At that time, there was a lack of confidence in both monetary policy and fiscal policy. The costs proved to be substantial. Unemployment increased more in line with that experienced in some European countries today. However, when the financial crisis reached Norway in 2008, our country was in a particularly favourable position. A long period of substantial petroleum revenues – and a clear savings plan – had provided us with considerable leeway. As a result, fiscal policy could also be put to effective use during the downturn. The guidelines stipulate that the government budget deficit shall over time be equivalent to 4 per cent of the capital in the Government Pension Fund Global, – more in bad times, less in good times. Chart 8: Fiscal policy. Change in the non-oil budget surplus from 2008 till 2010. In billions of NOK A fall in output and employment automatically leads to reduced taxes while unemployment benefits increase. An important aspect of the fiscal rule is that it includes a mechanism whereby these effects also translate into a weaker budget balance. These automatic stabilisers generated strong impulses through 2009 and 2010. The decline in output and employment automatically triggered a reduction in taxes and an increase in transfers of more than NOK 40 billion for the two years as a whole to the benefit of households and firms. The increase in the Government Pension Fund Global provided, under the fiscal rule, room for a NOK 25 billion increase in spending.
The social partners can apply a low and stable rate of inflation when they negotiate the share of economic growth to be taken out as real wages and set their ambitions with regard to employment. The guidelines and the financial crisis The financial crisis in 2008 put the economic policy guidelines to a severe test. The interest rate cuts that followed from the inflation target led to a reduction in households’ annual interest expenses of around NOK 40 billion. The krone acted as a buffer. The burden on leveraged companies was eased and many investment projects became profitable in an environment of lower interest rates. Monetary policy made a substantial overall contribution to Norway’s resilience to the crisis. 3  Speech delivered at the Petroleum Seminar at the Norwegian Association of Economists on 2 November 1988. 4  BIS central bankers’ speeches  Chart 6: Real interest rate. Per cent. August 1987 – February 1990 and June 2008 – December 2010 Chart 7: Registered unemployment. Per cent. August 1987 – February 1990 and June 2008 – December 2010 Well anchored inflation expectations made monetary policy effective – the reduction in Norges Bank’s key policy rate was perceived as a decline in the real interest rate. Other central banks experienced that there was little scope for reducing the real interest rate to a sufficiently low level. This downturn contrasts sharply with the downturn in the 1980s when the interest rate had to be maintained at a high level to defend the krone exchange rate.