The 1999 national budget estimates that in 20 years the central government’s net wealth will have risen to 120–130% of GDP. Financially, the state will thus be well equipped to cope with the higher expenditure associated with an ageing population. So far this year, the oil price has averaged slightly more than NOK 80 per barrel. The chart shows allocations to the Petroleum Fund with oil prices of NOK 110 and NOK 90 per barrel in the years ahead. An oil price of NOK 90 will alone result in a substantially smaller surplus than previously anticipated. In this scenario, the Petroleum Fund will peak at 75% of GDP in 2015. The bottom line in the chart shows a different scenario. We are still assuming an oil price of NOK 90 per barrel – in other words, one that is not especially low under present circumstances. In addition, we have assumed a further reduction in the budget surplus, equivalent to 0.5% of GDP, each year for the next 10 years. The combined effect is that after 10 years the budget surplus will have declined by about 5% of GDP compared with the other calculations. BIS Review 20/1999  14  This may seem substantial, but is no greater than the changes in the budget balance that we have seen previously. In the previous downturn, the government reduced its surplus by slightly more than 5% by means of an active countercyclical policy – and that was only during a five-year period.
If oil prices remain low, it may quickly become necessary to take a critical look at the scale of welfare schemes and public sector services, and it may also be necessary to increase taxes. If, later in the business cycle, measures are called for to curb unemployment, they should be designed to be readily reversible and in such a way that they do not erode government finances in the long term. Conclusion By way of introduction, I posed the following question: is our economy sufficiently robust to cope with the fall in oil prices without a new round of major structural adjustments? Our financial system is in a stronger position to cope with a new downturn than it was in the 1980s. We have avoided a debt bubble of the scale we witnessed last time. However, I am in doubt as to the financial industry’s long-term restructuring capacity. Norway must endorse the development of a new architecture for the global financial system. This is a demanding and long-term process, and we cannot expect all the problems to be solved over night. On the other hand, if we are to have any hope of a more stable and predictable world economy, the only real alternative is to enhance international codes for financial markets. We have observed that confidence in the krone is fragile. In order to restore confidence and maintain a stable exchange rate, monetary policy must be a credible anchor for expectations of continued low price inflation.