The decline in traditional exports will then persist. Sooner or later, the oil market will also feel the effects of the downturn and oil prices will decline. If the world economy experiences prolonged stagnation and the krone remains firm, a markedly lower interest rate will contribute to a weakening of the krone and mitigate the effects for Norway. On the other hand, any fiscal slippage will contribute to maintaining a strong krone. A precondition for countering a possible downturn by means of monetary policy easing is slower growth in labour costs. Monetary policy cannot prevent an increase in unemployment that is caused by a significantly higher rate of growth in labour costs in Norway compared with other countries. A stagnating global economy has changed the domestic inflation outlook in recent months. World stock markets have continued to decline. It does not appear that interest rates in the US and Europe will increase in the near future. They may even be reduced further before the recovery starts. In Norway, the interest rate has also been reduced. At the same time, fiscal policy is stimulating activity, partly through tax reductions and growth in government allocations. In addition, state finances weaken when the economy shows little growth and unemployment rises. As a result of the strong krone, however, overall economic policy is tight. With an equally tight policy ahead, inflation would probably have been lower than the inflation target. A gradual easing of monetary policy would thus seem appropriate. Does the inflation target promote stability?
Between 2004 and 2009, this expanded at an annual average of 5.3%. On the other hand, government investment remained broadly unchanged during this period and declined in the last two years, in part because actual outlays often fell short of targets. The dual challenge of maintaining a high level of investment spending while reducing the budget deficit, therefore, implies that it is recurrent expenditures that must be cut. Progress has already been made by reducing subsidies, through the privatisation of the shipyard and by aligning utility rates more closely to production costs. For next year, however, while an increase of less than 1% in recurrent spending is planned, few specific cuts have been identified. In this context, the latest Annual Report of the National Audit Office suggests there is ample scope for controlling expenditures more effectively and for improving revenue collection. 13 While taxpayers have every right to expect value for their money, a substantial, durable fiscal correction requires a fundamental reappraisal of the role of the state in providing services. The need to prioritize expenditure programmes has not been fully addressed. As a result, the most difficult challenges, such as how to ensure sustainable funding for tertiary education, pensions and health services, remain to be tackled. 14 Domestic consumption must return to a sustainable level. It is an inevitable adjustment for economies like ours that have lived beyond their means for far too long.