Real growth in public spending Revised National Budget 2002 2002 Growth in central government expenditure - Rise in prices for expenditure  7.0%  = Real spending growth  2.5%  4.4%  Distributed as follows: Real growth, transfers  2¾%  Real growth, investment  6¾%  Real growth, consumption  1½%  SG Kommunalbanken, 30.august 2002  Growth in public spending between 2001 and 2002 is estimated at 7 per cent. This is considerably higher than growth in private sector mainland GDP, which is estimated at around 4 per cent. The fiscal guideline is then closely adhered to. Real growth in public consumption is estimated at 1½ per cent. In other words, growth in production of public services will be moderate, even though public spending is rising sharply in nominal krone terms. This is because the cost of producing public services is rising sharply, reflecting high wage growth in the public sector. There have also been substantial increases in transfers to the household sector through social security schemes. The bulk of the high growth in central government allocations therefore translates into strong growth in household income and  BIS Review 48/2002  3  consumption. This tends to be the result when wage and costs pressure are already at such a high level. If the central government were to compensate public sector entities for the high wage increases, the result could easily be a new round up the wage spiral.
Monetary policy must reduce the possibility of passing on these costs in order to keep inflation at bay. This is done partly by keeping growth in demand for goods and services under control. In addition, a strong krone may boost imports of goods and services previously reserved for domestic producers. In rural areas and towns, where local government employment is an alternative to working in agriculture, fisheries, local services or small-scale industry, the public sector with its nationwide agreements can be a wage trend-setter. Wage growth in the public sector can therefore be an important source of higher inflation. In the public sector, higher labour costs due to costly income settlements can only be passed on to customers to a limited extent. On the other hand, the rise in costs can intensify pressures to increase government allocations. Most likely, the central government will be expected to pick up the bill when labour costs rise sharply. In the business sector – with its profitability requirements – higher labour costs must be matched by an increase in productivity. In principle, the central government will apply the same requirements to government agencies. How these requirements will be met in practice will have a decisive impact on developments in central government expenditure and, consequently, on interest rates and the krone exchange rate.