Growth in public spending from last year to this year is estimated at seven per cent. This is considerably stronger than the growth in value-added in the private sector of the mainland economy, which is estimated at around four per cent. The guideline for fiscal policy has been followed closely. Real growth in public consumption is estimated at 1½ per cent. In other words, growth in the production of public services will be moderate, even though public spending is rising sharply in nominal kroner terms because of the steep increase in the cost of producing public services. This reflects high wage growth in the public sector. There have also been substantial increases in transfers to the household sector in connection with our social security system. As a result, most of the strong growth in central government allocations translates into a sharp rise in household consumption, while growth in public service production remains moderate. This is only to be expected when there is steep increase in public sector allocations in an economy where there are no available resources. Employment and labour force participation rates are high. The labour market is tight. Unemployment remains low, with limited available resources. There will be slow growth in the labour force. Working hours have been reduced by increasing the number of vacation days. In addition, outflows from the labour market have risen over the last few years as a result of early retirement and the use of disability pensions.
A sharp rise in labour costs is currently fuelling brisk growth in the prices of goods and services produced in Norway. Inflation is being kept at bay because the rise in prices for imported goods is close to zero. A stronger krone exchange rate, increased trade with China and eastern European countries, a reduction in tariffs and the global downturn have kept import prices low. If the krone exchange rate remains at today’s level, imported price inflation will remain subdued. Wage growth has remained at between five and seven per cent every year since 1998. It appears that this year’s wage settlement will result in a similar outcome. Strong wage growth is the result of a tight labour market. The interest rate is higher in Norway than in most other OECD countries. This is a direct result of considerably higher nominal wage growth in Norway. The phasing in of petroleum revenues increases the demand for labour from the public sector and from enterprises selling goods and services to households. With little slack in the economy, employment in the internationally exposed sector must decline. As competitiveness has deteriorated, manufacturing employment has been scaled back in waves. Competitiveness deteriorated by around 10 per cent from 1994 to 2001. If wages in Norway relative to other countries develop along the same lines as last year and the krone exchange rate remains at the present level to the end of the year, competitiveness will deteriorate further by around seven per cent.