A high level of activity and a tight labour market could imply a tighter economic policy. At the same time, there were increasing demands to use a larger portion of the substantial and rising petroleum revenues that were manifested through the Government Petroleum Fund. The guidelines for fiscal policy had so far been that the budget should have an approximately neutral effect on the economy in a normal cyclical situation. A shift towards an increased use of petroleum revenues would then inevitably involve a fiscal policy that no longer had a neutral impact, but which would generally have an expansionary effect on the economy. In such a situation, it will be highly desirable to establish mechanisms that prevent serious imbalances in the economy. The phasing in of revenues must take place in a controlled manner and not through abrupt changes, but a counterbalance to the generally expansionary fiscal policy must also be established in order to avoid galloping inflation, unstable exchange rates and boom periods. The necessary structural changes in the Norwegian economy which an increased use of petroleum revenues implies must take place within a framework of nominal stability. The guidelines, as set out in Report no. 29 to the Storting (2000-2001), provide the response to the first challenge: “Considerable emphasis must be placed on stabilising fluctuations in the economy with a view to ensuring appropriate capacity utilisation and low unemployment.
A gradual phasing in of petroleum revenues is clearly preferable to large and, to some extent, unpredictable changes in fiscal policy from one year to the next. Without clear limits for the use of petroleum revenues, considerable uncertainty concerning the formulation of economic policy ahead could arise. For monetary policy, the guidelines are not a challenge but a benefit. When the implications of the guidelines for Norway’s industry structure become apparent, it is not given that everyone will be equally enthusiastic. If, at the same time, we have a strong exchange rate, some may want monetary policy to counter a strong krone exchange rate even if we are on track in relation to the inflation target. Monetary policy cannot and shall not do this. The objective of monetary policy is to contribute to low and stable inflation. Reducing interest rates in order to weaken the krone, thereby jeopardising the inflation target, would mean that we are not doing our job. Nor would this change the necessary structural adjustments that the increased use of petroleum revenues implies, but only increase their costs. Thank you for your attention. BIS Review 7/2002  11