Norway Prime Minister Says Time Has Come to Cut Oil Reliance
Norway’s Prime MinisterErna Solberg said pushing through a budget designed to avoid krone appreciation marks her first step toward weaning western Europe’s biggest crude producer off its oil reliance.
“We have to prepare Norway for an economy that is less oil income, directly, and less oil activity,” Solberg said yesterday in an interview in Oslo. “That’s a 20-year perspective, not a four-month perspective. Hopefully in 2014, we’ll see that our unemployment rate still is low and that we get bigger market access for some of our goods in the non-oil part of the economy.”
Norway has struggled to prevent its oil wealth from inflating asset prices and hobbling export competitiveness. Its $800 billion wealth fund, into which the government channels income from oil and gas, was started in 1996 with the express purpose of protecting the $500 billion economy from overheating. Yet growth in the wealth fund, which is now the world’s biggest, has weakened those efforts as rules designed to cap spending lose their clout.
Solberg’s Conservative Party-led minority coalition last week won approval from its support parties to use 2.9 percent, or 139 billion kroner ($23 billion), of the wealth fund to plug budget deficits in 2014. That’s 3.9 billion kroner more than proposed by the Labor-led government Solberg ousted in September elections. The expenditure amounts to 5.7 percent of trend mainland gross domestic product, up 0.5 percentage point from this year.
Solberg said her government wants to soften a period of sluggish economic growth, while seeking to assure exporters the stimulus won’t drive the krone higher. Though Norway’s oil wealth protected it from Europe’s debt crisis, the government sees the mainland economy, which excludes oil and gas output, slowing to 2 percent this year, compared 3.4 percent last year. GDP by that measure will grow 2.5 percent next year, it estimates.
“It’s important to try and limit the extent of crowding out of other sectors,” said Kjersti Haugland, an analyst at DNB ASA, Norway’s biggest bank.
The Nordic country, where crude and natural gas accounted for 41 percent of exports in the second quarter, gets about 25 percent of its total economic output from oil and gas.
Yet directing funds into other industries has proved difficult as Norway’s commodities wealth has so far helped keep people in jobs and left the AAA-rated government without any net debt. Credit default swaps suggest Norway is the world’s safest investment.
Solberg’s government sees unemployment at 3.6 percent next year, versus 3.5 percent in 2013. The coalition of Conservatives and the Progress Party plans to cut taxes and fees by 4.8 billion kroner next year, including a reduction in the basic tax rate to 27 percent from 28 percent, in part to cushion the slowdown.
“There’s a slight downturn in our economy and hopefully this budget will increase activity a little bit,” Solberg said. “But not so much that it strengthens the krone.”
Solberg said that a decision to cut Norway’s wealth tax next year could also help spur investment in the country’s non-oil industry, which has struggled to compete as the krone climbed and as an oil boom drove up costs across the economy,
The Prime Minister warned in an interview earlier this month that she won’t hesitate to cut spending should budget impulses force up the krone and undermine export competitiveness. Those comments drove down the currency.
The krone has slipped 1.7 percent against the euro since then and is down 12 percent this year. Still, since the end of 2008 -- the year Lehman Brothers Holdings Inc. failed -- the krone has gained 18 percent against the euro. Norway’s currency remains 26 percent overvalued, according to a purchasing power gauge compiled by the Organization for Economic Cooperation and Development.
The budget “has a positive impulse to the economy,” Solberg said. “Hopefully we will not see rising unemployment and that activity will continue.”
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