OSLO (Reuters) - Norway’s economic competitiveness is under threat so next year’s budget must be tight even though oil revenues could allow the government to stimulate growth, Finance Minister Sigbjoern Johnsen said on Wednesday.
Growth this year will be slower than earlier thought, but it is still healthy by European standards so Norway needs to save money for rainy days, Johnsen said at the Reuters Nordic Investment Summit, adding the authorities should not be afraid to tighten banking regulations to make growth more sustainable.
Norway runs budget surpluses year after year thanks to oil revenues and has saved up $780 billion, or more than $150,000 for each of its 5.1 million citizens, in an oil fund. Budget rules allow the government to spend 4 percent of the fund’s value each year but spending, as a portion of the fund, has been declining for years.
“We are in a period of reasonably good growth with high oil prices so ... in a situation like that, we should spend well below 4 percent,” said Johnsen, who will present his last budget on October 14. “It’s important to take advantage of the present situation to build reserves and spend far less than 4 percent.”
Johnsen’s Labor party lost elections to the centre-right opposition last month but new governments have little flexibility in amending budgets so incoming Prime Minister Erna Solberg will be for the most part stuck with Johnsen’s budget.
Although Norway was Europe’s best performing economy last year, the central bank has cut its 2013 mainland growth forecast to 1.75 percent from 2.5 percent, a big drop from last year’s 3.4 percent.
“Norway’s still in a very strong position and it would have been quite remarkable if one time or another low growth in Europe didn’t have a bigger impact on the Norwegian economy,” Johnsen said.
“The weakening of the krone so far this year is an advantage for export industries that have suffered from the high cost level and the weak international development, especially in Europe,” he said.
Johnsen welcomed the slowdown in the housing market, the biggest problem for an otherwise strong economy, but said it needed to slow more and there was no risk of a bubble bursting.
“The debt ratio in households is very high and a lot of households are vulnerable to even slight raises in interest rates,” Johnsen said. “The sharp rise in housing prices that we have seen the last years is not sustainable for a long period of time.”
House price growth has already started to cool more than expected, raising fears among economists that the slowdown could lead to deflation. Property price growth slowed to an annual 2.6 percent in August from 5.7 percent in June and 8.8 percent last December.
Still, Johnsen defended the government’s plans to further increase capital requirements for banks, even if that risked making mortgages more expensive, cooling the property market further and dampening consumer spending.
“It’s been my priority to build a strong financial sector in Norway and the capital requirements that were adopted in May were part of that,” Johnsen said. “Drawing experience from our own banking crisis in 1991 to 1993, and the global financial crisis from 2008, we clearly see the need to have strong banks.”
Follow Reuters Summits on Twitter @Reuters_Summits
Additional reporting by Terje Solsvik; Editing by Ruth Pitchford