Experts at Norges Bank Investment Management (NBIM) have come up with a new idea for guiding the country’s use of the vast oil wealth it has accumulated over the years, which they say would avert the risk that growing government spending – at times when the economy is weak – could deplete the now NOK15trn (€1.3trn) sovereign wealth fund.
NBIM, the central bank arm running the Government Pension Fund Global, (GPFG), published a paper entitled “Withdrawals from the GPFG and potential trade-offs” in which the authors said: “We outline a rule that attempts to strike a balance between spending cyclically and sustainably.”
This rule sets withdrawals directly in line with cyclical spending, but targets reductions in the fiscal deficit over time, they said.
“These gradual reductions in deficits help to improve the distribution of fund over the longer term, and can offset the increased risk of depletion associated with counter-cyclical spending,” NBIM said.
The paper was published as part of NBIM’s “discussion note” series – analysis and background documents in which, it says, views expressed are not necessarily those of the organisation.
Norway’s fiscal policy framework includes a spending rule that guides withdrawals from the GPFG – the huge fund which contains the country’s petroleum revenues of the last few decades plus investment returns.
The government’s permitted withdrawals are guided by the expected return on the fund, while also accommodating counter-cyclical fiscal deficits in Norway, according to the NBIM paper.
However, the authors said that in recent years, those withdrawals had financed growing fiscal deficits and a significant proportion of total fiscal expenditure.
The NBIM staff said that with withdrawals having averaged close to 3% of the value of the fund over the past few years, equating to around 20% of total fiscal spending, it was important to understand the risks in continuing to use fund withdrawals big parts of the budget.
“Declines in expected returns, or the value of the fund, could mean fiscal spending needs to adjust downward to ensure withdrawals remain sustainable,” it said in the paper.
“Another risk is that repeated periods of large counter-cyclical spending from the fund, such as during and after the COVID-19 pandemic, can increase the likelihood of depleting the fund over the long term,” the paper’s authors said.
In February 2022, advisers to the Norwegian government on fiscal policy recommended considering changing the fiscal spending rule, saying the current method made policy vulnerable to a fall in the value of the GPFG.
Back in May, the Norwegian government cranked up spending from the oil fund in its revised 2023 national budget, taking out NOK56bn more than had been planned for the current year in the budget set out last autumn, bringing the total oil fund spend for the year to NOK372.6bn.
It said more than NOK20bn of the NOK56bn increase was directly linked to the war in Ukraine.
Acknowledging that fund withdrawals in normal times should be well below 3% of the fund’s capital, the government said in May’s budget revision that it would aim for that in next year’s budget.
“At the same time, the further course of Russia’s war in Ukraine is uncertain, and this creates uncertainty both about the economic development and about the consequences for the national budget,” it said.
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