OECD calls for Norway to reform, cuts GDP forecast

OSLO, March 5 Wed Mar 5, 2014 6:00am EST

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OSLO, March 5 (Reuters) - The OECD lowered its GDP growth forecasts for Norway on Wednesday and called on the country to limit government spending and implement reforms because its current prosperity has masked a decline in competitiveness.

Growth on the mainland, which excludes Norway's vast offshore oil and shipping sectors, is now seen at 2.5 percent this year, a pick-up from last year's 2.0 percent but below an earlier forecast for 3.0 percent, the OECD said in a country report.

"Current prosperity has tended to disguise a slowing of underlying productivity growth," it said.

"Investment in the petroleum industry has risen very strongly in recent years, but is expected to slow markedly, while housing investment will also lose momentum."

With per-capita nominal GDP of about $100,000, Norway is one of the richest nations in the world but years of record investment in its oil sector have pushed costs sharply higher across all sectors, dealing a blow to the competitiveness of onshore industries.

"There is thus a risk that, beyond the cyclical recovery, future growth rates will be lower than those to which Norway has been accustomed, even in the mainland economy," it added.

It said Norway needs to cut taxes further and warned that Norway's flat wage structure, highly subsidized tertiary education, and large numbers of people taking early retirement through disability need to be addressed.

The OECD said a self-imposed limit on oil money spending is appropriate and Norway should consider spending even less because its structural budget deficit, or deficit excluding oil tax income, will be close to 6 percent of GDP.

Norway is allowed to spend up to 4 percent of its massive $840 billion sovereign wealth fund each year and actual spending of the fund, which manages the country's surplus oil revenue, is now closer to 3 percent.

But the OECD noted that the fund, worth about 200 percent of mainland GDP, has grown so fast, absolute spending is increasing even if it is declining as a percentage of the total.

"Norway should consider a longer-term policy of keeping the non-petroleum deficit well below the 4 percent guideline in view of the stronger-than-expected increase in the Government Pension Fund Global (oil fund), uncertainties in the future rate of return on the GPFG, pressure of demand in the economy, and fiscal challenges due to ageing," it said. (Reporting by Balazs Koranyi; Editing by Toby Chopra)

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