Econ 130: Fiscal Policy in Norway & EU

• Econ 130 Macroeconomics - Lecture Notes 12 focuses on Fiscal Policy

Fiscal Policy vs. Monetary Policy

• In Norway, regulations came into effect in 2001
• Fiscal policy involves government expenditures and revenues and is guided by the fiscal rule (Handlingsregelen)
• Monetary policy involves setting interest rates based on a flexible inflation target
• The EU operates under the Maastricht rules, which set limits on budget deficits and government debt
• A common interest rate policy is managed by the European Central Bank

Policy Interactions

• There is a trend in Norway and the EU towards fiscal policy being rule-based, with active macro policy implemented via interest rate policies

Structural Oil-Adjusted Budget Deficit

• The state budget operates with this deficit
• This deficit is calculated under the hypothetical scenario of a "normal" year with typical unemployment and tax revenues etc.
• The estimated deficit for 2025 is 460 billion NOK, which is 10.9% of GDP

Income and Expenditure in the 2021 State Budget Excluding Petroleum

• Total state budget revenue was 1,119.8 billion NOK
• Sum of taxes and fees from mainland Norway were 1,040.9 billion NOK
• Tax on wealth and income accounted for 256.7 billion NOK
• Employer's contribution and national insurance contribution amounted to 358.1 billion NOK
• VAT (Value Added Tax) revenue was 321.3 billion NOK
• Total state budget expenditure was 1,491.0 billion NOK
• Sum of national insurance was 523.5 billion NOK
• Old-age pension stood at 251.2 billion NOK
• Sickness benefit was 45.2 billion NOK
• Other social purposes was 151.5 billion NOK
• Health services were 34.2 billion NOK
• Parental benefit was 21.6 billion NOK
• Working life related funds was 19.7 billion NOK
• Block grant to municipalities and county municipalities was 178.9 billion NOK
• Regional health enterprises was 178.4 billion NOK
• Transport was 79.9 billion NOK
• Defence stood at 64.5 billion NOK
• Higher education, research, and colleges was 53.8 billion NOK
• Aid, including funds to Norfund and the AIIB, was 36.8 billion NOK
• Police and prosecution authority was 22.3 billion NOK
• Child benefit and cash support was 18.9 billion NOK
• Agricultural agreement was 16.9 billion NOK
• Interest on government debt was 10.2 billion NOK
• Other expenses was 307.1 billion NOK
• The oil-adjusted surplus was -371.2

Fiscal Policy vs. Interest Rate Policy

• The "modern" view is that interest rate policy is the first line of defense in stabilization policy, with fiscal policy as a complementary measure when needed
• The "G-policy" challenges that many budget elements may not be suitable for cyclical adjustments
• Interest rates can be altered more rapidly
• An independent central bank may be better at stabilization compared to a government controlled by politicians

Economic concepts

• Ricardian equivalence theory suggests that government spending today, like tax cuts, will be offset by future tax increases, with rational consumers saving today to pay for future taxes.
• During financial crises, defense crises, and with high government debt, countries can experience failing state revenues and increased unemployment benefits causing debt to increase quickly
• Austerity measures during recessions can be seen as EU policy of saving the banks - where Norway subsidizes interest rates rather than debt, budget are required to be balanced, fiscal austerity happens at the time of crises

Fiscal Policy in Norway

• The fiscal rule dictates that 3% of the fund's value can be used, and this excludes the petroleum wealth itself which creates an escalation plan
• The initial rate was 4 % of return on the fund to keep the fund from exploding, but has now gone down to 3%
• The Maastricht rules limit government debt to 3% of GDP annually
• Current oil money use is higher, and the fiscal rule isn't a guarantee that the macro economy will tolerate the use of oil money

The Oil Fund (Oljefondet)

• As of March 12, 2025, the fund's value was 18,724,488,247,717 NOK
• High input and low yield rates in 2022 along with the Ukraine war and a gas crises led to a flat oil fund
• The surge of funds in 2022, was due to the seven largest companies increase in value, and the drop in the krone rate of exchange

How Funds are Used

• The fund is used to purchase goods such as imports
• The oil fund enables Norway to sustain a trade deficit
• The dollar value is what counts
• The regulations are measured as a percentage of krone value
• Falls are easier to spot when viewing the funds in dollars, which means during crises the kroner weakens and the funds stabilize

Key Figures

• Transfer of Petroleum and fund return which accounts for an annual 4% results in as much as 8-10 percent of the trend BNP
• Budsjettfesten is over "Meruttak" 270″/8½% of F-BNP, and has increased from 1.8 pp in 2019-22 and is predicted to hit 0.3 pp 2022-30
• As of 2021 a handling room of 12.3 billion kroner was set aside of income and 16.3 for use
• As of 2021 it has been predicted for 2023-30 there is and income of 4.5 billions kroner were marked, and 4.4 for expense purposes

New Fiscal Rule

• Is the goal to use the cash flow from investments to account for rent and dividends?
• Why not increase the bond share?
• Should stabilization of oil utilization be accounted for proportional to BNP?
• Why are 100 billion NOK being used for bullets and the war in Ukraina?