March 10, 2014 / 12:36 PM / 3 years ago

Norway's PM Solberg cautious on wealth fund spending in 2015 budget

Norway's Prime Minister Erna Solberg speaks at the European People's Party (EPP) Elections Congress in Dublin March 6, 2014.Suzanne Plunkett

HURDAL, Norway (Reuters) - Norway should not dig too deeply into its $850-billion sovereign wealth fund in the coming budget because this could overheat the economy and erode recent competitiveness gains, Prime Minister Erna Solberg told Reuters on Monday.

Her government, composed of the center-right Conservatives and the more radical right-wing Progress Party, begins today negotiations over next year's budget, the first by the coalition since winning elections in September.

Both parties are keen to put their stamp on the document. But they will have to compromise with two small centrist parties, the Liberals and the Christian Democrats, in order to pass it through parliament.

Solberg said it was important not to spend too much money from the country's sovereign wealth fund.

"Something that has pulled in the right direction is that the Norwegian crown level has not been as high over the past six months and has therefore contributed somewhat positively to the competitiveness of Norwegian companies," Solberg said in an interview, ahead of negotiations between cabinet ministers.

"Using a lot of oil money could push it the other way," said the PM, who is the leader of the Conservatives.

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. Many economists say that too much spending from the oil fund could do the same.

The Nordic country is the world's seventh-largest oil exporter and the third-largest for gas.

It saves revenues from hydrocarbon production in the wealth fund for future generations, and in an average year aims to use only about four percent of the fund's value in the state's budget to avoid overheating the economy.

The OECD last week called on the country to limit government spending and implement reforms because its current prosperity had masked a decline in competitiveness.

Norway's economy has escaped the global economic downturn largely unscathed due to its oil sector, which has benefited from high oil prices, though more recent signs suggest there is a risk it may cool off.

On Monday Solberg said she expected the economy not to grow at the same rate as it did previously.

"Norway's economic growth will be somewhat lower this year and next than in previous years," Solberg told reporters.

The mainland economy - excluding the oil and shipping sectors - grew by about 2 percent in 2013 [ID:nL5N0LH1YY] and the central bank said in its December monetary policy report that it expected 2.25 percent growth this year.

Separately, inflation data published on Monday came out as expected, with core inflation, which excludes the volatile oil and shipping sectors, steady at 2.4 percent year-on-year in February.

"This is only one tenth higher than the central bank expected, so it should be neutral to the rate path," said Marius Nyborg Hov, an economist at Handelsbanken in Oslo.

The central bank will make public its next interest rate decision on March 27. The central bank's governor in February said it expected interest rates to stay low for years. They have been at 1.5 percent for the last two years.

Additional reporting by Oslo newsroom, writing by Gwladys Fouche; Editing by Toby Chopra

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