Analysis of Key Figures in the Budget for 2012

Government follows the guidelines for a gradual phasing of oil revenues in the Norwegian economy. The proposed budget for 2012 implies a use of oil revenues under the expected return on the Government Pension Fund Global (4-percent pitch). A budget that follows the guidelines contribute to predictability and provides for action to meet unforeseen events in the future.

Weak public finances in many countries and new new turmoil in international financial markets has made the economic outlook more uncertain. Both for the euro area and U.S. projections for economic growth revised down. A new backlash out there will affect the Norwegian economy.

Main features of the proposed budget for 2012

Norway has an open economy, and it is not shielded from developments abroad. A high domestic cost makes Norwegian export companies vulnerable to lower global growth and a stronger dollar. The budget for 2012 is adapted to the economic situation. The Government proposes to increase the use of oil revenues in line with the average growth in the expected return in the Government Pension Fund in this period.

The main features of the proposed budget for 2012 is as follows:

A structural non-oil budget deficit is expected to be 122.2 billion NOK in 2012. This will be 2.4 billion in the case of 4-percent pitch. The use of oil revenues increased in real terms by 9.9 billion NOK from 2011 to 2012. Macroeconomic simulations suggest that the budget will have an approximately neutral effect on the economy.

An unchanged tax level

Real growth in government expenditure is estimated to be 2.1 percent. It is just below average for the last 10 years. A real growth in total local government revenues from 2011 to 2012 is estimated to be 1.4 percent, or 5.0 billion. Local free income is increased in real terms by 3.75 billion, equivalent to 1.3 percent. Growth is measured in relation to income level in 2011 as was projected in the Revised National Budget 2011.

A non-oil budget deficit in 2012 to 120.2 billion kroner

The total government budget surplus and the Government Pension Fund, where interest and dividends on the Fund's capital is anticipated, is estimated to be 346 billion.

The total capital of the Government Pension Fund in the end of 2012 is projected to be slightly over 3685 billion.

The market value of the Government Pension Fund in the end of 2012 is estimated to be about 3,543 billion, while assets in the end of this year is expected to be 3,115 billion.

Increased uncertainty and weakening growth prospects

The international economic situation is marked by considerable uncertainty and lower growth prospects. Worries about growing public debt in industrial countries has spread to financial markets. Share prices have fallen sharply, risk premiums in credit markets have increased, and a new uncertainty about the solvency of European banks arises. The unrest has been exacerbated by weak figures for economic development.

Both the U.S. and Europe having had a clear upturn in economic activity last year have been turned into slower growth this year. Rising oil prices and natural disaster in Japan pulled down growth in the first half. Then also the increasing turmoil in financial markets and generally increased uncertainty has led the weaker growth in consumption and investment. To strengthen public finances several industrialized countries are tightening their fiscal policy, and this may in the short term, contribute negatively to production and employment. So far, however, activity remained buoyant in countries like China and India, but even these countries, there are signs of a slowdown. Oil prices are still over 20 percent higher than in 2010.

Overall, projected growth in GDP for Norway's main trading partners is to be 2 ¾ percent in 2011 and 2 ¼ per cent in 2012. Compared with the Revised National Budget 2011, estimates are lowered by a quarter percentage point this year and by almost 1 percentage point next year. For both years, the growth forecast is well below the average for the last five years before the financial crisis. Unemployment is expected to remain high in these countries in 2012.

Growth in line with the historical average in the Norwegian economy next year

The Norwegian mainland economy has grown continuously over the past seven quarters, and the added value is higher than before the financial crisis in autumn 2008. Last year, the growth is particularly driven by household consumption. Consumption growth has slowed somewhat in the first half of this year, but increased housing and petroleum investment have kept the growth in the mainland economy. Besides power generation, which has varied in recent quarters, increased GDP for mainland Norway by ¾ per cent in both 1 and 2 quarter, representing an annual growth rate of 3 per cent.

Low interest rates, high household saving and high income growth leads expectation for further recovery in domestic demand ahead. Both private consumption and residential and business investment are projected to increase. At the same time, Statistics Norways investment survey shows that oil companies have revised their investment plans for this year and next year significantly. Slower growth among Norway's trading partners, on the other hand, could dampen their activities in export-oriented businesses. Overall, projected GDP for mainland Norway is an increase by 2 ¾ percent this year and just over 3 percent in 2012, This increase is broadly in line with average growth over the past 40 years, but about ¼ percent lower than projected in the Revised National Budget 2011.

…And Employment

Figures from the national accounts figures show that employment rose by 0.3 percent in both the 1st and 2nd quarter of this year. Unemployment has stabilized at around 3 ¼ percent. It is estimated that employment continues to increase in the last quarter of 2011 and 2012. On an annual basis, the increase in employment is 30000 people in 2011 and 40000 people in 2012. Unemployment is projected to remain relatively stable at around 3 ¼ per cent of the workforce in both years. This is slightly lower than last year and well below the average for the past 20 years.

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