An official panel advising the Norwegian government on fiscal policy has recommended considering changing the rule which limits the amount of sovereign wealth fund money it can use to fund the annual budget, saying the current method makes policy vulnerable to a fall in the value of the NOK12trn (€1.2trn) fund.
The idea comes at a time when Norway has become increasingly dependent on the oil fund money to finance higher public spending, as well as fears the SWF could suffer a slump in value.
Submitting its first annual statement to Minister of Finance Trygve Slagsvold Vedum yesterday, the Fiscal Policy Committee, which was re-named and given a changed mandate last year, covering the topic of long-term sustainability in government finances.
A key part of the statement was the recommendation that the government investigate moving to a cash-flow rule to guide allowed spending from the Government Pension Fund Global (GPFG), away from the return-based rule in place now.
Vedum said: “The management of our common fortune, created by those before us, is a task I take seriously.”
He said the fiscal rule (handlingsregelen) was a cornerstone of Norwegian politics, had broad support and had served the country well.
“We look forward to getting thoroughly acquainted with the proposals from the committee,” he said.
The committee said that in its opinion there would be a need to adjust the fiscal rule. “This should be considered soon, and implementation should not be delayed for long,” the panel said in its statement.
Nine of the panel’s 10 members had agreed on this point, according to the announcement, with only Annette Alstadsæter, professor at the Norwegian University of Life Sciences dissenting. The majority believed there were “important disadvantages in basing the use of fund assets on the market value of the fund”, the committee said.
“A fund withdrawal based on a calculated sustainable level of the fund’s cash flow will provide a more stable guideline for the use of fund assets, since the cash flow is more stable than the market value,” it said.
“This may reduce the risk that a sharp fall in fund value will cause significant problems in fiscal policy,” they said.
According to the fiscal rule, the Norwegian government can use up to 3% of the expected return of the GPFG in its budget. The rule was exceeded in 2020 and 2021 as government spending shot up due to the pandemic.
Last year, the GPFG’s contribution to the budget amounted to 25% of government spending, which was an all-time high, according to Norges Bank Investment Management (NBIM), which manages the fund.
Nicolai Tangen, chief executive officer of NBIM, told a news conference last week that the fund’s stable revenue streams – the value of coupons, dividends and the rental income from real estate, as well as revenue from its new renewable infrastructure investments – was NOK200bn last year.
In 2021, the government’s withdrawal from the fund totalled NOK120bn, according to NBIM.
NBIM’s deputy CEO Trond Grande said at last week’s news conference one had to be prepared for market downturns. Though markets came back rapidly after the March 2020 crash when the fund lost NOK1.5trn in one go, he said, there was no guarantee of such a rebound next time.