Norway Readies for Election Budget Battle as Oil Cash Tempts

Updated on

As an election nears in Norway, let the oil money fight begin.

The government of western Europe’s biggest oil producer is on Tuesday starting its final round of talks to set next year’s budget, which will be presented on Oct. 6.

Prime Minister Erna Solberg will need to navigate conflicting demands of keeping up support for an economy that has been hammered by the plunge in crude and calls for trimming the record use of the nation’s oil wealth that’s threatening to erode its sovereign wealth fund.

“The outlook is still for weak growth in 2017 and there will be a need for an expansionary budget,” said Kyrre Aamdal, senior economist at DNB, Norway’s largest bank. “But maybe not as expansionary as this year.”

The government is this year dipping into its $890 billion wealth fund for the first time to ward off a recession. The stimulus effect has been estimated at 1.1 percentage points, the most since 2009. DNB expects it to slow to 0.6 percentage point next year.

Solberg on Tuesday said that the economy was still struggling with “low activity” and that next year’s budget will be geared at preventing unemployment from taking hold. There are also some “bright spots,” she said at a press conference in Oslo.

The two-party minority government will need push its budget through parliament, and its support parties, the Liberals and Christian Democrats, are already voicing their priorities and demands in what will be the last budget before elections next year.

“The current spending of oil money is not sustainable in the long run," Terje Breivik, deputy leader of the Liberals and member of the finance committee, said in an e-mail to Bloomberg. His party is pushing for a tax reform of lower levies on income and higher taxes on fuel, vehicles and pollution.

“There’s a large risk of passing on the bill to future generations,” Breivik said.

The wealth fund has also raised concern over the outflows which are expected to top 80 billion kroner this year. The net outflows are “relevant for how we think about the risk-bearing capacity of the fund,” Egil Matsen, the deputy governor at Norway’s central bank, said in an interview Friday.

Even so, the worst may now be over for the economy, which is showing signs of life after being supported by the fiscal stimulus and as the central bank has cut interest rates to a record low.

While the price of oil is creeping up toward $50, DNB still doesn’t see that income from the petroleum sector will be sufficient to cover the oil-corrected budget deficit, meaning outflow from the fund will continue.

But the government will probably stick to spending below the fiscal policy rule that limits oil money use to 4 percent of the wealth fund’s value. This year, spending is forecast to amount to 2.8 percent of the fund. Even with spending hitting record levels, the fund’s ballooning growth has allowed the government to stay within the 4 percent limit.

Solberg, the premier, says that is all as it should be.

“This government hasn’t used more than 3 percent at any point, even if we have used more oil money,” she said in an interview last week. “It’s completely natural that there’s a freedom to act in tough economic times.”