Economic Policies
#8Key Findings
Despite lingering concerns related to the country’s dependence on oil and gas, Norway’s economic policies receive a high overall ranking (rank 8). Its score on this measure has declined by 0.8 points since 2014.
The country experienced a substantial decline in GDP in mid-2020, but bounced back robustly. The economy remains strong overall, with solid public finances. A long-term transition is underway aimed at reducing dependence on oil and gas revenues, and promoting a transition to green industries. High welfare costs remain a challenge over the long term.
Flexible labor-market policies have kept unemployment low and employment rates high, in large part due to women’s high participation rates. Low layoff costs for firms foster considerable labor mobility. Income and consumption taxes are high, though corporate rates are moderate. CO2 taxes are high and poised to rise further, while non-carbon-based transport receives subsidies.
Income in the national petroleum fund remains substantial, and is used to cover the public budget deficit. With the fund’s growth, Norway has shifted from being a petrostate to becoming an investor state. This has reduced the country’s exposure to oil price shifts, but increased its exposure to volatile financial markets. R&D spending targets are very ambitious.
The country experienced a substantial decline in GDP in mid-2020, but bounced back robustly. The economy remains strong overall, with solid public finances. A long-term transition is underway aimed at reducing dependence on oil and gas revenues, and promoting a transition to green industries. High welfare costs remain a challenge over the long term.
Flexible labor-market policies have kept unemployment low and employment rates high, in large part due to women’s high participation rates. Low layoff costs for firms foster considerable labor mobility. Income and consumption taxes are high, though corporate rates are moderate. CO2 taxes are high and poised to rise further, while non-carbon-based transport receives subsidies.
Income in the national petroleum fund remains substantial, and is used to cover the public budget deficit. With the fund’s growth, Norway has shifted from being a petrostate to becoming an investor state. This has reduced the country’s exposure to oil price shifts, but increased its exposure to volatile financial markets. R&D spending targets are very ambitious.
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How successful has economic policy been in providing a reliable economic framework and in fostering international competitiveness?
10
9
9
Economic policy fully succeeds in providing a coherent set-up of different institutional spheres and regimes, thus stabilizing the economic environment. It largely contributes to the objectives of fostering a country’s competitive capabilities and attractiveness as an economic location.
8
7
6
7
6
Economic policy largely provides a reliable economic environment and supports the objectives of fostering a country’s competitive capabilities and attractiveness as an economic location.
5
4
3
4
3
Economic policy somewhat contributes to providing a reliable economic environment and helps to a certain degree in fostering a country’s competitive capabilities and attractiveness as an economic location.
2
1
1
Economic policy mainly acts in discretionary ways essentially destabilizing the economic environment. There is little coordination in the set-up of economic policy institutions. Economic policy generally fails in fostering a country’s competitive capabilities and attractiveness as an economic location.
The economy is in transition. The goal is to reduce dependence on oil and gas revenues, and to promote a transition to green, ecologically sustainable industries. The government has developed plans for raising taxes on carbon emissions and hydro and wind-based electrification of the petroleum extraction. There are growing concerns that rising housing prices and private debt levels will pose a challenge if interest rates increase.
The economy remains strong. Public finances are solid, but high welfare costs represent a challenge in the long term. The country has long enjoyed strong economic growth and near-full employment and has benefited from a well-functioning system of cooperation between the social partners.
The management of petroleum revenues – which are used domestically with prudence and otherwise invested abroad through a sovereign fund focused on equity, bonds and property assets – is held in high regard by international standards.
The state wields strong influence within the economy. 35 % of the equity on the Oslo stock exchange is under state ownership. Combined with the additional 30% under foreign ownership, this means that the share of the remaining domestic private-capital sector is relatively small. When the state makes its investments, it does so on market terms. Economic policy is generally considered to be fair and transparent. Regulatory arrangements are generally seen to be sound.
The primary strength of Norway’s economy lies in the public sector, particularly with respect to employment. The strongest areas are petroleum and petroleum-related industries such as maritime activities, as well as fisheries and fish-farming. It is a high-cost economy, both in terms of wages and taxes, and international competitiveness suffers in industries not related to the petroleum sector. However, the high level of welfare benefits and high costs also represent challenges in a period of declining revenues from petroleum activities.
Although the country has managed its petroleum wealth responsibly, the economy is still heavily dependent on petroleum. Some observers are concerned that a lack of competitiveness in the mainland economy might pose a future challenge to maintaining the country’s high standard of living and to expectations for continued high public-service standards. The downside of a petroleum-dominated economy, critics argue, is an economy that lacks entrepreneurship, is weak in terms of alternative industries and has less long-term strength than might be suggested by current favorable indicators. It also makes the economy vulnerable to changes in energy prices in world markets. These problems have now become strongly visible in the economy and a factor in economic policymaking.
The economy remains strong. Public finances are solid, but high welfare costs represent a challenge in the long term. The country has long enjoyed strong economic growth and near-full employment and has benefited from a well-functioning system of cooperation between the social partners.
The management of petroleum revenues – which are used domestically with prudence and otherwise invested abroad through a sovereign fund focused on equity, bonds and property assets – is held in high regard by international standards.
The state wields strong influence within the economy. 35 % of the equity on the Oslo stock exchange is under state ownership. Combined with the additional 30% under foreign ownership, this means that the share of the remaining domestic private-capital sector is relatively small. When the state makes its investments, it does so on market terms. Economic policy is generally considered to be fair and transparent. Regulatory arrangements are generally seen to be sound.
The primary strength of Norway’s economy lies in the public sector, particularly with respect to employment. The strongest areas are petroleum and petroleum-related industries such as maritime activities, as well as fisheries and fish-farming. It is a high-cost economy, both in terms of wages and taxes, and international competitiveness suffers in industries not related to the petroleum sector. However, the high level of welfare benefits and high costs also represent challenges in a period of declining revenues from petroleum activities.
Although the country has managed its petroleum wealth responsibly, the economy is still heavily dependent on petroleum. Some observers are concerned that a lack of competitiveness in the mainland economy might pose a future challenge to maintaining the country’s high standard of living and to expectations for continued high public-service standards. The downside of a petroleum-dominated economy, critics argue, is an economy that lacks entrepreneurship, is weak in terms of alternative industries and has less long-term strength than might be suggested by current favorable indicators. It also makes the economy vulnerable to changes in energy prices in world markets. These problems have now become strongly visible in the economy and a factor in economic policymaking.
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How effectively does labor market policy address unemployment?
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9
9
Successful strategies ensure unemployment is not a serious threat.
8
7
6
7
6
Labor market policies have been more or less successful.
5
4
3
4
3
Strategies against unemployment have shown little or no significant success.
2
1
1
Labor market policies have been unsuccessful and rather effected a rise in unemployment.
The aggregate level of employment is high by international standards, mainly due to the extensive labor-force participation of women (40% of employed women work part time). Unemployment rates are low, but the levels of absenteeism due to sickness and disability are also high, which potentially undermines the validity of low unemployment levels. The country’s labor market policy is proactive and emphasizes training and competency-building measures for the long-term unemployed. Unemployment benefits amount to 60% of an individual’s former wage, and are paid for 104 weeks. Employment-protection laws regulate dismissal procedures. Layoff costs are small for firms that need to downsize. This fosters a high level of mobility in the labor force; 20-25 % take up a new job each year. Wages in most industries are set through national, centralized bargaining between the social partners. In general, there is no legislation on minimum wages, however, due to increased labor mobility, particularly from Eastern Europe, and in order to prevent social dumping, all companies are by law subject to national agreements that have been reached between unions and employers. Social insurance coverage is universal, but benefits are wage- and employment-related. The combination of active labor market policies, high levels of mobility and generous social protection schemes makes Norway a prime example of a flexicurity model, in which labor is flexible and subject to market forces, but social security is guaranteed by the welfare state. However, there is concern in Norway over the tendency among workers to retire permanently from employment at a too low age. Since 2011, the country’s old-age and disability pension schemes have been subject to a series of reforms aimed at incentivizing prolonged economic activity and combining work with pensions. The anticipated effects on employment levels have yet to be verified.
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How effective is a country’s tax policy in realizing goals of revenue generation, equity, growth promotion and ecological sustainability?
10
9
9
Taxation policy fully achieves the objectives.
8
7
6
7
6
Taxation policy largely achieves the objectives.
5
4
3
4
3
Taxation policy partially achieves the objectives.
2
1
1
Taxation policy does not achieve the objectives at all.
Taxes on individuals, on income and consumption (VAT) are high, whereas taxes on assets and companies are comparatively low, apart from the natural resource extraction sectors, where taxes are extensive. The tax base for the public sector is broad and solid. There is a tradition for political compromises in the making of tax regimes, that aims to provide households and companies a simple and predictable system. Tax collection is conducted primarily electronically, which keeps transaction costs to a minimum. The tax system offers limited scope for strategic tax planning, and tax evasion is generally rare. Distributional regards are integrated into a progressive system of income- and payroll taxes and social security contributions. There are some subsidies for certain peripheral, geographical areas that are intended to promote investments and employment. A large share of the state’s tax revenue is spent on personal transfers in the context of the welfare state. This helps keep inequality levels low in the country while making it possible to invest heavily in infrastructure and the provision of public goods. Corporate taxation is moderate in comparison to other countries. The tax code aims to be equitable in the taxation of different types of economic activities and assets, although residential capital remains taxed at a significantly lower rate than are other forms. As a means to transforming the economy to a more sustainable, green economy, taxes on CO2 emissions are high and poised to rise further, whereas non-carbon based transport is favored by subsidies.
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To what extent does budgetary policy realize the goal of fiscal sustainability?
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9
9
Budgetary policy is fiscally sustainable.
8
7
6
7
6
Budgetary policy achieves most standards of fiscal sustainability.
5
4
3
4
3
Budgetary policy achieves some standards of fiscal sustainability.
2
1
1
Budgetary policy is fiscally unsustainable.
The Norwegian government has, since the 1990s, successfully managed the large flow of income from the extraction of offshore gas and oil. This income is projected to remain substantial over the next few decades, though it will decrease gradually as petroleum resources are depleted. This however, is partly compensated by the yield from the state petroleum fund, built up by income from petroleum taxes. The fund was created in 1990 by the Norwegian parliament as a means of sharing oil proceeds between current and future generations, and to soften the effects of volatile oil prices. The fund is administered by Norges Bank Investment Management (NBIM), an arm of Norway’s central bank, which invests exclusively in non-Norwegian assets. As the fund has grown, Norway has gradually moved away from its “petro-state” status to become more of an “investor state.” It might therefore be less harmed by fluctuating oil prices, but more exposed to global financial markets. As revenues from the fund are used to cover the public budget deficit, the Norwegian economy is increasingly sensitive to volatility in global financial markets.
Public finances remain sound, but are likely to be significantly more strained in the future. Revenues from the petroleum sector are expected to decrease, whereas an aging population implies rising costs for health and pension expenditures. The state will also have to play a key role in the transition to a less carbon-based economy. However, the population’s willingness to pay high taxes seems to be stable.
Public finances remain sound, but are likely to be significantly more strained in the future. Revenues from the petroleum sector are expected to decrease, whereas an aging population implies rising costs for health and pension expenditures. The state will also have to play a key role in the transition to a less carbon-based economy. However, the population’s willingness to pay high taxes seems to be stable.
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To what extent does research and innovation policy support technological innovations that foster the creation and introduction of new products?
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9
9
Research and innovation policy effectively supports innovations that foster the creation of new products and enhance productivity.
8
7
6
7
6
Research and innovation policy largely supports innovations that foster the creation of new products and enhance productivity.
5
4
3
4
3
Research and innovation policy partly supports innovations that foster the creation of new products and enhance productivity.
2
1
1
Research and innovation policy has largely failed to support innovations that foster the creation of new products and enhance productivity.
Norway is steadily increasing its spending on research and development (R&D), with 4% of GDP as a target. Innovation is limited by the fact that Norwegian industry and businesses spend less on research than their counterparts in other countries. Research policy is non-pluralistic, government-led and has historically not been strongly oriented toward enterprises or innovation in the market. The country’s strength lies in applied economic and social research rather than in basic and hard science research. However, there are some excellent research groups and networks. Research funding is predominantly public, and funds are distributed through a single national research council. New priorities have been given to research on marine issues and to green industries. Also, priority has been given to research and innovation that may contribute to improving efficiency and service quality in the public welfare services, including health services.
By international comparison, the country’s private sector provides little in the way of research funding. This low aggregate investment level is reflected in the relatively low number of patents that are granted. It is also relevant to note that the share of university degrees granted in science and technology is low, and that Norwegian children have fared especially poorly in scientific knowledge, at least in relative terms, in the OECD’s Program for International Student Assessment (PISA) study. However, the international rankings of some of the country’s most important universities have improved in recent years. The country would certainly benefit from a higher absolute level of investment in R&D. However, the research council’s centralized allocation of funds and state subsidies, with only limited participation by private donors, has also been criticized as a model. The council’s selection of priorities has often been too narrow. There is thus ample scope for increasing investment in academic and basic research, as well for promoting more involvement by private- and public sector actors.
By international comparison, the country’s private sector provides little in the way of research funding. This low aggregate investment level is reflected in the relatively low number of patents that are granted. It is also relevant to note that the share of university degrees granted in science and technology is low, and that Norwegian children have fared especially poorly in scientific knowledge, at least in relative terms, in the OECD’s Program for International Student Assessment (PISA) study. However, the international rankings of some of the country’s most important universities have improved in recent years. The country would certainly benefit from a higher absolute level of investment in R&D. However, the research council’s centralized allocation of funds and state subsidies, with only limited participation by private donors, has also been criticized as a model. The council’s selection of priorities has often been too narrow. There is thus ample scope for increasing investment in academic and basic research, as well for promoting more involvement by private- and public sector actors.
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To what extent does the government actively contribute to the effective regulation and supervision of the international financial architecture?
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9
9
The government (pro-)actively promotes the regulation and supervision of financial markets. It demonstrates initiative and responsibility in such endeavors and often acts as an international agenda-setter.
8
7
6
7
6
The government contributes to improving the regulation and supervision of financial markets. In some cases, it demonstrates initiative and responsibility in such endeavors.
5
4
3
4
3
The government rarely contributes to improving the regulation and supervision of financial markets. It seldom demonstrates initiative or responsibility in such endeavors.
2
1
1
The government does not contribute to improving the regulation and supervision of financial markets.
Being a small country, Norway is not a major actor in international financial regulation. However, it is a notable player in financial markets as a result of its rapidly growing sovereign wealth fund. In the area of institutional investors, it has contributed to setting standards of good financial and corporate governance. The petroleum fund itself has been a voice in international financial discussions and leads by demonstrating good practices. The set of so-called Santiago principles have established procedures for increasing transparency related to sovereign wealth funds, which has undoubtedly constrained government action in similar areas. Norway is supportive of international efforts to combat corruption, tax evasion and tax havens, and it has recently promoted initiatives such as disclosure of financial risks related to carbon emissions, and supported efforts to compel companies to report on the impact of their activities on the SDGs, ocean health and secure sound water management. In its financial regulatory policies, Norway is part of the European Union’s internal market, and complies with EU rules and regulations. Although the financial sector is heavily exposed to the petroleum and shipping industries, both of which have had to navigate difficult economic times, the financial sector remains robust and stable, which is in part a result of the regulatory reforms introduced by the government. The fund also supported the G-20-based initiative of carbon risk financial disclosure and joined a working group to explore how sovereign wealth funds can contribute to the achievement of Paris Agreement targets.