Sept. 11 (Bloomberg) -- Norway Conservative Party leader Erna Solberg pledged to limit spending of the nation’s $750 billion sovereign wealth fund after a jump in inflation triggered the biggest surge in the krone in two months.
Solberg, who ousted Labor Prime Minister Jens Stoltenberg in elections this week after promising tax cuts, said she’ll probably keep well within a 4 percent spending rule of Norway’s oil fund amid concern Scandinavia’s richest economy is overheating. Her government, which she has yet to form, is likely to keep spending closer to 3 percent, she said.
“We’ll always make sure that we don’t exceed the limits of our capacity in the economy when it comes to the impact of demand from the fiscal side of the budget,” Solberg said yesterday in an interview. For now, that means an appropriate level is “closer to 3 percent,” she said. “But if there’s an international crisis or economic slowdown, of course we increase the amount of money we are using.”
The rule, introduced last decade under Labor, is one of the main sticking points dividing the four-party coalition that won the Sept. 9 vote. The Conservatives, Liberals and the Christian Democrats all support keeping the rule while the Progress Party has campaigned on scrapping limits to allow more investment in infrastructure.
That’s triggered concern among economists that Norway’s next government might deploy policies that lead to a damaging appreciation of the krone. A report yesterday showed core inflation jumped to a four-year high in August of 2.5 percent. The news sent the krone soaring as much as 1.4 percent against the euro, its strongest since July 8.
Yesterday’s inflation data “means that we have to make sure that we are not increasing the budget so that it increases the demand,” Solberg said. “We also have to go in and ask why we got this jump; is it home made inflation or is it imported inflation.”
The krone slid for the first day in four today, weakening 0.2 percent to 7.8674 per euro as of 4:01 p.m. in Oslo.
While the 4 percent rule was designed to limit government spending, its effect has been partly undermined by growth in the size of the oil fund. With the fund quadrupling in size since 2005, even sticking to the rule results in faster public spending growth.
The government estimated in its revised budget this year that the spending room will grow 18 percent next year to 180 billion kroner ($30.3 billion). Stoltenberg’s outgoing coalition plans to spend 3.3 percent of the fund this year, or 125 billion kroner.
The Progress Party is also scaling back its talk of exceeding the 4 percent rule as it seeks to become part of a government coalition for the first time since the group started as an anti-tax movement in 1973.
“We don’t need to change the rule to be able to spend more money,” Ketil Solvik-Olsen, the Progress Party’s spokesman on financial issues and a potential minister, said in an interview yesterday. “There’s a lot of room to maneuver within today’s spending rule.”
Norway is struggling to stay competitive by finding ways to avoid an overheating cycle that risks driving up wages and rendering its exports too costly. The new government, which will take power in mid-October, will need to deal with a potential housing bubble, manufacturing wages that are about 70 percent higher than the European Union average and an overvalued krone.
Central bank Governor Oeystein Olsen, who helped design the 4 percent rule while at the finance ministry last decade, has proposed paring the spending limit to 3 percent to cool oil money spending.
“What drives us primarily is that we believe the money is being spent in the wrong way,” Solvik-Olsen said. “We need to make room to speed up public investments without having to cut public spending beforehand.”
The Conservatives, the Progress Party, the Liberal Party and the Christian Democrats got 96 seats of the 169 in parliament, with 99.9 percent of the votes counted. Stoltenberg’s three-party coalition won 72 seats. Labor prevailed as the biggest party with 55 seats, while the Conservatives jumped to 48 seats.
Norway’s mainland economy, which excludes oil and gas output, will grow 2 percent next year, unchanged from this year. That will beat the 0.7 percent estimate for the euro area, according to DNB ASA forecasts.
“One of the most important things to look at is the mix of how you use money because there’s a difference in how demand increases in our economy when it comes to taxes, public spending, education and infrastructure,” Solberg said.
To contact the editor responsible for this story: Jonas Bergman at firstname.lastname@example.org