In an election that was a foregone conclusion even before the first ballot was cast, Norway’s right-wing coalition led by the Conservative Party’s Erna Solberg swept to power on Monday. Perhaps the most controversial story from the election was the rise of the Progressive Party, the Conservatives’ key political ally. It is noted both for its anti-immigration positions and for its association with mass murderer Anders Breivik, a former party member.
While this aspect of the election has caught international attention, the bigger issue for voters in Norway was oil. Specifically, what to do with $760 billion worth of oil generated wealth in a sovereign wealth fund awkwardly and inaccurately named the Government Pension Fund-Global.
Much of the debate in the run-up to the election centered on questions of how the fund should be managed and spent. Current regulations limit the government’s ability to use the fund to 4 percent of its annual budget. The Labor Party, in power during the last eight years, often chose to use less. Outgoing prime minister Jens Stoltenberg advocated using only 3 percent of the money each year.
Many Norwegians were unhappy with this proposal, with criticism aimed at the government for failing to improve infrastructure and health care while sitting on top of a huge pile of money.
Certainly some criticism of the Labor Party’s management and use of the fund is legitimate. Compared to other sovereign wealth funds, such as the one run by Temasek Holdings in Singapore, Norway’s has underperformed. It has been invested very conservatively, with the majority of its investments in highly developed and slow growing economies like the United States and Switzerland. It has, until recently at least, tended toward investments with low volatility but low returns as well.
Investing the fund more aggressively is one thing. Spending the money is another altogether. Norway has been a paragon of macroprudential policy, often opting for conservative fiscal expenditure levels and running consistent budget surpluses.
Drilling down deeper, though, reveals a more complex story. Norwegian household debt is among the highest in the world, at nearly 200 percent of disposable income. Norway is also faced with a swelling property bubble and the housing market is overvalued by as much as 40 percent according to the International Monetary Fund. These are worse indicators than the United States had in the run-up to the subprime lending crisis that precipitated the global financial meltdown.
Norway is not the United States but what should be especially worrying for institutions and countries overexposed to Norwegian banks (which is the entire Nordic region) is that Solberg and the Conservative Party deny that a housing bubble is emerging at all and encourage deregulating lending rules so more first time homebuyers can get a mortgage. At the same time, their Progressive Party allies campaigned for removing the 4 percent spending limit from the sovereign wealth fund to increase budgetary allocations to infrastructure and education while providing cuts in taxes.
It is easy to see why this set of spending priorities would be popular in some quarters of the country. Likewise, it is probably difficult for average Norwegians to understand why they don’t spend their mountain of wealth when societal needs can clearly be recognized. But opening the fund’s floodgates is risky and shows a fundamental misunderstanding of Norway’s unique position in Europe.
First, as the euro crisis deepened , Norway — like Sweden and Switzerland, among others — came to be seen as a safe haven for parking wealth. Because the country did not aggressively work to counteract this, commodity and asset values shot up. In March of last year, the Norwegian central bank cut the benchmark rate to 1.5 percent, where it still stands, in a move to make the country less attractive to outside investment. This also put relatively cheap money in the hands of Norwegians looking to either buy homes or speculate on asset prices themselves.
Secondly, Norway’s economy exhibits classic Dutch disease symptoms. The nation’s production output and currency value have both been distorted as offshore oil emerged as the primary driver of growth. This has reduced its competitiveness in other sectors in proportion to the increasing value of the krone.
These two factors taken together mean that increases in domestic spending or decreases in taxation related to loosening restrictions on the use of the sovereign wealth fund will likely cause the Norwegian economy to overheat and costs to outstrip income — especially if interest rates are not raised. However, the sentiment in Norway currently is to reduce interest rates to stimulate lackluster economic expansion.
This cannot be done in tandem with increases in government spending. While it might satisfy short-term populist desires, it would have debilitating long-term effects for the country’s competitiveness, negative effects on prices for domestic goods and negative impacts on Norwegian homeowners.
Even in a worst-case scenario, it is possible that there is enough money in the oil fund to bail out Norway’s banks and stimulate economic activity during a housing bubble collapse or a recession caused by overheating. Using it for such purposes would undermine the original idea behind creating the fund, however.
According to the Ministry of Finance, the fund exists to “finance rising public pension expenditures and support long-term considerations in the spending of government petroleum revenues.” It is possible that the incoming government will spend it carefully to achieve just those ends, while meeting voters’ desires and improving everyday quality of life. However, using it to gain political popularity vis-à-vis undermining the country’s competitiveness and, worse, to bail out a flatlining Norwegian economy would be to waste years of careful planning and unfair to Norway’s future generations.