MNI INTERVIEW: Fiscal Rule To Stay After Tight Norway Election

Norway’s restrictions on transfers to central government from its sovereign wealth fund should survive any political haggling following knife-edge elections Sept 8, the election studies head at the country’s Institute for Social Research told MNI.

With polls showing the ruling Labour Party together with other left-of-centre groups on track to fall a seat or two below the 85 seats needed for a parliamentary majority, there seems to be a good chance that Norway is set to add to its fairly extensive history of minority governments. The main right-leaning parties and Labour are both committed to the existing fiscal arrangements, and if Labour finds itself relying on the Greens or the far-left Red Party to pass a budget, it is likely to hold firm in insisting on orthodoxy, Johannes Berg said in an interview.

Still, the Red and Green parties would demand some additional spending in return for support, Berg said.

"I think it's likely that they will have some success in negotiating with the Labour Party ... I'm sure there's some room for negotiations in terms of some more spending, or perhaps more taxes on the wealthy, the types of policies that the far left is advocating for," he said.

"But in terms of spending a much larger share of the oil fund on public expenditures, I think that would be going too far for the Labour Party, and they would not accept that.”

Norway's fiscal rule states that the USD2 trillion Government Pension Fund Global, which receives oil revenues, can only transfer funds to the central government equivalent to the fund's expected real return, estimated at 3% a year.

A Norges Bank working paper published in July contained analysis suggesting that a looser fiscal policy could be met with more hawkish monetary policy, should inflation prove to be unexpectedly resilient. (See MNI INTERVIEW: Cut Surprise Just Timing Issue -Norges Governor)

MONETARY POLICY

In its June Monetary Policy Report, Norges Bank said recent expansionary fiscal policy has boosted activity and noted the commitment to increased defence spending and enhanced support to Ukraine. Berg sees that continuing, given broad based political support

"All the parties in parliament have agreed to ... an increase in defence spending, even the far left right party, which traditionally is most sceptical of ... NATO membership," he said.

While the election still looks tight, the Labour Party has made a steep recovery in the polls following the exit of a centrist party from Prime Minister Jonas Gahr Store’s coalition and the return to national politics of former PM and NATO chief Jens Stoltenberg, now finance minister.

Support for Labour was 28% in an Aug 20-25 poll, ahead of the Progress Party, which wants to lower both taxes and immigration, on 18.5% and the Conservatives on 16.8%.