* Needs to prepare for life after oil
* Transition seen smooth but requires action
* Monetary policy just right (Adds fiscal, monetary policy assessment)
OSLO, May 23 The IMF called on Norway to cut back on spending its oil income, saying the economy needs no further stimulus and the government should focus on fostering private sector growth instead as it begins the long transition to life after oil.
The budget has provided the economy with repeated stimulus even though it is running near capacity. The government needs to cut back, both to save the oil income and maintain a more neutral fiscal stance, the Fund said on Friday.
"The upward trend in government consumption and investment, together with the increasing labour demand from the oil and gas sector ... has crowded out and increased labour cost pressure in other exposed industries," the IMF said after ending its annual consultation with Norway.
Norway has saved up its oil money in a fund now worth $870 billion, or $170,000 per man, woman and child, and will spend less than 3 percent of this sum this year, below its self-imposed 4 percent target.
Still, the actual amount it spends has risen because the oil fund has growth rapidly in recent years.
"We would urge a still more conservative use of the (oil fund's) resources to maintain a more neutral fiscal stance so long as the economy remains near or above capacity," it added.
Norway's oil production peaked in 2000, and current output is less than half that year's level.
As oil and gas investments ease up and then decline over the next several years, contributing less to growth, the government needs to prepare for a potentially rough transition, the IMF said. It should curb sickness and disability benefits, complete pension reform, boost productivity, improve public services and ease trade restrictions, particularly in agriculture.
Finance Minister Siv Jensen said she had noted the IMF mission's views but added: "At the same time I am also very concerned with how oil money is put to use. We should use it in a way that helps increase the productivity and growth potential of the economy."
Although the IMF is projecting a smooth transition to a post oil economy, it said there was a risk it could be rocky as growth would be lower, possibly leading to disruption in the labour market.
Monetary policy, however, was just right after overcoming last year's policy dilemma with surging house prices and super- low inflation, the IMF added.
"Relative to last year, many of the tensions ... more or less abated," Mission Chief Tom Dorsey said. "You seem to be at a goldilocks moment, when everything is sort of just right (for monetary policy)."
The IMF sees 2014 mainland growth, or excluding the oil sector, at 1.9 percent, broadly in line with the central bank's 1.75 percent projection. It forecasts 2015 growth at 2.4 percent versus the bank's 2.5 percent. (Reporting by Camilla Knudsen,; Writing by Balazs Koranyi; Editing by Mark Trevelyan)