Chapter

11 Norway

Author(s):
International Monetary Fund
Published Date:
March 1986
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Economic growth was higher in Norway in the 1970s than in most other industrial countries. From 1972 to 1979, GDP growth rates averaged almost 5 percent a year in reaction to rising oil activity and expansionary economic policies; these policies were designed to counteract recessionary external impulses that weigh heavily on Norway’s economy, where foreign trade amounts to 30 percent of GDP. In 1981 and 1982, however, the world recession, slower growth of oil and gas production, and more restrictive domestic policies designed to reduce inflation and improve the external position kept growth rates substantially lower and more in line with the global experience.

Throughout the period under review, unemployment remained one of the lowest among the smaller industrial countries, with rates kept below 2 percent in most years. In 1981 and 1982, the stagnation of economic growth was associated with some increase in unemployment, however, although, at 2 percent to 2½ percent, it remained quite low by international standards.

Inflation was a persistent problem, despite intensive government involvement in wage negotiations and heavy reliance on fiscal measures to secure moderate settlements in the context of incomes policy. At times, this effort was supported by a temporary wage-price freeze. In the 1972–78 period, inflation rates ranged from 7 percent to 12 percent. Inflation abated to less than 5 percent in 1979 when a general price and incomes freeze was in effect, but accelerated in the following year, and in the three years to 1982, rates ranged from 11 percent to 13½ percent annually. Expansionary economic policy based on the prospect of substantial future oil export revenues led to steadily widening current external deficits, from near balance in 1972 to 14 percent of GDP in 1977. A deficit of this magnitude was regarded as unsustainable, however, and after a redirection of economic policy toward a more restrictive stance in 1978 and a continued rise in oil exports, the current external position improved sharply from a deficit equivalent to 5 percent of GDP in 1978 to a surplus of 4 percent in 1981 and over 1 percent in 1982. The central government finances registered deficits throughout the period, except in 1981 and 1982.

Norway: Selected Economic Indicators, 1972–82
19721973197419751976197719781979198019811982
Real GDP, percentage changes5.24.15.24.26.83.64.55.14.30.91.0
Rate of unemployment1.71.51.52.31.81.51.82.01.72.02.6
Consumer prices, percentage changes7.27.59.411.79.19.18.14.810.913.611.3
External current account balance as percentage of GDP–0.2–1.8–4.8–8.5–11.9–14.0–5.2–2.12.03.81.2
Source: Organization for Economic Cooperation and Development, Economic Outlook, December 1984.
Source: Organization for Economic Cooperation and Development, Economic Outlook, December 1984.
Norway: Consolidated Central Government Finances, 1972–82(Year ended December 31)
19721973197419751976197719781979198019811982
Total Revenue
(as a percentage of GDP)37.938.437.837.538.738.638.838.941.343.142.6
Percentages of total revenue100.0100.0100.0100.0100.0100.0100.0100.0100.0100.0100.0
Income taxes21.716.017.216.517.317.618.020.627.228.527.1
Social security contributions19.827.226.927.225.525.625.725.522.121.822.3
Payroll (manpower) taxes
Property taxes0.91.01.61.41.11.11.01.11.01.00.9
Taxes on goods and services46.143.842.143.544.246.144.341.939.337.937.7
Taxes on international trade1.51.51.41.31.01.10.90.70.60.70.6
Other taxes0.30.50.20.20.20.20.20.10.10.2
Nontax revenue and grants9.910.210.410.010.68.39.910.19.710.111.2
Total Expenditure
(as a percentage of GDP)39.439.339.140.744.645.445.645.243.141.041.8
Percentages of total expenditure100.0100.0100.0100.0100.0100.0100.0100.0100.0100.0100.0
Expenditure on goods and services19.218.818.818.717.316.816.516.016.018.017.6
Of which:
Wages and salaries10.910.710.110.19.89.39.18.68.48.98.9
Interest payments2.52.52.82.33.64.14.85.76.46.35.8
Subsidies and other current transfers61.962.262.261.459.659.862.461.960.462.463.4
Of which:
Social security funds33.534.433.633.131.329.330.732.232.834.835.5
Capital expenditure4.43.94.03.83.53.63.62.95.35.04.7
Lending minus repayments12.112.612.313.816.015.712.713.512.08.38.4
Surplus/Deficit
(as a percentage of GDP)–1.5–0.9–1.4–3.2–5.9–6.9–6.8–6.3–1.82.10.8
Financing:
Abroad–0.1–0.3–0.13.02.43.65.32.0–0.8–1.6–2.1
Domestic1.51.21.40.23.43.21.54.32.5–0.51.3
Monetary authorities–1.1–0.50.71.20.50.3–2.0–1.0–0.1
Deposit money banks1.91.00.6–0.61.51.91.53.24.31.2–0.3
Other10.70.70.80.10.60.8–0.31.10.3–0.71.7
Memorandum Items:
General government expenditure and net lending/GDP56.256.255.958.860.763.064.463.255.852.252.8
Central government debt outstanding/GDP28.126.824.825.727.833.138.442.137.032.126.5
Source: International Monetary Fund, Government Finance Statistics Yearbook, 1983 and 1984.

Includes adjustments.

Source: International Monetary Fund, Government Finance Statistics Yearbook, 1983 and 1984.

Includes adjustments.

Expenditure

The expenditure of the Central Government expressed as a ratio of GDP expanded from 39½ percent to 42 percent between 1972 and 1982, which is the smallest expansion of the central government sector among this group of countries over the period. However, during 1976–79, the share was larger, 44½ percent to 45½ percent; the relative decline since then was reflected, in part, in net lending. Considerable changes took place in the size of individual expenditure categories. The share of expenditure on goods and services, which was more than 19 percent of total expenditure in 1972, had dropped to 16 percent by 1980, but increased to 17½ percent in 1982, Within this category wages and salaries also declined from 11 percent of the total to just under 9 percent. Both expenditure items also declined as a proportion of GDP. Interest payments on the government debt, on the other hand, rose sharply from 2½ percent of total expenditure in 1972 to 6 percent in 1982.

The share of subsidies and other current transfers in the total rose slightly over the period, reaching 63½ percent in 1982. The fastest growing elements were transfers to households and subsidies to support traditional industries, especially those exposed to foreign competition, and also to cushion the impact of structural change resulting from the rapid development of the oil and gas sector.

Capital expenditure, at 4½ percent in 1982, had risen slightly over the period. Net lending, on the other hand, declined as a proportion of total expenditure from 12 percent to 8½ percent between 1972 and 1982. However, this decline conceals the rapid growth of this category during the first half of the period; in 1976 its share was as high as 16 percent, reflecting the importance of central government loans to state banks, especially for housing, as part of the countercyclical fiscal policy.

Revenue

Central government revenue rose from the equivalent of 38 percent of GDP in 1972 to 42½ percent in 1982, which, after the Netherlands and Belgium, is the third highest ratio among the smaller industrial countries. This rise is accounted for largely by income taxes whose share in total revenue rose from 21½ percent in 1972 to 27 percent in 1982. The rise in revenue from income taxes derives largely from the corporate tax whose share in income taxes soared from 7 percent to 63 percent as a result of the rapid development of the oil sector. In fact, excluding the corporate income tax, revenue from the remaining sources taken together grew at a slower pace than GDP. The personal income tax declined as a proportion of total revenue from 20 percent to 10 percent over the period. Social security contributions increased sharply from 20 percent to 27 percent of the total in the 1972–75 period, but have since been on the decline and were 22½ percent in 1982. The decline reflects successive reductions in the rates of these taxes, usually associated with the implementation of incomes policy.

The share of taxes on goods and services in the total declined from 46 percent to 37½ percent over the period, which implies a slower growth rate than that of GDP. More than half the revenue in this category is derived from a value-added tax, the remainder comprising various excise taxes and duties. Nontax revenue and grants account for about 10 percent of total revenue and remained a relatively stable proportion during the period. The most significant items are property income and administrative fees and charges. Other revenue sources, that is, property taxes, taxes on international trade, and other taxes ranged between 2 percent and 3 percent of total revenue in most years.

The Fiscal Balance and ITS Financing

As already noted, the consolidated central government finances registered deficits in every year of the period, except 1981 and 1982, despite substantial surpluses of the social security system, especially in the early part of the period. The deficits widened to 6 percent to 7 percent of GDP in the 1976–79 period when an expansionary fiscal policy was pursued to counteract the impact of external impulses on employment and living standards. In 1980 the deficit dropped sharply to 2 percent of GDP, largely as a result of rapidly rising oil tax revenues, and surpluses of 2 percent and 1 percent were registered in 1981 and 1982, respectively. Data on the consolidated central government represent the overall cash deficit, but for a country like Norway where revenue from exported oil and other external transactions is significant, the domestic budget balance concept is important, especially for estimating the monetary impact of government operations. Estimates of the domestic budget balance are not available, but approximations that have been made by excluding oil tax revenue indicate that the domestic deficit is substantially larger than the unadjusted deficit and was probably 6 percent to 7 percent of mainland GDP in the last years of the period.

Sources of financing the fiscal deficit varied substantially over the period. From 1972–74 no recourse was had to external borrowing, but for the next five years, such financing frequently covered a large proportion of the financing requirement; in 1980 a policy decision was taken to cease foreign borrowing for this purpose. Financing by the monetary authorities took place in the 1975–78 period, especially in the first two years when about 20 percent of the deficit was financed in this way. Other domestic financing has fallen largely on deposit money banks, but also on the general public through bond sales. Central government debt, expressed as a percentage of GDP, rose from 28 percent to 42 percent from 1972 to 1979, but dropped to 26½ percent in 1982. The external component of the debt was 22½ percent of total debt in 1982, compared with 6 percent in 1972.

Fiscal Policy

The framework. Norway has a relatively large local government sector. In 1982 when central government expenditure was equivalent to 42 percent of GDP, the ratio of general government expenditure was 53 percent. However, the budget of the Central Government plays a dominant role in public sector activity and, in addition, the Central Government has at its disposal certain powerful instruments to promote fiscal policy objectives. One is through its influence on local government activity. Thus, about one fourth of total local government revenue and grants, based on 1979 data, is derived from central government transfers; and the significance of these transfers has risen even further since then. Also, the Central Government is empowered to establish a maximum rate for the local income tax, which accounts for over 40 percent of total local government revenue and grants. Moreover, the Central Government, in principle, supervises borrowing by local authorities whose finances in the past several years of the period registered deficits equivalent to about 1 percent of GDP annually. Also relevant is the importance of state banks in furthering certain fiscal objectives. A major part of their operation is the financing of projects, such as housing investment, which is specifically conceived as an instrument of employment support. Lending by state banks is in part financed by direct government loans.

Fiscal policy is formulated on the basis of a comprehensive forecast of the economy for the upcoming year—the national budget—which was initiated as early as 1947. This document states the major objectives of economic policy and is presented to Parliament annually, where it is discussed along with the ordinary budget. A revised national budget is customarily presented in the course of the fiscal year and may lead to adjustments in the government budget. Longer-term considerations have been a significant determinant of fiscal policy and economic policy in general.

Long-term programs covering four-year periods were once presented to Parliament. These programs, which date back to 1948, set forth prospects for major national expenditure and production components and served as a basis for discussing medium-term resource allocation problems and stabilization policy issues. They did not, however, constitute expenditure commitments on the part of the Government. The link between annual budgeting and the long-term programs appears to have weakened over time, and recently, the long-term programming exercises were discontinued.

Lastly, although more in the realm of monetary policy, the annual credit budgets also have fiscal policy implications, as they incorporate the significant financial operations of the Central Government that are channeled chiefly through the state banks. The credit budgets, which were initiated in 1965, seek to secure consistency between the financial and real sides of the economy and attempt, more particularly, to quantify the volume and allocation of credit that would be consistent with macroeconomic objectives.

Aims and measures. The maintenance of full employment was an overriding aim of fiscal policy throughout the period. Another priority objective was the continued improvement of social benefits that had been developed at a rapid pace during the 1960s. Fiscal measures were also applied intensely to moderate cost and price pressures in the framework of tripartite incomes settlements. The fiscal content in this incomes policy approach also served the separate policy aim of redistributing income in favor of lower income groups. An additional role assigned to fiscal policy was to cushion the impact of structural change caused by the world recession and the rapid development of the oil sector by way of granting support to the sectors hardest hit.

All these objectives implied a highly expansionary fiscal policy, which to a certain extent was perceived as justified by the prospect of large future oil revenue. As a result, the fiscal deficit widened sharply between 1973 and 1978. This widening was associated with high inflation rates and increasing current external deficits, and there was growing recognition that a shift to a less expansionary direction was needed to counteract the growing imbalances in the economy. The scope for an appropriate redirection of fiscal policy was limited, however, as the maintenance of full employment continued to enjoy a high priority as did the interaction of fiscal and incomes policies, which entailed high budgetary costs. Toward the end of the period, the effects of efforts to tighten fiscal policy as set out in the original budget tended to be reduced subsequently by employment-supporting measures, improvements in social benefits, and by tax reductions granted in the context of incomes policy.

In the mid-1970s, as it became apparent that the adverse impact of the oil crisis would extend to real growth and employment in addition to prices, the fiscal policy reaction was to stimulate demand. As investment demand was already high, the main emphasis was placed on giving a boost to private consumption. Measures introduced for this purpose included income tax reductions favoring lower income groups, increases in family allowances, consumer subsidies, pensions, and other social benefits, in particular the introduction in 1978 of a sick-pay scheme.

Similar measures were repeated in subsequent years, along with other measures that specifically aimed at sustaining employment, including public construction programs, lending at concessional terms for housing through the state banks, a stock-financing scheme whereby firms received subsidies to cover a certain proportion of the increase in stocks on the condition that employment was not reduced, wage cost subsidies in the textile industry, and retraining facilities. Also, as a means of sustaining employment in separate parts of the country, employers’ social security contributions were differentiated by regions.

As indicated earlier, incomes policy is a prominent aspect of overall economic policy in Norway and fiscal policy has been closely connected with it. The general demand-stimulating measures noted above, that is, income tax reductions, increased social benefits, and consumer subsidies, are typical fiscal measures incorporated in successive incomes settlements; other measures of this type include increased agricultural subsidies resulting from the raising of farm incomes, reductions in employers’ social security contributions, and increased tax deductibility for trade union membership fees.

Government support to industry has increased over the period and is closely related to the full employment objective. The main recipients of industrial subsidies are state-owned companies and the shipping industry. The specific forms these subsidies take include direct grants for specific purposes, reduced fees for the use of energy, direct wage subsidies, and various financial support schemes and loan guarantees. As indicated earlier, industrial subsidies are to a large extent selective and are designed to cushion the impact of structural change on the exposed sector and to promote regional policy.

Specific measures to implement a medium-term tax reform have been under preparation since such a reform was announced in 1977, and some were initiated toward the end of the period under review. The main objective is to reduce the adverse impact of high taxation on income distribution, savings, and work effort. As already noted, Norway has one of the highest tax ratios among industrial countries, and the income tax progression is quite steep. Marginal taxes range between 30 percent and 70 percent, with about one third of the taxpayers facing a marginal tax of 50 percent or more. The proposed measures include reduced progression of personal income taxes at the lower income steps, simplified deduction rules, increased taxation of higher incomes, and an increased share of indirect taxes. The Government that took office in 1981 announced in a medium-term policy strategy its intention to reduce the tax burden on both households and enterprises. To prevent the domestic budget deficit from widening, determined efforts were to be made to reduce public expenditure growth.

Overview and implications for future policy. Since the onset of the first oil crisis, fiscal policy in Norway has contributed significantly to the fair amount of success that has been achieved in dampening the adverse impact of external recessionary trends on economic activity and employment. However, this achievement has implied a persistent expansionary stance, whose sustainability was based on the prospect of large future oil revenues. While the expansionary policy kept up employment in a general way, the full employment policy also incorporated selective measures favoring industries exposed to foreign competition, other than oil. In an environment of a vast structural change, the selective employment-supporting policy, which was also highly motivated by socio-regional considerations, evidently retarded an adjustment that would have otherwise taken fuller advantage of the country’s production potential. More specifically, the extent of support under this policy obstructed labor mobility and limited the scope for structural adjustment. This problem is likely to remain a major consideration in the formulation of future fiscal and other economic policies.

The extensive application of fiscal measures to moderate wage settlements and reduce inflation appears to have enjoyed more limited success, although it is, of course, difficult to separate out the fiscal impact in this complex issue. In any case, the incomes policy-oriented fiscal measures contributed to the fiscal deficit, while the rate of inflation remained high. On the other hand, within the incomes policy approach, substantial progress was achieved in the stated policy aim of redistributing income in favor of middle- and lower-income groups.

At times in the past, the expansionary fiscal policy created problems for monetary policy, the scope of which is restricted by the government-dominated lending operations of the state banks, which, together with the domestic budget deficits, were a major cause of money supply growth. As a result, difficulties were encountered in covering the Central Government’s borrowing requirement by noninflationary means. Reducing the domestic budget deficit is likely to become an important element in the strategy to bring inflation under better control. Insofar as the prospective tax reform entails a net loss of revenue, the announced efforts to limit expenditure growth will assume enhanced significance in this context.

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