Norway’s high rate of vaccination has helped limit the impact of COVID-19 on the population and economy. GDP per capita remains among the highest in the OECD and output growth is expected to be solid over the next two years. Nevertheless the country faces challenges to sustain its strong socio-economic outcomes. This chapter looks at the increases in consumer-price inflation, Norway’s ever more expensive housing and the rising pressures on government budgets. It also examines how to strengthen labour force participation and productivity, as well as how to deliver on green transition.
OECD Economic Surveys: Norway 2022
OECD Economic Surveys: Norway
1. Key Policy Insights
Abstract
Norway has been more successful than many countries in limiting the spread and the health impact of COVID-19. Furthermore, the downturns in the economy during the pandemic have been comparatively mild (Figure 1.1). Substantial fiscal and monetary policy support has helped households and businesses through the crisis. As elsewhere, vaccination has been key to reopening of the economy. Following a short downturn due to the Omicron wave, the level of economic output will run slightly above trend over the next two years. Norway’s policymakers can now principally focus on ensuring macroeconomic stability in the wake of recovery and on addressing structural challenges.
Fiscal support during the pandemic has brought necessary relief to businesses and households and generated non-oil deficits considerably above the long-term guideline set by Norway’s fiscal rule (Figure 1.2). Phase out of most extraordinary measures was almost completed when the Omicron wave hit and renewed temporary measures were introduced. However, from spring 2022, fiscal spending is once again expected to return to more sustainable territory, below the guideline value in Norway’s fiscal rule. As in many other countries, headline consumer-price inflation has been pushed up significantly; in Norway, mainly due to large increases in electricity prices. Housing in Norwegian cities has become still more expensive with a new surge in prices during the pandemic (Figure 1.2). This has further raised risks to macro-financial stability from mortgage debt.
Norway continues to have good outcomes on many economic and social dimensions. GDP per capita remains among the highest in the OECD. Also, the country is broadly successful in its prioritisation of low inequality and the universal provision of core public services, including health and education. The gap between the highest and lowest incomes is among the smallest in the OECD area and rates of poverty are low. The gender wage gap is small. Norway generally scores well in subjective indicators of well being. Furthermore, survey data suggest Norway has among the highest levels of trust in the civil service and in government in comparison with other OECD countries.
Figure 1.1. Norway’s pandemic output and employment losses have been comparatively small
Source: OECD (2021), OECD Economic Outlook (database).
However, there are challenges in ensuring Norway’s good outcomes are sustained amid post-pandemic economic adjustment, continued population aging and the greater urgency in tackling climate change. Labour force participation needs to increase to ensure the high levels of employment that are a key pillar of Norway’s socio-economic model. Twenty years ago, Norway’s labour force participation rate was around one percentage point below the average of the top-five OECD participation rates. In 2019 it was around four percentage points below (Figure 1.2). Trend productivity growth has been picking up but remains below the rapid growth of the early 2000s (Figure 1.2). Higher private-sector productivity growth is needed to help businesses remain competitive. Improved public-sector productivity can strengthen the quality and efficiency of public services. The house-price surge has made it harder for young and low-income households to save for a deposit, weakening homeownership accessibility. Many low-income households devote a substantial proportion of their income to rents. Meanwhile, economic activity needs to adjust to obtain faster decline in net greenhouse-gas emissions; Norway is committed to approximately halving net emissions from current levels by 2030 and to achieving very low gross emissions by 2050 (Figure 1.2).
Figure 1.2. Norway faces challenges in government budgeting, house prices, labour-force participation, productivity and greenhouse gas emissions
1. The 3% deficit path is the deficit implied by the 3% rule for wealth fund spending. This measure of the structural non-oil deficit includes the additional spending from discretionary measures to support the economy during the COVID-19 pandemic, but not the effect of automatic stabilisers.
2. Labour productivity for the OECD is measured as output per worker instead of per hour worked.
3. Projections under current implemented policies do not include reductions that are intended via participation in the EU-ETS. Norway’s emissions targets are in “gross” terms, meaning notably that the CO2 absorption from forestry is not included.
Source: Ministry of Finance, National Budget 2022; Calculations based on Real Estate Norway (Eiendom Norge) data; OECD (2022), Analytical house prices database; OECD (2021), Employment and Labour Market Statistics (database); OECD (2021), OECD Economic Outlook (database); and Climate Action Tracker, Country Assessments 2020 - http://climateactiontracker.org.
The main messages of this Survey are:
Sustained economic recovery from the pandemic is increasingly assured, despite setback due to the Omicron wave. Widespread vaccination in Norway has reduced the impact of COVID-19 on the economy. Withdrawal of monetary stimulus should continue. Reduction of fiscal stimulus should recommence as health conditions improve. Tax and public spending policies need to create room for new initiatives while remaining within the fiscal rule. A close watch on price and cost developments is needed given the sharp price increases in recent quarters.
Structural policy should focus more fully on ensuring higher levels of productivity and employment, and on green transition. Insolvency processes for business require attention to help boost productivity growth. Further reduction in disincentives to remain in work, notably in sickness leave compensation and disability benefit, would help to boost employment. Climate change policy is sound on many fronts, however additional action is needed to ensure a large decline in emissions.
Improving housing affordability requires enabling the construction sector to respond faster to changes in demand and ensuring a good level of targeted support to vulnerable low-income households. Demand for home buying needs to be re-balanced through reducing tax biases favouring owner-occupied housing over investments in other assets.
Box 1.1. The new coalition government’s economic policies
A new coalition government is in office following the September 2021 election. It comprises the Labour Party (Arbeiderpartiet, AP) and the Centre Party (Senterpartiet, Sp) whose origins lie in representing Norway’s rural communities and farmers. The Labour Party has 48 seats and the Centre Party 28, so the coalition has 76 seats, falling short of a majority (85 seats are required for a majority in the 169 seat parliament). The Socialist Left Party (Sosialistisk Venstreparti, SV) (13 seats) is likely to play an important role supporting the government.
The new government is prioritising distributional, regional and climate policies. Themes of the government’s economic policy agenda include:
Increasing the tax burden born by high-income and wealthy households (i.e. more “progressivity” in the tax system), while keeping the overall tax burden on labour income constant. The wealth tax has been increased. The difference in income taxation between those with incomes below NOK 750 000 per year (roughly EUR 75 000) and those with income above this threshold has been widened. Furthermore, a temporary support scheme to compensate households for 80% of the electricity prices above a threshold of NOK 0.70 per kWh) and a cut in the electricity tax have been introduced in response to higher electricity prices.
Advancing green transition, including through increasing the price of carbon. Some offsetting policy adjustments have been introduced, including reduced taxation of vehicle use and ownership.
Encouraging full-time and permanent contracts over part-time and temporary work.
Greater support to households for childcare. For instance, the supplementary Budget for 2022 (published in November 2021) announced a reduction in the price ceiling for child care services, and this has been decided in the Parliament.
More support for rural communities. Government intentions include narrowing the gap between incomes in the agricultural sector and the rest of the economy and a pilot scheme of “rural growth agreements” for municipalities. The supplementary Budget for 2022 included proposals to increase support for agriculture, the fishing industry, and rural broadband.
Widespread vaccination has helped limit the impact of COVID-19
Though recent surges in infections brought new peaks in case numbers and fatalities, the cumulative case and fatality rates from COVID-19 have remained below the OECD average throughout the pandemic (Figure 1.3). Since the start of the pandemic Norway has experienced around 250 COVID-related deaths per million persons, compared with over 1 500 deaths per million in the OECD as a whole. A large proportion of the population has been vaccinated.
Early introduction of containment measures is thought to have contributed to Norway’s comparatively good outcomes. In particular, early implementation of international travel restrictions probably helped avoid the much higher number of cases seen in many other countries. Also, Norway’s comprehensive welfare support (bolstered by additional measures during the pandemic) reduced the risk of contagion -- for instance because individuals with symptoms were well supported financially if they did not work. The comprehensive public health care system has played a central role towards an effective response in treatment, testing and vaccination. Contextual factors that may have contributed towards relatively good outcomes include Norway’s low population density, a culture of following regulation and high trust in government. Furthermore, extensive broadband coverage has facilitated teleworking.
Risks to the economy from further COVID-19 outbreaks remain, as demonstrated by the emergence of the Omicron wave at the end of 2021. Countries with a substantial share of the population vaccinated, such as Norway, have been better able to withstand new waves of COVID-19 cases. Instances of serious illness are much lower, meaning less risk to individuals and less pressure on the health care system. The slow pace of vaccination in many developing countries, principally due to challenges in supply and distribution, raises global risks of new variants of COVID-19 emerging; travel to and from many countries remains restricted (Box 1.2).
Box 1.2. Norway’s engagement in accelerating global vaccination
Norway is engaged in international cooperation to mitigate the COVID-19 pandemic and to improve the multinational architecture for future pandemic preparedness and response. Norway co-leads the Facilitation Council for the Access to COVID-19 Tools – Accelerator (ACT-A) together with South Africa and is engaged in the international dialogue on future health security cooperation including establishing a new global financing mechanism for better pandemic preparedness. Norway has so far granted around NOK 6.5 billion to combat COVID-19 under the ACT-A. In addition, Norway has donated 5 million vaccine doses for low and lower-middle income countries under the vaccine pillar of ACT-A, COVAX.
Sources: The Access to COVID-19 Tools (ACT) Accelerator (who.int); Remarks by Jonas Gahr Støre, Prime Minister, Norway at the 8th ACT-Accelerator Facilitation Council (who.int).
Figure 1.3. Norway’s COVID-19 fatalities remain comparatively low, most of the population is vaccinated
1. The Oxford COVID-19 Government Response Tracker index is a composite measure based on nine response indicators including school closures, workplace closures, and travel bans, and is scaled from 0 (no restrictions) to 100 (highest category of restrictions). The unweighted OECD average covers all OECD countries where data are available for all components.
Source: Oxford University and Our World in Data.
Several indicators are suggesting enduring shifts in work habits and changes in where people want to live in the wake of the pandemic. As elsewhere, the crisis has led to a realisation that for many occupations teleworking is more feasible than previously thought possible. A lasting shift in work habits looks likely, though the magnitude of it is uncertain. Norwegian mobile phone data show that in October 2021, when there were very few restrictions, presence at work places was around 10% below pre-pandemic levels (Figure 1.4). A permanent reduction in the frequency of travel to workplaces would suggest:
Shifts in the geography of housing demand. Norges Bank research using property register transactions has found evidence of reduced demand for large flats and greater demand for detached houses (Lindquist et al., 2021[1]). There has reportedly also been strong increase in the demand for leisure homes.
Less use of public transport systems. Mobile phone data indicate that use of public transport systems is still below pre-pandemic levels, despite the return of aggregate economic activity and employment to pre-pandemic trend (Figure 1.4).
Reduced demand for work spaces, particularly office space, as employers adjust to more employees teleworking (though this could be offset by need for increased space per worker if distancing rules are maintained).
Lower demand for goods and services provided in business districts, and greater demand in residential areas. For instance, shrinkage in services linked to eating, entertainment and exercise in or near work places would seem likely.
Figure 1.4. A similar downshift in use of workplaces and public transport as other countries
Percentage change in the number of visits recorded on mobile devices relative to early 2020, 7-day moving average
Note: This dataset from Google measures visitor numbers to specific categories of location (e.g. grocery stores; parks; train stations) every day and compares this change relative to baseline a day before the pandemic outbreak. Baseline days represent a normal value for that day of the week, given as median value over the five‑week period from January 3rd to February 6th 2020. Measuring it relative to a normal value for that day of the week is helpful because people obviously often have different routines on weekends versus weekdays. The data are not seasonally adjusted.
Source: Google COVID-19 Community Mobility Reports via Our World in data (https://ourworldindata.org/grapher/visitors-transit-covid).
The economy continues to strengthen, but risks remain
Norway’s aggregate economic output is close to pre-pandemic trend, despite a temporary slowdown in activity from the Omicron wave. The OECD’s latest Economic Outlook (published December 2021) envisaged mainland output growth of 4.2% in 2022 and 1.7% in 2023. Due to the Omicron wave mainland output growth is expected to be weaker than previously forecast in 2022 but stronger in 2023; provisional estimates are for real mainland GDP growth of 3.7% in 2022 and 2.2% in 2023 (Table 1.3) (note, mainland output excludes oil and gas production and shipping). The level of real mainland GDP is still expected to run slightly above estimates of the pre-pandemic trend over the next two years (Figure 1.5). Household consumption will continue to contribute significantly, helped by the additional spending power from savings accumulated during the initial phases of the pandemic. Norges Bank lending surveys suggest the savings accumulated during lockdowns were not widely used to make additional mortgage payments, or towards down payments (Norges Bank, 2021[2]). So it would appear considerable savings are indeed available for further consumption.
Some sectors have been severely affected by the pandemic (Figure 1.6). Some experienced very large drops in activity in the initial months of the pandemic. Notably activity in accommodation and food services dropped by around 50% in the second quarter of 2020. This and other hard-hit industries had since seen significant recovery, before renewed tightening of containment measures in mid-December 2021. Meanwhile some sectors have seen increased activity over the pandemic. Retail has broadly fared well, reflecting substitution in spending from services to goods. In terms of specific sectors, predictably, activity in home delivery services grew rapidly. Also output increase in furniture manufacture and the manufacture of wood products has been large. These developments may link to surges in spending on interior decoration and home office equipment when rates of teleworking were high.
Figure 1.5. Output is close to its pre-crisis trend
Note: Panel A: The pre-crisis growth path is based on the November 2019 OECD Economic Outlook projection, with linear extrapolation for 2022 and 2023 based on trend growth in 2021. The December 2021 Economic Outlook projection was finalised end-November 2021 and the provisional projection was made in February 2022.
Source: OECD (2019), OECD Economic Outlook 106 and OECD (2021), OECD Economic Outlook 110 (databases); and provisional updates.
Figure 1.6. Most sectors hit hard by the pandemic are recovering, though not all
Output volume relative to pre-pandemic output Q4 2019, in %
Note: Calculations are based on national accounts value added data at 2018-prices, seasonally adjusted.
Source: Calculations based on data from Statistics Norway.
Given the prospect of total output running slightly above pre-pandemic trend when the economic impact of the Omicron wave has passed, macroeconomic stimulus should continue to be withdrawn (Figure 1.7). Prior to the recent surge in infections, fiscal revenues had grown and spending on government transfers had diminished as households and businesses returned to normal levels of economic activity. The government has been able to withdraw most of the temporary support programmes, though some support was reintroduced to combat the Omicron wave (Box 1.3). Norges Bank has begun raising its key policy rate, partly due to the rising price pressures. A first increase was made in September 2021, with a hike from zero to 0.25% and a second increase to 0.5% in December. The policy rate forecast indicates the rate will rise to 1.75% towards the end of 2024 (Norges Bank, 2021[2]). Thus far, the pace of stimulus withdrawal, both fiscal and monetary, appears appropriate. Norway’s fiscal support has mostly come through subsidies (as opposed to loans, guarantees and deferrals of tax liability), which reduces the risk of debt overhang and bankruptcies going forward, also making investment prospects brighter. According to IMF data, the total value of support has been relatively small in international comparison (Figure 1.8). Despite the improving economic outlook, the authorities must remain vigilant and responsive to any shift in circumstances, as proved necessary in mid-December 2021.
Figure 1.7. Normalisation of monetary and fiscal support is underway
1. Taylor-rule estimates are based on a backward-looking monetary-policy reaction function and OECD economic projections.
2. Annual change in the structural non-oil deficit. Estimated to be zero in 2021.
3. Automatic stabilisation data are calculations supplied by the Ministry of Finance. Estimated to be zero in 2021.
Source: Norges Bank; Statistics Norway and OECD calculations; and Ministry of Finance.
Figure 1.8. Norway’s package of fiscal support relied more on income support than on support through equity, loans and guarantees
Discretionary fiscal response to the COVID-19 crisis, % of GDP
Note: Estimates as of September 27th, 2021. Data include COVID-19 related measures since January 2020 and cover measures for implementation in 2020, 2021, and beyond.
1. According to the classification of economies in the IMF Database of fiscal policy responses to COVID-19, i.e. : Australia, Canada, France, Germany, Italy, Japan, Korea, Spain, United Kingdom, United States, Belgium, Czech Republic, Denmark, Finland, The Netherlands, New Zealand, Norway, Singapore, Sweden, Switzerland.
Source: IMF (2021), Database of fiscal policy responses to COVID-19.
Box 1.3. Special measures to support households and businesses during the pandemic
With an already comprehensive welfare system, existing benefit schemes could be adapted to provide much of the additional support to households during the pandemic. For instance, unemployment benefit was made more widely available and more generous in length and pay out (Table 1.1). As shown in later sections on fiscal policy, outlays on extensions to schemes in 2020 were equivalent to around 0.5% of GDP (regular outlays on the schemes also increased substantially). Many other measures were extended or introduced. These targeted specific groups and circumstances, such as compensation for parents having to remain at home due to school closures (an extension of existing parental benefits). In addition, some of the support for businesses was, in effect, also support for households, such as the wage subsidy for employers to re-employ temporary lay-offs. Most additional support had been withdrawn by the end of 2021, however some was re-introduced following the emergence of the Omicron wave in December 2021. This recent support included a new temporary wage subsidy for businesses. Norway’s extra support to businesses has been wide-ranging. It has included subsidies, reductions in employer contributions, tax deferrals, loan assistance and targeted support for a wide range of specific sectors (Table 1.2). Most measures were planned to be withdrawn during the last part of 2021, including the most prominent scheme, a subsidy which covered a proportion of fixed business costs for companies facing losses as a result of the pandemic (businesses had to pass criteria demonstrating at least 30% loss of income). This scheme was prolonged for November-December 2021 and the first two months of 2022. The scheme was introduced rapidly, and was subsequently adjusted in light of experience to make it better targeted. For example, a deductible was removed during the first months. Furthermore, the scheme was scaled up and down according to the health situation. In the scheme’s latter stages the alterations notably included substantial reduction in support for medium turnover losses partly due to concern about adverse effects around the threshold of 30%. As the economic emergency diminished, there was concern that the scheme was holding back economic recovery with businesses calculating it better to remain closed and eligible for subsidies than reopening in an uncertain economic environment. This is, in part, why the subsidy was tightened in times of economic improvement. In light of the spread of the omicron variant, the scheme was made more generous for November-December 2021.
Table 1.1. Government support for households during the COVID-19 crisis, selected measures
Source: OECD
Table 1.2. Government support for businesses during the COVID-19 crisis, selected measures
Source: OECD
One concern for the outlook is that the business sector may be weaker than appears in the data. Businesses and employment have been supported by various programmes, and thus the true state of economic recovery may be less robust than it appears. Activity in some sectors, though much recovered, remains below pre-pandemic levels and the increase in electricity costs will be weighing on many businesses. Furthermore, indicators on the health of the business sector have not always worked well in the wake of the pandemic downturn. For instance, bankruptcy filings temporarily stopped being a guide to the extent of business failure, inter alia due to less bankruptcy filings from the tax authorities during the pandemic and the introduction of a temporary scheme for tax deferrals (Figure 1.9). Further business failures may emerge, particularly in sectors hard hit by the crisis. Some evidence suggests risk of this materialising into a serious threat to economic recovery looks to be small. Norges Bank research finds that collecting deferred VAT will hardly trigger a wave of bankruptcies (Norges Bank, 2021[2]). Also, under a temporary scheme businesses are able to pay deferred tax debt bills in monthly instalments. Nevertheless, the risk of a destabilising wave of weak business performance, including bankruptcies, should not be discounted completely.
Table 1.3. Macroeconomic indicators and projections
Note, unless otherwise stated, these projection numbers are from a provisional economic forecast by OECD Secretariat completed in February 2022.
1. GDP excluding oil, gas and shipping.
2. Also includes shipping sector.
3. Following the approach taken by the Norwegian authorities, oil-sector investment is included in mainland GDP as most of the investment activity takes place on the mainland.
4. Contributions to changes in real GDP, actual amount in the first column.
5. Including statistical discrepancy.
6. Employment growth includes an adjustment to take account of a break in the data between 2020 and 2021.
7. Consumer price index excluding food and energy.
8. Year-on-year changes in this balance roughly equate to year-on-year changes in the Central-government structural non-oil balance.
9. Figures published in the government’s latest budget proposals.
10. The central-government non-oil balances notably exclude offshore-sector tax revenues and income from the Government Pension Fund Global. These balances are percentage of trend mainland GDP.
11. The “Structural Non-oil Balance” is the focus of government budgeting. “Structural” refers to adjustment for the business cycle made by the Ministry of Finance.
12. At the beginning of the year.
Source: OECD (2021), OECD Economic Outlook 110 (database); Statistics Norway; and Ministry of Finance.
Figure 1.9. Bankruptcies have so far been lower during the pandemic
New bankruptcy proceeding started, s.a.
Source: Statistics Norway and OECD calculations.
Uncertainty about the future global price of oil, and more broadly the future of the petroleum sector, is a perennial source of upside and downside risk for activity and incomes relating to the industry. Dramatic fall in the oil price in the initial months of the pandemic contributed to a decline in investment activity in the sector. With intensifying global awareness of climate change, it is possible that Norway’s transition away from oil and gas activities may be faster than previously expected, while the current high gas prices may point in the other direction. As discussed in previous Surveys, it is the speed of the transition from petroleum to other activity that will determine whether there are critical macroeconomic consequences for the Norwegian economy. If labour and capital resources can be reallocated away from the oil and gas sector and related industries at a speed that avoids substantial increase in unemployment or stranded assets, then the transition will be comparatively benign. Already, the Norwegian economy is less oil dependent than only a few years ago and has proven its strong ability to adjust. Oil companies have gone through a cost-cutting process, lifting profitability even at low prices. Employment in petroleum related activity has fallen by a third. Gas is becoming an increasingly large part of Norwegian petroleum-sector production. Furthermore, natural gas has a key role in the global energy transition. It enables increased and faster phasing out of coal for some European countries. Natural gas with carbon capture and storage might also be an important source for hydrogen production. The current energy crisis in Europe and geopolitical risks also illustrate the importance of stable and reliable gas deliveries to the European market.
Table 1.4. Events that could lead to major changes in the outlook
Financial stability: costs, prices and wages on watch, household debt still high
Recent energy-price increases are most likely temporary, but more persistent wider price pressure is a risk
In recent quarters, headline consumer price inflation has been strongly driven by large electricity price increases. Norway is connected to the European electricity grid but, as is typical in electricity markets, limitations in transmission capacity mean that, to an extent, electricity prices have a different level and dynamic from neighbouring markets (similarly, there are price differences across regions within Norway). Norway experienced particularly sharp electricity-price rises in late 2020 and in the autumn of 2021 (Figure 1.10., Panel E). Economic recovery, plus cold weather, boosted demand for electricity. Supply was, inter alia, affected by below-average wind and dry weather in southern Norway, the latter affecting hydropower generation. Growing global demand for liquefied natural gas (LNG) and consequent growth in natural gas prices in Europe have also played a role (Norges Bank, 2021[2]). As Norwegian households typically have variable-price electricity supply contracts, there is strong transmission from wholesale prices into retail energy bills. There is support to help with paying bills via social welfare; low-income households may receive a higher municipal social assistance payment where electricity costs are included in the municipality's means testing for benefits. Concern for the impact of recent electricity-price increases has prompted temporary compensation by central government (Box 1.4). In addition, a cut in the tax on electricity has also been introduced. Both the temporary compensation and the tax cut benefit all households, including higher-income households that can likely cope with high electricity prices. These policies are therefore an inefficient way to address concerns for energy affordability, which are primarily a concern for low-income households.
Figure 1.10. Norway’s headline consumer price inflation has been pushed up by large energy-price increases
Note: OECD-Europe includes OECD countries that are also European countries. Geographic definition of Europe including Turkey.
Source: OECD (2021), Main Economic Indicators (database); and OECD calculations.
Box 1.4. Norway’s temporary electricity-bill compensation scheme for households
Concern for the impact of high electricity prices on the cost of living prompted the government to introduce a temporary compensation scheme. For the month of December 2021 the scheme refunded 55% of the cost of electricity above a price of 0.70 NOK per kWh. For the period January to March 2022 the refund rate has been increased to 80%. The refund is capped at 5 000 kWh per household. It is made automatically on a household’s electricity bill and the power supply companies are compensated by the government. The government aims at introducing a similar scheme for the agricultural sector.
Similar to elsewhere, there are concerns about the effects on consumer prices of global supply bottlenecks in computer chips, lumber and shipping (notably reflected in high container prices). Some impact is apparent in consumer prices . For instance, maintenance and repair of dwellings showed sharp growth in mid-2021, reflecting a short-lived but substantial increase in lumber prices. However, so far the impact on overall prices in Norway of international supply-chain disruption has been small.
Meanwhile, however, a close watch on wage pressures is required. The pressures are growing with rising labour demand, relatively small inflows of foreign workers during the pandemic and the increase in consumer price inflation. A key question is whether the pressures start to fuel a generalised wage-price spiral. Certainly, labour market developments in some industries have been dramatic. At least prior to the Omicron wave, the vacancy rate in the accommodation and food services sector was high and with it, growth in average employee remuneration (Figure 1.11) (there is some concern that support for furloughed workers may be contributing to labour shortages in the sector, (Norges Bank, 2021[2])). Furthermore, recent quarterly wage data have indicated that more general wage growth may be underway, though more data points are needed to confirm this (Figure 1.12). Norway’s centralised wage-setting process limits the risk of wage-push inflation as it ensures macroeconomic considerations are typically given considerable weight in employee wage demands (the trade-exposed manufacturing sector is always the first sector that negotiates, providing a benchmark wage increase to other sectors). This said, when profits in the export sector are large, which has been the case in recent quarters due to higher oil and gas prices, then the guideline wage also increases.
It seems most likely that the recent pressures on consumer-price inflation will not spark a generalised surge in wage and price inflation. Norway’s headline consumer-price inflation has largely been pushed up by energy price hikes that have origins in temporary events, such as weather-related influences on hydroelectricity supply. A downward correction in energy prices, and headline inflation, seems likely. Core inflation remains moderate.
Nevertheless, an outbreak of generalised price and wage inflation cannot be ruled out. Despite the anchoring provided by Norway’s centralised wage bargaining system, wage inflation could see substantial increase. The tightening labour market has put employees in a strong position to ask for higher wages in response to rising living costs. Wage hikes would feed back into business costs, and likely output prices.
Figure 1.11. Remuneration and vacancies increased markedly in hospitality in 2021
Note: Panel A: Payment in cash includes all payments in cash from the employer including basic monthly earnings, fixed and variable allowances, bonuses, overtime pay and other payments in cash. Panel B: The job vacancy rate measures the proportion of total posts that are vacant.
Source: Statistics Norway.
Figure 1.12. Quarterly data indicate a more general increase in wage growth may be underway
Average nominal basic wage
Note: The basic wage index excludes supplementary components of earnings, such as overtime and bonuses. The wage index is for all industries and therefore changes in the index may reflect compositional changes in employment alongside changes in individual employees’ wages.
Source: Statistics Norway.
House prices and related debt remain a potential source of financial instability
Steep rises in house prices over the pandemic have added to past surges in the cost of home purchase. Canada, Sweden and Australia are among the OECD countries that have found themselves in a similar position (Figure 1.13). Expansionary monetary policy has been a contributory factor. Studies suggest that in Norway a 1 percentage-point reduction in the interest rate will lead (over time) to a pre-tax increase in house prices of between 4% and 11% (Norges Bank, 2021[2]). Higher savings arising from reduced consumption opportunities during lockdowns, and the prospect of more time working from home are also likely to have fuelled demand for housing, including renovation and upgrade. Lift-off in rate normalisation is likely to temper price growth. This may have already been playing a role in the recent softening of price growth seen in some areas, including Oslo. An estimate of the “fundamental” house price index by Norway’s Housing Lab research unit suggests the country’s house prices were overvalued by around 13% as of the second quarter of 2021, before Norges Bank begun raising its policy interest rate (the approach factors in household income, interest rates, and housing stock per capita).
Figure 1.13. House prices and debt are elevated
Source: Norges Bank; OECD Economic Outlook database; OECD dashboard of household statistics; and Refinitiv Datastream database.
The recent house-price increases, and further mortgage borrowing linked to this, add to risks of a correction with impacts on the wider economy. The most important channel would be through household consumption. House-price correction would directly damp consumption through negative wealth effects, precautionary saving responses and reduced expenditures related to the purchase and sale of housing (such as spending on renovation and interior decoration (OECD, 2019[3]). Weakening household consumption could, inter alia, feed through to the business sector, prompting business-loan losses for banks and an increase in mortgage borrowers encountering financial difficulty.
Furthermore, high household debt also makes Norway more vulnerable in the event of downturns, whether stemming from house-price correction or otherwise. Capitalisation requirements and safeguards in mortgage lending appear sufficient to avoid a direct risk to banks via mortgage default (see below). However, high household debt-servicing commitments imply large cutback in consumption in the event of a downturn in incomes. As most mortgages are variable-rate, changes in the interest rate directly impact a majority of mortgage holders. The substantial increase in the household saving ratio over the pandemic suggests many households currently have a buffer to handle any additional debt-servicing requirements. However, it is expected this will be eroded due to pent up demand boosting consumption of goods and services.
In addition, high household debt raises risks related to bank wholesale funding. Norwegian banks rely quite heavily on wholesale funding, much of it comprising covered bonds that are collateralised against mortgages. These bonds provide cheap and stable funding. However, there is substantial cross holding of these bonds within the Norwegian financial sector; over half the value of covered bonds is held by banks and mortgage institutions. This interconnectedness increases risks. For instance, a liquidity problem could balloon if banks simultaneously sell off covered bond holdings.
Macro-financial risk from Norwegian banks’ large holdings of commercial real estate has also grown in the wake of the pandemic. About half of banks’ exposures to the Norwegian corporate sector are in this segment. Norges Bank’s latest assessment (Norges Bank, 2021[2]) envisages a pick-up in commercial real estate rents in the near term as the economy recovers further. Further ahead, however, there is possible downside risk once businesses fully adjust to operating with more employees teleworking and consequently reduced needs for office space. As suggested in previous Surveys, additional data collection that gives a better picture of market developments would be helpful. In a welcome development on this front Norges Bank has recently switched to a new provider of statistics of prime office space that will provide data on a broader set of office premises (Norges Bank, 2021[4]).
Given these post-pandemic risks and normalisation of economic activity, macro prudential instruments are, sensibly, being maintained. Increases in Norway’s countercyclical buffer (part of bank capitalisation requirements) were announced in June 2021 (as part of the emergency economic response in early 2020, the buffer had been cut from 2.5% to 1%, Figure 1.14). Norges Bank has announced an intention to lift the countercyclical buffer requirement back to the pre-pandemic level from July 2023. Regulations on mortgage and consumer loans were renewed without alteration in January 2021. These include caps on loan-to-value ratios and on the ratio of debt to income (Box 1.5). Evidence from new loans prior to the pandemic showed that both these regulations were indeed limiting lending activity (see the 2019 Survey). During the pandemic they will have helped limit the growth in housing and mortgage demand prompted by the sharp reduction in the policy rate.
Box 1.5. Norway’s macroprudential measures on mortgages and consumer loans
Rules imposed by financial authorities on mortgage-lending and consumer loans are a core channel through which financial-market policy aims to ensure prudent lending to households. Bank capital requirements and the monitoring of financial institutions (for instance via the scrutiny of balance sheets or detailed lending data) are the two other main channels. Norway’s macroprudential rules on mortgage lending and consumer loans principally comprise caps on the value of a loan in relation to the value of the property being purchased (loan-to-value ratio) and a limit on a household’s total debt in relation to its income (debt-to-income limit) (Table 1.5). Lenders are also required to check that the borrower can cope with an increase in the interest rate (stress test). Interestingly, Norway’s macroprudential rules include some geographic variation; some mortgage rules are tougher for purchases in Oslo than in other parts of the country. Also, there are “flexibility quotas” that provide financial institutions scope to provide some loans that exceed the limits set.
Table 1.5. Details of Norway’s macroprudential rules on mortgages and consumer loans
Source: Lending Regulation, press release posted 25 October 2021, Ministry of Finance.
Figure 1.14. Bank capital buffers are being expanded now the crisis is receding
Ratio of Common Equity Tier 1 (CET) requirements to risk-weighted assets, Norwegian Banks
Note. Norges Bank has signalled an increase in the countercyclical buffer for July 2023.
Source: Norges Bank (2021), Norway’s Financial System and Norges Bank press releases.
Assessment of price inflation facing households, and analysis of monetary stance and financial stability, would be helped if the housing components of Norway’s consumer-price index more strongly reflected housing market developments. Together with a measure of market rents, Statistics Norway, like many other national statistical agencies, includes in the CPI an estimate of the implied cost of housing for owner-occupiers. To do this they assume that so-called “imputed rents” to owner-occupied dwellings evolve in line with market rents. This type of “rental equivalence” approach is appropriate in countries where rental markets are large, and representative of the broader housing market. This is not the case in Norway: the rental market is relatively small compared with that for owner-occupied dwellings, and caters to a different segment of the population. Consequently, the price dynamics for rental and owner-occupied properties can differ. Furthermore, it is in principle harder to infer growth in imputed rents from observed growth in market rents. Alternative methods, notably approaches based on tracking the user cost of housing, can be more appropriate in such settings. In Canada, a price index for owned accommodation is constructed by estimating movements in costs related to mortgage interest, repairs and maintenance, depreciation and taxes. This can help ensure the impact of housing price movements is reflected in growth in the CPI. In light of such approaches, and initiatives elsewhere, for instance by the European Central Bank (ECB, 2021[5]) consideration should be given to a measure for owner-occupied housing costs that more fully reflects housing market developments.
Table 1.6. Past recommendations on macroeconomic and financial stability
Fiscal policy: keeping on track with the fiscal rule
Like other Nordic countries, Norway’s public spending is comparatively high, reflecting a commitment to comprehensive public provision of services and welfare support integral to its socio-economic model. In any given year, Norway’s government outlays as a share of mainland GDP are often the highest in the OECD area (Figure 1.15). (Needless to say, the differences in public spending between Norway and other countries do not necessarily wholly reflect differences in provision. For instance, pension provisions in some other countries are centred on mandating saving into pension accounts that does not feature in public spending). Norway’s large outlays are partly funded by petroleum wealth through a fiscal system that allows it to run substantial mainland-economy budget deficits for the benefit of current and future generations (Box 1.6). Nevertheless, the tax revenues required are large and mainland Norway’s ratio of general government revenue to GDP is also among the highest in the OECD.
Figure 1.15. Norway’s socio-economic model involves high government spending and taxation
% of GDP
Note: Norway total general government mainland receipts minus mainland property income received, as % of mainland GDP; and total general government disbursements as % of mainland GDP.
Source: OECD (2021), OECD Economic Outlook (database).
Norway’s fiscal system worked well during the pandemic
Norway’s wealth-fund system (Box 1.6) has proved effective over the pandemic. Channelling public revenues from resource extraction into a wealth fund avoids the fiscal problems that can arise when such revenues feed directly into government balances; for instance when oil prices drop suddenly, as happened in the early phase of the pandemic. Indeed, the wealth-fund system operates counter cyclically; an oil-price drop generally triggers currency depreciation that usefully bolsters the value of the wealth fund (which invests in foreign assets) and consequently also the value of the guideline deficit. In addition, flexibility in the fiscal rule allows the deficit to run above the guideline in a given year (Box 1.6), providing scope for fiscal stimulus during a crisis.
Spending on special measures to help households and businesses is estimated to be equivalent to 4.1% of GDP in 2020 and 3% in 2021 (Table 1.7). Measures supporting companies accounted for 45% of the outlays, the largest item being a scheme supporting hard-hit businesses to cover fixed costs. Other pandemic support measures included extra support for households, typically through extensions to existing transfers and extra support to public services (notably health care).
Table 1.7. Estimated spending on special measures to support households and businesses during the pandemic
Total spending in each budget year, NOK billion
Note: The amounts for 2020 are adjusted to 2021 prices.
Source: Ministry of Finance, Proposition to Parliament 51S, January 2022.
National Budget planning for 2022 has been appropriately prudent. The central government’s core mainland deficit measure (the “structural non-oil deficit”) is estimated to turn out at 11.6% of trend mainland GDP in 2021, well above the guideline deficit in the fiscal rule. With economic recovery well advanced, and significantly reduced need for pandemic financial support for households and businesses, the fiscal deficit should decline substantially. The National Budget for 2022, published in autumn 2021 budgeted for a deficit of 9.5% of mainland GDP, which is below the “3% path” guideline value (Figure 1.16, Panel C). With inclusion of the subsequent temporary support during the Omicron wave and for compensating high electriciy prices, the deficit is estimated to turn out at 10.4% of mainland GDP. This budgeting strategy reflects concern that downside risks on the returns to the wealth fund have increased. Indeed, the long-term perspective used in budget planning for 2022 includes downward adjustment in the guideline deficit (technically, the equivalent of NOK 1 000 billion at 2021 prices has been deducted from the value of the fund before calculation of the 3% guideline deficit values). (This adjusted 3% path is shown alongside the standard 3% path in Panel C of Figure 1.16).
Box 1.6. Norway’s fiscal system
Norway has used revenues from offshore petroleum production to accumulate a wealth fund (the Government Pension Fund Global, GPFG). Inflows to the fund comprise: i) net cash flow from the petroleum sector (i.e. revenue from the state’s direct financial interest plus tax revenues); ii) net financial transactions related to the petroleum sector; and, iii) returns on the fund’s assets. Under the fiscal framework, withdrawal from the fund covers Norway’s entire non-oil budget deficit. The fund, which has a value equivalent to around 3.5 times annual GDP, is invested entirely in foreign assets, which helps offset the currency appreciation arising from petroleum exports.
The Government Pension Fund Global is operationally managed by Norges Bank Investment Management (NBIM), an arm of the central bank. The guidelines for the management are set by the Ministry of Finance and imply an index-near management strategy, with 70% equities and 30% bonds, and the possibility for the manager to invest in unlisted real estate and infrastructure for renewable energy within certain limits. NBIM as the operational manager has also put in place policies on investment and ownership strategies, including criteria on executive pay, board diversity, and sustainability reporting. In addition the Ministry of Finance has set ethical criteria for observation or exclusion of companies relating to certain products or companies’ conduct. In addition upstream oil and gas companies are excluded from the Fund due to considerations of oil price risk for the Norwegian economy. The Fund’s work on climate related risk has come under further scrutiny. In August 2021 an expert group established by the Ministry of Finance underscored need to further develop the climate risk strategy in the Fund’s investments, including that the fund should base its ownership work on an overall, long-term goal of net-zero emissions from the companies invested in (Ministry of Finance, 2021[6]). In September 2021 another expert group was established, in this instance to consider more broadly how the investment strategy of the Fund should be affected by geopolitical risks.
The fiscal rule states that the cyclically adjusted non-oil deficit (the “structural non-oil deficit”) should, over time, follow the expected real return on the Fund. The rule implies an intergenerationally fair use of oil wealth because spending the real returns implies leaving the real value of the Fund intact for future generations. Business cycle considerations are given significant emphasis which can lead the actual takeout rate to deviate from the 3% path both from one year to the next and over several years.
Since 2017 government budgeting has been based on a 3% expected real return to the fund. The expected return was previously estimated at 4%. The reduction was prompted by concerns of declining global rates of return. The rule alteration was also timely given the cyclical situation. Under the “4% rule” and with rapid growth in the wealth fund (Figure 1.16), the guideline deficits had risen substantially. In the decade 2007-2016, the structural non-oil deficit increased by 0.5 percentage points of GDP each year on average (Figure 1.16).
In sum, the rule enables Norway to sustainably run a large non-oil deficit, currently in the order of 10% of GDP (Figure 1.16). In effect, the oil wealth means that households and business benefit from lighter taxation and more public spending on services and investment than would otherwise be the case. If Norway’s fiscal rule is closely adhered to, all future generations stand to benefit. Governments in most other countries can, at best, only afford to run modest fiscal deficits during normal economic times, typically less than two percent of GDP. Some countries have to aim for balanced budgets to contain public-debt burdens and to build fiscal space to respond to negative shocks.
Figure 1.16. The structural non-oil deficit will have to trend downwards over the long term
Note: “3% deficit path” shows 3% of projected wealth-fund value as a percentage of trend mainland GDP. The “adjusted 3% path” shown in Panel C was incorporated in the long-term perspectives used to guide the 2022 Budget. It includes a downward adjustment to reflect assessment of elevated risk to returns to the wealth fund looking forward.
Source: Norges Bank Investment Management (MBIM); and Ministry of Finance, National Budget 2022.
Diminishing fiscal space ahead
The prudent government budgeting for 2022 sets an appropriate precedent as fiscal space is set to shrink in the coming years compared with conditions prior to the pandemic. Between 2011 and 2019, governments spent around 0.5% of GDP extra each year on additional initiatives (Figure 1.17). Growth in mainland tax revenues and the wealth fund provided headroom to cover structural growth in spending on transfers from demographic changes and demands on national insurance, with room to spare for additional initiatives. Ministry of Finance projections suggest that the fiscal space created by tax and wealth-fund transfers (in line with the fiscal rule) will approximately halve in the coming years. This reduced space will only just cover estimates of structural growth in spending, which is mainly due to outgoings relating to population aging. This implies no room for additional initiatives unless funded from measures that make efficiency gains in public spending or generate more revenues.
Figure 1.17. Scope for new spending will diminish in the coming years
Average annual increase in revenue or spending, % of 2021 mainland GDP
Note: "Demography" is an estimate of the increasing health care costs due to population ageing. "National Insurance Scheme" mainly reflects increasing costs in pensions and disability benefits. The NOK values in the calculations are re-based to 2021 and therefore 2021 mainland GDP is the denominator.
Source: Ministry of Finance and OECD calculations.
Furthermore, there will be even less fiscal space if cash flow from petroleum activities or returns to the fund are weaker than expected. As reflected in the downward adjustment in the guideline deficit, with attention to climate change gathering momentum globally, the risk of a faster-than-expected decline in cash flow from petroleum activities over the medium and long term has increased.Figure 1.18 illustrates that a halving of the cash flow from the petroleum fund could mean a steady decline in the deficit from 2030 onwards. Cash flow from the petroleum fund could, for instance, decline in the event of an accelerated wind down of petroleum production. If this was combined with a reduction in the return to the fund then declines in the implicit deficit would begin almost immediately. A trend decline in the return to the fund could, for instance, occur in the event of a global weakening in stock market valuations.
Figure 1.18. Fiscal sustainability: illustrative scenarios
Note: The baseline scenario is from Ministry of Finance estimates. The same nominal GDP growth is assumed in all scenarios. The basic 3% guideline is shown in the calculation, not the variant applied in the 2022 Budget that made an adjustment for financial risk.
Source: Calculations based on Ministry of Finance data.
Continued firm commitment to and conservative interpretation of the fiscal rule will be important as the trade-offs sharpen between revenues and spending in the years ahead. Public understanding and commitment to the fiscal rule have proved encouragingly robust in the past, albeit in a period where the value of the fund has trended strongly upwards. Maintaining strong commitment in the coming years underscores the importance of:
Ensuring the non-oil deficit declines in line with the diminishing need for economic support as the economy recovers, as envisaged in the 2022 National Budget.
Continuing to base fiscal planning on prudent projections of the Fund’s value, including through use of haircut adjustment to account for risks, as exemplified in the 2022 National Budget and the Long Term Perspective report. Planning on the basis of conservative estimates of inflows to the fund (see Box 1.6) reduces the risk of policies that add multi-year spending commitments which could prove unaffordable if the Fund’s value turns out lower than projected. Prudent estimates also strengthen capacity of the fiscal system to handle shocks to fiscal balances, such as that experienced during the pandemic.
Continued good communication with the press and the public on the principle of the fiscal rule, how it works and the benefits for current and future generations.
Making public services more efficient and ensuring wise public investment choices
With reduced fiscal room, government spending must become more efficient. Past Surveys have highlighted several areas where Norway’s comparatively high public spending could be made more effective. Public spending on social protection (this includes, for instance, support for low-income households, old-age pensions, disability support), and to an extent health care, distinguishes Norway, and the other Nordics, from most other OECD countries (Figure 1.19). For instance, in 2019 Nordic social protection spending was equivalent to over 20% of GDP, compared with an OECD average of 15%. Ensuring the substantial social protection spending achieves goals efficiently is therefore particularly important. In Norway, sick-leave compensation and disability support are widely recognised as in need of reform (discussed further below). In addition, Norway’s comparatively high spending on the category of Economic Affairs (Figure 1.19) in part reflects slow progress in unwinding support for the agricultural sector (discussed further below). Past Surveys have also found weak spots in Norway’s selection processes for large scale infrastructure projects.
Efforts to identify scope to improve specific areas of public spending should continue, including through the ongoing process of spending reviews. Recent years have seen reviews in a number of areas (Box 1.7). Such reviews need to ensure, inter alia, that opportunities for efficiency gains and quality improvements in government services via digitalisation are fully exploited. Norway scores well on indicators of the uptake of government digital services. However, there is almost certainly scope for further development of services.
Box 1.7. Public spending reviews in Norway
Given Norway’s extensive publicly funded services, ensuring good quality, and value for money is particularly important. It matters for remaining on target with budgets and for building headroom for new policy initiatives. It also helps towards trust in government and strengthens acceptability of the relatively high tax burdens required to fund public spending.
One way to ensure quality and value for money in public services is through spending reviews. These are frequently used in Norway and in recent years have covered:
Costs and price mechanisms of medicines under the National Insurance Scheme.
Management of the Police.
Efficiency and effectiveness of the Foreign Service (ongoing).
Policy instruments to promote Norwegian businesses abroad.
Identity system management.
Norwegian Public Roads Administration.
Climate Support Schemes.
Structure and administration of Municipal transfer systems.
Organisation and efficiency of government construction and property management.
Business support and financial means system.
Housing solutions and health and care services for the elderly (ongoing).
Budgeting processes should continue to incentivise improvements in the quality and cost efficiency of public services. In recent years central government budgeting has featured “efficiency dividends”, small annual reductions to baseline budget allocations to ministries and agencies (Box 1.8). Such a mechanism, or similar, should continue to feature in budget processes, and could be extended to regional and municipal budgeting. In a similar vein, past Surveys have suggested the introduction of medium-term expenditure frameworks (MTEFs). The authorities have previously given this proposal detailed consideration but judge it to be it unsuitable in the Norwegian context. A commonly expressed concern is that in Norway multi-year spending paths for ministries and agencies may in practice act as floors, rather than ceilings, on expenditure. However, as the challenges in containing existing spending and funding new spending mount, the potential advantages of a medium-term expenditure framework may increase. Given the prospect of more limited fiscal space in the coming years, policymakers should remain open to augmenting the fiscal system with medium-term benchmarks for items of discretionary and non-discretionary spending.
Figure 1.19. Public spending on social protection is particularly high in Norway and the other Nordic countries
General government spending, 2019, % of GDP
Note: The spending levels do not necessarily reflect overall levels of service, inter alia, due to variation across countries in the degree of private‑sector provision particularly in health care and education. Differences across countries in the use of tax (as opposed to spending) instruments and differences in how transfers are taxed are also considerations.
Source: OECD (2021), National Accounts (database).
Box 1.8. Norway’s budget “efficiency dividends”
Norway’s central government budget process includes “efficiency dividends”. These are small reductions to the baseline budget allocations (usually a 0.5% reduction from the baseline) to ministries and agencies. The proceeds of the reductions are pooled to fund new policy reforms or high priority tax or spending measures. The concept is that the allocation reductions prompt public-sector management to exploit headroom for efficiency gains, while also providing fiscal space for new spending measures.
According to the new government’s political platform, the efficiency dividends will be replaced by targeted processes and efficiency goals. In principle this can be a better way of achieving efficiency gains in government spending compared with uniform across-the-board cuts or efficiency devices like the dividends. However, properly identifying where the greatest scope for efficiency gains lies across Ministries and other spending bodies and operationalising this in budgets can be challenging both technically and politically.
Recent years have seen progress in tax reform
Pre-pandemic, one focus of tax policy was on lowering the tax burden, particularly that for businesses. Notably, the rate of “ordinary tax”, which applies to most forms of income – including corporate income – was reduced in a series of steps from 28% to 22% between 2013 and 2019. This has made Norwegian business taxation compare more favourably with that of other countries.
Policy in recent years has improved the consistency of tax rates and broadened tax bases. Some concessionary rates of VAT have been raised, thus narrowing differences in rates across goods and services. In addition, a financial activity tax has been introduced that aims to compensate for the absence of VAT on financial services (as in other countries, establishing value added from financial services for taxation purposes is challenging). In addition, Norway is making progress in tackling base erosion and profit shifting in corporate taxation. Further advances on these fronts would be welcome. Establishment of a committee on taxation with a broad remit in June 2021 provides opportunity to do so.
The new government aims for more progressivity in the tax system. One measure reduces the burden of taxation for those with an annual income below NOK 750 000 and increases it above this threshold. This supports middle- and lower-income households’ disposable incomes, directly helping to address concerns about housing affordability and other cost-of-living pressures, such as those anticipated in the coming years from greater carbon taxation. Furthermore, changes to the wealth tax include rate hikes and reductions in the discounts applied to some assets, including shares, high-end housing and holiday homes. One risk, discussed in previous Surveys, is that these changes could mean more instances where the effective rate of tax on investing is above 100%.
Options for fixing Norway’s tax treatment of homeownership
As underscored in Chapter 2 and in previous Surveys, Norway’s tax treatment of housing is unusually generous, fuelling strong demand for owner-occupied dwellings and inflating house prices. A few OECD countries have an approach to taxing housing that is broadly consistent with the tax treatment of other assets (i.e. mortgage interest payments are deductible but this is offset by imputing a rent to primary dwellings that is counted as taxable income). Many countries instead have no interest deduction for owner-occupied homes and no taxation of imputed rent; a solution that preserves an asymmetry in the tax treatment of different assets, but which avoids some challenges (both political and related to implementation) associated with taxing imputed rent. Norway, in contrast, allows mortgage interest deductions with no corresponding taxation of imputed rent to owner-occupied dwellings. Like many countries, Norway also charges no capital gains tax on the sale of primary residences. Indeed, Norway is among a group of OECD countries where the marginal effective tax rate on a debt-financed investment in a primary residence is negative—in other words the tax system raises the return to home ownership, rather than diminishing it (Figure 1.20. ).
Concessions in the taxation of owner-occupied housing need to be reduced. Chapter 2 finds that, from an administrative perspective, Norway is better placed than other countries to phase in a tax on imputed rental income. If this is not possible politically, it should instead gradually phase-out mortgage interest deductibility. Chapter 2’s recommendations also include aligning wealth-tax discount rates on housing and non-housing assets and taxing capital gains on the sale of owner-occupied dwellings. Adjusting the tax treatment of homeownership would be consistent with the government’s target of increasing progressivity. Revenues generated from increased taxation of housing could be used to reduce reliance on more distortive forms of taxation, especially labour income tax.
Figure 1.20. The tax system favours owner occupation of housing
Marginal effective tax rate for debt-financed investment in owner-occupied housing
Note: Unweighted OECD average excluding Costa Rica.
Source: Brys et al. (2022), "Measuring Effective Taxation of Housing".
Important developments in environmental and natural resource taxation
Steep increases in the price of carbon have been proposed that would further strengthen Norway’s track record on carbon taxation. Norway already has comparatively high and broad-based carbon taxation. The proposals envisage a schedule of hikes in the price of carbon to 2030 (see the environment section below for further discussion).
Meanwhile, tax concessions were made to the oil and gas sector in the early months of the pandemic when the oil price dropped. Measures, for instance, included allowing the immediate tax deduction of current and projected investment spending. The “uplift” that prevents normal profits from being exposed to the special petroleum tax was also increased. In total the temporary amendment is estimated by the Ministry of Finance to amount to a tax relief of about NOK 10 billion (in 2020 value terms), or around 0.3% of mainland GDP, a fairly substantial sum. Rebound in the oil price has meant that the oil and gas sector’s financial position has turned out less precarious than was anticipated when the concessions were made.
A major change to the tax treatment of petroleum exploration and development from 2022 has been proposed. Similar to the restructuring already introduced for hydropower, the Ministry of Finance has detailed a reform in which the special tax would be converted into a cash flow tax with immediate expense recognition of new investments. This would replace the current accrual system in which investment deductions are distributed over 6 years through depreciation, plus an additional uplift of 5.2% of investment costs over four years (therefore, a total uplift of 20.8%). Under the proposed reform, fiscal revenues would initially be smaller, but in future years would exceed estimates of the tax that would be received under the current regime. The proposed system is more neutral than the current special tax. The investment-based deductions (depreciation, uplift and interest deductions) in the current ordinary special tax are higher than they should have been in a neutral special tax. According to calculations by the Ministry of Finance (Ministry of Finance, 2021[7]), when secure investment deductions are valued with a risk-free return, the petroleum companies, in effect, cover about 12% of the investment costs after tax while they should cover around 23% in a neutral tax (close to the corporate tax rate). In the proposed change, the companies will cover more than 22% of the investment costs. The proposal has been on public consultation and will be followed up by the new Government.
Table 1.8. Past recommendations on fiscal policy, public spending and taxation
Box 9. Quantifying the fiscal impact of ambitious structural reforms
The following estimates roughly quantify the fiscal impact of ambitious medium-term reforms. The estimates should be considered illustrative, providing an indication of the scale of potential long-run effects of significant reform efforts. For instance, achieving a halving of the number of disability benefit recipients and sick leave absences would be an impressive achievement and would likely be a prolonged process. Similarly, achieving a 10% productivity gain in the provision of public goods and services would likely be a multi-year project.
Table 9. Illustrative fiscal impact of recommended reforms
Note: The calculations of impact are based on a long-run, production-function based model.
Box 1.10. Quantifying the GDP impact of structural reforms
The following estimates roughly quantify the impact on GDP per capita of ambitious medium-term reforms and are illustrative.
Table 1.10. Illustrative GDP impact of recommended reforms
Note: The calculations of impact are based on a long-run, production-function based model.
Supporting productivity and ensuring good governance
Policy needs to facilitate business-sector productivity growth
Financing Norway’s socio-economic model requires a business sector that is economically viable and internationally competitive in a comparatively high-wage, high-tax environment. Policy needs to help business benefit from technological advance. It also needs to address the opportunities and challenges of green transition. Facilitating an orderly shift away from petroleum sector activity will be part of this challenge in years to come. Currently, the sector accounts for around half of Norway’s goods exports (Figure 1.21. ) and direct and indirect employment makes up around 5% of the workforce (Box 1.11). The pace of the eventual decline in the industry will depend in part on domestic policy towards the sector, in particular the approach to issuing new exploration licences. Also influential will be developments in the global demand for petroleum products as technological development and emission reduction policies such as the EU’s Emissions Trading System (ETS) take greater effect.
Policy support towards facilitating an eventual transition away from the oil and gas sector should primarily comprise improvement to the general legal and administrative environment for businesses. This will enhance the overall responsiveness of the business sector to changing conditions, including the eventual petroleum-sector decline, and encourage competition, innovation and the adoption of new technologies. As is the case in many countries, improving digital infrastructure needs to remain on the policy agenda. In addition, good insolvency processes, for instance, are key to efficient reallocations of resources through business entry and exit (see below). Education and training also needs to remain responsive to evolving skill requirements. A strong policy focus on keeping specific industries or companies afloat, or on supporting perceived growth industries should be avoided. Governments generally have a poor track record in picking winners.
Figure 1.21. Crude oil and natural gas account for around 40% of the value of goods exports
2020
Source: Statistics Norway.
Box 1.11. Norway’s petroleum sector: its role in the economy
Norway’s petroleum sector (“petroleum” covers both oil and natural gas) comprises offshore production facilities, exploration activities and supply services; that latter two account for most of the petroleum sector’s employment. Growth in investment and employment was particularly strong from the mid-1970s to mid-1980s and from 2005 to 2013, prior to the 2014 global oil price fall. The supply sector is not solely linked to Norway’s offshore fields, providing services to other North Sea fields and elsewhere in the world. Offshore activity according to the national accounts definition (this covers oil and gas extraction, transport via pipelines and ocean transport) is around 15% of total economic activity. Direct employment in petroleum production only accounts for about 1% of total employment but including those employed in related activities lifts the share to around 5%. Norway’s south-west coast is particularly dependent on petroleum-related activity.
As described in Box 1.6, the petroleum sector makes a sizeable contribution to tax revenues. Net extraction revenues largely accrue to the state due to resource taxation and state ownership in production (the state has a 67% stake in the oil company Equinor and direct ownership via holdings in most of the large fields (these holdings are managed by state-owned company Petoro AS)). In addition, corporate income tax revenues are generated by supply services.
The prospects for petroleum-related activity depend on several factors. Growth in production has been underway in recent years due to the large Johan Svedrup field coming on stream and further increase in production is anticipated when the Johan Castberg field comes on stream (expected in 2023). However, the long-term trend in production is inevitably downward, and a white paper on Long-Term Perspectives (published in February 2021) projects a decline of 65% up to 2050, and the decline would be even larger without continued exploration.
Helping business start-up and ensuring good insolvency processes
Financial pressure on businesses during the pandemic has underscored the important role of insolvency procedures in giving struggling businesses a chance to turn around. Indeed concerns about business failure during the pandemic prompted a temporary change in legislation that provided a new route for business restructuring. However, take up has been low. One explanation is that, although relatively accommodating, the new route did not allow businesses to halt all contracts and have a fresh start.
Post-pandemic, ensuring insolvency processes along with conditions for business start-ups are in good shape remains important for longer-run productivity growth. As regards the administrative burden for setting up a business, Norway’s score is behind the best scoring countries, suggesting scope for improvement (Figure 1.22). In the case of insolvency, past Surveys have suggested that there is a need for better routes to recovery for businesses in difficulty. As detailed in the 2018 Survey, OECD data capturing the efficiency of insolvency processes indicate room for improvement. Time to discharge (i.e. the number of years a bankrupt person must wait until they are discharged from pre-bankruptcy indebtedness) is, in particular, relatively long.
Figure 1.22. Some scope to reduce the administrative burden in starting businesses
OECD Product Market Regulation (PMR) indicator, scale 0-6 from least to most restrictive
Source: OECD 2018 PMR database.
Improving the responsiveness of residential construction to housing demand
As underscored in Chapter 2, policies affecting the responsiveness of housing supply are key to improving housing affordability. For Norway, the main challenge is to create more leeway for the residential construction sector to respond to housing demand while retaining high standards on other fronts. Chapter 2 identifies:
Scope to relax land-use laws, to enable residential construction on land suitable for development near existing urban areas and more housing within cities.
Room for improving planning and zoning processes. Broadly, processes should be made shorter, simpler and more predictable. For instance, uncertainty for developers is amplified by the risk of time-consuming objections to local authorities’ decisions by regional and central-government authorities. Furthermore, there is scope for simplified approval processes for small-scale residential projects in developed areas.
A need to push ahead with regulatory change necessary to reduce construction waste generation, and improve building material recovery and reuse (see Environment section below).
Reform to agricultural-sector support remains slow
Norway’s subsidy and tariff support for the agriculture sector is still large and in need of substantial reform to improve the efficiency and sustainability of agricultural production. The OECD’s latest Agriculture Policy Monitoring and Evaluation (OECD, 2021[8]) highlights that support to producers is equivalent to 56% of gross farm receipts, which is the third highest value in the OECD area (Figure 1.23). This level of subsidy implies that, on average, the value of support in Norway is higher than the gross value of its agricultural production (valued at world market prices). There has been some welcome progress. Export subsidies have now been fully phased out, as per WTO regulation. However there remains considerable scope for further reform (Table 1.11).
Commitment by the new coalition government to address income gaps between the agricultural sector and the rest of the economy should be used as an opportunity to accelerate reform (Box 1.12). Agricultural Policy Monitoring and Evaluation underscores the need for a shift towards supporting long-term productivity growth and environmental sustainability. According to this report, this should include:
Further reduction in the most economically distorting forms of agricultural support in order to strengthen exposure to market signals and eliminate output-related measures. The full withdrawal of export subsidies is welcome, but distorting measures remain, including many import tariffs.
Re-orienting support towards general services – especially for the agricultural knowledge and innovation system – would raise productivity growth while maintaining environmental protection and sustainable natural resource management. Norway should strengthen efforts to provide farmers with tailored advice and support about sustainable technologies and practices.
Improving climate-change policy for the agricultural sector. In particular, an emission reduction target has been agreed for the sector but it remains uncertain how it will be achieved. Recent legislation restricting cultivation on peatlands could also significantly reduce GHG emissions from agriculture but the degree of application remains uncertain. Farmers remain exempt from GHG emission taxes and the EU cap-and-trade system.
Better identification of intended beneficiaries and more targeted policies so that agricultural policy can most effectively contribute to policy objectives, including food security, green transition, sustaining rural economies and landscape amenities.
Box 1.12. The current Norwegian government’s agricultural policies
Norway’s current government has a number of goals in agricultural policy. These include that the local agriculture sector provides Norway’s population with enough and safe food produced from Norwegian natural resources. The government underscores that this will contribute to employment, a reduced carbon footprint, and good nutrition and health. The government also wants farmers to have the same income opportunities as other groups, irrespectable of farm size, region or production. It aims to achieve this through strong import protection, annual agricultural negotiations and preserving the market regulation system.
Intended actions towards these goals include:
Presentation of a mandatory and timed plan to close the income gap between agriculture and other groups in society.
A cut in the maximal milk quota per farm.
Consideration of measures to reduce quota costs and quota rental.
Introduction of support ceilings in all production.
Introduction of an investment scheme for small and medium-sized dairy farms.
Presentation and implemention of a plan for increased safe food production from Norwegian resources and the setting of a target for the level of self-sufficiency of Norwegian agricultural food products, adjusted for imports of feed raw materials, of 50 per cent.
Stimulation of production of local food products, including organic food.
Ensuring import protection for Norwegian agriculture through the choice between ad-valorem and specific import tariffs, and by making sure that import protection is not weakened in new trade agreements.
Assessment of new and strong means of market regulation.
Source: Text provided to the Secretariat by the Government of Norway.
Figure 1.23. Producer support in agriculture remains among the highest in the OECD
Producer Support Estimate (PSE) transfers as a share of gross farm receipts, 2020
Note: Producer Support Estimate (PSE) is the annual monetary value of gross transfers from consumers and taxpayers to agricultural producers, measured at the farm gate level, arising from policy measures that support agriculture, regardless of their nature, objectives or impacts on farm production or income. It includes market price support, budgetary payments and budget revenue foregone, i.e. gross transfers from consumers and taxpayers to agricultural producers arising from policy measures based on: current output, input use, area planted/animal numbers/receipts/incomes (current, non-current), and non-commodity criteria.
Source: OECD (2021), "Producer and Consumer Support Estimates", OECD Agriculture statistics (database).
Enhancing government integrity and combatting financial crime
While Norway is generally seen as having strong integrity in government and policymaking (Figure 1.24.), efforts should be made to weed out instances of poor practice and to ensure no slippage in standards. As underscored in the latest OECD Government at a Glance (OECD, 2021[9]) the pandemic illustrated the importance of public trust in policymaking. Trust is crucial for people to understand and comply with extraordinary measures. It is also key to a society’s capacity to absorb and recover from shocks. Norway is in a position of relative strength on this front. Indicators shown in Government at a Glance suggest Norway has among the highest levels of trust in the civil service and government of all OECD countries.
Regulations on lobbying are a potential weak spot. Recent assessment in Lobbying in the 21st Century (OECD, 2021[10]) finds Norway is among several countries with no systematic framework for lobbying transparency. It is possible this is not a material problem because, for instance, lobbying is disciplined through other channels. Nevertheless, an exploration of the adequacy of transparency and checks on lobbying, and the potential gains from a more systematic framework is warranted.
Figure 1.24. Corruption is viewed as very low compared with other countries
Note: Panel B shows the point estimate and the margin of error. Panel D shows sector-based subcomponents of the “Control of Corruption” indicator by the Varieties of Democracy Project.
Source: Panel A: Transparency International; Panels B & C: World Bank, Worldwide Governance Indicators; Panel D: Varieties of Democracy Project, V-Dem Dataset v11.
As regards domestic corruption, Norway continues to score well on international indicators. It had the third best score in the 2020 edition of Transparency International’s Corruption Perceptions Index, and scores well in the World Economic Forum’s Executive Opinion Survey (Figure 1.21). However, Norway is not without corruption risk. Transparency International’s latest survey finds around 20% of respondents consider corruption to be a major problem (Transparency International Norge, 2021[11]). Furthermore, the latest annual threat assessment by the National Authority for Investigation and Prosecution of Economic and Environmental Crime (ØKOKRIM, 2020[12]) highlights that several serious corruption cases involving local planning authorities, along with cases involving public purchases, have been uncovered in recent years. The report underscores that, although public procurement regulation contains many non-discretionary criteria, there remains room for discretion that potentially opens the door to corrupt practices. Efforts to eliminate misconduct need to continue, for instance through encouraging local authorities’ efforts to combat corruption, and the provision of well-functioning whistle-blower channels.
OECD assessment points to room for stronger measures on corporate governance in foreign operations. Norway has many companies operating in corruption-exposed jurisdictions and sectors, such as oil and gas, shipping, and telecommunications. The latest evaluation of Norway’s implementation of the OECD Anti-Bribery Convention (OECD, 2020[13]) underscored several areas of good practice including: ØKOKRIM’s integrated approach to law enforcement, a robust framework for whistle-blower protection and corruption-risk management in official development assistance. However, the evaluation found scope for greater clarity in corporate liability for offences committed by related entities (e.g. subsidiaries or joint ventures) and called for more transparency when foreign bribery matters are resolved out of court. Shortfalls in clarity hinder the business community’s understanding of the law and may dissuade prosecution.
As regards combatting money laundering, indicators point to generally sound policies (Figure 1.25), but there is concern about laundering via the real estate market. In 2021, Norway’s Research Council funded a university research unit to investigate the extent to which real estate has ownership links to tax havens. It is not compulsory for deeds of transfer of property to be registered with the land registry (Grunnboken). As an unintended consequence, property transfer can be hidden from public view. Use of such unregistered deeds (blank deeds) is thought to be a channel for money laundering. Further investigation, and potentially policy action, is required.
Figure 1.25. Indicators of economic crime
Note: Panel A summarises the overall assessment on the exchange of information in practice from peer reviews by the Global Forum on Transparency and Exchange of Information for Tax Purposes. Peer reviews assess member jurisdictions' ability to ensure the transparency of their legal entities and arrangements and to co-operate with other tax administrations in accordance with the internationally agreed standard. The figure shows first round results; a second round is ongoing. Panel B shows ratings from the Financial Action Task Force (FATF) peer reviews of each member to assess levels of implementation of the FATF Recommendations. The ratings reflect the extent to which a country's measures are effective against 11 immediate outcomes. "Investigation and prosecution¹" refers to money laundering. "Investigation and prosecution²" refers to terrorist financing.
Source: OECD Secretariat’s own calculation based on the materials from the Global Forum on Transparency and Exchange of Information for Tax Purposes; and OECD Financial Action Task Force (FATF).
Table 1.11. Past recommendations on improving business conditions
Labour and social issues: tackling cost-of-living growth, ensuring high employment
Compared with other countries, Norway has high levels of employment and wages, low earnings inequality and overall good job quality. Wage earnings at the 90th percentile are around three times those of the 10th percentile; the OECD average is over four times (Figure 1.26). In Norway the gap between women’s and men’s median earnings is 5% compared with over 10% in the other Nordics and over 12% in the OECD (Figure 1.26). Illustrating generally good working conditions, only a small share of employees report working very long hours (Figure 1.26). High employment among women and comparatively narrow gender wage gaps are key factors underpinning low income inequality across households, a goal that has high priority in the Nordic socio-economic model. High employment is, in part, attributable to use of active labour market policies, for instance services helping individuals find new work and support for retraining. The current government aims to strengthen workforce attachment and job stability by advocating greater full-time work and permanent employment contracts over part-time and temporary forms of work. As discussed in the context of consumer price inflation above, Norway’s system of collective bargaining based on coordinated annual wage increases generally works well, providing top-down guidance on wage increases that is grounded in macroeconomic realities.
However, labour-force participation has been slipping, particularly compared with other countries. In 2000, Norway had the 3rd highest labour force participation rate in the OECD. As of 2020 it ranked 13th and the rate is a good margin below the average of the top 10 OECD countries (Figure 1.26). This flagging performance is taking the edge off Norway’s good record. Future falls in labour force participation, including due to population ageing, would further erode the productive capacity of Norway’s economy. There has been some progress ensuring balanced retirement choices among older cohorts—in Norway comparatively large numbers of people either take up pensions early, or effectively retire early through take-up of sickness and disability benefit. However, further work is needed. Also, Norway’s record on employment among young and middle-aged cohorts has been deteriorating, and this is also partly due to the generous sick leave and disability benefit systems.
Figure 1.26. Norway’s labour market still contributes to low inequality but employment is no longer top-ranking
Note: Panel A to C: data refer to 2019 or latest available year. The OECD average is an unweighted average. Panel A: The P90/P10 ratio is the ratio of the upper bound value of the ninth decile (i.e. the 10% of people with highest income) to that of the upper bound value of the first decile. Panel B: The gender wage gap is defined as the difference between median earnings of men and women relative to median earnings of men. Data refer to full-time employees on the one hand and to self-employed on the other. Panel C: Long hours in paid work refers to the share of employees (of all ages) whose usual working hours are 50 hours or more per week. Panel D: Norway's rank amongst the OECD countries is shown at the beginning and at the end of the period.
Source: OECD (2021), Income Distribution Database (IDD); OECD (2021), Employment and Labour Market Statistics database; OECD (2021), How’s Life? Well-being database.
Addressing rising costs of living, including housing expenses
Concern for the cost of living is gaining prominence in light of strong house-price growth during the pandemic and increases in the consumer-price index over recent quarters, notably due to large hikes in cost of electricity (see discussion on inflation above). In addition, living costs are set to be pushed up by carbon-price increases in the coming years. The new government has committed to shift more of the income-tax burden onto high-income households. This could help alleviate cost-of-living challenges for those that are less well off. The government intends to partially offset the effects of carbon tax increases with lower fuel taxation as a means of alleviating the cost of travel by petrol and diesel vehicles. This approach is arguably inefficient as a social measure as all users benefit, including those that can easily absorb higher carbon taxation. Environmentally, it moves incentives in the wrong direction.
For many households on low incomes, the cost of housing has become burdensome. As underscored in Chapter 2, Norwegian housing policy has long emphasised assistance with home purchase to improve housing affordability. While this has been successful in making ownership accessible to more households, more priority is needed on addressing shortfalls in affordable rental housing. Chapter 2’s recommendations include raising the supply of social housing, especially in high-cost cities.
Sickness and disability support still need reform to help ensure high levels of employment
As underscored in previous Surveys, including an in-depth examination for the 2019 Survey, Norway’s sickness leave compensation, in combination with disability benefit support, are a major channel for exit from the labour force. Active labour market policies have already been endeavouring to intensify efforts by management to tackle sick leave (particularly in the public sector) and to strengthen early intervention, treatment and rehabilitation. However, economic incentives, particularly in generous public sick-leave compensation, are also part of the problem and there has been little progress in rectifying this issue. The current level of sick leave support has been in some respects appropriate to the exceptional circumstances of the pandemic, providing 100% compensation to those having to take time off work due to illness and requiring employer financing only for an initial period of sick leave. Interestingly, data indicate only a small uptick in the rate of absence among employees during the pandemic (Box 1.13). However, the suitability of the scheme for normal times remains questionable. The full-salary compensation is provided for up to one year (which is exceptional in international comparison). The limited employer involvement in compensation is problematic because it means little incentives for taking preventative measures or facilitating return to work. The compensation scheme contributes to a very high incidence of sick leave and, in combination with comparatively large numbers of people on disability benefit is a significant route to early retirement among older cohorts, compromising labour supply and economic inclusiveness. Even more worrisome is a tendency of increased disability benefit take up rates among younger cohorts.
Box 1.13. Sickness absence among Norwegian employees during the pandemic
Rates of absence from work due to sickness picked up in Norway during the pandemic, but less than in some other countries. Between 2015 and 2019, the quarterly sickness absence rate averaged nearly 5.8%, i.e. around one in twenty work days were lost due to sickness. Since 2020 it has averaged a little over 6.1%(Figure 1.27). In contrast an OECD examination of paid sick leave in the initial months of the pandemic found substantial growth in the numbers of people on sick leave in some countries (OECD, 2020[14]). Norway’s comparatively low number of COVID-19 cases, especially in the early days of the pandemic, is likely to be the main reason for the contrast with other countries. Other factors that potentially damped sick leave include high numbers of furloughed workers and a measure that increased the number of days parents could stay home with children due to sickness or school closures.
Figure 1.27. The rate of sickness absence has increased only marginally during the pandemic
Sickness absence rate, seasonally adjusted
Note: Days lost due to own sickness (self-certified and doctor-certified) as a percentage of contractual person-days.
Source: Statistics Norway.
A commission evaluating (among other issues) the sickness and disability system delivered a second (and final) report in 2021 (Table 1.12). The report proposes a model that reduces employer financing for short-term absences but raises it for long-term absence. Such an approach would bring welcome strengthening in employers’ incentives for taking preventative steps and for providing rehabilitation in cases of long-term absence. However, the report does not recommend moving away from providing 100% compensation for up to 12 months. This is unfortunate as the prolonged full compensation is a key reason for Norway’s inflated sick leave absences. The commission’s previous report proposed a step down in compensation to 80% of a worker’s previous wage after six months absence (in the case of full-time absence), a move supported by in-depth assessment in the 2019 Survey.
Table 1.12. Key proposals made in Phase Two of the Employment Commission
Further progress on pension reform but more can be done
Ongoing population ageing underscores the need to resolve remaining issues in the pensions system. Public-sector pension reform was agreed on in 2018 (similar to a reform finalised in 2011 for the private sector), representing the final major step towards a more actuarially neutral and flexible pension system. A key feature of this new system is that individuals with an occupational pension can retire from age 62 up to 75 years with pension pay outs adjusted to become actuarially neutral regardless of withdrawal age. In addition, there is a proposal to switch pension indexation to a formulation using the average of consumer price and wage growth. The establishment of a committee to review pension reform may raise the prospects for further progress. It would be particularly welcome to see linkage of the age parameters of the pension system (such as the age-range for retirement) to life expectancy and better solutions to regressivity concerns.
There is scope for more progress regarding the special pension arrangements for certain public-sector professions, including the police, military and nurses. Under legislation introduced in 2021, mandatory retirement ages for public employees have been discontinued. This will allow those employeed in the professional groups concerned to work beyond the former mandatory retirement age. However, according to the political platform for the new government this change might be reversed, which is not advisable given that more needs to be done to modernise these occupational pensions given the changing nature of work in the professions concerned. Furthermore, there remain provisions allowing early retirement but without an actuarially based downward adjustment of the annual pension payout. Negotiations between government and the relevant professional bodies have yet to reach agreement.
Table 1.13. Past recommendations on human capital, jobs and welfare
The environment: pressing ahead with green transition
Norway has stepped up its greenhouse gas emission reduction targets in line with similar moves by the EU and many other countries. Achieving the goals requires reducing emissions from the current 50 million tonnes of CO2 equivalent to around 25 million tonnes in 2030 and close to zero by 2050 (Figure 1.2 above and Box 1.15 below). As also underscored in the forthcoming OECD Environmental Performance Review (Box 1.14), Norway’s starting point for domestic emission reduction is low compared with many developed countries in large part because its hydropower production (most of it in place well before widespread awareness of anthropogenic climate change) is sufficient to cover practically all domestic electricity demand. This is reflected in Norway’s relatively low emission intensity in energy use and high share of renewable energy (Figure 1.28., Panels A and B). Thus, costs of mitigation are generally relatively high in Norway compared to other European countries. Norway has very low particulate pollution (Figure 1.28., Panel C).
Box 1.14. The OECD’s upcoming Environmental Performance Review of Norway
The fourth OECD Environmental Performance Review of Norway will be published in the second quarter of 2022. The review team for the Norway Review includes experts from two reviewing countries (Finland and the United States). The review assesses Norway’s progress towards sustainable development over the last decade, with a focus on sustainable land-use management and its impacts on biodiversity and climate change. It evaluates the country’s track record against its environmental objectives, identifies good policy practices and key challenges. In addition, the review provides recommendations to help Norway improve the environmental effectiveness and economic efficiency of its policy mix and, ultimately, advance on its sustainable development reform agenda.
More information is available at: http://oe.cd/epr
Figure 1.28. Norway has considerable renewable energy resources
Note: Panel A: Included are CO2 emissions from combustion of coal, oil, natural gas and other fuels. Gross Domestic Product (GDP) is expressed at constant 2015 USD using PPP. Panel D: Emissions from biomass are included in the emissions base, in line with OECD Effective Carbon Rate data. This treats CO2 emissions from the combustion of biomass the same way as emissions from the combustion of fossil fuels. An alternative approach, taken in national GHG inventories, assumes that the net effect of production and consumption of biomass for fuels is carbon neutral.
Source: OECD Green Growth Indicators database; OECD Environment Statistics database; OECD National Accounts database; IEA World Energy Statistics and Balances database; OECD Exposure to air pollution database; and OECD Effective Carbon Rates database.
Box 1.15. Norway’s national climate goals
Norway’s key commitments on climate change policy comprise:
Climate target for 2030. A conditional target of 50-55% greenhouse gas (GHG) emissions reduction from the 1990 level by 2030 under its nationally determined contribution (NDC) to the Paris Agreement (previously the target was for a reduction of at least 40%). For the non-Emissions Trading System (ETS) sector the goal is for a 40% reduction compared to the level in 2005 (and within this, 50% for the transport sector). Norway will continue to cooperate with the EU on fulfilling the commitment and already participates in the Emission Trading System (EU-ETS). Norway’s 2030 target does not directly compare with the EU’s target. The EU’s enhanced climate target of a 55% reduction includes greenhouse gas removals through land use and forests. The Norwegian target mainly concerns emissions, not carbon uptake from forests. Net uptake from the LULUCF-sector counteracts around 40% of total gross emissions in Norway.
Climate neutrality goal by 2030. Emissions must be offset by climate action through emission trading systems or other international co-operation.
Low-emission society by 2050. This was first detailed in the 2017 Climate Change Act. The Act describes a low-emission society as one where, on the basis of scientific knowledge, global emission trends and national circumstances, greenhouse gas emissions are reduced within a range of 80-95% from 1990 levels. This range was revised to a reduction of 90-95% in the 2021 Climate Change Act. The legislation is not fully clear on what is included in this emission target; though it is generally held to exclude carbon uptake in forests. The effect of Norway’s participation in the EU-ETS will be taken into account in assessing progress towards this target (Ministry of Climate and Environment, 2017[15]).
Consistent with international rules on emission accounting, emissions generated in the process of extracting oil and gas are included in Norway’s targets. Most of these “upstream” emissions come from gas-powered generators on offshore production plaftorms. The emission count does not include the emissions implicit in Norwegian-exported oil and gas when used in other countries. These emissions emerge in accounts when they are used, for instance in transport or electricity generation. As most of Norway’s oil and gas is exported, the emissions emerge in the accounts of importing countries.
As elsewhere, green transition policy requires a mix of market-based instruments, regulatory measures and support for investment, including in research. Norway is a member of the European Trading System (ETS), a cap-and-trade system in which total emissions among emitters covered by the scheme are reduced over time with a market in emission credits determining how, and where, production adjusts to the reduced emissions. Around half of Norway’s emissions fall under the ETS. With comparatively high marginal costs of reducing domestic greenhouse gas (GHG) emissions (partly because emission reduction starts from a low base), it makes economic sense for Norway to, in part, reduce its net emission balance through the purchase of foreign emission credits (notwithstanding the complications in determining how much such purchases contribute to emission reduction). Norway’s high marginal emission-reduction costs means domestic emission reduction is often not cost effective. However, there are reasons for pressing ahead with policy actions. The recent sharp increase in ETS carbon prices, plus lead times required to bring in policy measures, means concrete action towards non-ETS reduction is nevertheless needed. Emissions from transport are prominent among non-ETS sectors, accounting for around 60% of non-ETS emissions. Devoting public resources to finding technological solutions to climate change is also important (see below). Norway’s past support of demand for electric cars has probably contributed to technological developments. However, going forward this effect is now likely small as Norway’s share of global demand for electric cars is declining rapidly.
Climate change and other environmental considerations are increasingly a factor in licencing decisions for new offshore fields for oil and gas development. For instance, permits for oil exploration off the Lofoten islands in northern Norway did not go ahead, largely for environmental reasons and the rich fisheries in the area. Furthermore, the political agreement on the 2022 Budget included a halt to an upcoming licencing round in so-called uncharted areas, while exploration is still open in pre-defined areas closer to existing infrastructure. Some are calling for wider measures. For instance, the EU announced in October 2021 that it will seek a ban on oil and gas production throughout the Arctic (by implication this would include those areas under Norwegian jurisdiction). There is some debate as to whether, similar to several other countries, Norway should introduce in a blanket ban on all new oil and gas exploration (Box 1.16).
Box 1.16. Economic considerations in bans on new oil and gas exploration
Some countries, including Denmark, France, Ireland, New Zealand and Portugal, have announced bans on new oil and gas exploration. In Denmark for instance the ban is on all new licensing rounds, implying decline in exploration and production as existing licences expire (a process due to end in 2050). Such bans can demonstrate good intention towards achieving climate change goals, in some cases reflecting a strategic decision to move away from oil and gas production in the future. The bans echo the messages derived from climate change modelling in the International Energy Agency’s widely cited ‘net zero’ report ( (IEA, 2021[16])). All countries that have announced bans on petroleum production have relatively low income from this sector.
A ban on petroleum production would be much more costly domestically for Norway than for many other countries. Furthermore, even abstracting from this the case for banning new oil and gas exploration, including in Norway, is not clear cut:
In the case of natural gas, future production may help other countries substitute away from more emission-intensive fuel sources. For instance, natural gas production in Norway can contribute to transition away from the more emission-intensive coal-based energy that supplies a significant share of Europe’s energy needs. Furthermore, in the scenarios reported in the IPCC report from the UN Climate Panel global gas production still plays an important role in 2050. Geopolitical risks are also a factor.
If emissions from oil and gas sectors are covered by effective carbon taxation and carbon trading systems, there is, in principle, no need for additional policy measures to curtail supply. In particular, the chief virtue of the EU’s cap-and-trade system (ETS), which covers Norway, and similar mechanisms elsewhere, is that it enables the market to determine the least costly path to emissions reduction. In practice:
o In Norway, emissions from petroleum production are included in the ETS, and on top of that there is a large CO2 tax. There is substantial work going on to electrify oil platforms to make production processes close to CO2-free.
o As most Norwegian oil and gas is exported to Europe, emissions embodied in the finished products are also, by implication, largely covered either by the ETS or by non-ETS European carbon-pricing mechanisms.
Forgone future production can, in effect, be substituted by production elsewhere, including possibly in countries with less stringent environmental standards for oil and gas exploration and production.
Source: OECD Secretariat.
Proposals for carbon price increases should be followed through
Norway has a stronger track record in pricing greenhouse-gas emissions than most OECD countries. Around 60% of emissions from energy use, including emissions from biomass, was priced at or above the commonly used benchmark of EUR 60 in 2018 according to the effective carbon rates framework (Figure 1.28). Furthermore, similar to moves by the Netherlands and the United Kingdom, the government’s Climate Action Plan 2021-30 (Government of Norway, 2021[17]) proposes a schedule of increases in the price on carbon (Box 1.17). The National Budget for 2022 makes a start by proposing a hike in taxes on non-ETS emissions from NOK 591 (around EUR 59) per tonne of CO2 equivalent to NOK 766 (around EUR 77, a real increase of 28%). In addition, the taxes on the continental shelf and for aviation covered by the ETS were increased by 28% and 5.4% respectively.
Box 1.17. Norway’s plan for climate action measures
Current plans for combatting climate change are primarily based on the Climate Action Plan that was published in January 2021 (Government of Norway, 2021[17]). Planned policy measures include:
A scheduled hike in the price on non-ETS emissions from the current value of NOK 591 (approximately EUR 60) to roughly NOK 2 000 (approximately EUR 200) in 2030. For ETS-emissions from extraction of petroleum on the continental shelf and aviation, it is stated that the total carbon price (allowances plus emission taxes) will also grow to roughly 2 000 NOK in 2030. As indicated in the main text, the 2022 national budget includes a first step in these increases.
Public procurement rules requiring zero-emission solutions in public procurement contracts involving passenger cars and small vans. There is also intention to introduce zero- and low-emission criteria in procurement processes for ferries and high-speed passenger vessels. In addition, requirements for zero- and low-emission solutions for aquaculture service vessels are planned.
More biofuel requirements, for instance the biofuel quota obligation for road traffic, are to be increased in the period up to 2030.
Further negotiation of an emission reduction plan for the agricultural sector. The government and the agricultural organisations have signed a letter of intent with the aim of reducing emissions and enhancing removals by a total of 5 million tonnes CO2 equivalent over the period 2021–2030.
Measures to advance technological solutions to emissions, including support for carbon capture and storage (CCS) through implementation of the Longship project.
Source: Climate Action Plan 2021-30 (Government of Norway, 2021).
Nevertheless, as previous Surveys have underscored, emission pricing and taxation could be more consistent across sectors (an issue faced by many countries) (Figure 1.29). While progress has been made toward consistency, there remain issues. In particular, GHG emissions of around 8 million tonnes of CO2 equivalent (i.e. around 15% of total emissions) are not priced by a tax or by the ETS, notably emissions of methane and nitrous oxides from agriculture (Ministry for Climate and Environment, 2020[18]) (Ministry of Climate and Environment, 2017[15]). There is some progress in these unpriced areas. Norway introduced a tax on emissions from waste incineration and abolished the tax exemption for the greenhouse industry in 2022. Furthermore, the Climate Action Plan recommends investigation of a tax on mineral fertiliser with a view to reducing nitrous oxide emissions.
Caution is required in measures aiming to offset the cost-of-living growth implied by carbon tax increases. As of 2022 the road use tax on biodiesel, bioethanol, mineral oil and petrol (affecting petrol and diesel vehicles) has been reduced. It is estimated that (for the typical vehicle user) this will offset around half of the effect on fuel prices of proposed rises in the carbon tax for 2022, limiting the increase in the disincentives to drive combustion engine vehicles compared to other uses of fossil fuels. Furthermore, the tax on traffic insurance has been reduced. A tax deduction for commuting has also been made more generous. These measures benefit well-off along with poorer households and are therefore inefficient as a social policy and imply a larger than necessary dilution of carbon taxation.
Figure 1.29. Effective carbon tax rates in Norway range from zero to around EUR 100 per tonne
Carbon price in 2021
Note: Prices for 2021 based on 2019 GHG emissions. The prices encompass tax rates in 2021 and ETS allowance price (NOK 472 per tonne of CO2). The prices have been converted in EUR/tCO2 using an exchange rate of 10 NOK/EUR. Emissions are measured according to the United Nations' National Inventory Report (NIR) 2019 for Norway, not including LULUCF. A tax on waste incineration was introduced in 2022.
Source: Statistics Norway; Norwegian Environment Agency; and Ministry of Finance.
There is scope to make housing construction greener
Norway’s energy-efficiency standards for new housing are among the world’s strictest but, as in many countries, measures to tackle emissions relating to construction, notably emissions from the manufacture of building materials, are not fully developed (Chapter 2). Buildings and construction account for 14% of Norway’s direct and indirect greenhouse gas emissions, with two thirds coming from the production and transport of building materials. Greener energy can help, and rises in the carbon price would assist in this regard. However, some emissions are harder to eliminate, for instance CO2 emissions inherent to the process of cement production. It is welcome that Norway’s Longship project (see below) includes a search for solutions to this problem.
In the absence of technological solutions, policy should focus on reducing material waste from construction, including through greater reuse of building products. A regulatory framework for this is being developed, which is welcome. For both regulation and market-based policy instruments, the implications for construction costs should be factored in to avoid trading-off housing affordability for potentially costly emissions reduction.
Supporting green technologies
Norway is supporting pilot and demonstration projects broadly through the environmental technology scheme (Innovation Norway), and technology adoption and carbon-capture and storage (CCS) projects. The state-owned agency, Enova SF, plays a prominent role in Norway’s climate change strategy. A large part of Enova’s budget (around NOK 3.4 billion or around 0.1 percentage points of GDP), supports the development and implementation of zero emission transport technologies such as batteries and hydrogen. In addition, Enova supports the development of technologies for emissions reduction in manufacturing and the energy sector, such as district heating. Around 10% of Enova’s budget subsidises households for the installation of advanced energy-saving technologies. Norway’s lead CCS initiative, Longship, comprises three full-scale carbon capture and storage projects (Box 1.18). Norway is also well placed to participate in the development of hydrogen power as pure hydrogen can be extracted from natural gas and the government is sponsoring hydrogen power projects via Enova.
Box 1.18. Norway’s Longship project
Longship is a project in which public funds are being used to support two full-scale CO2-capture projects and a full scale off-shore CO2 storage facility (Government of Norway, 2020[19]). The capture projects comprise installation of carbon capture in a ement factory and a waste-to-energy plant in Oslo. The cost of mitigating CO2 in these projects is likely to be several times higher than the quota price in the system. The excess costs can be seen as part of Norway’s contribution to developing and demonstrating technology for carbon capture and storage.
The cement-factory project exemplifies the potential for Longship to be a model for R&D support in related circular-economy initiatives to scale back use of emissions-intense building materials. It targets a significant technological hurdle to reducing global emissions, is backed by long-term funding commitment, and pairs research with a practical application to an emissions-intense industry. Success in the Longship project could realise significant cost-effective CO2 emissions reductions, which could be replicated in other countries. Complementary initiatives backed by government funding include SUPERCON, a project to develop methods to reduce the volume of concrete needed to build tunnels and CIRCULUS, a project to improve recovery and reuse of materials from concrete structures.
Source: (Government of Norway, 2020[19])
Norway should continue to prune its substantial incentives for electric vehicle ownership The incentives have been important to open the market for electric and hybrid cars. Now this market has matured, and the cost of mitigation by supporting electric vehicle purchases are very high. The incentives have already been pared back somewhat as ownership has become more established and as more affordable electric-vehicle models have become available. In 2021, around 65% of new car sales were battery-only and this figure is expected to rise further (Box 1.19). In 2022, both the annual vehicle insurance tax and the re-registration tax have been increased for electric vehicles. The political parties in government also intend to introduce VAT on electric vehicle purchases above a threshold value (thus aiming at the high end of the market). These moves, and further steps to pare back the concessions as the market matures further would be welcome. In parallel, it will be important to continue strengthening the promotion of shared mobility and climate-friendly modes of transport (i.e. zero-emission city buses, cycling and walking) in line with Norway’s “Zero-growth goal” in urban areas.
Box 1.19. Norway’s electric vehicle incentives
As of 2020 there were some 340 000 electric cars in Norway, the largest number among European countries and representing about 16% of global sales. The share of EVs among new vehicles being bought continues to grow; in 2021, 64.5% of new passenger registrations were battery (only) electric vehicles (BEVs) (around 86% including plug-in hybrid vehicles). The share of electric vehicles in the entire vehicle stock is growing quite rapidly. For instance, the share of battery-only passenger cars grew from 9.5% to 16% between 2019 and 2021 (the increase in BEV traffic volume is roughly similar). This is bringing Norway closer to its target of cutting transport emissions by 50% in 2030. The impressive outcomes in EV take-up have been driven by substantial tax benefits and privileges, including exemptions from value-added tax and vehicle registration tax, along with cheaper access to toll roads and parking (Figure 1.30) (Table 1.14). Also key has been the widening range of electric vehicles available, including lower-cost models.
However, the push to persuade households to purchase electric vehicles has come at a price. The policy has contributed to a sizeable revenue decline from car-related excise duties, from NOK 78 billion in 2007 to an estimated NOK 40 billion in 2021 (Figure 1.30). This equates to an average revenue loss of about 0.1 percentage points of mainland GDP each year. In addition, VAT revenues have fallen because of the VAT exemption for electric cars. The value of the exemption is estimated at NOK 11.3 billion in 2021. When viewed only in terms of direct CO2 abatement costs, the policy is not very efficient. Although there are uncertainties in abatement-cost calculation, the available estimates point to large costs. For instance, the tax breaks and the behavioral responses to them imply an abatement cost of EUR 1 370 per tonne of CO2 for battery electric cars (as of 2019) and at least EUR 640 and EUR 200 per tonne for light and heavy-duty commercial vehicles, according to one study (Fridstrom, 2021[20]). Similarly, a recent OECD working paper estimates the cost of emission reduction through the CO2-component in the registration tax to be around ten times the EU-ETS quota price – the cost of emitting a tonne of carbon under Europe’s emissions trading system (Eskeland and Yan, 2021[21]). As elsewhere, there are valid arguments for EV-subsidy exceeding the abatement cost. Larger subsidies help the EV market reach critical mass (reducing the need for subsidy in the long term).
As the EV market has become better established, government has started scaling back some of the incentives. Provisions allowing free use of bus lanes have been reduced and in 2022 a reduced rate for electric cars in the re-registration tax has been introduced and the standard rate has been introduced for electric cars in the annual vehicle insurance tax. In addition, the government parties have stated in their political platform that they will introduce VAT for the most expensive electric vehicles (above the value of NOK 600 000).
There is also a case for introducing a tax on electric vehicle use. Electric vehicles and conventional vehicles have approximately the same marginal externalities when CO2 is excluded. Fuel tax covers the externalities for conventional vehicles but there is no equivalent on electric vehicles. This shortfall strengthens the case for position-based distance, location and time-contingent road charge and it is welcome that the Norwegian authorities are currently working on this approach. This type of road charge can reframe vehicle taxation to ensure road users internalise congestion costs and related externalities. It can also help offset the fuel-tax revenues losses arising from the transition to EVs.
Government support for charging stations has been in place since 2010 and the current scheme, run by the state enterprise Enova (which provides funding and advice for energy and climate projects), aims for fast charging stations every 50km on around 7 500 km of Norway’s road network. The current network is already quite dense with the exception of some sparsely populated areas in the north. Overall, the growth in fast charging stations has been impressive. In 2015, there were only about 800 such charging points, as of July 2021 there were around 5 700 according to the NOBIL database of the Electric Car Association. In recent years, charging operators have been building fast charging stations without subsidy, especially in larger cities and along major highways. This is a further sign of the EV market reaching critical mass. While un-subsidised stations will probably become increasingly viable, government support will likely still be needed to ensure availability in remote areas.
Figure 1.30. Revenue from car related taxation is declining
Vehicle-related tax revenue, billions NOK
Note: Adjusted for inflation, estimated 2022 NOK values.
Source: Ministry of Finance.
Table 1.14. Key elements of Norway’s policies encouraging electric vehicle purchase
Source: OECD Secretariat
Table 1.15. Past recommendations on tackling environmental challenges
Main findings and recommendations: excluding those relating to the in-depth chapter
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