The shift towards imports from low-cost countries has moderated. After falling for several years, prices for imported goods are now beginning to rise. Looking back, inflation has varied somewhat. The three supply-side shocks reduced inflation while boosting production capacity. Low interest rates, favourable economic conditions internationally and substantial investment in the petroleum sector increased demand for goods and services. High capacity utilisation gradually pushed up inflation. Now that interest rates have risen to a more normal level and the global economic situation is deteriorating, growth is slowing and capacity utilisation may again seem to be approaching levels that are more sustainable. The impact of the downturn abroad on the Norwegian economy is uncertain, but on balance it now seems that inflation will gradually stabilise near 2.5 per cent without unnecessary wide fluctuations in output and employment. By and large, we must then be able to assert that inflation targeting has served us well during these years. There have been surprises. The growth potential of the Norwegian economy has been very high. It took a long time for employment to rise after the recovery started, and in 2006 – well into the upturn – inflation fell markedly. Over the past year, import prices and food prices have increased, and against this background the monetary stance may have to be on the tight side for a period.
On this score, our experience has been fairly positive with a high level of residential construction in recent years. The tax system should treat investment in residential property neutrally and on a par with other investments. Several official studies in recent decades 7 – from Sekse to Skauge – have shown that the tax system favours residential property consumption and investment. This leads to overinvestment in residential property, displacing other types of investment. At the same time, the tax system makes it more advantageous to own a home instead of renting. Through the years, the tax on the advantage of homeownership has been gradually reduced. In 2005, it was removed. Tax deductibility of debt interest was maintained. In practice, this implies a housing investment subsidy. Homeowners benefit from an income deduction for expenses for income acquisition, but do not pay taxes on the income. In central areas where available sites are scarce, the tax advantage will result in a higher level of house prices. A more neutral taxation of residential property – for example as proposed by the Skauge Commission in 2003 – would also have a stabilising effect on the price level in the housing market. A tax that is based more on market values will increase when house values rise and fall when house values decline. This will curb the willingness to pay when purchasing homes during upturns and sustain it during downturns. The exemption for residential property tax is a source of more unstable house prices and credit cycles.