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. BIS Review 19/2001  9  In recent years, central government real underlying spending growth has accelerated somewhat. In 2000 and 2001, spending growth has been higher than 2 per cent, which is higher than normal growth in the mainland economy. At the same time, direct and indirect taxes have increased. Fiscal policy has thus had a virtually neutral effect on domestic demand for two years while wage growth has been substantially higher than in other countries. A possible interpretation of this development is that it is more demanding to use the government budget to dampen cyclical fluctuations during an upturn than during a downturn. The willingness and ability to pursue a counter-cyclical policy may in itself be cyclical. Another interpretation is that a neutral fiscal stance this year, with a strong increase in government financial wealth, is a balanced approach to using the budget to stabilise the economy while phasing in an increase in financial income in the economy. Conclusion The Norwegian economy is fragile and vulnerable.
Developments in 1998 are one example, when the krone came under growing pressure as a result of the sharp fall in oil prices, turbulence in international capital market in the wake of the Russian crisis and imbalances in the Norwegian economy. Monetary policy The long-term objective of monetary policy is to provide the Norwegian economy with a nominal anchor - domestic price stability, and thereby the basis for a stable krone. Nominal stability is the best contribution monetary policy can make to economic growth and prosperity. A nominal anchor is also a necessary precondition for stable financial markets and property markets. High inflation and wide swings in the exchange rate impair the function of prices as an information vehicle. This leads to booms followed by busts and an arbitrary redistribution of income and wealth. Inflation therefore poisons the economy. By linking movements in the krone to the euro, we have chosen to follow the same standard for nominal stability in the economy as set by the euro area countries. BIS Review 19/2001  7  Since 1997, inflation has been higher in Norway than in the euro area. The difference partly reflects a period of strong growth in Norway, while the level of activity in Europe has been low. But the relatively high inflation rate in Norway cannot continue as this will undermine the basis for stability in the krone exchange rate and weaken confidence in monetary policy.