Europe

Norway's outgoing government proposes wealth fund spending cut

2 minute read

Prime Minister of Norway Erna Solberg speaks at the SDG Moment event as part of the UN General Assembly 76th session General Debate in UN General Assembly Hall, New York City, U.S., September 20, 2021. John Angelillo/Pool via REUTERS

  • Conservatives to be replaced by left-centre coalition
  • New government has only weeks to amend budget
  • 2022 deficit "markedly higher" versus 2019

OSLO, Oct 12 (Reuters) - Norway should sharply cut spending from its $1.3 trillion sovereign wealth fund in 2022 as the economy rebounds from the pandemic, the outgoing centre-right minority government told parliament on Tuesday.

In one of its last official acts before stepping down later this week, the government proposed withdrawing 322.4 billion Norwegian crowns ($37.6 billion) from the wealth fund next year, down from 406.8 billion crowns in 2021.

The government of Conservative Party Prime Minister Erna Solberg lost last month's election for parliament and will be replaced by a coalition of the leftwing Labour Party and the rural Centre Party.

The new government will have only a few weeks to introduce its own budget amendments and is thus expected to incorporate a significant part of Solberg's spending plan for 2022.

In it, the so-called structural non-oil deficit for next year was set at 2.6% of the fund's expected value at the end of 2021, the finance ministry said, well within parliament's 3.0% spending cap.

Projected spending for 2021 corresponds to 3.6% of the fund's value under a rule that allows extra withdrawals in times of economic hardship, below the 3.7% projected in May.

EXPANSION OF FISCAL POLICY?

The 2022 budget deficit is "still markedly higher" compared to 2019's, before the pandemic began and extraordinary measures to support the economy were put in place, economists at Nordea Markets said.

It "should not be seen as a contractionary budget," they said in a note, with the amount of money used from the wealth fund amounting to an increase to 10% of trend mainland GDP in 2022 from 7.4% in 2019.

"This is a clear expansion of fiscal policy," Nordea said.

Mainland gross domestic product, also known as non-oil GDP, is expected to grow by 3.9% in 2021, up from the 3.7% seen in May and more than reversing the 2.5% contraction of 2020, with a further expansion of 3.8% next year.

The wealth fund, which invests proceeds from the country's oil industry in foreign assets, is worth about $250,000 for every Norwegian citizen.

($1 = 8.5759 Norwegian crowns)

Editing by Gwladys Fouche, Kirsten Donovan and Barbara Lewis

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