Tuesday, 24 July 2012

A Financial Analysis of Norway, Part III: Central government fiscal accounts - Expenditure

Introduction

In this article the fiscal accounts of Norway's central government are analysed. The fiscal accounts are in effect the "profit and loss" or "income" statement for the central government. The period analysed is 1997/1998 to 2011 as it proved difficult to compile data prior to this. This 14-15 year period should be sufficient for the purposes of this article however. The data for the charts were compiled from regjeringen.no (the Norwegian government website). As the fiscal accounts are published in Norwegian only, the various items have been translated based on other reports issued in English by the government while some items were directly translated by the author. Some of the ministries changed their names and responsibilities in 2000 so for some of the ministries the data runs for only 12 years.

The focus in this article and the next will be on the fiscal accounts excluding oil and gas in accordance with the purpose of this series of articles (please refer to the introduction of the series). "Loan transactions" (financial items) are also removed so that in effect we end up with "operating income" (or "EBIT") for mainland Norway when expenditures are subtracted from the corresponding revenues. But first, the expenditures as reported in the central government's fiscal accounts.

Expenditures

During the period 1998 to 2011, total expenditure of the Norwegian central government expanded from NOK 467,009 million (or NOK 467.009 billion) to NOK 952,121 million in 2011, an increase of NOK 485,112 million or 104%.



On average during the 1998-2011 period, expenditures increased 5.63% per year (geometric average). Annual inflation was 2.06% during this period based on the Consumer Price Index (CPI) data from Statistics Norway which means that real (inflation adjusted) expenditures increased on average 3.47% ([1,0563/1,0206]-1 = 0,0350 = 3.50%) every year. The growth in expenditures is only fractionally related to population growth as it only grew by an average of 0.8% during the period. Most of the growth in expenditures is therefore growth in expenditure per capita.



As the chart above shows, the nominal growth rate in expenditure has been significant every year since 1999 except for 2002, 2003 and 2010. Expenditure growth increased dramatically during 2008 and 2009 and again in 2011. During the period 2002 to 2011 nominal expenditures increased on average 5.6% a year, while for 2005 to 2011 this increased to an average of 7.7% a year. Except for perhaps 2008, the reported inflation was moderate during the whole period.


Where has this substantial growth in expenditures come from? To answer this we'll have a look at the period since 2002 as the definition of the ministries (and the expenses allocated to them) are more consistent during this period.

Source: regjeringen.no, EcPoFi


As the table shows (% change is geometric averages), the expenditures of the Ministry of Labour increased the most during 2002-2011 period and it also increased its spending substantially for the 2005-2011 period as well (part of this is explained through a change in the structure of the ministry in 2010). This is followed by a 21.6% annual increase in Miscellaneous expenses, 15% annual increase for the Ministry of Petroleum and Energy and a 10.4% annual increase for the Ministry of Trade and Industry. Only two ministries decreased their expenditures from 2002-2011: the Ministry of Education and Research (down an average of 0.2% a year) and the Ministry of Government Administration, Reform and Church Affairs (down an average of 12.1% a year). It's worth noting that there are no foot notes of a change in the structure for the Ministry of Education and Research. The Norwegian government is hence reducing money spent on education while substantially increasing funds allocated to almost all other areas (there was however an increase in spending for the 2005-2011 period, but again at a slower pace than for most other areas).

The next table lists all central government expenditures for 2011 in NOK million.

Source: regjeringen.no, EcPoFi
By far the biggest expenditure was the National Insurance Scheme (pensions, disability, illness benefits etc) amounting to NOK 329,173 million (34.6% of total expenditures) in 2011. This item grew by an average of 5.4% a year from 1998 to 2011 and 6.6% a year from 2005 to 2011.



It is followed by the Ministry of Local Government and Regional Development which spent NOK 141,867 million in 2011, the Ministry of Health and Care Services which spent NOK 113,369 million and State-controlled Banks with costs of NOK 90,696 million. Also worth noting is that 4.5% of the total expenditures for 2011 were spent on education and research.

Conclusion on central government expenditures

The growth in central government expenditures was extravagant for the 1998 to 2011 period. Even more alarming is the fact that the pace of growth increased from 2005 to 2011 further expanding the already substantial size of the Norwegian "welfare state". In 2011, central government expenditures amounted to around NOK 194,000 (USD 31,700) per capita or about 42.3% of the average gross salary for workers in Norway. Further, in 2011 central government expenditure as a percent of Private Consumption was 84.4%, compared to an average of 80.9% for 1998 to 2011.

In summary, the Norwegian central government expenditures is scary reading for libertarians, conservatives and anyone who cares about sound management and preservation of a country's wealth and efficient use of its financial resources. Allowing expenditures to grow at the pace demonstrated above (from an already high expenditure base) is not prudent management. In fact, a case for mismanagement or even negligence can easily be argued. The central government's spending spree must end and a significant restructuring and decrease of government spending must start now. Otherwise the country will continue to waste more of its financial resources on expanding an already massive government sector at the expense of current and future generations. The Norwegian Government Insurance Scheme seems the logical place to start this process, but there are many cost centers here with the potential for a significant reduction in expenditure.


The next article in this series will discuss and analyse the central government's revenues and its revenues less expenditure ("operating result").

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