Norway’s economy is slowing as high inflation and interest rate increases continue to weigh on domestic demand. The labour market is tight but wages have risen less than prices so far, while high wage compression helps maintain a highly egalitarian economy. Inflation is declining but remains well above target and broad-based. The fiscal stance is expansionary and should be tightened to support monetary policy. While progress has been made to improve skills, skills mismatch remains high, and qualified labour is lacking notably in the technical sectors and in health care. The planned expansion of electricity generation and transmission lags projected demand, and Norway could soon become a net power importer. Higher and broader taxation of greenhouse gas emissions, coupled with investment in cost-effective actions abroad, would help to achieve further emission cuts more efficiently.
OECD Economic Surveys: Norway 2024
1. Key Policy Insights
Abstract
Introduction
Norway continues to enjoy high living standards. GDP per capita has long been far above the OECD average, boosted by high oil and gas revenues and sound fiscal and macroeconomic management (Figure 1.1, Panel A). Thanks to the huge domestic energy sources, the country has weathered the energy crisis better than most other countries. Skills are high and quite evenly distributed across the population. Norway is also one of the most egalitarian economies of the OECD thanks to high labour force participation, a compressed wage distribution, and small pay and employment differences between men and women. High employment, a relatively high retirement age and a well-diversified pension system will help Norway cope with ageing better than many other OECD countries. Households are protected from economic vagaries with universal health care, free education, and generous social benefits. Trust in institutions and in other people is among the highest in the world. And on top of that, Norway boasts one of Europe’s most diverse and pristine biospheres.
However, Norway was not sheltered from the shocks that hit OECD economies over the past few years. Inflation started to build up in late 2021; it has reached levels not seen since the 1980s, and has broadened, with second-round effects now taking over (Figure 1.1, Panel B). Rising transport, housing and food prices fuel inflation and burden households, notably low-income ones. The fiscal stance is not being tightened fast enough after high spending during the pandemic, and therefore fails to contribute sufficiently to the central bank’s efforts to return inflation to the target. The krone depreciated by around 8% against main trading partners over 2023, adding to inflationary pressures. Real interest rates are rising, slowing investment. The simultaneous trend rise of the unemployment and job vacancy rate points to growing imbalances in the post-pandemic labour market and a lack of skilled labour, holding back the transition to a productive, digitalised and green economy. While petroleum exports have been buoyant, geopolitical tensions still affect small open economies like Norway in various ways.
Figure 1.1. Norway’s lead has been eroding and it has not been spared inflation
Source: OECD, National Accounts database; and OECD, Consumer Prices database.
Besides having to manage the recent macroeconomic turbulences, Norway faces several long-term challenges. Productivity growth has been much below the OECD average over the past decade or so, and it has slowed again after a brief acceleration before the pandemic, jeopardising sustainable wage increases in the future. As a result, the lead in GDP per capita has been shrinking rather dramatically (Figure 1.1, Panel A). Exports of the non-oil sector continue to decline, remaining much below countries of similar size and wealth. Although Norway is currently quite young compared to most other OECD countries, the ratio of old people to those working will rise like elsewhere, putting pressure on pensions, health and long-term care. Absences due to sickness and disability are by far the highest in the OECD, thereby reducing participation, limiting return to work, and raising spending on social benefits. Finally, Norway will struggle to reach its objective to become a low-emission society by 2050 without additional policy measures.
Norway is the OECD’s public spending champion, partly reflecting the extensive coverage and generosity of the welfare system and ambitious regional development objectives. Currently, the Norwegian fiscal position is in excellent shape thanks to ample oil revenues and a fiscal framework that has allowed their accumulation in a sovereign wealth fund. However, challenges are looming. Coping with the depletion of oil resources and the fiscal consequence of ageing requires to increase the cost effectiveness of many public spending programmes, while leaving some room to reduce the high tax burden. The in-depth chapter identifies policy options to curb spending. These include: strengthening the fiscal framework by implementing medium-term budgeting, an expenditure rule and broadening the remit of the fiscal council; making regional policy more cost-conscious; reinforcing co-ordination and co-operation in the health care and education sectors; and improving incentives to contain spending in the sickness and disability schemes. Agricultural subsidies should be pruned and harm the environment less. Judicious reforms should improve spending control, while at the same time also lifting economic performance.
Opportunities for women and men are more equal in Norway than in most other OECD countries (Figure 1.2). Overall employment and participation rates are among the highest in the OECD and hardly differ among men and women, similar to other Nordic countries. Differences in pay (the gender wage gap) are among the lowest in the OECD and in Europe surpassed by only a few countries. The cost of childcare is low at around 8% of average wages, and enrolment in childcare facilities is high. As such, the availability and affordability of early childhood education and care supports mothers’ participation in the labour market and lowers barriers for working parents, especially for women. Effective marginal tax rates on second earners, often women – the share of additional gross earnings lost to either higher taxes or lower benefits when a person takes up or increases employment – are only slightly below the relatively high OECD average, reflecting a progressive income tax system and the means-testing of some benefits.
Against this background, this Survey has the following key messages:
Maintain a sufficiently restrictive monetary policy stance to bring inflation down over the medium term. Avoid fiscal stimulus so that fiscal policy supports monetary policy, and strengthen the fiscal framework.
Raise productivity and employment through structural reforms, notably to ensure the education system delivers stronger and more relevant skills.
Reform public spending thoroughly, including by bringing spending on a lower trajectory while increasing its impact on the well-being of households and the productivity of firms.
Figure 1.2. Norway provides broadly similar opportunities to women and men
Note: Panel A: employment rate of population aged 15-64. Panel B: difference between men’s and women’s median gross earnings as a share of men’s median gross earnings for full-time dependent employees. Panel C: user cost, net of any allowances, to full-time working parents with two children using full-time centre-based childcare. Panel D: share of gross earnings at the average wage when increasing hours worked from 50% to 100% of employment, for a second earner with two children and a partner working full-time at the average wage; effective tax rates include social assistance, temporary in-work benefits, and housing benefits; they do not include childcare benefits.
Source: OECD, Labour Force Survey; OECD, Social and Welfare Statistics database; OECD Taxes, Wages and Benefits.
Macroeconomic developments
The economy has slowed
The economy has slowed (Figure 1.3). Overall GDP growth fell to 0.5% and mainland GDP growth to 0.7% in 2023 (see Box 1.1)for the concepts of mainland and overall GDP). High inflation and interest payments and a tax hike on electric vehicles have weighed on private consumption, while savings built up during the pandemic provided support. Non-oil business investment, which had reached high levels, weakened, and housing investment contracted considerably owing to higher interest rates, while oil investment surged. As the labour market remained tight, wages increased strongly but were outpaced by inflation in 2023. Unit labour costs have risen strongly partly due to weak productivity growth, sustaining cost pressures. The fall in global energy prices in 2023 reduced the terms of trade and petroleum revenues, but they remain high by historical standards, contributing to a large budget surplus. Foreign demand for Norwegian energy remains strong to replace Russian oil and gas supply.
Figure 1.3. The economy has slowed amidst tightening financial conditions
Note: Panels A and B: GDP refers to overall GDP. Panel F: above 100 means increasing confidence and below 100 means weakening confidence.
Source: OECD, National Accounts database; OECD, Consumer Price Indices database; OECD, Economic Outlook No. 115 database; Statistics Norway and CEIC.
Monetary policy tightening – with the key policy rate rising from zero in late 2021 to 4.5% in late 2023 – has contributed to weaker demand and weighed on business and consumer sentiment. Inflation is trending down, with annual headline inflation having fallen below 5% since late 2023. Underlying inflation has also eased but remains elevated, partly because of a weaker krone. Real interest rates have become positive. House prices both in the residential and commercial sector – a key driver of inflation earlier on – have been cooling but picked up in early 2024. The electricity subsidy scheme has been extended to the end of 2024, supporting household income at considerable fiscal cost (around 0.1% of GDP).
Mainland GDP growth is expected to edge up to 0.8% in 2024 and to rise to 1.8% in 2025 as domestic activity expands gradually due to lower inflation and some monetary easing (Table 1.1). Headline inflation is projected to decline to around 3% by the end of 2025, still above the target of 2%, helped by lower energy prices and slowing demand. Investment will benefit from an improvement in global economic prospects and the implementation of climate-related projects. Lower financing costs and housing shortages will progressively stimulate housing investment, following the sharp decline in 2023. A still tight labour market, despite slightly rising unemployment, will keep nominal wage growth strong. Higher profits in the manufacturing sector, the front-runner in wage settlements, also point to high wage growth.
Table 1.1. Macroeconomic indicators and projections
1. GDP excluding oil and shipping.
2. Contributions to changes in real GDP, actual amount in the first column.
3. Consumer price index excluding food and energy.
4. Labour Force Survey.
Source: OECD Economic Outlook 115 database (updated).
The economic outlook is surrounded by persisting uncertainties and risks. Given its place on the map, Norway is very directly exposed to risks related to Russia. Geopolitical fragmentation and less open trade policy could disrupt supply chains and dent activity in small open economies like Norway. Higher borrowing costs could intensify housing market risks, notably related to high household indebtedness due to the high share of variable-rate loans. On the upside, households could spend more of the excess savings accumulated during the pandemic, spurring consumption, while faster than foreseen labour market integration of Ukrainian refugees could help ease labour market pressures. A selection of lower-probability but high-impact events that would have a qualitative impact on the outlook are described in Table 1.2.
Table 1.2. Events that could lead to major changes in the outlook
Box 1.1. Measuring GDPs in Norway
Norway uses two distinct measures of Gross Domestic Product (GDP): on the one hand standard or “overall GDP” encompassing all economic activities, and on the other hand “mainland GDP” excluding offshore petroleum activities and ocean transport (Figure 1.4, Panel A). The need to distinguish both GDP concepts goes back to the early 1970s with the discovery and subsequent exploitation of the sizeable oilfields on the Norwegian continental shelf. Since then, the petroleum sector has rapidly become a substantial part of Norway’s economy (Panel B). Due to the highly volatile nature of oil and gas revenues, the “mainland economy” is often seen as the proper indicator for structural analysis, notably as the government has shifted its focus towards reaching long-term economic and environmental sustainability.
Figure 1.4. The petroleum sector has expanded considerably
Note: In Panel A, mainland GDP consists of all domestic production activity except extraction of crude petroleum and natural gas, transport via pipeline, and sea and coastal freight and passenger water transport. The components in constant prices do not exactly add up to overall GDP due to their separate chaining. The contribution of mainland GDP and petroleum activities to overall GDP volume were thus approximated based on the volumes of each component.
Source: Statistics Norway.
Petroleum activities and ocean transport gradually expanded to 7% to 8% of GDP during the 1970s. They increased rapidly following the second oil shock in the early 1980s, quickly making up around 45% of exports and reaching 19% of overall GDP. The share of petroleum in GDP then remained relatively stable between the 1990s and the 2010s, hovering around 20%. Following Russia’s invasion of Ukraine in 2022, when many countries sought alternatives to Russian oil and gas, Norway has recorded all-time high petroleum and related products export receipts (Figure 1.4, Panel B).
The labour market remains tight
Despite some easing, the labour market remains tight (Figure 1.5). Unemployment, which fell rapidly in the wake of the post-pandemic recovery, has been edging up since 2022 but from a low of 3.2%. Women have a lower unemployed rate than men, but differences are small and shrinking. Employment has expanded most in the public sector and in construction over the past decade, while it declined in manufacturing. After a steep increase following the pandemic, labour force participation remains high at over 80%. Following a gradual decline over the past decade, immigration reached record levels in 2022, partly because of the inflow of Ukrainian refugees, while declining a bit in 2023. Unemployment among immigrants is trending down, pointing at the robust state of Norway’s economy and well-designed integration policies.
Figure 1.5. The labour market remains tight
Note: Panel C: immigrants are defined as individuals born abroad.
Source: OECD, Labour Force Survey; Eurostat; and Statistics Norway.
Following a steady decline over the past decade, employment rates rose strongly in 2021 and 2022, mainly among the young, and have remained fairly stable since (Figure 1.6). Even so, the gap between youth and overall unemployment has been widening slightly. In 2021 the Increasing Employment Commission noted that a part of the young were increasingly detached from the labour market and identified several underlying drivers, notably a lack of skills, insufficient activation policies and a relatively generous sickness and disability system (NOU, 2021[1]). The extent to which the recent reversal of the trend is structural or cyclical remains to be seen. As discussed further below, the government should step up labour market reforms to maintain high employment, including improving skills through stronger VET and adult learning; active labour market policies including wage subsidies; and a reform of the sickness and disability benefit system to prevent young people from dropping out permanently from the labour market, as recommended by the Commission (Chapter 2). The government continues to support employment notably through education reforms (Ministry of Education, 2023[2]).
Figure 1.6. Employment is growing again, especially among the young
Source: OECD, Labour Force Statistics.
The post-pandemic recovery has seen growing labour market imbalances. The relationship between unemployment and job vacancies has worsened, as the sum of vacant jobs and unemployed workers has increased since around 2021: the Beveridge curve has shifted outwards, although results should not be overinterpreted because the post-pandemic period is still relatively short (Figure 1.7). This partly reflects a high skills mismatch, as employers notably in health care and various technical areas struggle to recruit qualified labour. Despite overall high skills levels, lack of qualified workers and underqualification seems to be an issue in Norway. One-third of employers say they tried unsuccessfully to recruit/fill a job opening over the past year, while more than 40% of unemployed adults have not completed secondary education. The digital and green transitions as well as population ageing will further increase demand for qualified labour and require tailored labour-market policies, notably to increase the supply of jobs in the technical and health sectors (Ministry of Education, 2023[2]).
Labour immigration from Poland, Lithuania, Sweden, and other countries has sharply increased since 2020 as economic conditions were highly favourable in Norway. Ukrainian refugees under temporary protection accounted for a considerable share of new arrivals (Box 1.2). To address labour shortages and the lack of skilled labour, Norway further increased quotas for third-country national (non-EEA) workers in 2023, gave more priority to skilled immigration and facilitated immigration procedures more generally. While the employment rate of immigrants is around the OECD average (68% versus 67%), immigrant women have higher employment rates than in almost any other OECD country, illustrating that a robust labour market and well-developed childcare and family support services are key for labour market integration of immigrant women (OECD, 2023[3]). Against this background, Norway should continue to facilitate immigration of qualified labour; accelerate the recognition of foreign diplomas; and continue to offer services like universal childcare that help parents access the labour market more easily.
Figure 1.7. Labour market imbalances have grown
Unemployment and vacancies, 16-64 years old, four-quarter trailing moving average rates
Source: Statistics Norway; OECD Labour Force Statistics.
Box 1.2. Receiving and integrating Ukrainian refugees in Norway
Amidst the devastation caused by Russia’s large-scale war of aggression against Ukraine, more than 10 million people have become either internally displaced or refugees in the OECD area. In Norway, around 75 000 Ukrainian refugees had found shelter by early 2024, more as a share of the population than in any other Nordic country except Finland (Figure 1.8, Panel A). Since October 2023, the number of new arrivals in Norway has been gradually slowing (Panel B). More generally, the overall number of Ukrainian refugees in EU countries is declining, which can be attributed to both return movements to Ukraine and onward migration, particularly to non-European OECD countries. Scenarios of future refugee inflows vary a lot, owing to the uncertain development of the war.
Figure 1.8. Many Ukrainian refugees found shelter in Norway
Note: Refugees from Ukraine with granted refugee status, temporary protection, or a similar status since 24 February 2022.
Source: OECD, International Migration Outlook 2023; Norwegian Directorate of Immigration (UDI).
Like most OECD countries, Norway has implemented specific policies to manage the influx and facilitate the integration of refugees from Ukraine, akin to the EU’s temporary protection directive. Beneficiaries of temporary protection immediately receive a residence permit, as well as access to employment, accommodation, health, and education for persons under 18 years, alongside other rights. Access to some benefits has been tightened in early 2024 in line with other Nordic countries. A critical issue remains housing, whose lack in areas with strong employment opportunities discourages jobseekers, while some social benefits are linked to staying in asylum centres far from jobs. According to some observers, recognition of foreign diplomas is also relatively slow. This could explain why the employment rate of Ukrainians is relatively low at 20% (against 50% in Denmark). A recent White Paper on integration proposes steps to strengthen the formal qualification of refugees, among other policy initiatives (Ministry of Labour and Social Inclusion, 2024[4]).
Foreign trade is ever more shaped by the oil sector
Developments in foreign trade closely follow those in the petroleum sector. Norway’s current account balance is traditionally in large surplus owing to ample oil and gas revenues but fluctuating strongly in line with oil price developments (Figure 1.9). After the pandemic in 2020, the current account balance shot up from just above 1% of overall GDP to almost 30% within two years, while receding again in 2023. Trade openness, averaging around 35%, is below what could be expected for a small open economy, yet the indicator increased substantially in 2021 with rising oil exports, and in 2022 when the sanctions on Russia drove up petroleum prices and export revenues. Foreign direct investment inflows remain modest, as the oil and energy sectors – where most investment takes place - are in domestic public ownership. Going forward, the role of oil and gas in the economy is likely to decline: “peak petroleum” was reached in 2001, and production is expected to drop rapidly over the next 25 years (Figure 1.9, Panel D).
Exports and their destination countries have evolved over the past decade (Figure 1.10). Oil and oil-related industries (ships, oil platforms) made up around 60% of total goods exports in 2023, similar to 2012. Water transport (shipping) is the largest service sector, while services related to the oil sector are becoming more important. Export sectors like telecommunication equipment, medical instruments and digital services are gradually expanding, helping to diversify the economy, while business services and tourism are declining. An overwhelming and expanding share of Norwegian goods and services exports goes to Europe, as this is where petroleum and related goods are mostly exported to. Trade with Russia, Belarus and Ukraine was weak before the war at around 3% of exports and 2% of imports, although the sanctions following Russia’s invasion of Ukraine brought local trade with Russia to a standstill in the North of Norway.
With oil exports becoming so large, the share of manufacturing exports in GDP has declined to around 4%, much less than in the other Nordic countries, and GDP per capita growth is lower than in countries endowed with fewer natural resources. Despite the high quality of its institutional and macroeconomic framework, Norway might to some extent be exposed to the risk of “resource curse” (Box 1.3). In the long term, notably with the expected decline in extraction (Figure 1.9), the contribution of the petroleum sector to exports and economic growth is expected to subside (OECD, 2022[8]). Against this background, the country should prepare the transition away from the oil and gas sector and the diversification towards activities with a higher productivity potential by strengthening structural reforms as described below and as highlighted in earlier OECD Economic Surveys (see also the section on productivity).
Figure 1.9. The external balance strongly depends on oil
Note: Panel B: trade openness is measured as the average of goods and services imports and exports divided by overall GDP.
Source: OECD, Balance of Payments statistics; OECD, National Accounts database; OECD, FDI Statistics; Ministry of Energy and Norwegian Continental Shelf Directorate.
Figure 1.10. Exports by sector and country
Note: Panel A: services exports do not include financial service exports. Nordic countries include Denmark, Finland, Faroe Islands, Iceland, and Sweden.
Source: Statistics Norway; and OECD, Trade in Value added database.
Box 1.3. Does Norway fall prey to the resource curse?
The term “resource curse” was coined to describe the negative relationship between a country’s natural resource endowment and long-term economic development (Figure 1.11). More specifically, a higher oil export share is associated with lower GDP per capita growth in the long run (Kakanov, Blöchliger and Demmou, 2018[9]). Various explanations for the resource curse exist. They range from institutional factors such as weak rule of law and property rights; structural factors such as a lack of innovation and productivity growth in the natural resource sector; or else macroeconomic factors such as the challenge to run effective stabilisation policies when resource revenues are highly volatile, sometimes exacerbated by an inappropriate exchange rate regime. Commodity price booms could induce “Dutch disease”, which is a specific form of resource curse driven by the appreciation of the oil exporter’s currency, entailing a decline in competitiveness of the manufacturing sector.
Norway puts its resource wealth to good use. The quality of institutions is among the highest in the world, keeping rent seeking and political capture at bay and distributing the oil riches effectively and widely. Macroeconomic management of oil revenues is sound, notably with the creation and management of the sovereign wealth fund (Government Pension Fund Global) and the associated fiscal rules that ensure both stability and sustainability of fiscal policy (see fiscal section). Complementarities and spillovers also ensure that developments in the oil sector benefit manufacturing to some extent (e.g. oil exploration fosters ship and platform construction). Even so, Norway’s long-term growth has been below similar countries with a lower share of oil and gas exports, and the high-productivity manufacturing sector in Norway is much smaller than in other countries, continuing to decline. As such, Norway needs to foster structural reforms to avert the resource curse.
Figure 1.11. Norway may not fully escape the resource curse
Note: Panel A: average annual growth of GDP per capita versus average share of oil in goods export revenue between 2000 and 2022. Panel B: overall GDP for Norway.
Source: World Bank, World Development Indicators; IMF World Economic Outlook, October 2023.
Monetary and macroprudential policy tightening has peaked
Inflation is falling but remains above target
In December 2023, the central bank raised the key policy rate to 4.5%, the 14th and so far, last increase since the tightening cycle started in late 2021 (Figure 1.12). Policy rate adjustments have tended to be comparatively slow over much of the cycle, leading to a negative interest rate differential between Norway and its main trading partners. Against this backdrop, and with the US dollar and the euro holding up strongly, the krone depreciated by around 8% over 2023 against the currencies of main trading partners, like in some other small open economies including Sweden and Canada. Real interest rates based on measures of inflation and inflation expectations have been rising by around 1.5 percentage points since the beginning of 2023 and stood at around 1% at the end of the year, while real wage growth remained negative at -0.3% in 2023. The central bank estimates Norway’s neutral real interest rate (corresponding to a zero output gap, inflation at target and neutral monetary policy) at between -0.5% and +0.5%, although some estimates point at a higher rate of up to 1.5% (Norges Bank, 2023[11]).
Figure 1.12. Monetary policy has been tightened and the krone has weakened
Note: Panel A: inflation refers to national CPI adjusted for tax changes and excluding energy products (ATE); Panel B: consumer price index deflated measure of competitiveness (a rise reflects declining price competitiveness).
Source: Statistics Norway; Norges Bank; OECD, Competitiveness Indicators.
Inflation is set to decline further but to remain above target this year and next. Real interest rates have become positive for the first time in years and are expected to decline from mid-2024 (Figure 1.13). Uncertainty around the economic outlook and household’s reaction to higher consumer prices, higher interest rates and lower house prices remains wide (Norges Bank, 2023[12]), making it difficult to offer a time horizon for bringing inflation back to the 2% target. As the labour market remains rather tight and the 2024 wage agreements indicate higher wage growth than initially projected (5.2% against 4.9%), inflation could remain persistently above target. As such, the central bank projects little monetary easing until the end of 2024 (Norges Bank, 2024[13]). Against this background, the central bank should keep monetary policy tight enough to bring back inflation to around 2% by the latter half of 2025.
Figure 1.13. The central bank projects further disinflation but positive real interest rates
Note: Norges Bank projections. Panel A: recorded and projected CPI-ATE inflation; Panel B: projected money market rate over the next four quarters less projected CPI-ATE (adjusted for tax changes and excluding energy products) inflation over the same period.
Source: Norges Bank, Monetary Policy Report 1/2024.
Consumer price inflation is declining but remains high (Figure 1.14). Headline inflation peaked at around 7% in late 2022 and has gradually been receding since, yet it remains much above the central bank’s 2% target. As in many European countries, Norway’s inflation surge was initially propelled by energy prices, which almost doubled between mid-2021 and mid-2022. Inflation remains broad-based, with both goods and services contributing to price hikes, while the fall in energy and grocery retail prices since 2023 is pulling down inflation (Norges Bank, 2024[14]). Core inflation, which excludes food and energy prices, is easing as well, belatedly. “Second round” effects, notably via wage developments, have taken over, potentially hampering the slowdown of inflation more than initially expected (Norges Bank, 2023[15]).
Figure 1.14. Inflation is declining but has broadened
Note: Panel A: national CPI and national CPI adjusted for tax changes and excluding energy products (CPI ATE). Panel B: weighted contribution of each spending item to overall inflation. Panel C: national CPI adjusted for tax changes and excluding energy products (ATE).
Source: OECD Prices database; Norges Bank, Monetary Policy report 1/2024; OECD, Economic Outlook No.115 database.
The financial system looks resilient, but higher interest rates expose risks
Norway’s financial system increasingly feels the pinch of higher interest rates and a slowing economy. Credit growth is easing, and corporate insolvencies are on the rise, although from a low base (Figure 1.15). Creditworthy households and firms still appear to have ample access to credit. Banks’ exposures to commercial real estate firms (CRE) remain a vulnerability in the Norwegian financial system, like in Sweden (OECD, 2023[16]). CRE firms face higher interest rates and decreasing construction activity, making debt service more difficult (Norges Bank, 2023[17]). Household debt remains the highest in the OECD, and if the associated financial risks were to materialise, they could quickly spill over to other sectors such as banks or the consumption goods industry. However, growth of household debt has fallen below income growth.
Figure 1.15. Credit is slowing
Source: Statistics Norway.
Macroprudential policy is no longer being tightened. Since March 2023 the counter-cyclical buffer has remained unchanged at 2.5%, after having been gradually increased from 1% since June 2021. The maximum loan-to-value ratio remains at 85%, and the maximum ratio of debt to annual income at 500%. The most important policy adaptation in 2023 concerned the change of the debt-servicing capacity requirement. Borrowers must now be able to tolerate a 7% interest rate or a 3 percentage point interest rate increase, whichever is higher, compared with the previous requirement of a 5 percentage point rise in interest rates.
Banks look solid, liquid and highly profitable (partly because the interest rate spread between assets and liabilities has risen), satisfying capital and liquidity requirements by an ample margin (Figure 1.16). Large banks’ return on equity has been rising since 2020, reflecting higher net interest income and low credit losses. The share of non-performing loans has trended down since the mid-2010s (Panel B). Yet the central bank expects that the number of CREs not able to service their loans will increase in the coming years (around half of banks' corporate assets comprise lending to CREs). Higher losses are also expected on loans to households owing to higher interest expenses. Norwegian banks are highly interconnected, including with banks in other Nordic countries, through their crossholdings of covered bonds (one bank’s funding is another’s liquidity reserve), creating a systemic vulnerability as financial problems could more easily spread across banks. Yet stress tests conducted by the central bank and the financial supervisory authority suggest that banks could absorb a sharp economic downturn and continue to lend to households and firms.
Figure 1.16. Banks look sound and well-capitalised
Note: Panel A: return on equity after tax.
Source: Norges Bank, Financial Stability Report 1/2024; IMF, Financial Soundness Indicators.
Financial infrastructure security has become a core policy issue, as cyber-risks and threats have considerably expanded in recent years, although Norway has been spared a disastrous cyber-attack so far. As such, financial infrastructure security is seen in a wider context of critical networks such as for transport, power, and data transmission, with a cross-sectional and cross-agency regulatory framework intended to safeguard critical basic functions (NSM, 2023[18]). Within that framework, the Ministry of Finance has identified two core functions, namely “the ability to finance the public sector” and “safeguarding financial intermediation capabilities”. Financial sector authorities are working closely together to maintain the financial infrastructure and develop contingency plans such as alternative payment systems. Against this background, further developing the financial security architecture will help Norway to fend off attacks on key financial infrastructure.
The housing market cooled but supply falls short of demand
The housing market cooled through 2023 as income growth slowed and financial conditions, notably rising interest expenses and refinancing costs, worsened. Real house prices dropped by around 8% from their late 2022 peak (Figure 1.17, Panel A), although the decline may have come to a halt in early 2024. An estimate of the “fundamental” house price index by Norway’s Housing Lab research unit suggests that at the end of 2023 the country’s house prices were overvalued by around 7% compared to around 15% at the end of 2021. While the decline of house prices has so far not spilled over to the economy, further house-price correction could damp consumption through negative wealth effects, precautionary saving responses and reduced housing expenditures, adding to the effect of higher mortgage interest payments.
Debt service costs continue to rise (Figure 1.18). With the OECD’s highest debt-to-income ratio (Figure 1.17 , Panel B) and a net worth-to-income ratio below the OECD average, Norwegian households are particularly vulnerable to worsening financial conditions. Moreover, the high share of adjustable mortgages means that interest rate hikes spill over quickly to household debt service costs, thereby exacerbating housing affordability issues. If house prices were to start falling again, some households’ debt might no longer be covered by the respective property values. High mortgage debt is at least partly the result of highly favourable tax treatment of owner-occupied housing, as documented in the 2022 OECD Economic Survey of Norway (OECD, 2022). A gradual phase-out of the favourable tax treatment could help reduce the financial risks associated with high household debt (see tax section). In Denmark, scaling back the mortgage interest rate deduction has reduced equilibrium house prices and household indebtedness (OECD, 2021[19]).
Figure 1.17. House prices have undergone a correction, but household debt remains very high
Note: Panel A: ratio of nominal house price index to consumers’ expenditure deflator; Panel B: total outstanding debt – mostly mortgages - of households as a percentage of gross disposable income.
Source: OECD, Analytical House Prices database; OECD, Household Dashboard.
Figure 1.18. Debt service costs continue to rise
Note: Panel B: median of the mortgage burden (principal repayment and interest payments) or rent burden (private market and subsidized rent) as a share of disposable income.
Source: Norges Bank, Financial Stability Report 1/2024; OECD, Affordable Housing Indicators.
Housing supply remains constrained, notably in the capital area and other larger conurbations. While on average housing supply reacts relatively well to rising demand across the country (Figure 1.19, Panel B), a stringent green belt policy in larger conurbations and restrictions including bans on the conversion of arable land for other uses, limit supply in certain places (Tiitu, Naess and Ristimäki, 2021[20]). As a result, Norway has a very low urban expansion in international comparison (OECD, 2021[19]). Moreover, Norwegian cities set height limits on apartment blocks and non-residential buildings and have relatively few tall buildings per urban population compared with other rich countries, thereby limiting inner densification, as shown in the 2022 OECD Economic Survey of Norway. By limiting possibilities for both greenfield development close to built-up areas and densification of existing built areas, these restrictions contribute to an inflexible housing supply. The need for flexible supply responses will become more critical as trends such as population ageing, immigration, decreasing household size as well as work from home are weighing on demand patterns. Norway could help increase housing affordability by fostering housing supply, notably through the upgrading of low-density areas and selected green field developments close to public transport hubs.
Figure 1.19. Housing supply is constrained, driving up prices
Note: Panel A: residential buildings include detached houses, houses with two or more dwellings, and residences for communities; number of households refers to one or more family households as defined by Statistics Norway. Panel B: bars indicate the point estimate and the vertical lines show the corresponding confidence interval. Light blue bars indicate coefficients that are statistically equal to one.
Source: Statistics Norway; (Cavalleri, Cournède and Özsöğüt, 2019[21]):), How responsive are housing markets in the OECD? National level estimates.
Fiscal policy should be more forward-looking
A large fiscal surplus thanks to soaring oil revenues, but fiscal space will shrink
Norwegian fiscal policy outcomes are strongly shaped by the petroleum sector. Public spending is partly funded through a fiscal system that allows the country to run substantial mainland-economy budget deficits. Petroleum net revenues are transferred in full to the sovereign Fund (Government Pension Fund Global). A fiscal rule stipulates that transfers from the Fund to the budget shall, over time, equal the expected real return of the Fund, estimated at 3% annually. This rule has been observed in the past (though in 2020 when Covid-19 required extraordinary measures the transfers from the Fund exceeded the longer-term norm). The rule generally entails net accruals to the Fund. The non-oil structural budget deficit has constantly risen from 4% of GDP in 2010 to close to 10% in 2023. Fund withdrawals cover ever more spending, currently around 20% of the overall budget. Nevertheless, tax revenues are large and mainland Norway’s ratio of general government revenue to GDP is also among the highest in the OECD.
The budget surplus shot up to 26% of GDP in 2022, dropping to a still considerable 16% in 2023, owing to expanding oil revenues (Figure 1.20). The structural non-oil deficit rose from 9.2% of potential GDP in 2022 to 9.7% in 2023. As such the fiscal stance as measured by developments of the structural non-oil balance was expansionary. The initial structural non-oil budget deficit for 2023 was revised up substantially over the year, mainly because of unexpected wage growth in the public sector; support to Ukraine; a higher number of refugees; and support to households to cope with high energy prices. Consistent with the higher non-oil deficit, the take-out rate from the Fund rose from the initially planned 2.5% to 3%, close to the long-term fiscal rule. At the beginning of 2024, the total value of the sovereign Fund reached USD 1 655 billion, around 400% of mainland GDP or USD 278 000 for every Norwegian citizen. The “efficiency dividend” initiative of the former government, designed to create additional fiscal space, was shelved.
Figure 1.20. The rise and fall of oil revenues has driven fiscal outcomes in the past two years
Note: Panel A: structural non-oil balance computed as a share of mainland trend GDP; Panel B: assets and liabilities related to tax revenues are excluded.
Source: OECD, Economic Outlook No. 115 database; Ministry of Finance, Budget 2024.
Going forward, fiscal policy will hardly change tack. The 2024 budget foresees a rise of the structural non-oil deficit to 10.4% of GDP, corresponding to a fiscal impulse (expansionary fiscal stance) of around 0.7% of GDP (Figure 1.21, Panel A). This deficit is expected to remain below 3% of the value of the Fund. The budget includes few compositional changes, except a planned decline in the share of public investment (which remains higher than in most other countries at around 6.9% of GDP) and a sharp increase in defence spending to 2.2% of GDP (Ministry of Defense, 2024[22]). Spending rose more than GDP and tax revenues over the past decade (Panel B). Norway has not yet established a medium-term expenditure framework (MTEF), so no spending plans are available beyond 2025. Against the risk of declining returns of the Fund over the coming years, fiscal policy ought to become more contractionary, to create fiscal space for the future. Also, Norway could benefit from the introduction of a MTEF (Chapter 2).
Long-term projections carried out in 2021 by the Ministry of Finance estimate that the fiscal space created by taxes and fiscal-rule-abiding wealth-fund transfers will approximately halve by 2040 (updated projections, including a risk analysis, are to be released by June 2024). Revenues are likely to only cover structural spending growth associated with demographic changes and funding of national insurance schemes. This implies no room for new spending initiatives. Over the next 15 years or so, the fiscal gap is expected to deepen by almost 6% of GDP due to higher spending, lower tax revenues, lower oil revenues and lower returns of the wealth fund. Against this backdrop, the introduction of a spending rule could help rein in spending excesses while maintaining fiscal space for new policy initiatives. Spending rules are associated with (and ever more seen as causally linked to) improved fiscal performance such as improved budget balances, lower debt, and lower public spending volatility (Brändle and Elsener, 2023[23]) (Fall et al., 2015[24]). Additional supervision mechanisms such as a fiscal council with a broader remit could help improve the effectiveness of the fiscal framework (see Chapter 2).
Figure 1.21. Structural non-oil deficits are rising anew
Note: Panel B, volumes, deflated by mainland GDP deflator
Source: Ministry of Finance, Budget 2024; OECD, National Accounts database.
The fiscal cost of ageing will increase further
Norway is relatively young, owing not least to considerable labour immigration. Life expectancy and self-rated health status are among the highest in the OECD, both for men and women, partly thanks to a healthy lifestyle. The work life is rather long with the statutory retirement age at 67 years; participation remains above the OECD average, notably following the post-pandemic recovery; and older workers are well-integrated into the labour force. The pension system is well-diversified, comprising the core pay-as-you go national insurance pension system (folketrygden), occupational pension funds and individual tax-favoured savings. Nonetheless, public spending on pensions as a share of GDP exceeds the OECD average (Figure 1.22, Panel A). The 2011 pension reform in the private sector and a similar public sector reform in 2018 increased incentives to remain in work, thereby considerably expanding the fraction of those beyond 62 years in employment (Hernæs et al., 2023[25]). In this context, ageing costs are set to rise less than in many other OECD countries.
Figure 1.22. Norway is getting older
Note: Panel A: total public cash benefits spent on old age and survivors; mainland GDP for Norway. Panel B: number of individuals aged 65 and more divided by the population aged between 15 and 64.
Source: United Nations, Department of Economic and Social Affairs, Population Division (2022), World Population Prospects 2022, Online Edition; OECD, Social expenditure database.
Even so, the country will not escape the economic and fiscal impact of ageing. The old-age dependency ratio is expected to rise as population growth and immigration slow and the share of active cohorts contracts (Figure 1.23, Panel B). The government projects the fiscal cost of ageing to rise by around 2.5% of GDP by 2050, notably because of higher spending on health and long-term care, pensions, and sickness and disability benefits. Some provisions still allow for early retirement without a corresponding lower pension pay-out, although in 2023 the government and social partners agreed to phase out certain early retirement schemes. In March 2024 Parliament adopted a reform to raise the pension age in line with the increase in life expectancy from the 1964 cohort onwards and lift the pensionable age limit in the public sector from 70 to 72 years, largely in line with the proposals of the Committee on pension reform from 2022 (Ministry of Labour and Social Inclusion, 2024[26]). Moreover, the pension system will be evaluated comprehensively every 10 years.
Figure 1.23. Sickness and disability benefits are the most generous in the OECD
General government spending, 2022 or latest
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. There are differences across countries in the use of tax (as opposed to spending) instruments and how transfers are taxed. In both panels, GDP for Norway refers to mainland GDP.
Source: OECD, National Accounts database.
Pension reform could have a larger than expected economic and fiscal impact as it may reach beyond those directly affected by an increase of the statutory retirement age. Working couples tend to retire at the same time to spend more (leisure) time together after retirement, even if there is a non-negligible age difference between the two. Once the pension age is increased and one partner decides to work longer, the other partner often also decides to remain in work. Around one third of decisions to work longer after the 2011 pension reform seem to be related to what can be named “leisure complementarity” (or, correspondingly, “work complementarity”) rather than to the change in the pension age and related financial incentives for the individual person (Galaasen and Kruse, 2023[27]). Pension reforms could hence have a considerably larger effect on retirement and employment than estimated by models that do not consider this interaction.
The high and rising level of sickness and disability benefits poses a particular problem to the public finances (Chapter 2). Spending on Norway’s sickness and disability system makes up around 22% of total public spending or 8% of GDP, more than in any other OECD country and rising further (Figure 1.23). The current level of sick leave support is very generous, often providing 100% wage compensation. The rate of sickness leave, notably long-term absence, has increased since the pandemic. Long-term absences do not only create a burden on the public finances but severely increase the risk of dropping out of the labour market, and they are a pathway to early retirement. As sickness and disability benefits are widely recognised as in need of reform, an Increasing Employment Committee presented a set of proposals in 2021, notably strengthening participation obligations and extending the period of employer funding to incentivise employers to bring employees back to work. The government should follow up on these proposals to help people reintegrate into the labour market. A potential model could be the Danish work-oriented “flexjob” scheme (Chapter 2, Box 5), designed to assist individuals with reduced work capacity and allowing employers to adapt job tasks to accommodate employees' abilities, with the government subsidising wages for reduced work hours (OECD, 2019[28]) (NOU, 2021[29]).
Overall, Norway’s long-term fiscal profile is to a large extent shaped by the expected contraction of petroleum revenues and decline of the value of the oil fund as a share of mainland GDP (Figure 1.9). Also, population growth implies that Fund revenues must be distributed across a larger population, thereby covering a smaller proportion of total public expenditure (Figure 1.24). In an update of the baseline scenario developed by the Ministry of Finance in 2021, with growth remaining low due to persistently low productivity, gross government assets would reach around 420% of GDP by 2030 and then gradually fall. Correspondingly, to comply with the 3% fiscal rule, structural non-oil deficits would have to fall from currently 12.5% of potential GDP to around 9% by 2060, assuming a constant non-oil tax-to GDP ratio. Lower returns to the Fund and a smaller cash-flow from petroleum activities would accelerate the decline of the Fund’s value as a share of mainland GDP and imply even lower structural non-oil deficits. Past recommendations and actions taken with respect to monetary, financial and fiscal policies are summarised in Table 1.4, and the fiscal impact of recommended reforms is shown in Box 1.4.
Box 1.4. Quantifying fiscal policy recommendations
The following estimates roughly quantify the fiscal impact of selected recommendations within a 5 to 10-year horizon, using simple and illustrative policy changes. The reported effects do not include behavioural responses and growth effects.
Table 1.3. Illustrative fiscal impact of recommended reforms
Note: The recommendation related to improving education outcomes is included in the structural quantification, but its fiscal impact cannot be quantified.
Source: OECD own calculations.
Figure 1.24. The value of the Fund as share of mainland GDP is likely to decline
Note: The scenarios are an update of the estimates in the previous OECD Economic Survey of Norway in 2022, which were based on Ministry of Finance estimates from 2021. New Ministry of Finance estimates were under preparation at the time of writing.
Source: Calculations based on Ministry of Finance data.
Table 1.4. Past recommendations and actions taken in monetary, financial, and fiscal policies
Revenues rely strongly on natural resource taxation
Norway’s tax burden is among the highest in the OECD. Unlike most other countries, the tax system is heavily geared toward revenues from natural resource taxation, notably from the petroleum sector (revenues from the latter go to the Fund rather than the state budget). The corporate income tax rate currently stands at 22% and maintaining it at a low level has been a perennial objective of governments of different colour, because business taxes tend to reduce investment, distort financing towards debt and have unclear distributional consequences (NOU, 2018[30]). At less than 0.5% of GDP, taxation of immovable property plays a marginal role, as municipalities are allowed but not obliged to levy this tax, and around 10% do not (however, immovable property is subject to the central government wealth tax). After a gradual decline over the past decade or so, overall taxation levels have been climbing again, mostly because of large increases in petroleum revenues (Figure 1.25).
Tax reforms since 2022 have made the tax system more equitable but also increased overall tax pressure. Marginal tax rates on low and middle wage income have been reduced, thus encouraging increased labour supply, and the basic allowance has been significantly increased. Total taxes on high wage income were somewhat increased by broadening income brackets, while tax rates were kept unchanged. This supports middle- and lower-income households’ disposable incomes, thereby addressing concerns about cost-of-living pressures. Wealth taxation was increased while the tax allowance was expanded, strengthening progressivity. Following these tax hikes, the marginal tax rate on savings and investment is high and could - since wealth taxes weigh upon capital instead of returns - lie above 100% if returns are low (NOU, 2022[31]). A new resource tax on aquaculture was introduced in 2023 and one on wind power in 2024, mirroring the taxes on hydropower in place since 1997 (Amundsen, 2024[32]). Subsidies for electric cars were scaled down in 2023 as VAT relief for cars above NOK 500 000 or around EUR 45 000 (“Tesla rebate”) was abolished. In line with proposals of the Tax Commission, Norway should further reduce income taxes, notably for low incomes, to increase work incentives. It should also reduce the net wealth tax by expanding allowances and/or reduce tax rates, to spur investment in small and family businesses, while taxing all assets at market prices.
Figure 1.25. The tax take is on the rise and heavily geared towards natural resource taxes
Note: Panel A: OECD-EU stands for the unweighted average of 22 OECD countries that are EU members. Panel B: all other taxes include VAT, other taxes on goods and services and taxes that cannot be allocated across categories.
Source: OECD, Global Revenue Statistics database.
The taxation of owner-occupied housing remains among the lightest in the OECD, as shown in the previous OECD Economic Survey of Norway (OECD, 2022[8]), contributing to high housing demand and house prices. Norway, contrary to most other countries, allows mortgage interest deductions with no corresponding taxation of imputed rent accruing to owner-occupied dwellings. Norway also charges no capital gains tax on the sale of primary residences. Finally, housing wealth is taxed more lightly than other wealth and capital. As such, the marginal tax rate on a debt-financed primary residence is negative (i.e., the return to debt-financed homeownership is higher after taxation than before it). No housing tax reforms were introduced since the previous Survey, except for a somewhat higher net wealth taxation of primary residences above a certain value and taxation of secondary homes at 100% of market value. The government should follow the proposals of the Tax Commission in 2022 to reform housing taxation, notably to introduce a tax on imputed rent on owner-occupied dwellings or to phase out deductibility of mortgage interest payments. Successful reform in other OECD countries may also provide inspiration (Box 1.5).
Box 1.5. Reforming the taxation of housing: OECD country experience
Norway is among the countries that boost housing demand through generous mortgage interest relief. Phasing that out can reduce house prices by substantial amounts in countries where supply lacks flexibility because much of the value of mortgage interest relief gets capitalised into land prices. In Denmark, scaling back the mortgage interest rate deduction has reduced equilibrium house prices and household indebtedness. Similarly, studies in the United States show that eliminating mortgage interest relief reduces house prices and increases homeownership. In the long term, lower house prices make housing markets more inclusive by facilitating homeownership of a wider share of the population and by driving down rents. In the medium term and before prices adjust, phasing out mortgage interest relief comes at a loss to homeowners who benefited from the tax advantage. The resulting political economy challenge means that countries that have reduced or eliminated mortgage interest relief have typically done so gradually (France, the Netherlands, the United Kingdom).
The Dutch tax system was long offering exceptionally favourable conditions to homeowners with large mortgages, while applying substantial levies on housing transactions. Reforms have brought several benefits. First, reducing the favourable tax treatment of mortgage-funded homeownership lowered household indebtedness, contributed to greater economic stability and resilience, while also curbing house price increases. Second, lowering transaction taxes made the housing market more fluid, facilitating residential mobility and labour reallocation. The two reforms went well together in a tax package, as they had opposite effects on overall tax revenues. In addition, a series of measures have gradually narrowed the favourable treatment of mortgage borrowing under the personal income tax. A significant first step taken in 2013 was to restrict interest relief to mortgages that must be reimbursed over time. Tax relief was excluded for “balloon mortgages” where much or all of the principal is repaid at the term in a lump sum and which had contributed to very high household indebtedness. A further reform was launched in 2014 to reduce the maximum mortgage relief rate by 0.5 percentage point per year until 2040 (from a starting point of 52% in 2014). In 2017, the government decided to accelerate this phase-out, taking it to 3 percentage points a year from 49% in 2020 to 37% in 2023.
Source: (OECD, 2021[33]), (OECD, 2023[34]).
Productivity growth should be strengthened
Productivity growth is lacklustre and firm dynamism weak
Norway is one of the most productive countries of the OECD, but at around 0.5% per year productivity growth is clearly below the OECD average of around 1% (Figure 1.26). Without oil, productivity growth would have been even lower (it was around 0.8% in the oil sector). Moreover, the share of employment in startups is below other Nordic countries except Sweden, and post-entry growth of firms among the lowest, suggesting weak business dynamism (Calvino, Criscuolo and Menon, 2016[35]). Against this background, Norway needs to develop a policy framework that enables the growth of new productive sectors less connected to extraction. Policy support should include improvements to the general legal and administrative environment for businesses. This will enhance the overall responsiveness of the business sector to changing conditions, and encourage competition, innovation, and the adoption of new technologies, as pointed out in the previous OECD Economic Survey of Norway (OECD, 2022[8]). Structural reforms aimed at raising productivity could help raise Norway’s per capita income level by up to 8% (Box 1.6).
Figure 1.26. Productivity growth has been lacklustre, and firm dynamism is rather weak
Note: Panel C, birth rate refers to the number of enterprise births in the reference period (t) divided by the number of active enterprises in t.
Source: OECD, Productivity database; OECD, Structural and Demographic Business statistics.
The economic development is uneven across Norwegian regions, with productivity gaps widening between regions (Figure 1.27). Moreover, population has barely grown in Northern areas. As in other OECD countries, economic geography seems to be driven by economies of agglomeration, with Oslo being richest and attracting more people (Glaeser, 2008[36]). For a long time, the government has been fostering incentives for people and business to locate in the Northern counties, notably by increasing public investment, improving public services, reducing taxation, and, since 2021 exploring multi-level agreements with selected municipalities to promote local development. Initiatives to foster a green industry sector are supported by abundant clean energy supply (see section below on the power market). While some policies can indeed help reduce population decline and support productivity, experience with place-based policies and their effectiveness is mixed, and they can be costly (Chapter 2) (Rawdanowicz and Millot, forthcoming[37]).
Box 1.6. Quantifying structural reforms
Selected reforms proposed in this Survey are quantified in the table below, using simple and illustrative policy changes and based on both cross-country and single-country regression analysis. Some reforms are not quantifiable under available information or given the shape of the policy design. Most estimates rely on empirical relationships between past structural reforms and productivity, employment, and investment, assuming swift and full implementation. They do not reflect specific settings in Norway. Hence, the estimates are merely illustrative, and results should be interpreted with care.
Table 1.5. Potential impact of structural reforms on per capita income
Source: OECD calculations based on (Égert and Gal, 2017[38]), (Cournède, Fournier and Hoeller, 2018[39]), and (Egert, de la Maisonneuve and Turner, 2023[40]).
Figure 1.27. Population and economic growth is concentrating in southern agglomerations
Note: In Panel A, offshore activity on the continental shelf is excluded.
Source: OECD, Regional Statistics.
The business climate is average, but administrative burdens are high
Norway’s business climate is close to the OECD average, as shown by the provisional vintage of the new OECD indicators of product market regulation stringency. However, differences are large across dimensions (Figure 1.28). The scope of public ownership is slightly above average, owing to the prevalence of large state-owned enterprises (SOEs) in the energy and extraction sectors, although SOEs are well-governed. The state is less involved in business operations than in most other countries, and barriers to trade and investment as well as barriers in the network sectors are low. However, the administrative burden for both incorporated and personally-owned firms is above the OECD average, and the periodic evaluation of existing regulations (regulatory assessment) is weak. Against this background, the government should focus on the evaluation and reform of the administrative framework to run businesses, to help raise productivity, foster innovative start-ups, and speed up economic diversification.
Figure 1.28. Product market regulation is slightly more stringent than in the average OECD country
Product Market Regulation, difference to OECD average, 2023
Note: A positive sign means more stringent regulation than in the average OECD country. A negative sign means less stringent regulation.
Source: OECD 2023 Product Market Regulation indicators.
A case in point are the insolvency procedures which can still be relatively long and cumbersome. The insolvency framework was temporarily eased during the Covid-19 period to facilitate the restructuring of firms in financial difficulties. The government should make those changes permanent and continue reforming the insolvency framework, to help viable firms prosper while helping unviable ones to leave the market and reallocate labour and capital to more productive uses (André and Demmou, 2022[41]). Past reform recommendations and actions taken to strengthen productivity and employment since the previous OECD Economic Survey of Norway are shown in Table 1.6.
Table 1.6. Past recommendations and actions taken to strengthen productivity and employment
Wage agreements foster high employment, and wage dispersion is low
Wage agreements tend to help strengthen employment and avoid a wage-price spiral thanks to a highly-coordinated wage bargaining mechanism (Kolsrud and Nymoen, 2023[42]) (Gjelsvik, Nymoen and Sparrman, 2020[43]). National wage formation is based on pattern wage bargaining, where collective bargaining in the wage-leading manufacturing sector defines a norm for the negotiations that take place in the rest of the economy and the public sector (wage-following). While there are no regulations in the labour legislation preventing different sectors or individual firms from deviating from agreements established by the manufacturing sector, social partners have historically complied with the central agreements as the model has broad societal support. The Norwegian wage setting pattern tends to foster high employment rather than high wages. Overall, the Norwegian model has worked well in a context of a relatively stable industrial structure. It tends to come under pressure from disruptive industries like AI-based technologies with the power to undermine pattern wage bargaining.
Differences in wages across sectors and corporate hierarchy are among the lowest in the OECD, as are differences between wages for men and women, reflecting a high degree of equality of opportunity for workers (Figure 1.29). Wage compression fosters social and economic integration and reduces pressure for (costly) redistribution. However, low wage dispersion might have implications for innovation and skills development as workers have few incentives to move from low to high-skill productivity sectors. Moreover, a flat wage curve might discourage pursuing higher education (or encourage studying for pleasure rather than a new job), as investing in human capital and knowledge-intensive activities and sectors hardly pays off. The system relies on high unionisation and has come under threat from labour immigration as immigrants often accept lower wages and tend not to be covered by collective agreements, unlike most native workers. Therefore, union coverage in certain sectors has been decreasing quite rapidly, opening the way for stronger wage differentiation.
Figure 1.29. Wage dispersion is very low
Note: Panel A, difference in hours worked between men and women in full-time dependent employment; Panel B, gross monthly earnings of full-time employees, excluding apprentices, working in enterprises with 10 or more employees.
Source: OECD, Labour Force Survey – gender wage gap; OECD, Labour Force Survey – decile ratios of gross earnings.
Keeping trust and integrity high
The quality of institutions is a fundamental determinant of productivity and economic growth. Good governance encompasses the rule of law, government accountability and effectiveness, political stability, trust in governmental institutions, regulatory quality, corruption control and transparency. Evidence suggests that well-functioning public institutions gain higher public trust which in turn can lead to more efficient governance, and that corruption undermines institutional quality, erodes trust, increases costs and risks for businesses, thereby distorting the efficient allocation of resources (Acemoglu and Robinson, 2010[44]). Overall, some of the highest institutional quality in the world and high trust in national and local governments, the civil service, and the legal system are underpinning Norway’s position as a good place to live and do business (OECD, 2023[45]). Table 1.7 summarises past recommendations and action taken to address public integrity since the publication of the previous OECD Economic Survey of Norway.
Table 1.7. Past recommendations and actions taken to strengthen public integrity
Even so, Norway is not without corruption risk. Indicator values measuring control of corruption are declining slightly, with the difference to other Nordic countries widening (Figure 1.30). Relatively poor scores for corruption in the public sector suggest that some regulations and practices, notably regarding public procurement, could open the door to corrupt practices. Corruption remains an issue in local governments, where efforts to eliminate misconduct need to continue. The authorities also note that unlawful practices are increasingly shifting to the digital world, with internet fraud expanding rapidly, like in other countries (ØKOKRIM, 2022[46]). Norway is about to set up a register of beneficial rights owners, which is aimed at preventing unlawful use of companies and other legal entities. Against this background, public integrity should remain a guiding principle in the government’s anticorruption policies, and efforts should continue to weed out instances of poor practice, given their role in maintaining trust and a good business climate.
Figure 1.30. Norway has high-quality institutions, but control of corruption remains important
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 and C: World Bank, Worldwide Governance Indicators; Panel D: Varieties of Democracy; Project, V-Dem Dataset v12.
Fostering strong and relevant skills
Skills mismatch is considerable
Skills are widely regarded as a fundamental determinant of long-term growth, as differences in multi-factor productivity are strongly driven by differences in the quality of human capital in a country (Egert, de la Maisonneuve and Turner, 2023[40]). The increasing economic importance of knowledge, for instance in the areas of digitalisation or green transition, is projected to raise the returns to skills further. Policymaking should be concerned with both strengthening the overall stock of human capital (“strong skills”) and aligning that stock with labour market needs (“relevant skills”), thereby avoiding skills mismatch. Indicators from the latest OECD Survey of Adult Skills (PIAAC) suggest that higher skill and qualification mismatch is associated with lower labour productivity (OECD, 2019[47]). Over-skilling and under-qualification account for most of these impacts, notably because more productive firms find it difficult to attract skilled labour.
Norway’s skill profile is evolving rapidly. Over the past two decades, growth of the labour force was mainly driven by demand for high-skilled workers, while demand for medium-skilled workers declined (Figure 1.31). Only 9% of jobs are in the low-skilled category today, the lowest share in the OECD. Shortages of skilled labour have become more acute. Measured by national indicators, labour shortages have more than tripled between 2016 and 2022, particularly in the technical and health sectors (Ministry of Education, 2023[2]). In 2023, around one third of Norwegian employers had tried to recruit during the past three months without success. Occupations that require a vocational or higher education qualification, such as engineers, technicians, medical professionals, teachers, and managers, are among the most difficult to fill. A lack of skilled car mechanics threatens continued maintenance of the large and growing fleet of electric cars (de Prez, 2020[48]).
Figure 1.31. Skills should be better aligned with labour market needs
Note: Panel A: high-skill occupations are managers, professionals, and technicians and associate professionals; medium-skill occupations are clerical support workers, skilled agricultural workers, craft and related trades workers and plant and machine operators and assemblers; low-skill occupations are service and sales workers, and elementary occupations. The armed forces and non-responses are not shown.
Source: Eurostat, Labour Force Survey; and OECD, Skills for Jobs database.
Policy has reacted to the rapidly changing skills and labour market challenges. In 2017 a Skills Needs Committee, along with a Skills Policy Council (Kompetansepolitisk råd) made up of social partners, was established to analyse and discuss skills policy issues. In 2023 a White Paper detailed a set of policy steps to upgrade skills for a productive economy, the green transition and high-quality welfare services. The government plans to get more people to work by developing a closer cooperation between the counties and the labour market authorities; making it easier to get student loans for short courses; and continuing to invest in a flexible and decentralized education system (Ministry of Education, 2023[2]). An education policy reform (“Completion Reform”) for upper secondary education to be legislated in August 2024 introduces the right to completion and retraining and codifies schools’ obligation to reduce absenteeism.
Foundational skills are declining to a worrying extent
The quality of compulsory education as measured by PISA has declined to a worrying extent since 2015 (Figure 1.32). The recent deterioration does not solely reflect the deleterious impact of the Covid-19 pandemic. Indeed, Norway featured above the OECD average between the 2009 and 2018 waves but is now considerably below the OECD average of around 500 points. Gaps in student performance between different socio-economic and ethnic groups, as well as between girls and boys, remain wide (see Chapter 2). Even if girls are more avid readers than boys in virtually all OECD countries, the gender difference in Norway is especially large. Immigrant students, notably boys, fare worse than native students. But differences between schools are very low, suggesting uniform school quality across the country independent of school size or location, and the role of socio-economic background for success is among the lowest in the OECD (OECD, 2023[49]).
Figure 1.32. PISA results have declined sharply
Note: The score of 500 is the normalized average of all participating countries.
Source: OECD, PISA 2022 results.
Norway has progressively reacted to the declining quality of compulsory education. In 2020, the country implemented a new core curriculum in primary and secondary education, to help students better adapt to future skills needs. Generic competences like critical thinking and problem solving were integrated into the subject curricula. There now seems to be a stronger connection between the core principles of education and subject curricula, and subjects have become more practical and exploratory. The education reform, to come into force in summer 2024, strengthens the responsibility of the counties, notably with respect to a seamless transition to non-compulsory education, offers more career counselling and strengthens absence control. These initiatives are welcome and could help lift foundational skills again. They should be complemented by policies addressing the high within-school differences (see Chapter 2).
Vocational education and training could be made more attractive
Norway has a well-established track of vocational education and training (VET). Around half of upper-secondary students start a vocational track, where courses of study are typically shorter, partly explaining Norway’s relatively low ranking in terms of years at school. The VET system relies strongly on work-based learning (apprenticeships, sometimes called “dual system”), making it strongly labour-market driven as employers and professional associations actively shape learning and skills (Figure 1.33). Norway’s VET programmes start with two years of schooling, followed by a two-year apprenticeship. Firms receive a grant intended to cover the cost of the first year of the apprenticeship. Employers resist an earlier start of apprenticeships - which is common in most other countries with a dual system - arguing that younger students are not sufficiently productive. In 2023, around 5 600 applicants or 20% of VET students had not received an apprenticeship. As such and unlike in countries with strong VET like Denmark, Germany or the Netherlands, the labour market test comes in rather late, potentially explaining relatively large mismatch and high dropout rates.
Some policy initiatives to widen the appeal of upper-secondary VET started in 2021, based on the Employment Commission’s recommendation that more young people complete upper secondary education. In 2021 the number of upper secondary vocational programmes was extended from eight to ten, and several were adapted to better fit labour market needs. The education reform to be enacted in 2024 will provide students with an entitlement to upper secondary education until completion, and a broader access to professional trade certificates (see above). In addition, the reform will modularize training to make it easier for adults to gain a competence and complete a training they have started but interrupted previously. In late 2023 the government increased financial support for internships in the health sector, notably in institutions in the north of the country. These initiatives are welcome, as they are likely to increase the level and relevance of skills.
Figure 1.33. Norway has a well-established VET system
Students in work- and school-based learning, share in upper-secondary education, 2021
Source: OECD, Education at a Glance database.
Norway’s VET system lacks a comprehensive tertiary level as it offers relatively few progression opportunities for apprentices graduating from upper-secondary VET. Tertiary VET studies do not exceed two years, and programmes are not classified as higher education (although there are some pathways for upper-secondary VET students to get access to universities), unlike the VET universities (“Fachhochschulen”) in Germany or Switzerland for instance. As such, tertiary VET accounts for around 10% of university students only, which is low given the high share of upper-secondary VET. With reputation of the short cycle relatively low, many students who complete upper secondary VET choose to pass academic exams to be admitted to universities and university colleges, thereby extending study times. Against the background of labour market needs for more higher-level technically skilled workers, the government should gradually develop a fully-fledged tertiary vocational track. This track can be made more attractive by either extending the existing short-cycle programmes, or by opening direct access for secondary VET students to the university colleges, notably those that offer studies in the technical areas or in health care (OECD, 2022[50]). Expanding tertiary VET could also help reduce late transfers to the general track, reduce drop-out rates and shorten study length.
Tertiary education needs more labour market relevance
Norway should continue to enhance the labour market relevance of its tertiary education sector, relying on earlier reform success. Several reforms have been passed since the launch of Norway’s skills strategy in 2017. Most intended university mergers have been completed, which helps reach quality linked to economies of scale and scope. A development-agreement process across institutions was completed in 2019 and new development agreements are now in place for the period 2023-26. Tertiary institutions enjoy large autonomy to define academic content, course design and hiring of staff. Despite these reforms and the rapid expansion of the technical and health areas over the past few years, skills mismatch remains considerable. Moreover, female participation in STEM remains lacklustre, suggesting low attractiveness of these studies for women (Figure 1.34). Also, the business sector is hardly present in tertiary education, potentially weakening its labour market relevance.
Figure 1.34. Relatively few tertiary students graduate from STEM areas, especially women
In 2021
Note: STEM refers to engineering, manufacturing and construction; information and communication technologies (ICTs); and natural sciences, mathematics and statistics.
Source: OECD Skills for Jobs database.
The ongoing reform of university funding aims at improving performance by increasing the autonomy, flexibility, and responsibility of higher education institutions. As part of the reform, the number of performance indicators determining funding has been reduced, while more emphasis is given to strategic “development agreements” (Ministry of Education, 2022[51]). The reduction in the number of indicators for performance-based funding – such as for research outcomes – was justified on the grounds that they were unable to capture the complexity of objectives for the higher education sector and led universities to offer similar (often low-cost and low-risk) curricula. The new development agreements are thought to increase specialisation and coordination among universities. Also, higher fixed cost in the technical areas is supposed to be better addressed. However, objectives described in the development agreements are not linked to funding, providing the universities with weak incentives to reform. Against this background, the government should strengthen the “development agreements” by linking their achievement to funding levels. Moreover, some performance funding should be related to labour market success as done in Denmark, Estonia, Finland, or Poland, encouraging the relevance of acquired skills.
Corporate funding of the tertiary sector and collaboration with the business sector are weak (Figure 1.35). The share of private funding of tertiary education is lower than in almost any OECD country, partly reflecting the lack of a fully-fledged vocational tertiary education tier. Firms’ involvement in curriculum design, teaching and work-based learning is limited, even though Norway’s universities, social partners and students traditionally consider work-based learning as one of the potentially most effective practices to support the labour market relevance of programmes (OECD, 2014[52]). Universities have few incentives to attract corporate funding to expand research or teaching, and the level of third-party funding is no longer considered an indicator of performance. Around half of tertiary graduates fail to make internships or other stints in a firm, narrowing their exposure to real-life experiences. Strengthening financial cooperation between higher education institutions and employers, notably in research projects, could help lift research outcomes and productivity considerably (Arora et al., 2023[53]).
Figure 1.35. Students and firms contribute little to university funding
Share of public, household, and corporate private funding at tertiary level, 2020 or latest
Note: International sources of funding, that are particularly important for Greece (12% of total) and Estonia (12% of total), yet generally unimportant are excluded from the total funding. 2021 data for Costa Rica and New Zealand.
Source: OECD, Education at a Glance database.
Timely completion and dropout rates in higher education remain a major concern in Norway, straining public resources and reducing lifetime earnings. More than half of bachelor’s degree students do not complete their programme within the prescribed time, and one in five higher education students drop out of their programme (although these numbers are close to the OECD average (OECD, 2022[54])). There are several contributing factors: the relatively low financial cost of participation in higher education in Norway, a robust job market, insufficient academic preparation before enrolment, and inadequate career guidance. Non-completion can also be associated with the relatively large share of mature learners in Norway who do not necessarily intend to complete a programme and acquire a qualification, but simply wish to develop additional skills through a particular subject course.
Towards a resilient and sustainable power sector
Within a short time span the electricity sector has taken on much greater importance for the economic future of the country. The rapid electrification of the transport system and climate-friendly industrialisation requires a considerable increase in Norway’s electricity supply and large investments in the grid. Russia’s invasion of Ukraine has accelerated the impetus to replace oil and gas by clean, domestic, and renewable energy less prone to political blackmail. With Norway producing half of Europe’s hydropower and a large portion thereof backed by reservoirs, the pressure for a stronger integration of the power market around the North Sea has risen. At the same time environmental protection and municipal resistance against new generation – notably onshore wind – reduces the scope for large generation extensions, while the economic viability of offshore wind remains uncertain.
Domestic demand for power is growing
Domestic demand for electricity is expanding fast. The green transition and decarbonisation efforts, especially the electrification of transport and evolving energy-intensive industries (e.g. batteries for electric cars, data centres), the rising role of electricity compared to other energy carriers and the integrating European power market will lift demand for Norwegian electricity. As such, domestic power demand in Norway is expected to grow from 140 Terawatt hours (TWh) to 190 TWh by 2040, an increase of 35% within 15 years from an already high baseline. Also, growth projections have risen considerably within just a few years (Figure 1.36).
Figure 1.36. Domestic demand for power is growing
Electricity consumption in TWh, actual and projected
Note: Long-term power market analyses 2017-2030; long-term power market analysis 2021-2040; and long-term power market analysis 2023-2040.
Source: Norwegian Water Resources and Energy Directorate (NVE).
Norway’s topography and settlement pattern poses additional problems to the generation and distribution of power. While population increasingly concentrates in the South (Figure 1.27), production capacity and new generation sources remain mostly in the North, putting pressure on interconnectors to ease network congestion, both within Norway and across the border (Figure 1.37).
Figure 1.37. Production and consumption of electricity are geographically imbalanced
Note: Panel A represents the average of 2018-2019.
Source: NordPool.
Given the country’s mountainous nature, grid expansion is expensive, so traditionally a part of Norwegian power production in the North has been transported to the South via the Swedish grid (Box 1.7). Other challenges, including security measures, establishing the first offshore wind projects and regulatory support for onshore wind and solar developments, add further pressures to the future development of Norway’s electricity market. Finally, further integration of the electricity market in the North Sea will require investment into stable, fast-reacting, and robust interconnectors across international borders.
Box 1.7. Structure and regulation of the Norwegian power market
Norway has an open and well-regulated power sector. The country opened the electricity market as early as 1991 and has often been a leader in terms of good power regulation (Figure 1.38). Generation, transmission, and distribution of electricity are fully unbundled. Around 400 companies, most of them owned by municipal, county, or central government authorities, generate or distribute electricity. The energy regulator NVE-RME is responsible for the regulation of operators that distribute electricity to households and firms, as well as for the transmission grid and system operator Statnett. Prices in the five market areas are set daily using a transparent bidding procedure. Norway is integrated into the Nordic-Baltic power market and increasingly connected, both in physical and institutional terms, to electricity markets in the rest of Europe. Nord Pool is the exchange for physical power trade for the Nordic and Baltic countries.
Area-based pricing encourages generation close to demand centres and incentivises location of factories to be built where power is cheap, while signalling the benefits of expanding capacity or grid enforcement across market areas. Persistent price differences, e.g. between north and south, imply a need for grid expansion. In turn, increasing actual generation or transmission capacity is partly subject to licensing new plants, grid expansions and new interconnectors, which is the realm of policy rather than markets.
Figure 1.38. The electricity market is open and well regulated
Product market regulation in the electricity sector, 2023
Note: The indicator assesses regulation, conduct and public ownership in the electricity sector. 0 is least restrictive; 6 is most restrictive.
Source: OECD provisional 2023 Product Market Regulation indicators.
Price patterns reflect both rising demand and capacity limits within the country
The idiosyncrasies of power affect price patterns. Norway’s power market is geographically divided into five electricity market areas, demarcated by major physical bottlenecks in the transmission grid. Prices are equal within one area but often differ between areas, reflecting relative scarcity and misalignment between supply and demand in each area (Figure 1.39). While electricity prices had been similar across Norway for long, gaps between North and South became more apparent since 2021, with prices in the North sometimes approaching zero. The price gaps can be partly explained by one-offs such as high precipitation or dry spells in some regions, yet others reflect structural changes in the economy, notably increased power generation in the North against consumption in the South. Since Sweden, whose market is integrated with its Norwegian counterpart, has a similar transmission problem, it cannot fully make up for the growing electricity need in Norway’s South.
With price differences emerging, policy trade-offs have surfaced between maintaining low prices in the South; expanding Norway’s position as a power exporter; and fostering industrial development in the North; requiring prioritisation. Over the past few years, the share of exports in total electricity production has risen to around 20%, more than at almost any time in the past, notably following the urge to replace oil and gas from Russia by other energy carriers (Figure 1.40). Since electricity is mostly exported across the southern market areas, additional export demand raises prices for households and firms located there. In 2023 an expert commission was appointed to evaluate six proposals to reduce price pressures, including the creation of separate electricity auctions for domestic and foreign use, but concluded that the market organisation should remain as is. Investing in generation and transmission capacity could help maintain Norway’s power exports and ease pressure on prices in the South. Yet the northern counties sometimes contest higher transmission capacity on the grounds that it would reduce their competitive edge, notably to attract green industries such as battery factories or data centres by offering cheap electricity (Ministry of Local Government and Regional Development, 2023[55]). Against this complex background, the government should stick to the Fiscal Policy Advisory Committee’s advice pointing out that expanding exports further or maintaining low electricity prices in favour of domestic industry could be distorting and economically costly and should not be policy objectives to be followed (Advisory Committee for Fiscal Policy Analyses, 2024[56]).
Figure 1.39. Electricity prices are diverging across Norway
Daily wholesale market prices, by power market
Note: Day-ahead prices represent the result of Nord Pool’s day-ahead implicit auction market. All prices shown are wholesale and exclude any fees, charges or taxes applied at the national level.
Source: Nord Pool.
Figure 1.40. Electricity production is mostly hydro and increasingly exported
Domestic generation and consumption of energy, Terawatt-hours (TWh)
Source: Statistics Norway.
Removing regulatory obstacles could increase investment to lift power supply
Because of rising electricity consumption due to electrification of transport and green industries, Norway will need to invest in new power generation capacity and grid expansion. Official estimates project an additional 10 TWh in generation capacity by 2030, mostly involving investments in small hydro plants, the upgrading of existing installations like turbines and a few onshore wind farms. The time of large new hydropower projects seems to be over as environmental and nature preservation prevent most pristine areas from being exploited. As such, the planned increase in generation is considerably below the estimated path in consumption, making Norway potentially a net power importer over the coming decades. Less predictability of hydropower generation because of climate change (potentially longer dry spells combined with stronger floods), and less flexibility because of an increasing role of wind power – which cannot be stored – add to supply uncertainty.
Land-use conflicts are often an obstacle to the expansion of wind generation. Wind is becoming a significant additional source of energy. When the winds blow, onshore wind is among the cheapest energy sources. However, there are limits to a rapid expansion of wind energy. Large onshore wind plants meet with resistance from local communities, and the licencing process can take two to four years for larger projects. That does not seem excessive but would need more scrutiny as Norway is missing in international comparative datasets (NOU, 2022[57]), (Fox, Czyżak and Brown, 2022[58]). Recent changes to the Planning and Building Act have given municipalities a stronger say in the licencing process, while they get a larger share in tax resulting from the exploitation of wind energy. The authorities expect that these changes will make the process more predictable and reduce the time to obtain a licence. Simplifying licensing rules and speeding up the licensing process may further help increase power supply, notably from wind. In April 2023 the government presented an action plan for faster grid development and more efficient use of the grid.
Stronger physical and institutional cross-border integration of the power grids can help increase both security and stability of electricity provision in Norway and neighbouring countries. Norway has a large share of flexible hydropower, Denmark has a large share of wind power, and Sweden has some nuclear power, each with a different load profile. Supply of the different energy carriers varies over time, making electricity exchange mutually beneficial. For instance, Norway has a considerable power surplus in periods of good hydrological conditions (e.g. snowmelt, heavy rainfalls), while Denmark’s power generation fluctuates with the strength of wind. Higher exchange capacity can also help balance extreme weather events such as the dry spells in 2022. Finally, a rapid incorporation of EU energy legislation into the European Economic Area agreement could help promote the integration of the power market around the North Sea (NOU, 2024[59]). Against this background, facilitating grid extension across borders and deepening integrated wholesale electricity markets, could make electricity provision both more stable and affordable (International Energy Agency, 2022[60]).
Decarbonisation and other green issues
Norway’s per capita greenhouse gas emissions remain around the OECD average, but their decline has accelerated following the mass electrification of the transport sector over the past few years (Figure 1.41). Industry accounts for the highest share of emissions given the activities of a large power intensive export industry and the petroleum sector, while emissions from energy production (mostly hydro) and the rapidly electrifying car fleet are below average. Agricultural emissions, mostly methane and nitrous oxides, are above OECD averages, reflecting the importance of intensive agriculture. Norway is affected by climate change through rising floods, more droughts, melting glaciers which provide storage for hydropower, and rising sea levels. Norway aims at reducing emissions by at least 55% by 2030 compared to 1990 and seeks to reach that target through climate cooperation with the European Union. Norway’s long-term climate target is to become a low emission society in 2050, equivalent to reducing emissions by 90 to 95% compared to 1990 levels (NOU, 2023[61]). To reach this ambitious objective, Norway should implement an appropriate policy mix, notably by strengthening emission pricing and public investment in R&D, carbon emission reduction and climate change adaptation (d’Arcangelo et al., 2022[62]).
The climate action plan foresees a gradual increase and broadening of carbon taxation, and new investment mainly in the transport sector, as recommended in the previous OECD Economic Survey of Norway. Increasing carbon taxation (against lower labour taxation) to 2000 NOK (around 175 EUR) per tonne by 2030 could help reduce emissions by around 9%, with little overall macroeconomic impact (Kaushal and Yonezawa, 2022[63]). Taxing methane and nitrous oxide should also be considered, bearing in mind persisting practical issues when measuring the respective emissions. Sector-wise, road transport, fisheries and household gas use would be the largest contributors to emission reductions, suggesting that they can be achieved at comparatively low cost in these sectors. However, these sectors would also be the most affected in terms of lower activity. As such, further domestic decarbonisation efforts could probably be reached at relatively high cost only, notably since energy generation is already mostly decarbonised (hydropower). Norway also invests a lot in carbon capture and storage.
The government is also strengthening policies to adapt to climate change. In 2023 it published a new White Paper on climate change adaptation, with a focus on governance and coordination across sectors and levels of government; additional risk assessment, and the role of nature- and ecosystem-based solutions (Ministry of Climate and Environment, 2023[64]). For example, the government puts much emphasis on green roofs, open waterways and more trees in cities and towns, to mitigate floods and stormwater, stabilize the soil, and prevent landslides. Moreover, the government wants to help municipalities to invest in such measures. As a reaction to disastrous floodings and landslides during summer 2023, it decided to strengthen flood protection and invest more in flood control measures and dam safety. The government should also develop policies to address the growing severity of dry spells, which as shown in 2022 can affect the supply of hydroelectricity. Table 1.8 summarises past recommendations and action taken to tackle climate change since publication of the previous OECD Economic Survey of Norway.
Figure 1.41. Norway needs to do more to curb emissions
Note: Panel C: land use and forestry are not included in “other”: Panel D: Environmental Policy Stringency is defined as the degree to which environmental policies put an explicit or implicit price on polluting or environmentally harmful behaviour through various policy tools.
Source: OECD, Environment Statistics database; OECD, Effective Carbon Rates; OECD, Environmental Policy Stringency Index.
Table 1.8. Past recommendations and actions taken to tackle climate change
Carbon has a worldwide impact, no matter where it is released, so it makes sense to reduce emissions where that is least costly, especially in a context of high abatement costs as in Norway. The Paris agreement allows countries to credit emission cuts abroad against their own emission targets. The Government has extended the International Climate and Forest Initiative (NICFI) to 2030, providing support to cut emissions and supporting policy reform at the global level. Relying on Norway’s comparative advantages, the NICFI is focusing on the transition towards the use of renewable energy sources. Apart from crediting through Norway’s participation in the EU-ETS, it is unclear whether Norway will make use of flexibility mechanisms to achieve the 2030 target under the Paris Agreement and credit any emission reductions against its own (non-EU-ETS) targets. It should consider doing so and develop credits against trustworthy emission reduction projects abroad, especially as emission targets will likely be difficult to achieve by domestic policy action alone (OECD, 2022[65]). This would help Norway to accelerate emission cuts, reduce the overall cost of reaching emission targets and strengthen innovation and technology transfer to emerging market economies.
Norway has a good record on domestic environmental performance overall (OECD, 2022[65]). Air quality in cities is among the highest in Europe. Land-use change is exerting some pressures on Norway’s diverse and pristine landscapes. Issues remain in highly subsidised agriculture, which is neither subject to the EU-ETS nor to any domestic environmental tax. Nitrogen and phosphorus levels are among the highest in the OECD, damaging water and air quality. The country has abundant water resources but almost 30% of captured water is lost through leaking, which should be addressed through adequate investment. As such, agricultural subsidies should be redirected from income and production support towards incentives for more environment- and climate-compatible agricultural outcomes (Chapter 2).
Findings and recommendations for a strong and resilient economy
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