September 10, 2009 / 10:57 AM / 10 years ago

Oil windfall at heart of tight Norway election

OSLO (Reuters) - Norway’s ruling center-left is within reach of becoming the first government to win re-election since 1996 when the North Sea state began investing its oil windfall in an offshore fund.

The oil fund has ballooned to $80,000 per citizen, and Norwegians’ expectations for public services have grown rapidly, making re-election tougher for governments, say sociologists.

Inflated to more than $400 billion, Norway’s wealth fund has become the world’s biggest democratic experiment in wealth management and sits at the core of Norwegian politics in the run-up to the September 14 parliamentary election.

All parties in Norway’s parliament, except the right-wing Progress Party, favor keeping curbs on spending the oil windfall in a bid to avoid the economic ills that have hobbled the economies of some resource-rich countries.

“Norway is dependent on oil like a drug,” Conservative leader Erna Solberg told Reuters in an interview this week.

“A lot of countries run (budget) deficits, they choose between taxation and public expenditure. In Norway, you can ... use more oil money, and we are trying to fight that,” said Solberg, who hopes to become prime minister in a center-right cabinet if the leftists lose next Monday’s vote.

The red-green coalition is running neck-and-neck with the center-right opposition in opinion polls, with both sides seen capable of forming the next government.

Given the country’s oil wealth, many Norwegians find it hard to accept months-long queues for medical procedures, no free school lunches for children and a lack of space in public retirement homes.

“In the oil era, politicians are not rewarded for things that have gone well but punished for those that haven’t,” said Bernt Aardal from the Institute for Social Research in Oslo.

Since 1996, no sitting government has won an election. In the four decades since Norway found oil, only two governments have won re-election despite fast-rising living standards.

CRISIS ALIBI

Norway’s revenues from oil and gas activities all flow into the wealth fund, which invests them in foreign stocks and bonds to save for future generations once the black gold runs out.

The restraint is meant to avoid the “Dutch disease,” a concept named after the Netherlands 1960s gas boom led to high inflation and interest rates, currency appreciation and ultimately a decline in manufacturing and the economy.

Norwegian rules specify that “in normal years” the state can use 4 percent of the oil fund — seen as the fund’s long-term annual real rate of return — to finance budget expenditure.

Some say the global financial crisis helped the government’s election prospects by providing a strong alibi to dig a little deeper into the oil fund to stimulate sagging domestic demand.

This year it will use more than 7 percent of the fund for fiscal expansion, helping take the sting out of the main rallying cry of the Progress Party, which for years has called on governments to let loose with oil spending.

The government has benefited from its handling of the crisis while support for Progress dropped by some 10 percentage points.

Both Labor and the Conservatives look to rein in fiscal expansion as the economy recovers. Official forecasts predict the non-oil economy growing 2.1 percent in 2010.

“It will not be a policy of continuous stimulus,” Foreign Minister and senior Labor official Jonas Gahr Stoere told Reuters. “We will have to go back to more balanced expenditures which has been Norway’s trademark.”

Editing by Janet Lawrence

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