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Since its establishment in , inflation has remained well anchored exemplified in Figure 4, Panels E and F, for an in-depth assessment see Norges Bank a. The regime has also proved adept at taking into account other economic considerations, most notably the prolonged low policy rates elsewhere, especially those in the Eurozone and the United States and, in recent years, the downturn in domestic economic activity following the oilprice drop of The policy rate, 0.

Eventually policy should tighten as growth picks up further. Positive adjustment to the inflation-targeting regime has been made. Norges Bank announced in May various procedural changes to increase transparency, and the frequency of communication and decision making. There are to be eight monetary policy meetings per year instead of six and the minutes of the meetings are to be published the in-depth Monetary Policy Report with Financial Stability Assessment will remain quarterly.

Though there were no glaring problems to resolve, the moves bring practice more in line with inflation-targeting systems elsewhere. Box 1. The database comprises over 70 indicators across six categories of vulnerability five domestic, one international. For Norway the analysis is based on predicting periods of downturn identified by Norges Bank.

These comprise, ignoring small gaps, essentially four downturn episodes. Principal components analysis was used to develop a single-number leading indicator. This indicator was then used to estimate the downturn probability at different time horizons Figure 6. Note: The above panel shows estimates of the downturn probabilities at horizons of 2, 4, 8 and 12 quarters.

The red line in Panel C, for instance suggests that the 8-quarter horizon recession probability increased from about 0. As similar exercises for other countries have found, the indicators developed from the resilience database are not hugely accurate. In Figure 6, the indicators are performing well if they peak around the beginning of a downturn. On this basis, some lag-lengths provided some warning of the latest two downturns.

Yet none of the variables warned of the prolonged downturn that began in the mids. Bearing in mind the limited accuracy, the growth in the short-lag variables in the most recent data suggests there is a non-negligible risk of downturn. Examination of the principle components analysis indicates that recent increased risk of downturn is due to variables reflecting domestic credit conditions and external risk factors. As regards the overall objectives to the bank it advocates adding a separate financial stability goal, in addition to price stability and adding an explicit duty to contribute to high and stable output and employment.

In parallel, the Ministry of Finance has announced an overhaul of the monetary policy remit. However in the Norwegian context it would bring welcome transparency to an existing responsibility, given that financial stability already features in discussions and clearly has some weight in decisions, especially given housing-market developments. Such a move could be reflected in having separate committees for monetary policy and financial stability. House prices and household debt remain a central concern House prices have roughly doubled in real terms since , with strong increases continuing in recent years Figure 7, Panels A and B.

As in other countries with strong growth in house prices and associated borrowing, the prolonged low-interest-rate environment has been a primary driver. In Norway most mortgages are variable rate, thus amplifying the response to low interest rates. Localised demand pressure from continuing population shift to urban areas has also been playing a role. Supply response to the booming housing market in the form of new housing has been sizeable, especially in Eastern Norway which includes Oslo Panel F.

Recognising the risks from elevated debt levels, the Norwegian authorities have been using macroprudential tools and strengthening capital requirements. In addition, banking-sector capital requirements have increased substantially in recent years Figure 8. In addition, leverage-ratio requirements on banks were introduced in December Also, tighter capital requirements for insurance companies have been introduced via implementation of the Solvency II framework in Finanstilsynet, It appears that the market-cooling measures, in combination with the surge in housing supply, have borne fruit as house prices have been falling in recent months.

This may mark the beginning of a sustained market correction. Several price falls have been. New home sales have fallen off in Eastern Norway, also pointing to a softening of the market Figure 7, Panel F. Figure 8. Capital requirements on Norwegian Banks Common Equity Tier 1 requirements in the new regulatory framework1. Ratio of Common Equity Tier 1 capital to risk-weighted assets. Source: Central Bank of Norway. Note: The above series are seasonally adjusted.

If the recent house price developments represent the start of a sustained correction, then the critical issue is whether the market is heading for a soft landing smooth adjustment to a new equilibrium or a hard landing erratic adjustment, possibly with prices dropping below equilibrium before stabilising. An IMF house-price regression exercise. However, there are uncertainties in such regression results, and an average price correction can contain substantial adjustment in some market segments.

In sum, there are no grounds for complacency. In the Norwegian context, the chief economic impact from weakening house prices is most likely to come via dampened household consumption demand, due to negative wealth effects, precautionary saving responses and reduced expenditures related to the purchase and sale of housing such as spending on renovation and interior decoration. This could, inter alia, lead to losses on loans to businesses thus putting stress on the financial sector. Financial-sector stress will also likely increase from mortgage borrowers encountering financial difficulty in the event of reduced income for instance through redundancy.

Banking-sector stress tests conducted by Norges Bank Norges Bank, b , which incorporate large house-price corrections, suggest a low probability of financial-sector meltdown. Strong vigilance on housing and credit market developments needs to be retained and the authorities should be prepared to make a wide-ranging policy response.

This should include, as necessary, delay to monetary policy normalization. Automatic fiscal stabilisation in the event of a macroeconomic downturn from the house-price correction could be augmented by welfare measures to provide extra support to low-income households most affected. Also, there may be need to support the banking sector, though as discussed above, the chance of this being required appears low. Whether the housing market is heading for a soft landing or otherwise, efforts for structural improvement in the market should continue so as to reduce risk of overheating in the future.

Ongoing efforts to facilitate supply through lighter planning regulation and procedure should continue these efforts probably have already helped the supply response seen in recent years, Figure 7, Panel F. In addition, further work in the regulation of foreign-bank branches operating in Norway would be welcome. The branches face the same regulation in some domains, such as the mortgage-lending requirements discussed above.

Economics: How Scandinavia Got it Right

However, in other domains the foreign-bank branches are governed by the banking regulation of their parent. Reciprocal agreements between Norway and key foreign-bank domicile countries notably Denmark and Sweden have eased problems generated by such regulatory differences but the issue remains.

Furthermore, it has gained importance following the conversion of Nordea Bank Norge from a subsidiary to a branch of the parent bank. Table 3. Implementation of past recommendations on monetary and financial stability Recommendations. Should house-price growth remain uncomfortably high, consider additional macroprudential measures while closely monitoring and reviewing their effectiveness.

Norway Economic Snapshot

Tightening of macroprudential regulation continues. Banking sector capital requirements. Insurance sector. This will imply significantly higher solvency requirements for Norwegian insurers. Facilitate more responsive housing supply. In particular, reduce incentives of local authorities to withhold land for development, other than those related to clear externalities that cannot be compensated with revenue raised from sales.

The rule implies an intergenerationally fair use of oil wealth because spending the real returns implies leaving the real value of the Fund intact for future generations.

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The fiscal rule puts emphasis on evening out economic fluctuations. This leeway for discretion in the setting of annual deficits enables fiscal policy to avoid unwarranted procyclicality due to fluctuation in the value of the fund. However, in recent years the scenario envisaged under the rule has not quite played out in practice largely because of rapid rise in the return on the fund discussed further below.

Box 2. Under the fiscal framework, withdrawal from the fund covers the non-oil budget deficit. The fund is invested entirely in foreign assets abroad and this offsets pressure for currency appreciation from petroleum exports Dutch Disease. There is therefore a trade-off between fund accumulation and running mainland deficits and this is governed by the fiscal rule see main text. The parliament unanimously concurred.

The new rule more strongly assures intergenerational equity. The prospect of continued low returns on bonds is a prime reason. Rapid growth in the fund in recent years, largely due to depreciation of the kroner, meant the target deficits grew rapidly Figure 10, Panels A and B. These arguments helped restraint fiscal expansion to a level more appropriate with the cyclical position of the economy.

There was some discussion for instance, in the previous Survey about the adoption of a supplementary rule to help guide fiscal policy over the medium term. As shown in Figure 10, Panel C, it has usefully brought the target deficit much closer to current deficit levels, thus resolving tension at least temporarily between the fiscal rule and cyclical concerns. Now that the actual and the target deficits are more aligned, the fiscal rule should operate more as intended, with the structural deficit fluctuating around the target value and reflecting the appropriate fiscal impulse for the cyclical position of the economy.

This approach will probably work well, but if it proves inadequate then more precision on the fluctuations could be considered.

Between and the non-oil structural deficit increased, on average, by 0. The wealth fund has itself been the subject of some policy attention. The proportion of shares in the fund benchmark is to be increased from This could potentially enhance the depth of expertise and specialisation in fund management. Clearly, the success of such a reorganisation depends whether governance. The commission rightly identifies that removing the fund management from the bank potentially exposes it to greater pressure to shift away from the practices and principles of the fund.

Because of this, the commission recommends that the role and objectives of the fund are embodied in legislation. Overall, there is much merit in the creation of a separate body to manage the wealth fund. Nonetheless, such a move needs to be approached with caution given the challenges of identifying unintended consequences from new governance structures. Outcomes in public services are generally of good quality, comparing reasonably with other countries.

However, efficiency continues to be a challenge. Despite countervailing mechanisms to ensure value for money in public spending and to control drawdown of resource wealth, more expensive options tend to be chosen and reform to existing systems is often slow. The challenge will be to ensure gains in public-spending. The dividends are part of a wider programme to encourage productivity gains in central government.

In government budget proposals the dividend has always been set at 0. For instance, the dividend was set at 0. The proceeds of the dividends are pooled and used to fund new policy reforms or high-priority spending or tax measures. The mechanism should be maintained in the coming years to help create space for policy initiatives. Other initiatives to improve budgeting and public-spending efficiency include the establishment of an advisory service for government agencies engaged in ICT projects the Digitalisation Council, established in , and a new body that scrutinises new laws and regulations with a view to minimising the impact on business the Better Regulation Council.

Establishment of these bodies reflects a multi-agency approach to budget discipline and scrutiny, and one reason why in a recent re assessment the authorities have concluded against establishing an independent public-efficiency unit this has long been discussed in Norway. The commission recommended more comprehensive multi-annual budget projections and steps in this direction were included in the budget documentation.

The commission, however, did not find merit for stronger multi-year guidance. It argued multiannual appropriations to individual ministries and government agencies would not be helpful in the Norwegian context. It also argued that aggregate multi-annual expenditure ceilings, which have been the recommendation of past Surveys, would not be beneficial.

The case for ceilings may well emerge, for instance if the risk of government resorting to tax-raising measures to achieve deficit goals increases. Greater use should be made of regular spending reviews as a means of identifying and motivating opportunities for efficiency gain in public services. One approach would be to introduce a permanent fiscal council, along the lines seen in a number of other countries. Alternatively, if the existing structure of institutional oversight for instance, that provided by the Auditor General is considered sufficiently comprehensive then greater use of ad hoc reviews of public spending could be pursued.

Inefficiencies in transport-infrastructure investment Transport infrastructure is often costly with investment and returns spanning many years. Norway has long been investing heavily in this area and more so in recent years. In addition the long land border with Sweden involves cooperation on transport issues. Civilian public-sector investment has averaged 4. Ensuring good selection of projects and cost-effective implementation is important. Transport-infrastructure investment accounts for a substantial proportion of public investment and Chapter 2 of this Survey takes an in-depth look the processes whereby infrastructure projects are selected and implemented.

There is room to improve the planning and decision making process, most importantly for large-scale projects. Governance has been improved with the recent establishment of two new management companies for road and rail infrastructure, which brings greater independence to infrastructure management. Yet challenges remain, in particular it is widely held that transport infrastructure projects could be better selected and cost less.

The latest plan is different; it has a year planning period split into two 6-year phases. This may imply the plan will be rolled over after 6 years; however this. Each transport plan contains a shortlist of projects. The transport agencies then deliver a planning proposal to the Ministry of Transport and Communications. Before projects are suggested for inclusion in the National Transport Plan by the transport agencies they pass through an appraisal process that assesses different solutions to the infrastructure problem being addressed.

The resulting choice is then checked by an external quality assessment process. These assessments are then made available to the politicians responsible for selecting projects for the shortlists. This does not become apparent until projects pass through the internal cost-benefit analysis and quality assessment. Cheaper options are then seldom chosen in the final selection process. The projects shortlisted for the National Transport Plan have traditionally not always been the most highly ranked in the economic assessments and quality assessment.

Politics often dominates the selection and the scope of spending gets expanded by projects with weak cost benefit results. This may be amplified by timing. By tradition, the planning cycle has been timed so that the shortlist is always drawn up in political negotiation within the government coalition of the day towards the end of its term of office, therefore in the runup to an election government terms are fixed at four-year intervals.

There is welcome recognition of these problems among many policymakers and a desire to fix them. One positive step already taken is the intention to have six year phases. However, the next rolling of the plan is not yet decided. The latest transport plan also endeavours to raise the profile of economic analysis. Strengthening of top-down influence in the planning process, such as in metropolitan areas to strengthen co-ordination across municipalities. Continue refining CBA techniques and coverage with a view to strengthening accuracy, credibility and scope, especially as regards economic benefits that are difficult to monetise.

Strengthen the role of economic-efficiency considerations in project selection. Chapter 2, for instance, suggests taking further steps to deal with cost increases during the planning phase. For instance, in Denmark explicit buffers are included in the initial cost estimate. Reduce implementation delays and broaden ex post assessment. It also recommends establishing an independent body to conduct ex post evaluations that complement the self-evaluations conducted by the transport agencies.

Commitment to comprehensive public services means comparatively high tax rates are unavoidable. As described in Chapter 1, recent reform has concentrated on shifting the tax mix away from direct income taxes towards indirect taxes. The most prominent impact has been on corporate-income taxation for employees there has been partial offset through increases in the progressive tax that applies to wage earnings.

The rate of corporate tax is now middle ranking in OECD comparison, meanwhile income tax on households remains high Figure Chapter 1 also underscores the benefits for further progress towards uniformity in VAT and supports the financial-activity tax that aims to substitute for the absence of VAT on financial services. The Chapter also recommends further reductions in the rates of wealth tax on non-housing assets; especially in an environment of low returns on assets, taxes on wealth can dissuade savings.

Equality issues are important, and many countries use inheritance taxes to facilitate the redistribution of wealth across generations, but the effect is diminished by estate planning strategies. As explained in previous Surveys, an optimal approach to housing taxation involves a tax on imputed rental income, after deducting related expenses, such as interest payments. This was the approach used in Norway in the past, but the taxation of imputed rental income has been withdrawn.

The Chapter draws attention to this generous tax treatment of housing. Table 4. Implementation of past recommendations on fiscal policy, public spending and taxation Recommendations. The lower rate will be first applied to the budget. The reduction in the drawdown rate obviates the need for additional guidance as recommended.

Following recommendations of the commission on multi-year budgeting, the Budget more clearly communicates the multi-year revenue and expenditure outlook. Establishment of the Digitalisation Council in , an advisory service for government agencies engaged in ICT projects. Establishment of the Better Regulation Council, a body that scrutinises new laws and regulations with a view to minimising the impact on business. Following a central-government campaign, mergers are underway that will reduce the number of municipalities from to and the number of regions from 19 to In personal-income tax, either incorporate imputed rental income or abolish mortgage interest deductibility.

Economy of Norway

Some further progress in alignment of taxation across asset classes. No major progress in reforming tax treatment of housing in personal income tax, though reduction in the tax rate on ordinary income reduces the tax value of the mortgage interest deduction. As discussed in Chapter 1, globalisation and technological change have been re-shaping Norway in similar ways to many other advanced economies. In Norway, globalisation-related processes have so far not generated substantial socio-economic deprivation, partly thanks to comprehensive welfare support.

However, this should not give rise to complacency given the ongoing evolution of globalisation, and the prospect of declining in oil-related activities over the longer term see Box 3. Decline in oil and gas exports are most likely to be steady but will nonetheless mark a profound change in resource allocation and in trade given these currently account for half of export earnings Figure This would facilitate a reallocation of resources to high-productivity sectors that are at the top end of global supply chains. Chapter 1 of this Survey looks at a range of policy issues.

Box 3. Growth in petroleum investment and employment was particularly steep from the mids to mids and from to , prior to the global-oil price fall. Also, the supply companies often provide goods and services outside the petroleum sector, which complicates estimation of the scope of petroleum-related activity. As underscored in the main text, the petroleum sector makes a large sizeable contribution to fiscal revenues.

In addition, corporate-tax revenues are generated by the petroleum supply industry. The breadth of petroleum-related activity complicates assessment of future developments. Based on current output and estimates of developments in reserves, production in Norwegian fields will run out around However, new large finds are possible.

Also the sector is not solely dependent Norwegian offshore production, and includes decommissioning activity, which tends to run countercyclically to developments in production and exploration. Note: Industry, construction and services except public administration, defence, compulsory social security.

Source: Eurostat. Framework conditions: avenues for improvement remain Competitive markets can be a powerful driver of efficient resource allocation and productivity growth. Welcome attention is being paid to improving competition legislation. Nevertheless, issues in the competition legislation remain. Sectoral exemptions e. Stateownership administration is many respects exemplary. For instance, governance guidelines generally follow accepted good practice. Also, some progress has been made in increasing the independence of the regulators of state-owned companies, though more could be done.

Still, many of the state stakes are in companies operating in competitive and efficient markets where the rationale for retaining stake ownership indefinitely is weaker. It is encouraging that partial or complete sell offs continue. Healthy firm dynamics are also key to resource allocation and productivity growth.

In Norway the processes associated with establishing and operating business in Norway are in reasonable shape. Nevertheless, new OECD data capturing the efficiency of insolvency processes indicates room for improvement Figure Time to discharge i. Also, there are shortfalls in tools for prevention and restructuring.

Figure Regulatory indices on product markets and services trade point to room for improvement. The index includes regulatory transparency, barriers to competition, and other discriminatory measures, restrictions on movement of people and restrictions on foreign entry. The STRI methodology takes into account different market and trade cost structures across sectors to ensure that they reflect the relative restrictiveness of each sector.

Nevertheless, the indices may not be perfectly comparable across sectors. The indicators are for or the most recent year available. Note: The insolvency composite indicator is an unweighted average of 5 dimensions: treatment of failed entrepreneurs, prevention and streamlining, restructuring tools, and other factors. Source: McGowan et al. The programme has strengthens, in particular it is refundable, which can help innovative enterprises at an early stage of development in particular. A new governmentinitiated impact evaluation is due to be published in Considerable attention and fiscal resources are devoted to innovative firms.

Currently, access to finance is high on the current policy agenda. Steps already taken include proposals. Also, there are intentions to propose measures that will make share-option compensation of employees more attractive. Furthermore, a committee on access to capital is due to report in , and will identify potential weak points. The policy attention to access to capital certainly has potential for useful impact, though as is the case for innovation support more widely, uncertainties in the effectiveness of measures implies that assessment processes are important for ensuring the development of a good menu of policies.

More generally, it is a timely moment for a review of the full menu of innovation support measures. Research capacities of universities and research institutes are an important draw for business investment and scale effects from collaborative research networks can generate highproductivity growth clusters. There now only 21 higher-education providers compared with 33 previously. Structural change within the merged institutions, in particular the amalgamation of faculties, is progressing at varying speeds and the full impact of the reform will take some time to emerge.

Reforms to funding are being used reshaped research incentives in both the higher-education and research-institute sectors, but more could be done. In higher education, a roll out of performance agreements is underway that will also see further alteration of research incentives. Market disruption: taxi-market reform has proved particularly challenging In Norway, new business models based on internet platforms in personal transport e.

Uber and short-term accommodation e. AirBnB have received the most policy attention to date. Policy needs to embrace disruption, though not unconditionally. New business models for providing goods and services often improve household welfare in terms of consumption, but can bring downsides for consumers and employees, and can be founded on undesirable exploitation of loopholes in regulation or taxation. Services such as Uber are available in parts of the country but in most cases paid rides are illegal due to compulsory licencing for taxi services. Uber ceased its ride-sharing service UberPop in Norway as of 30 October , pointing to restrictive Norwegian taxi regulation as discriminatory and curbing its business model.

The number of taxi licences is set by county governments, generating supply-demand mismatch. The taxi-licencing system has not moved with the times in other respects. For instance, driver regulations in some localities still include geographicalknowledge requirements. Replacement of the current taxi-licencing system with less restrictive regulation to address availability and consumer protection would be welcome. New forms of accommodation have been less contentious. Short-term rentals via internet platforms, such as Airbnb, occupy a small but growing segment of the market.

However, parliament has requested amendments in housing legislation concerning short-time rentals. Negative impact on the affordability of ordinary.

OECD Economic Survey: Norway (overview) by OECD - Issuu

Policy should help ensure a balanced development in short-term rents. Policy can ensure good information on the rules and regulations. As elsewhere, the wave of internet-platform businesses has generated some tax issues. Income of private home rentals is tax-exempt if less than half the property by rental value is hired out. In the finance bill, the government proposes to remove the exemption on short-time rentals less than 30 days. Also, benefits from income-tax exemptions and uncertainties in the definitional boundary between private and commercial operation for tax purposes have come to the fore.

The tax authorities are considering a disclosure duty for data-holders who enable or facilitate rentals or paid services via digital platforms. Privateaccommodation rental is not subject to VAT. More generally, the prevalence of small-scale operators in disruption raises the question of VAT thresholds, which in Norway are relatively low. Action taken since the previous Survey January Improve framework conditions for business activity. The government has launched an evaluation of policy promoting university-business linkages, including assessment of whether technology transfer offices require more powers.

Road: A new company charged with planning, construction, operation and maintenance segments of the national road network has been established. Consolidation of road-toll companies continues. More extensive use of public-private partnerships is planned. We use your LinkedIn profile and activity data to personalize ads and to show you more relevant ads.

An economic lens on policies for growth and well-being

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Inequality is low 3 1. The Gini coefficient ranges from zero to 1, zero indicating all individuals have the same income; 1 indicating one individual receives all income. Productivity has slowed 7 0. Maintaining macroeconomic and financial stability 8 9. Inflation remains well anchored 9 0. Recommendations for macroeconomic policy 1. Normalise the monetary stance as forecast, with rate increases starting in late 2.

Focus on restraint in government spending and public-service efficiency in light of the adjusted fiscal rule 11 This should include, as necessary, delay to monetary policy normalization and the introduction of targeted fiscal policy 14 Improving business policies 15 Norwegian business operates in a high cost environment 16Source: Eurostat. There is room to improve regulation 17 0. Recommendations for maintaining a successful business sector 1. Complete the programme of income-tax rate cuts and consider further reductions 2.