases in 1989 and 1990. Such trends will not be allowed to continue, and importance is therefore being attached to improving the management of public expenditure and curbing its growth. 1.2 The Government's medium-term economic strategy The Government's medium-term economic policy strategy was laid down in the Revised National Budget 1990. Its main features are: - A structural policy program aimed at better resource utilisation and a higher rate of productivity growth than in the 1970s and 1980s. The program is intended to improve the functioning of the labour, financial and capital markets, the energy market, and the goods and services market, and to adapt economic policy better to environmental considerations. A separate program aimed at making public services and administration more efficient is being prepared. The Government has already adopted structural policy measures or proposed extensive reforms in a number of areas. A Report on reforms in the taxation of companies and capital was recently submitted to the Storeing. The primary purpose is to bring about a more efficient allocation of investments in the Norwegian economy. The proposed Budget for 1991 also includes far-reaching proposals on the pricing of environmental goods, reflecting their value in alternative uses, and other economic measures in environmental policy. Several state banks, including the Post Office Savings Bank and the Municipalities Bank, will be modernised, and will have to operate on the same terms as their private competitors. The recently adopted Energy Act, under which the energy market can be made much more efficient, enters into force on 1 January 1991. - A stable demand policy. Budget policy must be designed to give enterprises stable and predictable working conditions. Experience in the 1970s and 1980s showed that attempts at fine tuning of economic developments through fiscal policy often fail. For one thing, it proves difficult in practice to implement the stimulating or restrictive budgetary measures intended for such fine-tuning at the right time or on the right scale. Experience also shows that once expansionary measures are in place, it is difficult to tighten the budget again, even though that is what the state of the economy requires. - A budget policy whereby the Fiscal Budget is gradually made less dependent on revenues from petroleum activities. If the Norwegian economy is to be made more efficient, laying firm foundations for higher employment, this should be done by curbing expenditure and not by raising tax and excise levels. According to the Budget proposal for 1991, Fiscal Budget expenditure will increase less than Mainland Norway's GDP. Furthermore, the Fiscal Budget deficit, adjusted for petroleum revenues and transfers from Norges Bank, should be no higher in real terms in 1993 than in 1990. If petroleum revenues in 1991 and on towards 1993 increase more than technically assumed in this Report, the Government assumes that the additional income will be used to improve the Fiscal Budget balance before loan transactions and, eventually, to build up a petroleum fund. - The Government will continue to work towards lower personal and company income tax rates. Lower rates will be combined with a broader tax base, in which among other things various types of investments and savings will be more uniformly taxed. Emphasis will also be given to more extensive use of excise duties in the interests of environmental protection. - This year's income settlements were arrived at in free negotiations between the organizations, with no special legislation and within a framework, including tax rules, established in advance through the Government's economic policy. The Government intends to adopt the same approach to income settlements in the years ahead. Cuts in subsidies to industry will help to keep wages at levels where they more accurately reflect socio-economic yields, and to promote necessary restructuring. Increasing foreign competition for industries which have previously been relatively sheltered may also contribute to lower wage inflation. 1.3 Economic policy in 1991 Fiscal policy plans for 1991 are based upon a moderate but broadly-based upward cycle in the Norwegian economy. 1989 and 1990 have seen employment in the Mainland economy falling, whereas output declined in 1989 but is rising a little in 1990. The economy may now gradually be entering a phase in which Mainland GDP grows by 2 to 2 1/2 per cent per year, making it possible to reduce unemployment. Growth in 1991 is now expected to be 2 1/4 per cent. Consequently, considerably less stimulation of demand in the Fiscal Budget than in the last two years is warranted. Fiscal policy should aim at establishing interest rate developments conducive to an investment upturn in the Norwegian economy. The main features of fiscal policy for 1991 are: - The Fiscal Budget balance before loan transactions moves from a surplus of NOK 1.1 billion in 1989 to an estimated deficit of NOK 5.3 billion in 1990 and 5.5 billion in 1991, assuming an oil price of USD 21 per barrel in 1991. - In the Budget proposal for 1991, the oil-adjusted deficit, i.e., excluding revenues from central government petroleum activities and transfers from Norges Bank, amounts to NOK 44.8 billion. - The net one-off effect of the reorganization of certain state banks and of changed budgeting routines will be a substantial addition to the Fiscal Budget surplus before loan transactions. The changes will have little effect on demand in the economy. Adjusted for these changes, the Government's Fiscal Budget proposal for 1991 shows an oil-adjusted deficit of NOK 47.7 billion, which means an increase of NOK 5.3 billion in the underlying deficit compared to the estimated accounts for 1990. - Fiscal Budget expenditure excluding petroleum activities is set to increase nominally by 6.0 per cent from 1990 to 1991. This is somewhat lower than the estimated nominal GDP growth in the Mainland economy. It also marks a distinct departure from the trends of the two previous years, when expenditure grew by 9.5 and 9.6 per cent respectively. - The Budget for 1991 contributes to an increase of 1/2 per cent in domestic demand as a proportion of Mainland GDP (Diagram 2). Through 1991, the Government intends to implement the budget adopted by the Storting by funding necessary additional allocations either by reducing other allocations or by reducing the budgetary reserves intended for additional allocations. The budgetary reserves are kept at a low level. [See Table 2: Key Fiscal Budget figures. Central government budget incl. Social Security] The Storting decided last spring that a State Petroleum Fund should be established, and this is being done with effect from 1 January 1991. The Fund is intended to add a longer-term perspective to the use of central government petroleum revenues, in accordance among other things with the above stated intentions in the guidelines for medium-term Fiscal Budget developments. According to the guidelines for the Fund, net Government revenues from petroleum activities are to build up in the Fund. Transfers from the Fund to the Fiscal Budget are to be decided on by the Storting in connection with its treatment of the Budget, taking account of the guidelines drawn up for medium-term economic policy. Although the Government proposes to transfer all the Fund's revenues in 1991, estimated at NOK 33.6 billion and NOK 6.7 billion higher than net petroleum revenues in 1990, back to the Fiscal Budget, this will still leave a deficit before loan transactions in 1991 of NOK 5.5 billion. Any petroleum revenues in excess of these estimates will be used to cover the deficit before loan transactions and, in the event, also up to half of the remaining net borrowing requirement. In view of the Budget's original imbalance, petroleum revenues will have to be NOK 13.8 billion higher than assumed in the Budget proposal for any positive balance to accumulate in the Petroleum Fund. This requires an average oil price per barrel of USD 27 or higher in 1991. Local government revenues increase in real terms by about 1 3/4 per cent from 1990 to 1991. The estimated use of goods and services for 1991 assume a 1 per cent drop in local government consumption and no change in the volume of investment compared to 1990. Tax and excise plans for 1991 are among other things aimed at easing the transition to more comprehensive reforms. Higher duties and lower personal income tax are envisaged, with much of the tax reduction to be brought about by lowering the progressive tax rates. The maximum rate for taxes on wage incomes will be reduced from 59.3 to 56.8 per cent. In other respects, the tax plans are designed to contribute, with the Budget as a whole, to moderate wage settlements in 1991. Main items in the proposals include: - Real personal tax reductions of NOK 2.6 billion. - Increases of NOK 2.4 billion in excise duties. - VAT exemption for milk for consumption, estimated at NOK 0.8 billion. This must be viewed in relation to a reduction of NOK 0.35 billion in subsidies to consumers. - Greater regional variation in employers' national insurance contributions, entailing an annual NOK 0.6 billion reduction in budget revenues. Policies for 1991 are based upon an average rate of wage and price inflation of about 4 per cent. The Government's tax proposals will result in stronger growth in after-tax incomes; given moderate settlements, this will leave wage-earners with more or less the same purchasing power in 1991 as in 1990, if not slightly higher. [See Table 3: Increase in the money supply (M2). Per cent.] Monetary and credit policy and budget policy will be aimed at maintaining a stable exchange rate. Subject to the constraints this imposes, interest rate policy will be kept under constant review in the light of developments in domestic demand for goods and services, in costs and prices, and in private and municipal borrowing. As an aid in the continuous assessment of monetary and credit policy instruments, a target zone of from 5 to 9 per cent is being set for domestic credit growth in 1991 (Diagram 3). In a situation of low domestic demand and activity, importance will be attached to lower interest rates and interest stability. For 1990, it is assumed that central government will meet the bulk of its borrowing requirement by drawing on its liquidity reserves. The need for central government borrowing in 1991 will be kept under continuous review in the light of developments in central government liquidity reserves and private banks' loans from Norges Bank. The intention is to meet the central government borrowing requirement by drawing on the liquidity reserves and perhaps to some extent by issuing new krone bonds. As in 1990, for precautionary purposes, an authorisation is proposed for central government to raise foreign currency loans of up to NOK 10 billion in 1991. European monetary cooperation within the EMS is being developed further. The strategic position of the Norwegian krone, on the fringes of a dominant monetary cooperation area, is marked by the fact that the Norwegian economy is small, very open, and dependent on developments in the prices of oil and a small number of industrial commodities. The position is reflected in Norway's interest rates, which are generally higher than European rates. With this in mind, the Government believes that it would be in Norway's best interests to develop closer cooperation with the European monetary system. This ought among other things to include cooperation on the fixing of exchange rates and on interventions. Institutionally, closer cooperation ought to develop out of the meetings which already regularly take place between Norwegian monetary policy authorities and their EC counterparts. The overall ceiling on loans by state banks, not including the Post Office Savings Bank, the Municipalities Bank and the Bank for Industry, will be kept at roughly the same nominal level in 1991 as in 1990. Lending, as measured by the total value of the loans outstanding, is estimated to increase by a good 10 per cent in 1991. Labour market measures were stepped up considerably in the second half of 1988 and through 1989. From 1989 to 1990, these increase further, from 37,500 persons to an estimated 44,500. The measures will be maintained at about their present level in the first half of 1991. The level for the second half of the year will be considered in the Revised National Budget in the light of labour market developments. A provisional figure for the whole of 1991 has been set at some 42,000 workplaces.