Norway’s new government presented a revised budget that will raise spending of the nation’s oil wealth to cover tax cuts and boost infrastructure and education.
The government will use 2.9 percent, or 139 billion kroner ($23 billion), of its sovereign wealth fund to plug deficits in 2014. That’s 3.9 billion kroner more than the ousted Labor-led coalition proposed last month. The use of oil money will amount to 5.7 percent of trend mainland gross domestic product, up from an estimated 5.2 percent this year.
“It’s a good budget that is well adapted to the challenges in Norway’s economy,” Finance Minister Siv Jensen said today.
The government cut forecasts from last month, estimating that mainland economic growth, which excludes oil and gas output, will be 2 percent this year and 2.5 percent next year. The Conservative and Progress Party minority coalition wants 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.
“Growth in the mainland economy seems to have slowed somewhat this year,” the government said. “The slowdown may well be temporary, but may also signal that high costs for businesses and high household debt are becoming a drag on growth.”
The stimulus is “adequate,” said Hans Olav Syversen, a Christian Democrat who heads the finance committee in parliament. The new government needs the support of his party and the Liberals to pass the budget.
“We have a revised budget in May,” he said in an interview at parliament today. “We can look at the developments in the months ahead and then come back in May to see whether the right thing to do is to boost spending.”
The Liberals’ Terje Breivik, also a member of the finance committee, foresees tough negotiations next week before the budget is approved. Stimulus is “one of the strongest sides of this budget,” he said.
Norwegian governments have kept oil money spending below the 4 percent limit of the fund since 2009. Norway places most of its oil revenue in a fund, which invests abroad to avoid stoking inflation in the domestic economy. The Government Pension Fund Global is the world’s largest sovereign wealth fund. Norway today estimated the fund will grow to 5.34 trillion kroner at the end of 2014.
There has been “no shift to irresponsible spending, but new direction emphasizing investment,” said Knut Anton Mork, chief economist in Oslo at Svenska Handelsbanken AB, in a note. “With the Progress Party in government, even heading the Ministry of Finance, many have feared a shift away from the policies of fiscal restraint that were designed for maintaining the real balance of the sovereign wealth fund.”
Governments have been keeping oil spending in check to avoid overheating. Norges Bank left its main rate at 1.5 percent last month and has signaled faster tightening after efforts to fight back to krone’s appreciation paid off.
The krone slid 0.7 percent to 8.1678 as of 1:35 p.m. in Oslo.
Legislators and central bankers have sought to calibrate policy to avoid spurring krone gains and guarding 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.
“The net budget weakening of 3.9 billion kroner is too small to have much of an impact on the overall balance of the economy,” said Mork. “Norges Bank should welcome this measure of stimulus to take some of the heat off the building pressures to ease as the economy levels out, especially after yesterday’s ECB cut.”
The minority coalition now needs to negotiate with its smaller support parties in parliament to pass the budget.
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