First, the government has shown little ability and willingness to impose clear and ambitious return requirements and control the financial risk in companies where it has a dominant stake. In addition, if the companies are underperforming, both jobs and regions will be adversely affected. Second, the government has not developed effective management of equity in the companies. The size of equity and the dividend policy seem to be randomly determined by historical factors. New equity management instruments, such as share buy-backs and extraordinary dividends, are seldom used. On the whole, it seems difficult for a state-owned enterprise and for the state as owner to acknowledge that a growth period may have come to an end and that the owners should invest their capital elsewhere. Third, the state as owner will always have a strong aversion to negative corporate events. On the other hand, the state will provide little extra rewards to a company that has boosted its return on equity by one or two percentage points. The result is an erosion of an important driving force behind growth. BIS Review 14/2001  11  In a state-owned enterprise the board or management of the company and the state as owner may have a common interest in overcapitalising the company because they will then both be on the safe side. Fourth, the state has complex and elaborate procedures for making decisions. Moreover, the procedures are designed to accommodate tasks other than the role of ownership.
Second, real interest rates must also be increased with a view to removing the causes behind the differentials. BIS Review 14/2001  5  Interaction with fiscal policy It is important that the annual budgets are based on a long-term strategy that takes into account possible fluctuations in oil revenues from one year to the next. With large and, to some extent, varying budget revenues, the basis for determining central government expenditure and taxes from one year to the next may easily be impaired. If budget spending is allowed to vary in step with oil prices, the Norwegian economy may experience abrupt shifts and instability. Changes in oil prices may then quickly influence wage and price expectations, the exchange rate and long-term rates. In addition, short-term rates would have to be changed frequently and sharply. Budget tightening and spending growth Percentage change from previous year 3  3  Spending growth  2  2  1  1  0  0  -1  -1  Total effect of the budget  -2 93  94  95  96  97  98  99  00  -2 01  In recent years, central government real underlying spending growth has accelerated somewhat. Both in 2000 and 2001, spending growth has been higher than 2 per cent, which is above potential growth in the mainland economy. At the same time, taxes have increased.