Tighter Norwegian Budget

The Norwegian government proposes a slightly tighter budget

(16.05.2011) The Norwegian government proposes a slightly tighter budget.

By Kyrre Aamdal, Senior Economist at DNB Markets

Friday the Norwegian government delivered its Revised National Budget. The government now suggests spending less than the fiscal rule, but expenditure growth is higher than the first proposal. Due to large net petroleum revenues, the budget is often calculated without petroleum revenues and expenses.

The petroleum net revenues are allocated to the Government Pension Fund Global (Petroleum Fund), and the non-oil budget deficit is covered by transfers from the Petroleum Fund. The fiscal rule says that over time the structural, non-oil deficit should be four per cent of the Petroleum Find. In the Revised Budget 2011 the structural non-oil budget deficit is estimated to NOK 112.9 bn in 2011, a NOK 15.2 bn decline from the original budget in October. The budget is estimated to have a 0.3% tightening effect on Norwegian Mainland GDP (October Budget: 0.2%).

The spending of oil revenue is NOK 10,3 bn less than implied by a mechanical interpretation of the fiscal rule (4% of the oil fund value). The reduction of the non-oil budget deficit is largely due to revised income figures for 2010, figures released ultimo April. The higher revenue level is continued in 2011. But the government has in principle chosen not to spend the higher revenues. Still the real, underlying growth in government expenditure is projected to 2.8%, which is higher than the 2.25% estimated in October. This is due to lower expenses in 2010 and somewhat higher expenses in 2011 than projected.

The Norwegian government foresees a tighter labour market than before: Unemployment in 2011 downwardly adjusted, from 3.6% to 3.2%. Wage settlements have exceeded the government's expectations and the wage growth is upwardly revised, to 3.9% from 3.25% in October. The mainland GDP is still expected to increase by well 3 per cent in 2011 and 3½% in 2012.

The government underlines that it is puts weight to avoiding contributing to larger pressure in the Norwegian economy, which could lead to more rapid hikes from Norges Bank, a stronger NOK and a further deterioration of competitiveness among Norwegian exporters. However, the new budget proposal contains very few discretional tightening actions, and the reduction of the oil-corrected budget deficit is due to non-discretional proposals.

Today Statistics Norway released Norwegian trade figures for April. Normally such figures do not affect market pricing. In the U.S. NY Fed provides Empire State PMI for May. Later the TICS data and NAHB housing market index are released, both with moderate potential to move the markets. Later this week, there are a couple of important Norwegian events. On Thursday Norges Bank released the semi-annual Financial Stability Report. On Friday the central bank governor Øystein Olsen will hold an introductory statement at a hearing before the Standing Committee on Finance and Economic Affairs of the Storting (Norwegian parliament).

In the U.S. housing starts and industrial production figures will be released on Wednesday and existing home sales figures on Thursday. Wednesday the Fed will release the minutes from the April meeting. Even though Fed governor Bernanke held a press conference after the meeting, the minutes may reveal interesting aspects of the internal discussions and disagreements between the FOMC members. Also on Wednesday the Bank of England releases minutes from the May meeting. Her we might get more information of the Bank's assessments regarding the economic picture and the possibility for a rate hike.

Tomorrow Norway celebrates the National Day and markets are closed.