Norway's Budget Excesses Set to End as PM Tightens Purse Strings

  • Conservatives have to adopt more ‘moderate’ tax cuts, PM Says
  • State asset sales aren’t high on agenda, Premier Says

Even Norway can run up against fiscal reality.

A tempered prime minister over the weekend wrapped up her Conservative Party’s congress ahead of September’s election. Gone are big plans for further cuts in income or wealth taxes or big divestment of government stakes in companies.

The Conservatives admit that there is now a shrinking margin for more fiscal stimulus and tax cuts after a record push over the past three years. That follows after Prime Minister Erna Solberg last month tightened the 16-year-old fiscal policy rule that limits spending from the country’s $900 billion wealth fund amid criticism she was pumping too much oil money into the economy. 

Erna Solberg

Photographer: Simon Dawson/Bloomberg

The changes “gives less fiscal leeway and also means, of course, that the party has to adopt more moderate tax cuts going forward," Solberg said in an interview Sunday. “It’s most important to make the right kind of tax reductions, rather than the level of the cuts.”

Solberg meets with her cabinet outside Oslo on Tuesday to start work on next year’s budget. She rules in a coalition with the Progress Party, and has overseen record spending of the nation’s oil wealth to support the economy after oil prices crashed in 2014.

Soon after the Solberg government took office in 2013, the economy of western Europe’s largest oil producer was hit by an oil price shock resulting in thousands of job losses. Combating the worst downturn in a generation, the government resorted to massive fiscal stimulus and also cut taxes by 21 billion kroner ($2.5 billion) over the past three years.

The government on Tuesday lowered its forecast for mainland growth this year to 1.6 percent from the 1.7 percent it forecast in this year’s budget. It predicts oil investments will drop 11.6 percent this year, versus the 10 percent predicted in the budget. It raised its forecast for the price of crude oil to 479 kroner ($55.85) this year from 425 kroner earlier.

Finance Minister Siv Jensen, who’s head of the Progress Party, said she doesn’t necessarily need to play by the Conservative Party’s rulebook. “I’m guessing we are going to be a bit more on offense,” she said in an interview after a press conference on Tuesday.

“If we manage to raise productivity, that will mean an incredible lot for the room to maneuver going forward,” she said.

The premier remained steadfast in pushing through long-term reforms for the economy even as polls show her coalition losing support.

"Growth is still fragile, we can’t say it’s over yet, there are still challenges in the economy," Solberg said. "Particularly there are challenges related to job growth and investments in the mainland economy.”

Solberg signaled that the government won’t push ahead with large divestments of state holdings, something that has been a priority for the Conservatives. The Norwegian state has the highest share of ownership in listed companies in Europe, holding large stakes in companies such as Statoil ASA, Telenor ASA and DNB ASA.

"It’s not high on our agenda to sell state assets," Solberg said. "What’s important is to get good returns on our investments, and to keep core businesses in Norway.”

Recent polls show that Solberg’s coalition, together with its support parties, the Liberals and the Christian Democrats, now falls short of reaching a majority in parliament. The Labor Party, together with the Center Party and either the Socialist Left Party or the Christian Democrats, would win a new majority. 

Surging support for the anti-European Union Center Party has also raised concerns that Norway ties to the bloc could come under pressure. The party is calling for changes to EEA accord that gives Norway access to the common market.

"I expect the Labor party to stay firm to their promise not to form a new government that aims to weaken the EEA agreement," Solberg said.

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