The Organisation for Economic Co-operation and Development (OECD) has warned Norway that spending down income from its national pension fund is hampering much-needed fiscal reforms.

The comments came in the OECD’s latest economic survey of Norway.

Norway’s fiscal policy works within guidelines for the use of revenue from oil and gas production.

All government revenues from oil and gas production are paid into the Government Pension Fund Global (GPFG).

Part of the GPFG’s investment income can be used to help fund government spending.

There is a fiscal rule, the so-called 4% rule, which stipulates that the structural mainland budget deficit – the central government deficit excluding petroleum revenues – should, over time, be equivalent to 4% of the value of the GPFG at the end of the year prior to the budget year.

The figure of 4% is used because it was estimated to be the real rate of return the fund could expect in the long run.

But the report says the average return from 1997 up to late 2013 has been only 3.25%.

It goes on to say: “Under the previous government’s policy of maintaining the average level of taxation unchanged, rising GPFG revenue has been used to fund increasing levels of public expenditure.

“This keeps the burden of taxation at relatively high levels, likely to induce distortions and inefficiencies in private sector behaviour.”

It then recommends: “Levels of taxation could be reduced over time, especially if public spending efficiency were improved. Stronger impact evaluations and cost-benefit analyses could help raise efficiency.”

The new government is considering establishing an independent efficiency unit for the public sector with a remit to audit cost-benefit analyses.

However, the previous Economic Survey in 2012 suggested creating a more powerful cross-ministry agency to monitor such impact evaluations and cost-benefit analyses.

Siv Jensen, Norway’s minister of finance, said: “The OECD’s recommendations are in line with our efforts to increase efficiency in public spending.

“In this way, we can make room for a gradual reduction in the level of taxation.

“By lowering taxes, we allow the economy to work more efficiently and release more of its growth potential.”

He also said the country’s 2014 Budget introduced “growth-enhancing” tax cuts and redirected spending towards investments in infrastructure and knowledge.