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Budgeting in Norway Working party of Senior Budget Officials, OECD Morten Baltzersen June 2006

This article explores Norway's strong economy, high financial investments, and effective budgeting strategies. It discusses Norway's GDP growth, labor productivity, labor market participation rate, unemployment rate, net financial liabilities, government expenditures, future pensions, and fiscal policy rule. It also highlights the medium-term budgetary framework, pressure to increase mandatory spending programs, off-budget spending, and the role of local government in financing welfare services.

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Budgeting in Norway Working party of Senior Budget Officials, OECD Morten Baltzersen June 2006

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  1. Budgeting in NorwayWorking party of Senior Budget Officials, OECD Morten Baltzersen June 2006

  2. Norway has a strong economy GDP per capita. 2003adjusted for purchasing power. USD

  3. GDP • Average growth in GDP 1995-2005: • 3,3 % US • 2,0 % Euro-area • Average growth in GDP 1995-2005 in Norway: • 2,8 % GDP • 3,1 % mainland GDP GDP growth in Norway GDP Mainland GDP Mainland average

  4. Strong growth in labour productivity Labour productivity of the total economy, year 2000 equals 100 • Average growth in labour productivity 1994-2004: • Norway 1,8 % • US 2,0 % • Euro-area 0,9 %

  5. High labour market participation rate Labour participation rate • Labour market participation rate for population between 15-64 years in 2004: • Norway 79,2 % • US 75,4 % • OECD 70,1 % • Euro-area 71,4 %

  6. ..and low unemployment Unemployment rate • Unemployment rates in 2005: • Norway 4,6 % • US 5,1 % • OECD 6,5 % • Euro-area 8,7 %

  7. High financial investments General government’s net lending, pct. of GDP • General government’s net lending as share of GDP in 2005: • Norway 15,9 % • US -3,7 % • OECD -3,2 % • Euro-area -2,9 %

  8. Negative net financial liabilities • General government’s net financial liabilities share of GDP in 2005: • Norway -89,3 % • USA 45,7 % • OECD 46,5 % • Euro-area 57,2 % • The Government Pension Fund – Global • 250 bill. US$ (01.01.06) • 81,7 % of net financial wealth General government’s net financial liabilities, pct. of GDP

  9. Public sector Government’s expenditures, pct. of GDP • Government’s expenditures share of GDP in 2005: • Norway 39,9 % • Industrial • countries 40,9 % • EU-15 47,3 %

  10. Future pensions Pension expenses under the National Insurance Scheme and net oil and gas revenues, as share of mainland GDP • Effective retirement age has decreased. • Share of elderly is growing. • Expenditure on pensions will increase substantially. • The petroleum revenues do not cover future pension liabilities. Pensions Net oil and gas revenues

  11. Fiscal policy rule • Petroleum income should be phased into the economy on par with the development in expected return on the Petroleum fund (Government Pension Fund - Global) • Considerably emphasis must be put on stabilising the economy In practice: • Over time, the structural, non-oil budget deficit shall correspond to the real return on the Government Petroleum Fund, estimated at 4 per cent. • Calculation of expected real return is based on the value of the Fund at the beginning of the year. This way we avoid uncertainty about oil prices during the year, but fluctuations in exchange rates and the stock market can influence the real return and value of the fund considerably. • This underpins why the rule should not be used mechanically, and considerable emphasis should be placed on stabilising economic fluctuations.

  12. Medium-term budgetary framework • The fiscal rule anchors fiscal policy in the medium and long term: • Frame for total spending of oil revenues. • Comparable to multi annual aggregated spending ceilings by limiting non-oil budget deficits. • Multi annual appropriations: • Would reduce the fiscal flexibility by “protecting” expenditure programs from budget cuts. • Multi year appropriations would easily form a floor in the future budget negotiations rather than a ceiling. • Remedy to avoid cost overruns: • Better planning and estimates. • Consistent policy priorities. • Thorough quality check of the total cost frame on large investment projects.

  13. Pressure to increase mandatory spending programs • About 50% of total expenditure on mandatory spending programs. • Pressure for more mandatory spending programs through: • Earmarked activity based grants to local governments. • Vouchers in health care and other state level provided services. • Performance based budgeting for state agencies.

  14. Off budget spending • Pressure to circumvent budget constraints by off budget financing: • Earmarking oil revenus for off budget spending. • Earmarked off budget funds. • Cash budgeting under pressure: • Loan financing (under the line) of investments • Public-private partnerships • Government enterprises for public services with borrowing facilities.

  15. Local government (municipalities and counties) • Important provider of welfare services: • Primary education, secondary education, health care, care of elderly, kindergarten and social security. • Local production gives room for local priorities and adjustments within fixed budgets. • Minimum national standards in important areas as education. • Growing pressure for centralization e.g. the health sector. • Important principles for financing local government: • An overall governmental financing consisting of taxes and transfers (block grants and some earmarked grants). • Grants based on income equalization due to large regional differences in tax base and costs. • Local tax autonomy would undermine this system.

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