BIS Review 20/1999  8  Division of responsibility fails Stabilisation policy is a very demanding task in an economy like Norway, with occasional major exogenous shocks. The question that must now be asked is how our system functions when exposed to pressure. Oil prices were high in 1996, 1997 and into 1998, which resulted in large surpluses on the current account and the government budget. Domestic activity was also rising, with strong growth in employment. Deliveries to the petroleum sector generated a strong and uncontrolled growth impetus to the mainland economy. During the budget deliberations in the Storting (Norwegian parliament), major changes were made. Compared with the large surpluses generated by petroleum revenues, the changes to the budget may have seemed small, but these changes were important for economic developments. I will illustrate this by means of an example. Assume that the oil price temporarily increases by NOK 10 per barrel, or a little less than USD 1.50 per barrel. This is a small change in the oil price, well within normal variations from one year to the next. Government revenues – and thereby the budget surplus – would then increase by about NOK 9 billion in the first year and NOK 11–12 billion the next year. This corresponds to about 1% of Norway’s GDP. The assumption is that all the revenues from such a minor increase in oil prices will be transferred to the Government Petroleum Fund and that fiscal policy will remain firm.
A country normally seeks to achieve balanced public sector budgets over the business cycle. Norway is in a special situation, however, because of its petroleum activities. Revenues fluctuate sharply in pace with the oil price and domestic business cycles. Oil and gas production will peak a few years into the next century. It is therefore important to achieve a substantial surplus now, and accumulate financial wealth that can be used to finance the welfare system when oil revenues taper off. Otherwise, welfare schemes may have to be scaled back considerably when these revenues fall. The Petroleum Fund consists of the accumulated surpluses of government finances. Capital was first allocated to the Fund in 1995. At the end of 1998 the market value of the Fund’s capital was approximately NOK 170 billion. National insurance scheme expenditure will increase in the future. In 1999 expenditure on retirement and disability pensions is expected to amount to NOK 91 billion. This corresponds to about 8% of Norway’s GDP. The percentage will probably double over the next 30 years, and this will happen after Norwegian oil production has peaked. The challenge to the real economy is that the working population will decline sharply, while the proportion receiving income from the public sector will rise. Projections for government oil revenues have been based on an oil price in the order of NOK 100 to NOK 120 per barrel. This will generate substantial government surpluses in the years ahead, and a seemingly steady accumulation of capital in the Petroleum Fund.