Norwegian government likely to present neutral-to-slightly expansionary fiscal policy, says DNB Markets

The Norwegian government is expected to present a neutral to slightly expansionary fiscal policy, with a structural, non-oil deficit at NOK260 billion, according to the latest research report from DNB Markets.

Further, the government is expected to have an optimistic view of economic trends next year, with activity growth a little higher than normal and an economy running a little above full capacity. The outlook is for the low and stable inflation to continue.

The same applies to interest rates according to Norges Bank’s rate path. These trends point to a slightly tightening fiscal policy stance. On the other hand, the deficit in 2019 is on course to be below the 3 percent target in the fiscal policy guidelines.

From end-2018 to date the Government Pension Fund Global (GPFG) has increased substantially, and the 3 percent rule thus opens for an increase in the deficit, and with that a more expansionary policy. The government consists of four parties with very different priorities. Budget discussion may be solved by adding more money, the report added.

Over the past few years much attention has been given to the substantial rise in the use of income from the petroleum activity. The government may want to demonstrate that it can be responsible and have a long-term and sustainable budget policy.

In the revised national budget for 2019, presented in May, the government proposed a structural non-oil budget deficit of NOK238 billion for the year. It estimated the deficit was equal to 2.9 percent of the pension fund capital.

Measured as a percentage of the trend in mainland GDP, the estimated deficit was 7.7 percent, up 0.5 percentage point from 2018. Real, underlying growth in spending in 2019 was estimated at 2.0 percent, and corresponding nominal growth at 4.1 percent. Nominal growth in mainland GDP was estimated at 4.8 percent. These indicators suggest to us a slightly expansionary budget stance.

"We expect the structural non-oil deficit to increase by NOK15 billion measured in fixed 2020 prices. This corresponds to 2.7 percent of the GPFG, estimated at NOK9,800 billion by year-end," DNB Markets further commented in the report.