Norway’s Christian Democrats, whose support the minority government needs to pass a budget, said it’s time to place more limits on oil-wealth spending and protect the economy from overheating.
Norway, which uses oil money to plug its budget deficits, has placed a 4 percent limit on spending from its $810 billion sovereign wealth fund. Knut Arild Hareide, leader of the Christian Democrats, said that cap is now meaningless as the fund balloons in size.
“It’s not a limit, because no one will use 4 percent,” Hareide, whose party also heads parliament’s finance committee, said in an interview yesterday in Oslo. “It’s not responsible to do that.”
Norges Bank Governor Oeystein Olsen, who helped design the rule last decade, has warned since February 2012 that the cap should be lowered to 3 percent to fulfill the goal of protecting Scandinavia’s richest economy from overheating.
“None of the politicians said anything at that time, but we are ready for that debate now,” Hareide said.
The Christian Democrats were part of the four-party opposition that ousted the former government in September elections. The party, together with the Liberals, stayed out of the government while vowing to support the Conservative and Progress Party minority government in parliament.
“We are satisfied with the agreement but we haven’t started the work yet,” Hareide said. The first test will be Nov. 8 when the new government presents its revisions to the outgoing Labor-led coalition’s budget, he said. Hareide’s Christian Democrats support the new government’s promise to boost infrastructure spending and cut taxes.
The previous government’s budget, which was released earlier this month, called for using 2.9 percent of the wealth fund, staying within the 4 percent cap for a fifth year.
“Even to stick to 3 percent now has the implication of an expansionary impulse to the Norwegian economy,” Olsen said in an interview last week.
While that may seem restrictive, actual spending will increase as the oil fund is predicted to swell to $870 billion by the end next year and reach $1.2 trillion by 2020. Total use of the money will be 135 billion kroner ($23 billion) next year, up from an estimated 124 billion kroner this year, according to the previous government’s budget.
The new government is expected to present a budget with oil spending of about 140 billion kroner, Dagens Naeringsliv reported this week, citing people with knowledge of the budget. Still, spending will decline to 2.8 percent of the wealth fund, as the new budget will revise the estimated size of the fund to 5 trillion kroner from 4.7 trillion kroner, DN reported.
“As long as we politicians spend less than 3 percent, there’s no need to do something about the rule,” said the Liberal Party’s Terje Breivik, a member of the finance committee in parliament.
The Liberal party, who have also agreed to support the minority government in parliament, said today that the revised budget should stick to spending 135 billion kroner of the oil fund, as proposed by the Labor government last month.
Policy makers have sought to calibrate policy to avoid spurring krone gains while at the same time fueling an economy where household debt has swelled to a record and housing prices have soared. As the euro area struggled through its debt crisis, western Europe’s largest oil exporter emerged as a haven. While that helped keep unemployment below 4 percent, it also fueled the risk of overheating.