The Government has included a further increase in the deficit, measured as above, in the National Budget for 2004. However, the budget balance figures are influenced by transactions that have little effect on demand. For 2003 and 2004 as a whole, fiscal policy will probably generate some stimulus to activity in the Norwegian economy. As cyclical developments will probably stabilise, our forecast is based on the technical assumption that the structural deficit will not increase in 2005 and 2006. This would also seem to be consistent with the practical application of the fiscal rule, cf. the discussion by the Ministry of Finance in the National Budget for 2004. According to the fiscal policy guideline, the use of petroleum revenues over the central government budget shall over time correspond to the expected real return on the Government Petroleum Fund. At the same time, fiscal policy shall contribute to smoothing fluctuations in output and employment. Since the introduction of the fiscal policy guideline in spring 2001, the scope for manoeuvre in fiscal policy has been reduced. The projection for the Petroleum Fund’s expected real return has been revised down substantially since the Revised National Budget for 2001. Wage growth in the years 1998-2003 indicates that the degree of labour shortages in all sectors of the labour market plays an important role in wage formation.
Weaker developments both abroad and at home have had an impact on the Norwegian labour market. Unemployment has increased. Decisions concerning saving and investment are affected by the real interest rate, that is the nominal rate minus expected inflation. The real interest rate is also low. An enterprise investing in productive capital will typically apply a longer perspective than a household buying durable consumer goods. Enterprises’ cost estimates will be based on the interest rate and expected inflation in the long term, while short-term interest rates and expectations will be more important to households. Monetary policy influences inflation indirectly via domestic demand for goods and services and via its effect on the exchange rate. Because changes in the economy take time to feed through, monetary policy functions with a lag. It will therefore take time for all the effects of the substantial changes in the interest rate since December 2002 to come into evidence. When interest rates fall, consumption rises both because disposable income increases and because it is less profitable for households to save. Borrowing also becomes less costly, with an associated rise in investment. Higher demand leads to higher employment. Another important mechanism is that lower interest rates make it less attractive to invest in NOK. Lower interest rates will therefore normally lead to lower capital inflows and a weaker krone. Imported goods thereby become more expensive and inflation can rise relatively rapidly.