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The crown crisis has contributed to a historically sharp drop in oil prices and is about to cause the worst recession in the Norwegian economy since the war.
The state’s oil revenue is shrinking, while spending is increasing sharply, which means that the government in the revised national budget proposes to double the withdrawal of the Oil Fund to NOK 480 billion.
At the same time, the Ministry of Finance warns that the record withdrawal will reduce the fund’s performance “for all future years.”
Elisabeth Holvik, chief economist at Sparebank 1 Markets, believes that we have been warned that we cannot rely on the Oil Fund forever.
– We have received many warnings, says Holvik, who this week was appointed to sit on the committee that will advise the government on how Norway should emerge from the crown crisis.
Record of high use of oil money
The price of oil has more than halved since the New Year, and economists at the Ministry of Finance believe it will be at today’s low levels throughout the year. Thus, the state’s oil revenue has also been reduced by just over NOK 157 billion since last year.
At the same time, the Ministry estimates that spending is increasing considerably and that the income of the oil companies, which are established directly in the Petroleum Fund, is falling to record levels.
This means that the government will have to raise NOK 480 billion from the Norwegian Petroleum Fund this year, based on the oil-corrected deficit.
The structural deficit adjusted for oil, adjusted by the state of the economy, shows a use of oil money of NOK 419.6 billion. This represents 4.2 percent of the Petroleum Fund.
Powerful warning
The Ministry has concluded that increased use of the Petroleum Fund this year, in isolation, will reduce the expected annual return that can be used on state budgets by about NOK 11 billion for “all future years.”
“There is a risk that this loss of income will increase before the crisis ends,” warns the ministry.
In clear order, the Ministry of Finance notes that public administration spending was high even before the crown crisis, and at the same time they issue a strong warning:
“Going back to the long-term guide to using oil revenues can be difficult,” they caution, and they continue:
Revised National Budget (GNI)
- Inform the Storting, which the government presents each year in mid-May. The announcement is an update of the National Budget and contains a description of the main characteristics of economic development and economic policy.
- At the same time as the revised national budget, the government presents two proposals to the Storting. The “Additional Allocations and New Priorities in the State Budget” proposal contains the government’s proposal for changes to the state budget for the current year.
- The Government’s proposals for tax changes are presented in a separate proposal on “Changes in tax rules”.
“In previous periods of sharp increase in the use of oil money, growth in the value of the fund has facilitated a return to the path of 3 percent. Instead, there is now the possibility of less growth in the fund’s capital. ”
The crown reinforces the warning.
Holvik says it is difficult to predict how many years will pass before the use of oil money drops below three percent again, but says:
– I don’t think it’s going to happen for a while.
She points out that every perspective message in recent years has warned that we must change.
– With the fall in oil prices and the crisis in the crown, the roar was even louder. That is why the Ministry of Finance is now so clear, she says.
Lean on the exchange rate of the crown
The chief economist explains that the prerequisite for the action rule was that we should spend oil money on measures that promote growth, not in the public sector, to avoid excessive public spending in the face of the wave of aging.
– Then they did the opposite. We have gained weaker competitiveness and rely on the crown exchange rate, says Holvik.
The crown has continually depreciated over the past seven years, enhancing Norwegian companies’ great advantages in meeting competitors abroad.
– It becomes a self-reinforcing mechanism. When the krona depreciates, the value of the Oil Fund increases in NOK. Then we can spend more money on oil in the state budget, which in turn increases public spending, says Holvik.
Calls for an unpopular policy
The consequence of this is that Norway becomes more expensive to operate, she believes.
– The employment rate has fallen in recent years, which is a warning that something about the structure of the Norwegian economy has made us less productive, says Holvik.
She believes that crises can create an understanding that politicians must make unpopular decisions, and hopes that this can happen now.
– Everyone has to give a little to make sure we really have a state of well-being in the future, she says.
Among other things, Holvik wants to discuss the wealth tax and bring jobs home to Norway, such as Norwegian frozen fish processing, which is now happening in China.
Too optimistic
In the revised national budget, the Ministry of Finance estimates that the Norwegian economy will decline by 4.0 percent this year, one of the most optimistic projections.
Øystein Børsum, chief strategist at Swedbank, is one of several who respond to this.
“I am surprised that they are so optimistic, it seems that the government is too optimistic for its measures to work,” he says.
The stock market is also surprised that they do not estimate increased use of oil money. He himself has projected a greater need for financing of around $ 430 billion this year.
So far, the crown crisis has increased the government deficit by around NOK 240 billion. This number is expected to increase as the government introduces more emergency measures in the coming weeks. Still, Børsum believes the ministry is overly optimistic.(Terms)Copyright Dagens Næringsliv AS and / or our suppliers. We want you to share our cases using a link, which links directly to our pages. Copying or any other use of all or part of the content may only be made with written permission or as permitted by law. For more terms see here.
