Monday, 16 July 2012

A Financial Analysis of Norway, Part II cont.: Adjusted GDP

Following on from the previous article in this series when net exports were analysed, this time we'll have a look at adjusted GDP, or GDP for mainland Norway (which excludes oil and gas). But before that let's have a quick look at net exports in 2011 by category a bit more in detail. Export and import data from Statistics Norway was combined to calculate net figures.

Net exports by category excluding oil and gas for 2011

Other than oil and gas, net exports from Shipping in 2011 of NOK 77.460 billion (2.8% of GDP) is the only other sizeable category that contribute to GDP. The largest net import categories are Travel and Machinery and Other Equipment which combined reduced GDP by 5.1% (NOK 138.955 billion) in 2011. Again, the above highlights that without oil and gas, Norway is a significant net importer of goods and services. In total and again excluding oil and gas, net imports reduced GDP by 6.3% or NOK 172.198 billion in 2011.

GDP for mainland Norway (GDP excluding oil and gas)

Statistics Norway do report a single GDP figure for mainland Norway (which excludes oil and gas), but they do not report the various components without oil and gas. In order to calculate the component values for adjusted GDP, investments related to oil and gas and ocean services have been removed from the reported Gross investment figure and also been removed from Net exports. The corresponding figure is out on average by 3.2% compared to the reported mainland GDP figure for the 1970 to 2011 period (the adjusted GDP figure is 3.2% lower than the reported figure). This discrepancy has not been found, but it is most likely related to either government spending or government investment. The figures below will therefore understate the percentage of adjusted GDP for one of those components or both.

The adjusted component figures change dramatically when offshore is removed from GDP. For example, government spending in 2011 increases from 21.5% of GDP when offshore is included to 29.1% when offshore is removed while private spending increases from 41.5% to 56.0%. Government spending in Norway on this adjusted basis is amongst the highest in the world when compared to statistics reported by The World Bank. Gross investment remains largely unchanged (from 23.2% to 23.4%) while Net exports sees a reduction from 13.8% of GDP to a negative 8.6% (meaning Norway is then a net importer of goods and services).

The high percentage of government spending can be confirmed by taking the government spending figure and dividing it by the mainland GDP reported by Statistics Norway. The chart looks like this:

As the chart shows, government spending as a percentage of mainland GDP increased from 17.7% in 1970 to 28.1% in 2011. The next chart shows government spending per capita and is inflation adjusted (CPI) so that all amounts are in NOK 2011 values.

Since 1970, the inflation adjusted government spending per capita increased from NOK 28,674 to NOK 119,057 in 2011. This represents a real annual increase of 3.5% a year (8.7% including inflation). Since 2000, the annual real growth was 3.8% or 5.8% a year including inflation. The corresponding figures for the last five years are an annual real growth of 3.9% or 6.1% yearly including inflation.

Concluding the above, the government spending has increased steadily for many years and continued to increase rapidly in recent years as well. For mainland Norway government spending is by and large representing a bigger chunk of GDP every year while Gross investment represents a smaller part of GDP than it did during the 1970s and 1980s. Private consumption's share of mainland GDP has decreased since the early 1990s while adjusted Net exports (net imports that is) has remained largely unchanged. In sum, talk of a "Norwegian Model" is premature and is nothing more than growth of GDP through expansion of government spending (which grows quicker than private spending) and huge profits from the extraction and sale of oil and gas. The above clearly suggests government spending needs to be reduced significantly starting as quickly as possible as it has increased too quickly for too long (and still does!) and instead be substituted by growth in the private sector, gross investments and a more competitive export sector in addition to oil and gas.

In the next article in this series, revenues and expenditures of the central government will be discussed in detail.

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