Norway’s Sept. 9 election is set to open up a debate on how much of the nation’s oil wealth can be funneled straight into Scandinavia’s richest economy.
The Progress Party, poised to enter government for the first time since being founded in 1973, is campaigning on a platform to scrap Norway’s 4 percent spending limit on oil revenue. The rule, which was pushed through by Prime Minister Jens Stoltenberg’s Labor Party early last decade to prevent overheating, is backed by all other groups in parliament.
“The biggest question is to which extent the Progress Party will form the fiscal policy and use of oil money,” Olav Chen, senior portfolio manager at Storebrand ASA (STB), who oversees about $8 billion, said Aug. 28 in an e-mail.
According to most polls, the Progress Party is on course to become the second-biggest group in a coalition led by Erna Solberg’s Conservatives. Solberg has sought to reassure voters and economists that she’ll be responsible in overseeing the nation’s $760 billion wealth fund. Her party has discussed restructuring the fund to help it generate higher returns.
The Progress Party and the Conservatives have both campaigned on promises to cut income taxes and the wealth tax, and to increase investments in infrastructure such as roads.
The opposition, which also includes the Christian Democrats and the Liberal Party, is set to win 100 seats in parliament, versus 68 for the three-party government, according to a weighted average of 24 opinion polls as of Sept. 2 by the website Pollofpolls.no.
Labor, whose leader Stoltenberg has been prime minister for eight years, is warning voters that excessive oil-funded spending will damage the economy. Norway, western Europe’s biggest oil and gas producer, is struggling to stay competitive as manufacturing wage costs hover almost 70 percent above the European Union average. Economists have warned that more oil spending would exacerbate the pay disparity versus Europe.
Labor this year proposed spending 3.3 percent of the fund to plug budget deficits, staying within the 4 percent rule for a fourth year. Still, with the fund quadrupling in size since the middle of last decade, that represents a 19 percent increase in government spending versus 2012. The government estimates the fund will grow about 50 percent by 2020.
DNB ASA (DNB), Norway’s largest bank, said in an August report that the growing amount of oil money means there’s plenty of room under the fiscal rule for the opposition, including the Progress Party, to fulfill its economic ambitions. DNB estimates a new government will cut taxes by 25 billion kroner ($4.1 billion), increase public spending at 1 percent annually and boost investments by 7.5 percent in 2015 and 2016.
The Progress Party, which has been a political outsider because of its anti-immigration stance, argues that Norway should drop the fiscal rule to promote investments rather than welfare.
“What we’ve been spending the money on is having fun today, we have not been spending for the next generation,” Ketil Solvik Olsen, finance spokesman for the party, said in an interview on Aug. 19. “If you can invest it in the current economy, that’s also going to be good for the economy.”
Norwegian billionaire real estate developer Olav Thon last week endorsed the party in a full-page ad in two Norwegian newspapers saying the party will help reduce bureaucracy that’s bad for businesses.
Storebrand’s Chen, as well as economists at Nordea Bank AB (NDA) and DNB, argue the Conservatives will probably rein in the Progress Party when it comes to oil spending. Solberg has said that sound economic policy is “symbolized in the fiscal spending rule.”
“The overall effect from the fiscal policy to the economy is not very different between the Labor Party and the Conservatives,” said Kyrre Aamdal, senior economist at DNB.
As she prepares to become prime minister, Solberg faces a slowdown in the $500 billion economy. Once a haven from Europe’s debt turmoil, Norway is now struggling to spur demand just as the rest of Europe surfaces from half a decade of economic pain. DNB predicts Norway will be the only European nation of the 15 it tracks whose economic growth won’t accelerate next year.
“The Progress Party’s alternative budget uses more money than we would have done but it’s not this big, big difference,” Solberg said today in an interview. “If you sum up their policy, yes, it might be a bit more different. We’re going to follow a tight fiscal policy when the economy needs it. We’re responsible when it comes to the economic development of Norway, it’s the backbone the Conservative Party’s policies.”
Growth will still exceed the average in Europe. Norway’s mainland economy, which excludes oil and gas output, will expand 2 percent next year, beating the 0.7 percent for the euro area, DNB predicts.
Norway’s exporters came under pressure last year after investors used the krone as a haven from Europe’s debt crisis. Some of those gains have since reversed as the euro zone emerged from its recession. While the krone has lost about 9 percent this year, the currency of the AAA nation is still 28 percent overvalued versus the euro, according to an Organization for Economic Cooperation and Development gauge based on purchasing power.
After cutting interest rates twice, Norges Bank has kept its benchmark rate at 1.5 percent since March 2012. It says it’s ready to act to prevent krone gains from undermining its inflation target and the economy. The bank aims to balance policy to avoid currency gains without overheating an economy buoyed by a booming petroleum industry and record house prices.
Both the Conservatives and the Progress Party have said their policies won’t add to pressure on the krone, rebutting claims by Labor Finance Minister Sigbjoern Johnsen.
“The Conservatives will have to take another look at the fiscal spending rule and they will agree that we will need to change how we use the money and how much of the money we use in order to maintain a responsible economic policy,” Progress Party leader Siv Jensen said in a debate on NRK radio today. “Keeping to the rule is not a good idea.”
For now, polls still show that the two parties would need the backing of the smaller Christian Democrats and the Liberals. They both have signaled that they’re reluctant to form a government with the Progress Party, which once counted mass murderer Anders Behring Breivik as a member.
“Our main concern is that so far we don’t know what the fiscal policy platform is,” said Aamdal. “We don’t know which parties will take part in government, we see large differences in the fiscal policies for the different parties.”
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