The Governor Øystein Olsen kept an unusually speech Thursday night. He had more to say about fiscal policy – government and parliamentary responsibility field – than on monetary policy, which he himself is responsible. And the message to our politicians were exceptionally clear.
Olsen believes we have come to a crossroads where it should be an end to increase the use of oil money to cover an increasing share of government expenditure. The consequence is that it takes “noticeable tightening budget, year by year.”
WE SEEM think this is good advice, although “noticeable tightening” are not very precisely and some of the central bank’s calculations rests on assumptions who must be uncertain.
The most affordable interpretation of what Olsen suggests, is that we must begin to make room in the budget for the increase will come in spending on pensions, health and care of elderly people sign up with heaviness. The elderly and the sick should not be balancing records.
The dimensions of this challenge is great. Although overall expenditure continues to increase, it will no longer be enough to almost everything on the state budget.
The challenges of elderly travel, have lain there long. But politically it is difficult to make cuts now when far until the State may face something resembling acute money problems. Most thought that we still had plenty of time for us.
What is new is that the need for action has increased due to the sharp fall in oil prices, and because oil fund presumably come to a lower return on their investments than before.
Central Bank Governor has proposed something similar to such horse cures like most other European countries have undergone. It is rather talk about being precautionary measures to ensure the welfare state sustainability in the longer term.
The course change as he suggests, can still emerge as dramatically compared with the period behind us.
The last fifteen years have been a golden age for Norway and not least for the state. Thanks to rising oil prices Pension Fund has grown sharply. The transfers to the state budget has increased at the same pace. This means that oil money each year have covered a little more government spending than last year.
This has been a deliberate policy and a wise policy, embodied in the so-called fiscal rule. It should ensure a gradual phasing in of petroleum revenues in the Norwegian economy. It has also created an extra leeway for new and often costly reforms.
IT HAS YET been clear that the period of the use of oil revenues increasing at a faster pace than government spending had to be limited in time.
It has also been on the cards that as oil production declines, the image reversed: The part of government expenditure covered by oil money, will have to decline. Then something must succumb. It will require cuts in some expenditure items or tax increases, at least if we do not begin to eat of the Fund itself at the expense of future generations.
In the worst case, with continued low oil prices, we can already now be at this turning point. But also more optimistic assumptions, it now seems risky to postpone a course change in fiscal policy.
Olsen reminds us that a more difficult future has arrived sooner than we thought – and that we can undermine the welfare state sustainability if we do not take roof early enough.
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