Norway has not experienced a pronounced economic downturn since the crisis around 1990, when a cost crisis, an employment crisis with a sharp increase in unemployment and a decline in output, a currency crisis, a fall in property prices and a banking crisis all occurred around the same time. A long upturn followed in the period from 1992 to 2008. National income rose by an annual 5.4 per cent in this period, far higher than the rate of output growth in the mainland economy. Income growth has been higher than in the 1950s and 1960s. 4  BIS Review 15/2010  Behind these favourable developments were the major structural reforms of the 1980s and 1990s that resulted in higher production capacity in the Norwegian economy. The Norwegian business sector experienced a long period of high productivity growth. Shifting forces have otherwise driven the economy – during the crisis around 1990, labour costs decreased to a low level compared with Norway’s trading partners and wage settlements were moderate. In 1995, the cost level was 10–12 per cent below Norway’s average for the oil age from 1970 to today. In addition, real interest rates in Norway fell markedly through the 1990s from high levels. This was because the fixed krone exchange rate regime maintained through the crisis period managed to bring down inflation and inflation expectations. BIS Review 15/2010  5  Moreover, growth in public spending was rapidly reduced once business sector activity had recovered. Norway experienced an economic shift in the 2000s.
We have been able to draw lessons from both positive and negative outcomes of  14  BIS Review 15/2010  such a policy in the 1970s and around 1990. There may be material here for a “handbook” of effective Keynesian use of instruments. First, when demand for goods and services and inflation prospects fall, the interest rate is lowered. At the same time, the automatic stabilisers in the budgets will work when tax revenues fall and benefit payments increase. When the fall in demand for goods and services is so steep that an interest rate close to zero is not sufficient, tax rates are reduced or government measures are applied. The measures should not influence long-term public sector priorities such as the size of the welfare state or the permanent tax level. When the economy turns, as it now has in Norway, the rule is that fiscal policy should be tightened fairly rapidly. This provides room for growth in the business sector. When public expenditure has been reduced, the key rate can then be increased to a normal level. According to the fiscal policy guidelines, petroleum revenues should be phased in gradually into the economy, approximately in pace with the expected real return on the Government Pension Fund Global, which is estimated at 4 per cent. In periods of high or rapidly rising unemployment, petroleum revenue spending can be increased, and inversely fiscal retrenchment is needed during periods of high economic activity and resource shortages.