Table 1  The fiscal rule was drawn up in 2001. Today, the situation is different. In 2001, a real return on the Fund of 4 percent, or a little higher, based on the then prevailing distribution between equities and bonds, was a reasonable assumption. Today, calculations yield a lower figure for expected real return. 1 The real return on bonds in the Fund’s portfolio can now be estimated at 1 percent. With a normal risk premium on equities, the real return on the whole Fund can be quantified at 3 percent. There is a possibility that the real return will be higher, but it may also be lower. If we spend more than the annual return on the Fund, we will be eating into the savings portion. The conclusion is that a more robust approach would now be to base fiscal policy on an annual expected real return on the Fund of 3 percent. Such an adjustment would underpin the main principles that were behind the establishment of the fiscal rule – stability and sustainability. 1  8  See Norges Bank Staff Memo 6/2012. BIS central bankers’ speeches  Chart 8  In 2011 the structural non-oil budget deficit was about 3 percent, which is close to such a new path. Adapting petroleum revenue spending to a lower expected return should not therefore be particularly demanding. If we wait, a necessary policy adjustment later could be far more painful.
BIS central bankers’ speeches  3  Chart 4  The combination of large deficits and growing demographic problems is particularly challenging, as is the case for southern European countries, where fertility rates are well below the replacement rate and lower than the average for advanced countries. The demographic challenge will be even greater ahead. In some of the countries the number of pensioners will be close to the number of economically active. The basis for economic growth is thus weakened. The burden of rising debt and pension payments will be heavier. It takes a long time to reverse demographic trends. Financial incentives can be effective. Norway, with favourable support schemes for families with children, has a relatively high birth rate. In other European countries, there is a risk that these hard times will exacerbate the demographic challenge. Unemployment, in particular among youth, has risen sharply and many people have a dark view of the future. The events of recent years have brought fresh experience and reminded us of several historical lessons. Economic policy must be sustainable. Governments must save during upturns in order to weather downturns. At the same time, there are limits to what economic policy can accomplish if the economic foundations are being eroded. A competitive business sector is crucial to maintaining growth and welfare. This also applies to Norway. The financial crisis was a reminder of how risk can be mis-assessed.