Challenges facing the Norwegian economy

The Government has released a white paper discussing challenges and policy options facing the Norwegian economy towards 2060, stating it is likely to be faced with difficult choices in the decades to come.

The paper, titled "The long-term Perspective for the Norwegian Economy", states that Norway is a wealthy society with a high income level, comprehensive public welfare benefits and solid public finances.

It says that while the starting point is advantageous, the Norwegian economy is likely to be faced with difficult choices in the decades to come, such as those related to changes in the global economy, global warming and population aging. In particular, increased life expectancy will threaten the sustainability of our public finances unless retirement also is postponed.

- The main message in Long-term Perspectives for the Norwegian Economy 2013 is simple, but important: Labour is the key to securing welfare, also in the future. Public policies must therefore support broad participation in the labour force, says Minister of Finance Sigbjørn Johnsen.

The white paper considers current policies in a long-term perspective. Doing so requires insight into the forces driving economic development and analysis of the consequences of different policy options. A key topic is fiscal sustainability and the challenges related to population aging.

It says Norway has a high income level and scores high in international quality-of-life surveys. Our wealth is more evenly distributed, and inter-generational income mobility is higher, than in most other countries. Comprehensive in-kind welfare benefits and transfers are supported by solid public finances. A sound capacity for economic growth, fair income distribution and comprehensive public welfare systems are key features of the Norwegian social model.

A small country like Norway benefits particularly from the division of labour made possible by international trade. In recent decades, populous countries like China, India and Brazil have become more strongly integrated into the global economy. Strong growth in these emerging markets has boosted global production, in particular during the international financial crisis. For Norway, this has improved the access to affordable consumer imports, while the prices of important Norwegian exports like oil have remained at high levels. Norway's terms of trade has improved considerably since the late 1990s. However, gains in the terms of trade can quickly be reversed.

- Norway is vulnerable to lower prices on our export goods. We must make sure our economy is flexible and be prepared to meet unexpected external shocks. The macroeconomic framework is designed to promote a solid and stable development of the Norwegian economy, Finance Minister Johnsen underlines.

The Government Pension Fund Global, also called the National Oil Fund is an important element of the macroeconomic framework, helping us to separates the earning of petroleum income from the use of that income. The fiscal policy rule stipulates that the spending out of the fund over time should equal the expected real return, so that petroleum wealth also will benefit future generations. It also allows fiscal policy to play a stabilizing role. The tripartite cooperation between the government and the social partners facilitates wage setting consistent with international competitiveness and low unemployment. Monetary policy helps to ensure low, stable inflation and counteracts fluctuations in production and employment. Policies for financial stability emphasise solidity, liquidity and sound conduct through regulation and supervision.

Rising life expectancy entails population aging in both Norway and most other industrialised nations. While longevity indicates a healthy society, it may also challenge growth and the sustainability of public finances if retirement is not postponed correspondingly. This is in particular the case for Norway, with comprehensive and tax- financed public welfare benefits. On average, individuals in the labour force are net contributors to public finances, while children, youth and the elderly are net beneficiaries. Although the returns on the Government Pension Fund Global contribute significantly to public expenditure, the fund is far from large enough to overcome the challenges presented by an aging population.

The white paper considers the sustainability of public finances in different scenarios. Given the present tax level and welfare system, population aging will produce a gradually increasing gap between public revenues and expenditures if the labour supply of various demographic remains unchanged. In 2060, this financing gap is estimated to 6 per cent of Mainland GDP. The estimates are uncertain, but the overall picture is robust to changes in a number of underlying assumptions.

- We should not be misled by the rosy state of public finances today and the next few years. Over time, Norway is likely to meet significant budget challenges. We must keep this in mind when we take policy decisions, says Johnsen.

The white paper illustrates that it is not oil, but our collective work effort, that is the basis of our welfare. Over time, a public welfare system will be unsustainable if the share of net beneficiaries in the population continues to increase. If we live longer, it would seem sensible to boost average labour supply by postponing withdrawal from the labour market or increasing hours worked. Reducing the share of individuals on sickness and disability schemes will also improve the long-term sustainability of public finances. Labour is not only the key to economic independence for each individual, but also to sustainable welfare schemes, the Finance Minister says.