Wednesday, 20 June 2012

A Financial Analysis of Norway, Part I: Introduction

Norway is amongst the wealthiest nations on earth with a GDP per capita of NOK 549,243  (ca USD 91,540) in 2011, the second highest in Europe (behind Luxembourg) according to Statistics Norway and the third highest in the world in 2010 according to the World Bank. The country's wealth has primarily been generated by exploration of its vast crude oil and natural gas reserves which was first discovered in the late 1960s. Most of the profits made from oil and gas are transferred to the Government Pension Fund Global and at the end of Q1-2012 the value of the fund was NOK 3,496 billion, or about USD 592 billion, making it perhaps the largest sovereign wealth fund in the world according to some reports. Despite this enviable financial position, especially during these financially worrying times, the country has achieved little of significance outside of its offshore industry (if you're not from Norway, can you think of a Norwegian company other than Statoil?). The electorate and politicians alike in Norway need to reassess really what a government is supposed to get involved with and how much money should be spent by it. When analysing Norway, it makes sense to break it down in two departments: onshore (mainland Norway) and offshore (the oil and gas industry), like one would do when analysing a company with many revenue streams and departments.

Many observers, including the government itself (you would expect them to!), seem to be full of praise on how well Norway is doing. Well, on the net Norway is doing extremely well financially as it has been blessed with massive oil and gas reserves for more than four decades. But the really interesting question is: how well could it have done and how well could it do with all this wealth? How well are things going compared to its potential? In a series of posts titled "A Financial Analysis of Norway" I try to shed some light on what is not going well in Norway in economic/financial terms. I will include the source material references in english when they are available, but if not the source will be in Norwegian I am afraid.

The motivation behind this series of articles is that the Norwegian government and the state has been on an unsustainable spending spree in recent years (and long before that many libertarians would argue) which is making Norway and its people worse off than they could be (or not as well-off as they could be). For example, ranks Norway only 40 in the world in its "economic freedom" rankings for 2012 and at number 20 out of 43 in Europe, "mainly reflecting a considerable deterioration in the control of government spending" (it evaluates countries in four broad areas of economic freedom: rule of law; regulatory efficiency; limited government; and open markets). The spending spree includes further expanding an already overweight public sector, through generous unemployment benefits, a multitude of government grants by government ministers as reported by (the largest tabloid newspaper in Norway), to mention a few. Much of this has been financed by high personal tax rates and other direct and indirect taxes, a basic VAT rate of 25%, toll roads everywhere, the introduction of tax on dividends  in 2006 (leading to double-taxation for shareholders with some exceptions), the list goes on.

Dispite a high overall tax burden by any standard (and remember when looking at this chart that Norway has one of the highest GDP per capita in the world), the central government still managed to run a deficit for mainland Norway of an average of about NOK 60.424 billion a year, every year, during the last 10 years (based on National Accounts as published by - the Ministry of Finance has confirmed the fiscal accounts are not published in english). During the last three years, the annual deficit for the central governemt for mainland Norway averaged NOK 94.064 billion a year. These are by no means small sums for a country of just five million people.

The first chart (of many charts to come) is the government spending to private consumption ratio depicted below. It has increased from about 44.7% in 2000 to about 51.9% in 2011. Government spending in Norway reached more than 50% of private consumption for the first time in 2009 and has for the last three years remained above this level.

To be continued.

Source:, EcPoFi