World Economy

Norway Told to Tighten Fiscal Spending

The IMF has recommended a spending target of about 2.5-3% from 4%.The IMF has recommended a spending target of about 2.5-3% from 4%.

Norway should limit what it spends from its $860 billion wealth fund to avoid creating economic imbalances, the International Monetary Fund said on Thursday, after the fund grew faster than the economy in the last 20 years.

Under the fiscal spending rule, governments can spend in their budgets an average 4% of the wealth fund per year—the estimated long-term return of the fund, Reuters reported.

The sovereign wealth fund, the world’s largest, invests the Norwegian state’s revenues from offshore oil and gas production. It invests up to 60% in equities, 35% in fixed income and 5% in real estate. It cannot invest in Norway.

“The fiscal rule’s 4% target is no longer appropriate, the IMF said in a statement after visiting Norway, and recommended a spending target of about 2.5-3%.

“The fact that the fund has been growing much faster than the economy has allowed increased spending of oil revenues as share of mainland GDP,” it said.

When it was set up 20 years ago, the fund was half the size of Norway’s GDP. It now is 2.5 times the size.

Long-term, a weak global investment climate threatens the fund’s ability to generate returns of 4% and lower oil prices mean reduced inflows to the fund, economists have said.

 Change in Spending Rules Rejected

Until recently, any suggestion of changing the fiscal spending rule, in place since 2001, had been rejected by successive prime ministers, but last month Prime Minister Erna Solberg said it could be tightened.

This year, the Norwegian government will spend 2.8% of the fund’s value and expects to spend 3% in 2017.

The IMF said mainland Norwegian growth, which excludes the volatile oil and shipping sectors, would grow 1% this year and 1.75% next year. In July, it had expected growth to be 1.1% in 2016 and 1.7% in 2017.

“The economy is slowly recovering from the shock of low oil prices,” said the IMF, adding that there were some downside risks, including on the international front weaker-than-expected growth in key economies that could derail the non-oil export recovery, as well as persistently low oil prices.

“Domestically, a housing market correction could result in an abrupt reduction in consumption and residential investment with ripple effects on corporate earnings and banks,” it said. Unemployment, which hit 4.9% in September, is expected to peak this year before falling in 2017, the IMF said.

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