Thursday, 11 October 2012

A Financial Analysis of Norway, Part IV: Fiscal Policy Guidelines and the 4% rule

As explained previously in this series of articles, A Financial Analysis of Norway, the fiscal deficits for mainland Norway are basically financed through drawing down capital from the Government Pension Fund Global (GPFG), Norway's oil fund. The Norwegian Ministry of Finance sets out its fiscal policies with respect to the use of these funds as follows:
The fiscal policy guidelines, in place since 2001, stipulate that fiscal policy shall be geared towards a gradual increase in the use of petroleum revenues. Over time, the structural non-oil central government budget deficit shall correspond to the expected real return, estimated at 4 percent, on the Government Pension Fund - Global. However, the guidelines also allow fiscal policy to be used actively to counter fluctuations in economic activity. In a cyclical expansion, fiscal policy restraint relative to the spending rule is called for, whereas in a cyclical downturn higher spending of oil revenues is justified to stabilize the economy.
Basically, the fiscal policies stipulate explicitly that the government should run a structural non-oil budget deficit so as to face in the petroleum revenues in the economy. Prime minister Stoltenberg refers to this as "responsible use of money" (see here). To the contrary, this is not responsible use of this wealth as the government uses the 4 percent rule as an excuse and a reason to further expand government spending and increase the size of the bureaucracy (see charts in previous articles in this series for more on this). The 4 percent rule leads to undisciplined spending and money wasting on a grand scale in other areas as well (skim through some of these as examples). VG.no, the Norwegian news paper, has put together an excellent overview of a range of government grants issued over the past few year (in Norwegian only, see here) a selection of which is shown in the appendix at the bottom of this article.

Based on the market value of the fund as of Q2 2012 which was NOK 3,561 billion (see Appendix), the government can spend about NOK 142.440 billion of the oil fund over the next year. With some NOK 400 billion in total income expected from petroleum activities this year (and for many years to come), the fund will grow ever bigger (assuming no losses from the funds investments activities, which arguable is a poor assumption - see here). There appears to be some debate as to what the 4% rule actually means and how the money should be spent. It is written however in the guidelines (St.meld.nr.29, 2000-2001) that money from the GPFG "should be spent partly on increased employment in the public sector and partly on reducing taxes". Well, the government has certainly achieved the "goal" of increasing the number of public sector employees as almost 102,000 general government employees were added during the 2000 to 2011 period. As of 2011, some 795,000 are on the payroll of the general government (and this number does not include all the hours worked by the private sector servicing the public sector), or 30.2% of total employment in Norway.


As for reducing taxes the government has not been quite as "successful". Actually, it has, not surprisingly, done exactly the opposite. During the period 2000 to 2011, total taxes and duties excluding petroleum activities, increased by NOK 370,883 billion or 91.2% to NOK 777,549 billion.


As a percentage of GDP, taxes and duties increased from 27.5% in 2000 to 28.6% in 2011 (4.1% increase). As a percentage of Private Consumption, taxes and duties increased from 63.5% in 2000 to 68.9% in 2011 (8.4% increase). And finally, as a percentage of Mainland Norway GDP (which excludes the GDP element from petroleum activities), taxes and duties increased from  36.5% in 2000 to 37.3% in 2011 (2.1% increase). During a period of growing income from petroleum, businesses and tax payers are actually paying more in taxes and duties in 2011 than in 2000, both in absolute terms and percentage terms. The current prime minister of Norway was in charge when this 4% rule was put in place and rather than reduce the overall tax burden for Norwegians as the 4% rule stipulates it has been increased.



The government will spend a record NOK 123.663 billion of the oil fund according to the 2013 budget published recently of which only 5.9% of the total budget is for investments (including the military). The government hence plans to spend even more of Norway's wealth on running costs, of which social security represents a major (and growing) item (budgeted to be 34.7% of the total budget for 2013). A spending spree indeed and central planning on a grand scale.

The implications of the above are two fold. First, with an ever growing oil fund, the "4% rule" should be revised immediately and reduced dramatically. Secondly, what the money from the oil fund is spent on also need to be revised and clarified immediately. A prudent spending rule would aim for a structural non-oil surplus together with a reduction in taxes and then spend some of the money from the oil fund on much needed investments, such as infrastructure (especially roads and railways). Such a rule would serve to discipline government spending and ensure much more efficient and prudent government spending and certainly protect the wealth generated from petroleum activities being wasted on ever expanding public sector expenditures including social security. Most importantly, such a change in fiscal policies is urgent to change the very unfortunate culture the current government has created, a culture that can be the demise of Norway longer term and which will be extremely difficult to change the longer it remains in place; namely that of big government which too many depend on and an overall tax burden which provides less than optimal incentives to work and innovate. One day Norway will run out of oil. Previous governments and the parliament are also to blame here, as well as the current opposition parties who have not been nearly vocal and forceful enough to reign in spending.

The time is now for a change for the better in Norway. Fundamentally rewriting the 4% rule to ensure Norway runs a non-oil budget surplus is key to achieving this change. Unfortunately for Norway and its future generations, there is currently not one single political party in the country who could even contemplate such a change. Not even for the longer term.



Appendix

GPFG's market value per quarter. Billions of kroner

Source: Norge Bank Investment Management

A selection of money distributions (grants etc) by the Norwegian Ministry of Foreign Affairs in 2011. Source: VG.no

Recipient Amount, NOK
FMO- FINANCIAL MECHANISM OFFICE 1 171 800 000
FMO- FINANCIAL MECHANISM OFFICE 1 170 040 000
UNICEF- United Nations Children's Fund 1 020 000 000
BNDES - Brazilian Development Bank 1 000 000 000
UNDP - UN Development Programme 840 000 000
IDA - International Development Association 779 000 000
Norfund 757 250 000
AFDB - African Development Bank 534 156 000
GFATM - Global Fund to Fight AIDS, Tuberculosis and Malaria 450 000 000
GAVI - Global Alliance for Vaccines and Immunization 428 600 000
IBRD - International Bank for Reconstruction and Development 350 000 000
UNFPA - UN Population Fund 347 000 000
UNCERF - United Nations Central Emergency Response Fund 343 600 000
UNHCR - UN Office of the UN High Commissioner for Refugees 290 000 000
IBRD - International Bank for Reconstruction and Development 289 516 000
Nordisk Ministerråd - Nordic Council of Ministers 287 295 000
World Bank 285 000 000
Tanzania Ministry of Finance 274 706 000
Flyktninghjelpen 269 646 000
Norfund 242 750 000
IBRD - International Bank for Reconstruction and Development 240 950 000
WHO - World Health Organization 225 600 000
Norges Røde Kors 219 580 000
IDA - International Development Association 213 000 000
Government of MOZAMBIQUE 209 826 000
UNDP - UN Development Programme 192 081 000
EFTA - European Free Trade Association 191 513 000
ICRC - International Committee of the Red Cross 184 000 000
UNDP - UN Development Programme 167 250 000
UNAIDS - UN Programme on HIV/AIDS 161 507 000
UNDP - UN Development Programme 159 855 000
Norges Røde Kors 154 472 000
UNOCHA - UN Office of Co-ordination of Humanitarian Affairs 151 000 000
UNRWA - UN Relief and Works Agency 150 000 000
WFP - World Food Programme 145 000 000
Liberia Ministry of Lands, Mines & Energy 141 950 000
Fredskorpset 139 524 000
Norsk Folkehjelp 136 732 000
AMCs - Advance Market Commitments 131 400 000
Zambia Ministry of Finance and National Planning 124 631 000
UN Foundation 120 000 000
World Bank 117 635 000
Uganda Ministry of Finance, Planning and Economic Development 115 842 000
Malawi Ministry of Finance 115 648 000
CGIAR - Consultative Group on International Agricultural Research 110 000 000
UNICEF- United Nations Children's Fund 109 666 000
UNDP - UN Development Programme 109 173 000
GEF - Global Environment Facility 106 333 000
UN - United Nations 104 244 000
UNITAID 102 052 000
MONUC - UN Organization Mission in the Democratic Republic of the Congo 101 623 000
UNEP - UN Environment Programme 100 000 000
UNDP - UN Development Programme 99 600 000
Nepal Ministry of Finance 98 105 000
UNHCR - UN Office of the UN High Commissioner for Refugees 86 288 400
Politidirektoratet 81 116 000
Mozambique Ministry of Foreign Affairs and Cooperation 80 783 800
IFAD - International Fund for Agricultural Development 80 045 000
UNAMID - African Union / UN Hybrid operation in Darfur 79 473 300
UNDP - UN Development Programme 79 000 000
UN-HABITAT - United Nations Human Settlements Programme 79 000 000
Conservation Farming Unit (ZAM) 78 306 600
IDA - HIPC 77 719 000
UN Women 75 000 000
Innovasjon Norge 71 993 300
ASDB - Asian Development Bank 71 824 900
World Bank 69 955 000
Kirkens Nødhjelp 69 378 500
UNDP - UN Development Programme 69 120 000
IDA - MDRI - Multilateral Debt Relief Initative 67 810 000
Flyktninghjelpen 67 651 000
World Bank 65 000 000
Uganda Ministry of Energy and Mineral Development 64 938 900
MINUSTAH - UN Stabilization Mission in Haiti 62 280 500
UNDG - United Nations Development Group 60 000 000
UNHCHR - Office of the UN High Commissioner for Human Rights 58 652 900
NDF - Nordic Development Fund 57 851 200
World Bank 55 186 800
UN Women 51 697 000
UNHCR - UN Office of the UN High Commissioner for Refugees 50 000 000
DFID - Department for International Development 50 000 000
IMF - PRGF - Poverty Reduction and Growth Trust 50 000 000
UNICEF- United Nations Children's Fund 48 943 500
AFDB - African Development Bank 48 804 400
UNDP - UN Development Programme 48 522 700
IFFIm - International Finance Facility for Immunisation 48 500 000
UNESCO - UN Educational, Scientific and Cultural Organisation 47 500 000
UNICEF- United Nations Children's Fund 47 000 000
UNDP - UN Development Programme 46 611 400
Henry Dunant Centre for Humanitarian Dialogue 44 000 000
UNCERF - United Nations Central Emergency Response Fund 43 700 000
FMO- FINANCIAL MECHANISM OFFICE 42 711 800
UNRWA - UN Relief and Works Agency 40 500 000
WFP - World Food Programme 40 000 000
ILO - International Labour Organisation 40 000 000
ACTED - Agency for Technical Cooperation And Development 39 718 000
UNDP - UN Development Programme 38 248 000
UNOCHA - UN Office of Co-ordination of Humanitarian Affairs 37 500 000
UNDP - UN Development Programme 37 485 200
KD - Kunnskapsdepartementet 37 400 000
FMO- FINANCIAL MECHANISM OFFICE 37 366 600
UNOCI - UN Operation in Côte d'Ivoire 37 123 900
UNICEF- United Nations Children's Fund 37 100 000
Barentssekretariatet 36 150 000
Council of Europe 35 973 300
FAO - Food and Agricultural Organization of the United Nations 35 000 000
Tanzania Ministry of Finance 35 000 000
DFID - Department for International Development 34 214 800
BMZ - German Federal Ministry for Economic Cooperation and Development 34 000 000
Miljøverndepartementet 33 999 100
IMG - International Management Group 33 160 800
Undefined 32 032 800
UNMIS - United Nations Mission in the Sudan 31 727 700
Norges Forskningsråd 31 560 600
WFP - World Food Programme 31 000 000
IBRD - International Bank for Reconstruction and Development 30 832 400
NATO - North Atlantic Treaty Organisation 30 669 500
Grand Total, NOK 19 344 279 600
Grand Total, USD  3 358 381 875



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