(10.09.2013)
After yesterday’s Norwegian General Election PM Jens Stoltenberg has announced that he will leave office. This paves the way for a likely Centre-Right government, headed by the Conservative party, by mid-October, with the Progress Party, the Christian Democrats and the Liberal Party as possible members. In terms of fiscal policy we expect this outcome to be about neutral for economic growth.
Due to pre-election signals as well as experience from earlier Conservative government periods, we expect tax cuts and higher public investment growth, at the expense of lower growth in public spending. We expect the new Government to adhere to the fiscal rule of spending oil money.
By Kjersti Haugland, Senior economist DNB Markets The outcome of yesterday’s General Elections was well in line with expectations. The Centre-Left government will be replaced by a conservative coalition government. Current Prime Minister Jens Stoltenberg yesterday announced that his Centre-Left government will resign when the Storting (Parliament) takes seat in mid-October. The new government will probably take over from Friday 18 October, and will probably have a budget proposal ready in Mid-November.
The Conservative Party won 48 mandates, while the Progress party won 29 seats. The two smaller parties which have said that they want to join and/or support a Conservative government, the Christian Democrats and/or the Liberal Party won 10 and 9 seats respectively. In total, they form a clear majority with 96 of 169 seats in the Storting.
Negotiations start now: In the next weeks the potential partners will negotiate to form a comprehensive political platform.
The Conservative and Progress parties are in agreement about lowering income tax and wealth tax as well as increasing public sector fees in some areas. They have divergent views on which tax and excise cuts to be given priority, on how to compensate for tax cuts and on how public sector fees are to be increased.
Fiscal rule to be maintained: The Conservative party have promised adherence to the fiscal rule for use of the nation’s oil money (i.e. spending limited to the estimated real return of the Pension Fund - 4 percent – in a “normal year”). The Progress party wants to change the rule. In its last budget proposal, however, the party showed that it can reprioritise within the limit of the 4 percent rule. As the outgoing Stoltenberg government has indicated that the 2014 budget will be based upon a structural deficit equal to 3 percent of the oil fund, the fiscal rule currently gives a good deal of latitude for budget changes, both balanced and uncovered. It is thus doubtful that the fiscal rule will be an obstacle for the cooperation between the parties in a coalition government. We thus assume that a new government will maintain the fiscal rule.
Composition changes: We expect the new government to lower income and wealth taxes, reduce growth in public spending and increase public investments. We assume that households’ income tax and wealth tax expenses will be reduced by a total of around NOK 25 billion in the period from 2014 to 2016, based on fixed prices. We expect public spending to increase by about 1 per cent per year. This will reduce public spending as share of Mainland GDP by 0.8 percentage points. Public investments are expected to increase by 7½ per cent in 2015 and 2016. This will increase public investments in relation to Mainland GDP by 0.5 percentage points. These changes alone could give a budget deficit of roughly NOK 8 billion for the years 2014-2016 combined. In addition, we need to allow for underlying real growth in many of the budgeted expenses. As mentioned, the fiscal rule will give plenty of room for the presumed policy.
Assessment: We expect the overall stance of the forthcoming conservative budget to be neutral to the mainland economy. Thus the outcome of the election should be neutral to monetary policy assessments, and the NOK.
