In an effort to avoid a prolonged recession, the center-left government of Norway has announced that it will dip into its oil fund to allow for an expansionary budget for 2009. The country has enjoyed a long period of economic growth, and benefited from the recent oil spike -- but with the risk looming, in an election year, of a downturn and increasing unemployment, it has decided to be less restrictive in its use of oil revenues.
Stimulus plans. Growth is expected to slow from its recent average of 5.0% to about 1.5% next year. Prime Minister Jens Stoltenberg, who leads the center-left coalition, has announced that his government is preparing a fiscal stimulus package to be presented to parliament on January 26:
It will focus on financing infrastructure projects to boost employment through a number of credit guarantee schemes, as well as sectoral and regional aid.
Oslo has already announced that it will boost spending by 3.25% next year, resulting in a 2.6% budget deficit.
A principal aim is to curb unemployment.
This spending will be paid for by drawing more deeply than usual on the country's sovereign wealth funds. Nearly all the country's oil wealth has been invested in the Government Pension Fund (Global), commonly known under its former name of the Petroleum Fund:
The Petroleum Fund is the largest sovereign wealth fund in Europe and the second largest in the world, with a value of over 2 trillion Norwegian kroner (284 billion dollars).
Normally, the government limits spending of the oil wealth to 4% of the fund's total value -- the expected annual return on investment -- so as not to deplete it. Yet it has flexibility to support growth, as the fund's guidelines allow fiscal policy to be used actively to counter fluctuations in economic activity.
Norges Bank cut its key interest rate by a deeper-than-expected 175 basis points (bp) to 3%, the lowest rate in 22 years, on December 17 -- and signaled that more monetary easing lay ahead. It believes that the economy is likely to contract in the fourth quarter of 2008 and first quarter of 2009.
Election outlook. The economy will inevitably affect the election scheduled for September 14, 2009. The outlook remains uncertain for the red-green coalition government led by Stoltenberg:
The coalition, between the Labour Party, Socialist Left (SL) and the Centre Party, came to power in October 2005 with a small majority of 87 out of 169 seats in the Storting (parliament). It is dominated by the Labour Party, with 61 seats.
Labour will campaign for a renewed majority for the ruling coalition in September's elections, but polls give it around 70 seats if there were an election tomorrow.
The four center-right parties -- Conservatives, the Liberals, the Christian Democrats and the Progress Party (PP) -- would gain 94 seats and thus be able to form majority in theory.
However, this would require them to form a coherent bloc, a difficulty given differences between the populist PP (the largest party on the right) and its centrist potential allies.
If the ruling coalition loses its parliamentary majority, another possible outcome is that the Labour Party forms a minority government on its own, as it has done in the past.
The planned fiscal stimulus package, combined with the cut in interest rates, highlights the severity of the expected downturn. Given its oil wealth, Norway has better prospects of stimulating growth and employment than its European neighbors. The Labour Party has a reasonable chance of remaining in government after the 2009 election, most likely in a minority administration. However, much will depend on the success of its handling of the economic crisis.