OECD Economic Surveys: Norway 2024

Report

OECD Economic Surveys: Norway

20 June 2024

2. Raising the Effectiveness of Public Spending

Peter Hoeller

Abstract

Public spending is very high in Norway, partly reflecting the welfare system’s extensive coverage and generosity as well as ambitious regional development objectives. Moreover, several institutional features undermine the cost-effectiveness of public spending programmes. Abundant oil revenues have so far mitigated strains on the public finances. However, coping with the depletion of oil resources and the fiscal consequences of ageing require to increase the cost effectiveness of many public spending programmes, while leaving some room to reduce the high tax burden. This chapter identifies policy options to curb spending. These include: strengthening the fiscal framework, by implementing a medium-term fiscal framework, an expenditure rule and by broadening the remit of the fiscal council; making regional policy more cost-conscious; reinforcing coordination and cooperation in the health and education sectors; and improving incentives to contain spending by the sickness and disability schemes. Agricultural subsidies should be pruned and harm the environment less. Judicious reforms should improve spending control, while also boosting economic performance.

The past and future of overall public spending

Overall, 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. The use of part of the revenues has given Norway room for fiscal policy manoeuvre for decades that few other countries have enjoyed. This has allowed Norway considerable freedom to expand the scope of public services, implement new policies and counter economic setbacks.

However, the use of the room for fiscal manoeuvre has also implied that government spending is the highest in the OECD. Public sector spending amounts to more than 60% of mainland GDP. Disregarding the upward blip in spending during the pandemic, public spending has drifted up in Norway, contrary to the OECD average and developments in Denmark and Sweden (Figure 2.1). Even after considering measurement issues, spending remains very high (Box 2.1). Government employment amounts to one third of total employment, which is nearly double the OECD average. The general government mainland tax revenue to GDP ratio is also among the highest in the OECD, despite the sizeable oil revenues. How these vast resources are used is of great importance for the performance of the Norwegian economy.

Figure 2.1. Government spending has drifted up and is very high in international comparison

Total general government spending as a per cent of GDP

Box 2.1. Measuring the size of the Norwegian public sector

The ratio of public outlays to GDP is the most commonly used indicator for expressing public sector size in an international and historical context. Such comparisons should, however, be made with care. In the case of Norway, two important factors need to be considered:

The taxation of social transfers, together with the extent to which countries provide social or economic assistance via tax expenditure, rather than direct government spending, may change government spending rankings in international comparison (OECD, 2023[1]). Like in other Nordic countries, Norway’s social transfers are taxed, increasing the public sector ratio as compared to countries that do not tax transfers. The equivalent of more than 5% of GDP of social cash benefits were clawed back through the tax system in 2019, compared with some 3% of GDP on average in the OECD. Taxing transfers allows countries to levy the progressive personal income tax, so that they can maintain fairness in their tax and benefit system.
The sizeable Norwegian offshore petroleum sector — about a quarter of total GDP on average in recent years — creates a specific measurement problem (see Box 1.1 in chapter 1 for more detail). According to the fiscal rule, the authorities aim to save the net factor income of the petroleum sector and to spend only the real returns from the Government Pension Fund Global. In this context, it is more relevant to measure the size of the public sector as a percentage of mainland GDP, which excludes factor income from the petroleum sector. The additional advantage is that this ratio is less volatile as it is not influenced by the strongly fluctuating oil price.
In sum, taking into account the taxation of benefits would reduce spending by some 5% of GDP while excluding the oil sector and scaling by mainland GDP increased the spending to GDP ratio by nearly 10 percentage points before the recent oil price spike.

OECD work has shown that a large government is a drag on growth, because this usually implies considerable adverse effects of distortionary taxation on growth (Fournier and Johansson, 2016[2]). However, the negative effect of big government can be reduced by a high degree of government effectiveness and, judged by the Word Bank government effectiveness indicators, Norway has one of the most effective governments. Also, a high level of trust in government helps and Norwegian society is characterised by both high interpersonal trust and a high level of trust in government institutions (OECD, 2023[3]).

Given that overall spending is very high, it is not surprising that the shares of spending items such as health, education and social spending are also very high. Indeed, virtually all spending items are above the OECD average and many are also above those in other Nordic countries (Figure 2.2).

Figure 2.2. Spending in most areas is higher than elsewhere

Spending function categories, 2022 or latest

The composition of spending also matters, because some spending items are more conducive to growth than others (Bloch and Fournier, 2018[4]) (Fournier and Johansson, 2016[2]). On the positive side, Norway invests strongly in growth-promoting spending items, such as education and infrastructure. Even so, there can be concerns about cost-effectiveness also in these spending areas. Moreover, pension spending is below the OECD average, mainly due to the high retirement age, which is conducive to employment and growth (pension spending is discussed in Chapter 1). Healthcare is important for the well-being of the whole population as well as for the productivity of the work force. On the other hand, certain spending items, such as the high share of sickness and disability spending in total spending are a drag on growth. The generous sickness and disability benefits provide adverse work incentives. Cutting public subsidies, such as the sizeable ones for the agricultural sector would boost growth, as subsidies that do not correct market failures can distort the allocation of resources and may preserve low-productivity enterprises and postpone the necessary reallocation of resources to a more productive use.

Cross-country estimates of the effect of government spending categories on growth mainly rely on monetary flows and can thus not capture the details of institutional features and programme design of individual countries, which can be important for the effectiveness of spending. These issues will be pursued below. Improving services, while containing cost pressures, is a key policy challenge in most OECD countries, including Norway. Spending reforms that contain outlays while improving outcomes are attractive because they also hold the promise of having a positive impact on growth.

In the future, fiscal challenges will stem from population ageing, the dwindling of the oil revenue and the climate transition. The transition to a greener society will affect Norwegian oil and gas activities, but the 2021 White Paper on long-term projections notes that the impact may be less than feared (Ministry of Finance, 2021[5]). Nevertheless, oil revenue is set to shrink in the coming decades, notwithstanding the continued granting of new offshore drilling permits. Ageing will push up spending on pensions, health and long-term care and the fiscal room for manoeuvre will shrink. Moreover, Norway has set out a 12-year plan to raise defence spending from close to 2% of GDP in 2024 to 2.7% by 2030 and close to 3% by 2036. The defence investment will focus inter alia on capabilities in the maritime domain and procurement of long-range surveillance drones, satellites and air defence systems (Ministry of Defence, 2024[6]).

Norway will have to make the public finances futureproof, also to reduce the considerable tax burden. Both the overall size and the composition of spending are important for employment and productivity growth as well as inclusiveness. While employment and productivity growth have been mediocre in international comparison (Chapter 1), Norway scores very well on various metrics of inclusiveness, such as the Gini coefficient of disposable income or the poverty rate. This chapter focuses therefore on public spending effectiveness, rather than inclusiveness.

Improving the fiscal framework

Fiscal frameworks vary widely across OECD countries. The literature has focused on the main elements of fiscal frameworks that often generate synergies: fiscal rules, independent fiscal institutions or fiscal councils, and medium-term expenditure frameworks. Spending reviews are also increasingly being used as they help to prioritise spending and identify areas for spending cuts.

Medium-term fiscal frameworks can ensure consistency between policies and targets

Past OECD Economic Surveys of Norway, including the most recent 2022 one, have suggested to introduce medium-term fiscal frameworks, as exist in virtually all OECD countries (OECD, 2019[7]). A medium-term expenditure framework can bolster the effectiveness of the fiscal framework and ensure time consistency between policies and targets. The expenditure framework converts fiscal targets into detailed expenditure plans. Successful medium-term budget frameworks provide binding restrictions on multi-year expenditure and a clear and consistent statement of the government’s medium-term priorities within an overall expenditure ceiling.

The Norwegian authorities have previously considered the introduction of a medium-term spending framework, but judged it to be unsuitable in the Norwegian context (OECD, 2022[8]). A commonly expressed concern is that in Norway multi-year spending paths for ministries and agencies may act as floors, rather than ceilings, on expenditure. However, as the challenges in containing current spending and funding new spending mount, the potential advantages of a medium-term expenditure framework will increase (Calmfors, 2020[9]). Given the prospect of more limited fiscal space in the coming years, policymakers should remain open to augmenting the fiscal framework with medium-term spending benchmarks.

A fiscal spending rule could help avoid the upward drift in spending

A fiscal rule serves as a commitment tool to increase the cost of deviations and to anchor expectations about future fiscal developments. Expenditure rules enhance fiscal discipline thanks to better accountability and higher transparency in the budget process. They allow for better control of primary spending by the government. A well-designed spending rule does not prevent the automatic stabilisers from operating. A spending rule can also limit pro-cyclical spending in the presence of revenue windfalls in good times. On the other hand, it can induce the use of tax expenditure for various policy objectives for which direct spending might be better suited.

Econometric evidence suggests that fiscal rules have an impact on various dimensions of fiscal performance, such as the primary balance, the cyclically-adjusted primary balance, government receipts and government spending (Fall et al., 2015[10]). The estimations suggest that spending rules have a considerable effect in restraining government spending. A budget balance rule also has a negative and significant effect on spending, but it is smaller than that of a spending rule. (Vinturis, 2023[11]) finds that spending rules have no overall spending effect, but only reduce public consumption, while no effect on public investment was found. (Manescu and Bova, 2020[12]) show that spending rules can reduce the pro-cyclicality of fiscal policy.

In the case of Norway, the fiscal rule (handlingsregelen) stipulates that over time transfers from the Government Pension Fund Global should equal the expected real return of the fund, estimated to be 3% annually (reduced from 4% in 2017). This helps smooth out cyclical disturbances as well as the consequences of large changes in the value of the fund.

Fund withdrawals cover ever more of central government budget spending, now around 20%. The (Advisory Panel on Fiscal Policy Analysis, 2023[13]) recently suggested that a thorough study should be carried out on how the fiscal rule should be adapted to the fact that withdrawals from the fund cover such a large amount of public spending. A sharp and prolonged fall in the value of the fund would place a serious strain on fiscal policy. Overall, the budget surplus is hugely positive every year including the oil revenues but hugely negative if oil revenues are excluded. The Advisory Panel also suggested that the fiscal rule could be based on the cash flow of the fund (dividends, coupon rates, rental income, etc.). Such a rule could result in smaller fluctuations of the fiscal balance from year to year than the 3% rule, because cash flow fluctuates less than the fund’s market value (Advisory Panel on Fiscal Policy Analysis, 2022[14]). However, strict adherence to a cash flow rule may limit the required fiscal deficits to cope with downturns (Norges Bank Investment Management, 2023[15]).

Most OECD countries follow a fiscal rule that focuses on budget balances, for instance, by limiting the size of actual or structural budget deficits. In Norway, the main purpose of the fiscal rule is to distribute the use of resource revenues over time and across generations and to preserve the real value of the fund for the benefit of future generations. Given the specificities of Norway, a budget deficit rule would be unhelpful. However, a spending rule, which exists in many countries, could help in containing government spending and avoid its upward drift as a per cent of GDP (Box 2.2).

In Norway, public investment as a share of GDP is high in international comparison. It is often argued that public investment that fosters long-run growth should be excluded from fiscal targets. However, drawing the line for public investment that matters for long-run growth is not straightforward, as not only physical investment, but also spending in areas such as education or research and development have a positive effect on growth.

Box 2.2. Spending rules in the other Nordic countries

Expenditure rules increase the pressure on political decision-makers to prioritise between expenditure increases in various areas. They can also be a constraint on taxation: a target for government expenditure together with a target for the fiscal balance determine an implicit target for the tax ratio.

Expenditure rules can be formulated in nominal or in real terms. On the one hand, nominal rules help stabilise the economy when there are unanticipated changes in inflation due to demand shocks: higher (lower) inflation than expected because of a positive (negative) demand shock implies a decrease (increase) in real government expenditure counteracting the shock. On the other hand, nominal ceilings have the drawback that goals for the development of real spending are not met in the case of unanticipated inflation. The latter consideration is likely more of a concern, the longer the time period for which an expenditure rule applies.

Denmark and Finland set expenditure ceilings for central government in real terms. Denmark sets them for three years, Finland for four years. In both cases, interest payments and cyclically-sensitive expenditure items are excluded and the expenditure ceiling can be changed in exceptional circumstances. In Sweden, the spending ceiling is set in nominal terms for all central government outlays except interest payments three years ahead. Iceland does not have a spending rule.

Source: (Calmfors, 2020[9]).

Fiscal councils are watchdogs of fiscal policy

Independent fiscal institutions (IFIs) or fiscal councils foster fiscal discipline and thereby complement fiscal rules. They are public institutions with a mandate to critically assess and, in some cases, provide non-partisan advice on fiscal policy and performance. In contrast to audit institutions, their assessments are forward-looking and unlike independent central banks, they do not have the authority to make policy. Rather, they ensure that unbiased information about the government’s fiscal policies and their implications for public finance sustainability is available. This increased transparency makes the fiscal councils to “fiscal watchdogs” by alerting both policymakers and voters to fiscal risks.

In Norway, the Advisory Panel on Fiscal Policy Analysis provides professional advice to the Ministry of Finance’s work on macroeconomic issues and fiscal sustainability. Its mandate was extended in 2021 to advise on the long-term sustainability of the government finances and to assess whether the government’s fiscal policy is compatible with such considerations. With the extended mandate it was also ensured that the Panel has access to ministry staff. The Panel provides an annual statement on these assessments. Recent statements provide recommendations on issues such as how to provide more stable funding from the Pension Fund Global, to raise the emphasis on the long-term consequences of current policies and the Panel has highlighted the trade-off between public spending and tax changes for the long-term performance of the economy. The extension brings the remit close to that of fiscal councils in other OECD countries. But the remit is still narrow as compared to most other fiscal councils, as long-term sustainability analysis is still carried out by the Finance Ministry. For long-term sustainability analysis the government itself produces a White Paper with long-term projections and policy simulations every four years. The most recent one was issued in 2021 (Ministry of Finance, 2021[5]) (Box 2.3). The next one will be issued after mid2024.

Box 2.3. The government’s long-term projections and policy simulations

Fiscal room for manoeuvre will decline over time because of rising ageing-related spending combined with lower growth in tax revenue and of the Government Pension Fund Global. Lower growth in tax revenue and higher pension, health and care expenditure also imply that in a few years’ time, government expenditure will outpace revenue.

The need to progress with public sector reforms was illustrated by simulations presented in the 2021 White Paper. The baseline scenario assumed moderate further improvement in the standard of public service provision. It suggested that the fiscal gap would rise to 5.6% of mainland GDP by 2060. The fiscal gap indicates what tax level adjustment will be necessary to fund public expenditure for a given net transfer from the Government Pension Fund Global within the limits of the fiscal rule. Simulations around the baseline scenario were expressed as changes in the fiscal gap. With medium-term growth in public service provision in line with average growth over 1993-2017, the fiscal gap would increase to 10.4% of mainland GDP. Measured by the average tax rate on household incomes, this would correspond to an increase from 24.6% in 2021 to 38.6% in 2060. Moreover, the baseline scenario assumed a considerable change in the trend in public service provision growth from 0.7 to only 0.1% per year.

At the same time, large gains could be reaped from spending reforms. They were illustrated by scenarios featuring in the 2021 White Paper:

Public administration productivity growth may enable the public sector to provide better services at lower cost. An annual reduction in public administration resource use of 0.25 percentage points would reduce the fiscal gap towards 2060 by 3.1 percentage points.
Higher employment raises tax revenue and reduces social security spending. If, for example, enough disability benefit recipients could be brought into the labour force over the next decade to halve the difference between the Norwegian and Swedish disability benefit recipient rate, Norway would have 80 000 more people working and NOK 44 billion (1.3% of GDP) in increased budgetary room for manoeuvre in ten years.
If the difference in sick leave between Norway and Sweden could be reduced by two thirds, Norway would have about 20 000 more people working and NOK 20 billion (0.6% of GDP) in increased room for manoeuvre in ten years.
In a similar vein, getting more people to continue working would save NOK 12 billion (0.4% of GDP) and getting youth to start work earlier also NOK 12 billion.
If municipalities raised efficiency corresponding to ½ per cent of operating expenses, they would be able to free up NOK 1.4 billion (0.1% of GDP) per year to be used by them for other purposes and initiatives of their choosing.

Source: (Ministry of Finance, 2021[5]).

Fiscal councils exist in three out of four OECD economies, but vary widely with regard to mandate and resource endowment (Rawdanowicz et al., 2021[16]). Most are tasked with the analysis of long-term fiscal sustainability and monitoring fiscal rule compliance. Many also play a role in macroeconomic or fiscal forecasts, though only a small number prepare their country’s official forecasts or provide costings of policy measures. Fiscal councils with more demanding mandates, particularly those involved in policy costing, tend to have more staff at their disposal. Fiscal councils also often play an active role in assessing fiscal risks related to long-term challenges such as ageing and climate change (Caldera Sánchez et al., 2024[17]). Such assessments as well as the costing of new policy initiatives would be especially welcome in the Norwegian context (Box 2.4).

Box 2.4. Independent fiscal institutions: international experience

According to the OECD Principles for Independent Fiscal Institutions (IFIs), non-partisanship and independence are pre-requisites for a successful IFI; leadership should be selected strictly on the basis of merit and technical competence; the leadership’s term should be independent of the electoral cycle; IFIs should be precluded from any normative policy-making responsibilities; and reports and analyses should be produced on the institution’s own initiative (OECD, 2014[18]).

The Irish case is a good example of how IFIs can raise public awareness of long-term fiscal challenges and strengthen fiscal management. Established in 2012, the Irish Fiscal Advisory Council (IFAC) is mandated to independently assess the government’s fiscal stance and budgetary forecasts, endorse the official macroeconomic forecasts prepared by the Department of Finance and monitor compliance with budgetary rules. The Council consists of five members, who are appointed by the Minister of Finance among recognised domestic and international experts in macroeconomic and fiscal matters. Over the years, IFAC has become central to the national debate on public finances, particularly by stressing the need to ensure fiscal sustainability in the face of systemic challenges, such as population ageing, climate change and the digital transition. IFAC’s reports and recommendations have gradually made inroads in the policy sphere. The authorities adopted a spending rule in 2021 and enhanced transparency via the adoption of strengthened medium- and long-term budgetary frameworks.

Chile’s fiscal council, created in 2013, initially was an advisory council within the Ministry of Finance. In 2019, the Autonomous Fiscal Council (CFA) was established. It is an independent institution with the mandate of contributing to the responsible management of the central government's fiscal policy. The 2019 law broadened the council’s mandate, gave it its own resources and ensured its legal independence. The CFA has been able to establish itself as a respected institution, providing advice on possible deviations from structural balance targets, proposing mitigation measures, issuing opinions on the package of measures during the pandemic and making proposals to strengthen the fiscal framework, among others. It is also responsible for the evaluation of the medium and long-term sustainability of public finances (Caldera Sánchez et al., 2024[17]). In 2020, the OECD gave recommendations to the CFA on how to strengthen the analysis of the long-term sustainability of public finances (OECD, 2020[19]).

Denmark, Finland, Iceland and Sweden have independent institutions monitoring fiscal policy. In Finland, the National Audit Office is responsible for evaluating compliance with the fiscal rules. The monitoring covers adherence to the medium-term fiscal policy objective and the related correction mechanism, preparation and implementation of the General Government Fiscal Plan and compliance with the stability pact. The government’s macroeconomic forecasts used in fiscal policymaking are also assessed. In case of violations of the rules, the head of the audit office can give a speech in the parliament. Parliamentarians can then ask questions to the government. The Audit Office produces both an annual report and a report every fourth year on the government’s fiscal policy during the parliament’s term of office. Independent evaluation is also made by the Economic Policy Council. The Council publishes an annual report. While it has a wide remit, fiscal policy evaluation has been a main focus. In addition, selected key issues are analysed. Much attention has been devoted to the government plans on social and healthcare, and regional governance reform (Calmfors, 2020[9]).

Spending reviews help prioritise spending and raise its effectiveness

Spending reviews are widely used in OECD countries. They have become a core instrument for expenditure prioritisation and reallocation and a permanent feature of the budget process in many countries (Tryggvadottir, 2022[20]). Spending reviews provide a link between financial accounting and performance budgeting, obliging ministries and agencies to set priorities. The purposes of a spending review include: i) enabling governments to manage the aggregate level of expenditure; ii) reallocating expenditure according to the priorities of the government and iii) improving the effectiveness within programmes and policies. A recent econometric analysis found that countries differ in their propensity to reallocate public expenditure, when needs or government priorities change. More active reallocation is positively correlated with having a fiscal council and following an expenditure rule. More active reallocation is also positively correlated with sounder governance indices (Barnes, Cournède and Pascal, 2023[21]).

The OECD Best Practices for Spending Reviews suggest that for them to be successful it is important to specify the objectives and the scope of the reviews, to set up clear governance arrangements throughout the review process, to ensure integration with the budget process and that recommendations are implemented in an accountable and transparent manner (Box 2.5).

Box 2.5. Spending reviews: some best practice examples

Ireland

The spending reviews aim to improve the allocation of public spending across all areas of government. The Department of Public Expenditure and Reform is responsible for spending reviews and the way in which spending reviews integrate with the annual budget process. The Irish Government Economic and Evaluation Service (IGEES) supports the Department in this role in conjunction with the departments being reviewed and external experts. Through the IGEES, the government is systematically assessing the efficiency and effectiveness of government spending by applying dedicated resources to spending reviews. The scope of the Spending Review 2020-2022 was broadened to encompass policy analysis and evaluation in addition to the focus on expenditure re-prioritisation.

Germany

The first two spending reviews took place in 2015 and were on intermodal transport and a job-training scheme. These reviews had a limited scope while the Ministry of Finance and the relevant line ministries accumulated experience in undertaking spending reviews. In subsequent rounds of spending reviews, the scope of the review was increased, as did the complexity of the reviews by analysing the inter-relationships between several expenditure programmes within a given area of policy.

Denmark

Spending reviews are led by the Ministry of Finance, with the government using them to reallocate resources and increase efficiency. The spending reviews inform budget negotiations and decisions on multi-annual budget agreements. The reviews are conducted over a relatively short period, where the decision on which reviews to conduct is taken in January or February and the reviews are undertaken over the ensuing months with the aim of having the findings available by the beginning of May. This ensures that the findings of a spending review are available when the government decides on budget priorities in June.

Source: (Tryggvadottir, 2022[20]).

In Norway, a specialised unit for spending reviews is located in the Ministry of Finance. The unit works closely with line ministries to reach agreements on the set of recommendations put forward to ministers for final decision. All spending reviews comprise a steering group and a working group. Representatives from the Ministry of Finance, line ministries and if applicable relevant agencies are represented on both the steering group and the project team. While a representative from the Ministry of Finance chairs the steering group, a representative from a line ministry often holds the position of project manager in the working group. The working group works closely with the Agency for Public and Financial Management and external experts to ensure the quality of work and that the spending review includes stakeholders and knowledge resources from both the line ministry and stakeholders. The steering group has the overall responsibility for the quality of the material submitted to the government. As a final step, a presentation of the main findings and recommendations is provided to the relevant ministers, which is important for the political acceptance of the findings.

Spending reviews are aligned with the budget process and a routine part of budget planning. The Norwegian government initiates a budget strategy conference in autumn where the economic outlook is discussed. Based upon that discussion, the government decides its priorities and guidelines for the budget process for the following year. Mandates for spending reviews have been part of the discussion, where the results of previous spending reviews are also reviewed. Soon after the final spending review report is delivered, the Ministry of Finance, in close cooperation with line ministries, present the recommendations to the government for approval. Thus, recommendations from spending reviews that have direct effect on spending are integrated in the budget process.

Since 2016, 19 spending reviews have been undertaken. They covered, inter alia, the National Road Administration, the use of policy instruments to promote Norwegian businesses abroad, the organisation and efficiency of construction and property management affairs or support schemes to promote businesses. While the spending reviews are well-developed and well-integrated in the budget process, their scope has been far too narrow to achieve large efficiency gains and constrain overall spending. The United Kingdom and Ireland, for instance, have used comprehensive spending reviews, carried out every few years, to identify savings across the whole of government and redirect resources towards priority programmes and objectives (OECD, 2019[7]). Encouraging in this respect is that a spending review of health-related benefits will be launched soon. The review will cover sickness and disability benefits, two large spending areas. Moreover, since 2023, ex-post evaluations of spending reviews have started. One ex-post evaluation exists already. This is a step in the right direction, as the ex-post evaluation assesses whether the measures agreed upon in the initial evaluation have been effectively implemented. Comprehensive spending reviews should play a prominent role in the decision-making process.

Fiscal federalism and regional policy objectives affect many spending areas

Two choices of Norwegian society are very important in shaping government spending decisions, namely providing a universal and generous welfare system and maintaining a decentralised settlement pattern in the country: local governments provide a wide range of public services, even in the most remote jurisdictions to retain people, and often at a high cost (Box 2.6). Within this context, the distribution of spending responsibilities across government levels raises efficiency issues while the funding system of local governments does not provide strong incentives to contain local spending.

Box 2.6. The division of responsibilities between government levels

The Norwegian government has three levels: the central government, 15 counties and 357 municipalities.

The central government is responsible for higher education and universities, hospitals, the social security system, the national road network, railways, labour market training schemes, justice and police force, prisons, defence and foreign policy.
Counties are responsible for upper secondary schools, vocational training, child welfare institutions, institutions for the care of drug and alcohol abusers, county roads and the provision of local public transport and museums.
Municipalities are responsible for primary and lower secondary schools, early childhood educational and care facilities, child welfare, primary healthcare, care for the elderly and disabled, public libraries, fire departments, harbours, municipal roads, water supply, sewage, garbage collection and disposal, and the organisation of land use within the municipality.

While responsible for the provision of many public services, local governments must comply with national laws defining minimum quality standards and other spending parameters for most services they provide. All municipalities and counties fulfil the same functions and have the same responsibilities regardless of size.

The importance of the local level (counties and municipalities) is reflected in its share in general government spending, which amounted to 33% in 2022.

Source: (Ministry of Local Government and Regional Development, 2023[22]).

To retain households in remote areas and to attract people to move there, the central government imposes a demanding set of regulations and standards for the provision of core public services on municipalities. These concern, in particular, primary education, healthcare and care for the elderly. An important goal of the General Purpose Grant Scheme is to ensure that, through a compensation of involuntary cost differences, all local governments have the means to provide an equal standard of public services to their residents. The general grant also contains grants based on regional policy. These grants take care of various considerations, such as regional and district policy goals, population growth and challenges related to urban areas.

Central government-imposed regulations and standards are underpinned by intergovernmental transfers, which offset differences in income and cost levels across jurisdictions, combined with specific grants for remote areas. This implies that small municipalities have higher local government revenue per capita than large ones. Public employment is close to half of total employment in the northern part of Norway (Finnmark and the northern part of Troms county) compared with 30% economy-wide (Figure 2.3). In many municipalities, the share of public in total employment is above 50% (KOSTRA database). Despite the wide-ranging efforts to stem the tide (Box 2.7), net migration out of rural areas has long been observed. In addition, birth rates in small municipalities are lower than in larger municipalities. The smallest municipalities have therefore a large share of retired persons, who need health and nursing care. A partial estimate of spending on regional policy puts it at nearly NOK 60 billion (1.6% of GDP) in 2023, mainly on rural policy and four peripheral areas as well as on a range of sectoral policies.

Figure 2.3. Public employment is the highest in the OECD

General government employment as a share of total employment

Box 2.7. Regional and rural policy initiatives

Rural parts of Norway benefit from special support measures. The most comprehensive scheme that subsidises employment is the Regionally Differentiated Social Security Contributions scheme, with a zero rate in the action zone of North Troms and Finnmark and a low rate in the rest of the rural areas. The total value of this is estimated at around NOK 21.8 billion for 2023 (0.5% of GDP) These differentiated social contributions are a good way of supporting rural communities, because they apply to all forms of business activity and favour businesses where the wage bill forms a large proportion of costs, which ties in with the objective of preserving local populations. However, the deadweight loss may be considerable as the scheme applies to established as well as new businesses and there is no time limit on the support.

The government aims to strengthen the dynamism of the lagging areas and to make it more attractive for people to stay, move, work and establish businesses there. Other major measures include:

Additional housing loans at attractive conditions and more lenient land-use planning guidelines in rural areas.
Better cooperation between municipalities in the provision of kindergarten, school and healthcare services as well as more hospital funding.
Municipalities and county authorities can apply for exemptions from laws and regulations in selected areas.
Better funding of road maintenance in rural areas.
From 2024, ferry transport to small island communities is provided for free, ferry fares have been lowered and the maximum price of tickets has been halved on the regional flight routes along the coast of Western Norway and in Northern Norway.
The government pursues a major expansion of broadband and mobile coverage throughout the country, but counties with many rural municipalities have been prioritised to a greater extent than before.
The special income tax allowance in the action zone in North Troms and Finnmark was doubled from NOK 15 000 in 2021 to NOK 30 000 in 2023. The zone also benefits from a reduced corporate income tax rate (18.5% versus 22%), and no surcharge on electricity consumption. There is also no VAT on electricity consumption in the northernmost counties.
To attract young residents, the government has introduced free kindergarten service in the action zone of North Troms and Finnmark, and the debt relief scheme for student loans has been strengthened in the action zone.
Efforts to move public sector jobs outside the largest cities have been strengthened and moving more central government agencies and jobs to rural municipalities will be considered.

Following Russia’s invasion of Ukraine, cross-border cooperation with Russia has been put on hold. This has major consequences for East Finnmark and makes it natural to intensify cooperation with Finland and Sweden. Topics for cross-border dialogue in the North include the green transition, access to expertise and increased interaction between local businesses and universities. In addition, the government has strengthened the military presence in Northern Norway.

Source: (Ministry of Local Government and Regional Development, 2023[23]).

A recent report shows that there is a clear connection between a municipality's population size and centrality and the statutory compliance with central government rules (Ministry of Local Government and Regional Development, 2023[22]). Large municipalities and those that are centrally located fulfil statutory requirements to a greater extent than smaller and less central ones. Small and peripheral municipalities generally have greater challenges in more spending areas than larger and more central municipalities. A lack of competence and capacity is the main reason for the inadequate fulfilment of municipal tasks. This applies, in particular, to competences for highly specialised tasks, as well as tasks that require interdisciplinary efforts. There is also a lack of capacity to manage the development of services and community development. Difficulties in attracting competent people to sparsely populated areas add to the pressures, especially in the health and long-term care sector. Because many small municipalities are experiencing a population decline, an increasing proportion of elderly persons, fewer persons of working age and a lack of competence, small municipalities will have increasing difficulties to fulfil the statutory task responsibilities, particularly for tasks that require specialised and interdisciplinary professional competences.

To reduce the high cost of providing good quality public services successive governments have encouraged the merger of local administrations. This has been successful, and the number of counties has declined from 19 in 2013 to 12 in 2021 and the number of municipalities from 428 to 356. However, the current government has stopped further mergers and has allowed the demerging of counties and municipalities. Since 2022, three counties and one municipality were again divided. Even after the large merger wave the number of small municipalities remains very high, especially in comparison with Sweden and Denmark (Figure 2.4). There could be considerable economies of scale and thus cost reductions by restarting mergers, at least of small municipalities. A recent meta-analysis suggests that there are economies of scale, but only for small municipalities of up to 10 000 inhabitants, with gains largest in the education sector (Gomez-Reino, Lago-Penas and Martinez-Vazquez, 2023[24]). There are still many municipalities below the 10 000-inhabitant threshold in Norway.

Figure 2.4. The size distribution of municipalities in Nordic countries

2023 or latest available date

Another option would be to differentiate the responsibilities that municipalities or county authorities have for some tasks. Differentiated responsibilities would imply that small and peripheral municipalities would be relieved from tasks that are transferred to another municipality, county or central government to reduce the challenges these municipalities have in terms of adequate capacity and competence. On the other hand, such an approach would deviate from the principle of generalist municipalities and be politically very difficult. (Ministry of Local Government and Regional Development, 2023[22]) argues that strengthening inter-municipal cooperation is a better and well-established solution. France, for instance, has promoted inter-municipal cooperation via integrated territorial entities with own-source taxing powers (OECD, 2024[25]). Yet another option would be to centralise an entire responsibility, as happened with moving the responsibility for the hospitals from the counties to the central government, which established four Regional Health Authorities under the authority of the Health Ministry.

Municipalities frequently co-operate in sectors such as waste disposal and water supply to reap scale economies. Small municipalities are often engaged in many cooperation arrangements with other municipalities. These reflect efforts towards providing services efficiently, but for many municipalities the number and the complexity of the arrangements is difficult to manage. Moreover, municipalities that want to co-operate are dependent on municipalities wanting to cooperate with them, but often larger municipalities with greater capacity and competence do not want to cooperate with less resourceful municipalities (Ministry of Local Government and Regional Development, 2023[22]). Better incentives for cooperation should be provided.

Cooperation is still limited in some core sectors, such as schools. Each municipality has the obligation to deliver education to every resident child in the school nearest to home but has no incentive to accept non-resident pupils since it is not entitled to a corresponding compensation from the central government grant system. And bilateral compensation is rare. Such obstacles to cooperation should be removed. Long distances within and between municipalities in some regions limit the scope for cooperation and thus scale economies. But the lack of cooperation also partly explains the differences in school size: In Finnmark, Nordland and Sogn og Fjordane over half of all schools have fewer than 100 pupils, while in Oslo 40% of schools have 500 or more pupils. In Troms og Finnmark only one school has more than 500 pupils (The Norwegian Education Mirror, 2023[26]). On the other hand, many small schools have closed. Recently, they had an average of only 69 pupils in the last year they remained open (The Norwegian Education Mirror, 2020[27]).

Enlarging the operational scale of small municipalities, whether by mergers or cooperation, would not only help local administrations provide better services more effectively but could also create an opportunity to grant them greater autonomy in their spending decisions. In the present system, strong control and steering by central government in part reflects the challenges that small municipalities have in running services. If the minimum scale of operations can be ramped up, then central government can potentially give more decision-making leeway to the local level.

Healthcare: better coordination of services is needed

High public spending, delivering good overall health outcomes

Healthcare systems differ across OECD countries. They range from systems that rely extensively on market mechanisms and private providers with mostly fee-for-service payments, to systems that are mainly public and heavily regulated. In the latter, private provision tends to be limited, suppliers have less incentives to increase the volume of care and their prices tend to be tightly regulated. The vast majority of healthcare services in Norway is provided by a mix of public and private providers with a public tender, and most spending is tax-financed. Access to healthcare is almost universal irrespective of income or place of residence and healthcare services are expected to be of high quality for all (European Commission and OECD, 2023[28]).

The governance of the Norwegian healthcare system is partly decentralised. Municipalities are responsible for primary care and public health services. while hospital and specialist care and hospital pharmacies are overseen by four regional health authorities. At the national level, the Ministry of Health and Care Services is in charge of planning, regulation and general stewardship. Primary care and public health include services such as general practitioners (GPs), maternity and child health centres and school health services, in addition to long-term care and social services. The counties’ role is limited to dental care for children and some vulnerable populations. (Dougherty et al., 2021[29]) found that a moderate degree of decentralisation in the healthcare sector reduces public spending. However, a high degree of decentralisation is associated with higher public spending.

Norway’s healthcare spending has drifted up over time and is very high in international comparison. Per capita spending is the fourth highest in the OECD and is considerably higher than in Denmark, Sweden and Finland (Figure 2.5). Like in other Nordic countries, Norway’s healthcare spending features a high share of government and a low share of private healthcare spending. Another feature is the higher share of spending on hospital services in total health spending, although in Norway hospital trusts are also responsible for specialised outpatient care (Figure 2.6). Hospital services tend to be considerably more expensive than outpatient services. Also, the share of long-term care in total health spending is very high, like in other Nordic countries. On the other hand, the share of spending on preventive care is among the lowest in the OECD, but this may reflect classification issues as routine vaccination or cancer screening rates are high.

Figure 2.5. Healthcare spending ranks among the OECD’s highest and is mainly publicly financed

Health expenditure per capita, 2022 or nearest year

Norway also stands out by the size of its health work force (Figure 2.7). The number of doctors per capita is the fourth highest in the OECD, higher than in Sweden and Denmark and considerably higher than in Finland. Also, the number of nurses is the third highest in the OECD. Though Finland has even more, Sweden and Denmark have much fewer. In many countries there is some offset between high and low numbers of doctors and nurses, but not in Norway, where both are very high. Taking together the number of doctors, nurses, healthcare assistants and other providers per 1 000 population, the health workforce is the third highest in the OECD.

Figure 2.6. Norway’s healthcare system is hospital-oriented

Health expenditure by type of service, 2021 or latest

Figure 2.7. The number of both doctors and nurses is among the highest in the OECD

The density of doctors is generally greater in metropolitan regions, reflecting the concentration of specialised services such as surgery, and physicians’ preferences to practise in densely populated areas. Norway does not only have a high density of doctors on average but also stands out by having a narrow distribution of doctors per capita across its regions (Figure 2.8). For instance, the Norwegian region with the lowest density of doctors has a higher density than the region with the highest density in Belgium, France, New Zealand or the United Kingdom (OECD, 2023[30]). Given the size of the country and the low population density, this suggests that the healthcare units are small outside metropolitan areas, which implies higher patient costs for many services. For instance, the average number of patients on a GP’s list was 1 084 at the national level in 2022, but with large geographical variation. For example, in Troms og Finnmark the average was 803 patients, while in Oslo it was 1 380 patients. Despite the small dispersion in the regional supply of services, a shortage of GPs is a problem in some regions. According to the government, increased spending in the 2024 budget should facilitate shorter waiting times, strengthen mental healthcare and promote collaborative measures in the Northern Norway Regional Health Authority (Ministry of Finance, 2023[31]). The 2024 budget also included measures to create more medical training posts to raise the number of GP posts even further.

Most indicators of health outcomes lie considerably above the OECD average. At 82.6 years in 2022, life expectancy at birth was the 7th highest in the OECD, as high as in Sweden, but higher than in Denmark and Finland. The gender gap in life expectancy is among the narrowest in the OECD. Also health inequality, as measured by the dispersion in the age of death among individuals is low in Norway.

Figure 2.8. The geographic density of doctors is fairly even

Physician density across regions, by territorial Level 2 regions, 2021 (or nearest year)

Health outcomes are not only determined by healthcare spending, but also by the quality of care, lifestyle and the socioeconomic environment. Norway scores well on quality of health indicators: the rates of both treatable and preventable mortality in Norway are among the lowest in Europe. Lifestyle factors include the consumption of tobacco and alcohol, how healthy the diet is, or the amount of physical exercise undertaken. On most of these measures, Norway scores very well (OECD, 2023[30]). However, low overall fruit consumption and physical inactivity among adolescents are public health concerns (European Commission and OECD, 2023[28]). Norway also scores well on socio-economic factors, such as GDP per capita, income distribution, education and pollution levels. Given that the lifestyle and socio-economic factors are so favourable, it is surprising that per capita healthcare spending is so high. Institutional features of the healthcare system, such as near universal coverage, a generous benefit package and the use of high-quality treatment technology seem important in shaping health spending, but it should also be possible to contain spending, while still allowing an improvement in health status.

While healthcare quality is high, there is considerable variation in the volume of treatments within many fields of the health service (Ministry of Finance, 2021[5]). Variation is unwarranted when it is not due to differences in demographics, geography, morbidity or other factors outside a healthcare provider’s control. Greater variation is justified for treatments where there are geographic differences in the population’s level of morbidity. A national health atlas (https://helseatlas.no/en) has documented interregional variation in the use of a range of health services. For example, there are large differences in the use of outpatient services and hospital admission rates for children across regions, which do not appear to be explained by difference in population disease burdens. A wide variation can also be illustrated by shoulder surgeries. There were about 300 shoulder surgeries per 100 000 inhabitants in Finnmark as compared to close to 100 in Norway on average (Ministry of Health and Care Services, 2019[32]). (Godøy and Huitfeldt, 2018[33]) examined the extent to which regional variation in healthcare utilisation is driven by local factors, as opposed to underlying patient health and whether higher regional supply of healthcare is associated with better health outcomes. In principle, regional variation in healthcare utilisation can be driven by variation in demand factors, such as patient health, as well as supply factors, such as physicians’ practice styles. Demand-driven variation is less problematic because it depends on how much care the inhabitants require. In contrast, supply-driven variation is indicative of inefficiencies and thus of a potential for reducing spending. The results show that local factors account for roughly half of the gap between high and low utilisation regions.

Ageing will push up healthcare spending in the future, especially for long-term care, with smaller communities feeling the greatest impact. Depopulation of rural areas has long been observed. In addition, birth rates in small municipalities are lower than in larger municipalities. The smallest municipalities will therefore have the largest number of retired persons and persons who need nursing care per person of working age. The expected drastic change of the share of older people is illustrated by the number of municipalities that will have more than 25% of people older than 67 years, which could go from 14 in 2020 to 196 in 2035 (Ministry of Health and Care Services, 2019[32]). Care of older people is a local government responsibility, and the smallest municipalities will face a steep increase in needs in this area. Recruiting qualified personnel for the long-term care sector is already a major issue. Moreover, there are major differences between municipalities in terms of population size and how well they discharge their responsibilities, and there is a risk that such differences will increase.

Improving coordination, raising co-payments and leveraging digitalisation

Primary and secondary care need to be better coordinated

Given the provider split between primary and secondary care and the interactions between the two, improving coordination of healthcare services is a perennial issue. Already a White Paper published in 2005 identified patient groups deemed particularly vulnerable to coordination problems and proposed a countrywide system of agreements between hospitals and their nearby municipalities to coordinate the provision of care ( (WHO, 2020[34]). The 2011 Municipal Health and Care Act introduced two key changes. Firstly, municipalities were given full responsibility for patients ready to be discharged from hospital treatment by providing local care beds for patients with a need for pre- or post-hospital services. Secondly, municipalities were made responsible for co-financing hospital care, which could have reduced hospital spending. However, the latter was abandoned three years later. The 2011 Public Health Act established a new foundation for strengthening systematic public health work in the development of health and other policies. It also provided a broad basis for coordinating public health work across various sectors and actors, and between authorities at the local, regional and national level.

Coordination was also strengthened in 2020 by the establishment of 19 healthcare communities. Each community encompasses a health trust and the municipalities in the trust’s region. Within these communities, municipalities and health trusts collaborate in developing and planning services to achieve shared health objectives. Priority was given to the development of services for children and young people with large and complex needs, people with multiple chronic illnesses, people with severe mental illness and substance use disorders and frail elderly people. Health trusts and collaborating municipalities work with patients and GPs to arrange services for vulnerable patient groups who need both hospital and outpatient care. Existing agreements and structures for cooperation will be used as a basis, but will be developed further.

The recent 2024-2027 National Health and Coordination Plan again stresses that various parts of the health and care services are not sufficiently interconnected and that it must become easier for municipalities and hospitals to collaborate on coherent patient pathways based on local needs and assessments (Ministry of Health and Care Services, 2024[35]). Better coordination will be addressed by further efforts to provide integrated services and potential changes in the funding of GPs. The National Health and Coordination Plan underlines that it must become easier for municipalities and hospitals to collaborate on good, coherent patient pathways based on local needs and assessments. New forms of organisation will be introduced to create more coherent services and better use of personnel, such as integrated mental health services for children and adolescents, combined positions for midwives and more thematic organisation of mental health care. Also a recruitment and collaboration grant will be established that will provide an incentive for joint service development between municipalities and hospitals. The grant will make it easier for municipalities and hospitals to collaborate on joint planning, service development and good patient trajectories for those that need both municipal healthcare and hospital services.

Better coordination between outpatient and hospital care and other reforms, such as many changes to activity-based financing to encourage more day surgery (Ministry of Health and Care Services, 2019[32]) have led to a shift of inpatient into outpatient settings, leading to a decreasing number of hospital beds, shorter length of stay and wider use of day surgery. Nevertheless, there are still more curative hospital beds in Norway than in Sweden, Denmark or Finland (Figure 2.9). There seems thus potential for further gains from the strengthening of care coordination between hospitals and municipalities.

Figure 2.9. The number of hospital beds has declined

Number of total hospital beds per 1000 population

Consider higher out-of-pocket payments and changes to the health benefit package

Healthcare coverage is universal and public sources account for most of healthcare expenditure. Various mechanisms, such as exemptions and ceilings on out-of-pocket payments, limit the financial burden of care on individuals. For inpatient care and long-term home-based nursing care, no cost-sharing is required. Also healthcare for children under the age of 16, pregnant women, people receiving low pensions and those injured in occupational accidents is exempted from co-payments. Public spending represents 86% of total healthcare spending in Norway, which is among the highest shares in the OECD.

As a result, the health care system provides strong financial protection. In 2021, it guaranteed near-complete coverage for the costs of inpatient care. Similarly, public coverage for outpatient care was 86%. Both exceed the OECD average considerably. In contrast, public coverage rates for dental care and pharmaceuticals is much lower, but close to the OECD average (OECD, 2023[30]).

To contain spending higher out-of-pocket payments could be envisaged for health spending with a sufficiently high price elasticity, while leaving the ceilings for such payments in place to avoid financial hardship. In addition, the health benefit package could be revisited.

For Norway, differences in care needs cannot fully explain the local variation in long-term care service levels, which also reflect interregional differences in eligibility criteria and user charge differences. Studies find clear priority differences, where, for example, municipalities prioritise differently as to the coverage of long-term care services (between 32 and 76% coverage in 2018 for the population older than 80 years). In addition, there seems to be municipal variation in how they strike a balance between institution- and home-based care services and in the quality of services provided (Rostgaard et al., 2022[36]). In 2022, more than 30 municipalities had less than 5% of the population older than 80 years in a long-term care institution, while for nearly 80 municipalities the share was higher than 10% and for 16 municipalities the share was 15% or more (Kostra database).

Given the high share of spending, higher co-payments could also be considered in the long-term care sector. Demand-side pressures are high, reflecting both the ageing of the population and the low cost of services to the users. After user charges and state transfers, the municipalities are responsible for the funding of nursing and long-term care. As in many high-income OECD countries, the percentage of older people in expensive nursing homes has declined over the past decades, with a corresponding increase in less-expensive home care services. The decline in long-term care beds in institutions and hospitals per 1 000 population aged 65 years and over was the strongest in the Nordic countries between 2011 and 2021. Nevertheless, Norway’s spending on long-term care is still the second highest in the OECD, closely followed by Sweden and Denmark (OECD, 2023[30]).

Low user charges are combined with relatively generous eligibility. However, unlike cash benefits such as unemployment benefits where assessment of eligibility is relatively straightforward, long-term care services are generally allocated according to an assessment of individual need with less clear-cut eligibility criteria. Individual needs assessments and formal decisions are made at the local level, where it might be difficult to refuse the demanded service. Low user charges and eligibility are reflected in a high share of spending on long-term care.

Health Technology Assessment (HTAs) determine, which technologies are included in the public health benefit package. HTAs help ascertain if existing and new services, medicines, and medical equipment offer good value-for-money. Consequently, HTAs can be used as the basis to exclude cost-ineffective interventions from public financing (OECD, 2024[37]). The design of the out-of-pocket payment structure could be revisited by adopting more conservative criteria in the determination of which technologies should be included in the public benefits package, to ensure a higher cost-effectiveness profile of government health spending. The use of generic drugs is close to the OECD average, but considerably below that of the United Kingdom, Germany or Denmark.

Data governance and digital tools could enable efficiency gains

Digitalisation is playing an important role in healthcare systems through electronic health records, the use of population health data for monitoring and policy, and the integration of digital tools such as telemedicine into routine clinical care. It should also help in raising the productivity of the health workforce. Norway is among the many OECD countries that are implementing a digital health strategy (Ministry of Health and Care Services, 2019[32]). According to Health at a Glance 2023 (OECD, 2023[30]) it has one of the most elaborate strategies as it includes seven of eight policy goals, such as moving towards a people-centric system, improving the productivity of the health workforce or focusing on health prevention. The missing policy goal is supporting learning health systems.

Modernised patient record systems help to improve information-sharing and make work processes more efficient. In Norway, digital solutions have been established, which support cooperation and communication, internally and between municipalities and hospitals throughout the patient journey.

The use of digital tools in the health sector is not only important for healthcare coordination, but also for cost containment. For instance, Sunnaas Hospital has been using video conferences to provide multidisciplinary follow-up for people with spinal cord injuries and pressure sores, in close collaboration with the home nursing service in the municipality. A cost-benefit evaluation of this patient group showed that video consultations cost 15% of what physical meetings in outpatient clinics would cost, and only 3% of the costs which would be involved in a hospital admission (Ministry of Health and Care Services, 2019[32]). Oslo University Hospital provides remote hospital services at home for patients who have had bone marrow transplants for leukaemia. Patients can stay at home instead of being kept in isolation in hospital while their bone marrow function is returning to normal. A specialised team of nurses and doctors monitors the patient daily in their own home.

The Covid-19 pandemic accelerated the use of telemedicine, the use of information and communication technologies to deliver healthcare at a distance. Telemedicine interventions can deliver value for money by reducing the workload of healthcare workers, lowering waiting and travelling times, reducing unnecessary in-person care, shortening the length of consultations, and having lower unit costs than in-person care services. The pre-pandemic restrictions to the use of telemedicine were relaxed in virtually all OECD countries, including in Norway. During 2020, doctor teleconsultations reached more than 20% of total doctor consultations (OECD, 2023[38]). The spread of telemedicine was helped by financial incentives for providers to offer telemedicine services. Already before the pandemic, there was a substantial body of evidence showing that, when appropriately implemented, telemedicine services can be effective, safe and cost-effective. The body of evidence has grown since the start of the pandemic (OECD, 2023[38]). There is still considerable room for raising the use of telemedicine. In 2021, the share of doctor teleconsultations in total consultations in Norway was less than half of that in Denmark.

The care and assistance needs of older people can be reduced through adapted housing facilities. Increased prosperity and technical progress may make the elderly better equipped to modify their homes to prepare for a situation of impaired health. Welfare technology solutions can improve the ability of individuals to look after themselves in their own home and ensure quality of life and dignity for users. Welfare technology can also in some cases serve as an attractive alternative to ordinary service provision.

Health at a Glance 2023 (OECD, 2023[30]) provides an analysis of the policy components of an integrated digital health system to establish dimensions of digital health readiness – analytic, data, technology and human factor readiness. Despite the elaborate Norwegian digital health strategy, it points to areas that could be improved. Concerning analytic readiness, including the capability to link and use health data across critical data domains, Norway did well, but was still considerably behind the leader in this domain, Denmark (Figure 2.10). Moreover, Norway did poorly on dataset governance.

Figure 2.10. Linking and using health data across critical domains and dataset governance

Higher score corresponds to a better outcome

In its recent 2024-27 Health and Coordination Plan, the government plans to complete the measures that have already been initiated (Ministry of Health and Care Services, 2024[35]). Over the next four years, the government will prioritise digital collaboration to facilitate good patient trajectories and a simpler working day for professionals. The government will also support local responsibility for digitalisation through the establishment of a health technology scheme. It would be beneficial to improve the alignment of the Health and Coordination Plan with the OECD Recommendation on Health Data Governance (2016). Improved data governance is critical to ensure compatible policies across health organisations while implementing harmonised semantic and technical data standards. When implemented, good data governance improves timely access to quality data for authorised purposes, provides common guardrails for innovation for innovative enterprises, and fosters trust in health data use for the public and health providers.

Education: high spending, but only average results

Education spending and results

Schooling quality and equity are important determinants of individual earnings, the distribution of income, productivity and economic growth. Moreover, people with a better education are more likely to find employment, stay employed, have higher earnings and are in better health (OECD, 2022[39]).

In Norway, the governance and funding of schools reflect a long-established tradition of decentralisation. Primary and lower secondary schools are owned and run by municipalities, and upper secondary schools by counties. In primary and secondary education, responsibilities for budgets, staffing, and student admissions are often devolved to the school level. Schools are funded by the municipalities and counties. The municipalities and counties draw most of their revenue from local taxes, and from a redistributive grant system. The grant system accounts for differences in their size, school-aged population, and disadvantage factors such as parental education and immigration background. In primary and secondary education, most municipalities and counties devolve financial management to the school level. Schools receive a block grant to be used for wages and operating expenses, while responsibility for building maintenance remains with the municipalities. Schools in Norway have relatively more autonomy and flexibility in making decisions on the use of resources as well as curriculum and pedagogy than the OECD average. However, central government regulations and agreements place limits on spending and revenues. For example, salaries and working conditions are negotiated centrally with social partners (OECD, 2020[40]).

In Norway, spending per pupil in secondary education is very high in international comparison (Figure 2.11, Panel A). This is partly explained by Norway’s status as a wealthy country and also points to the high value placed on education in Norway (OECD, 2020[40]). As noted above regional policy also plays a role.

Figure 2.11. Spending on education is very high, but PISA scores are only average

Spending on education is only to a certain extent related to student performance (OECD, 2023[41]). Among the countries whose cumulative expenditure per student, between the ages of 6 and 15, was under USD 75 000 (in purchasing power parity) in 2019, higher spending was associated with higher scores in the PISA mathematics test. But this was not the case among the countries whose spending was above USD 75 000. For these countries, the way in which financial resources are used seems to matter more for student performance than the level of education spending. (Égert, Maisonneuve and Turner, 2023[42]) come to similar conclusions on the link between spending and PISA scores. In Norway, the cumulative expenditure per student was USD 153 300 in 2022. This is double the USD 75 000 threshold and was the second highest in the OECD (Figure 2.11). Denmark, Finland and Sweden achieved much better results, while spending less.

Norwegian 15-year olds perform only average in mathematics and reading, while they are significantly below the OECD average in science (OECD, 2023[41]). PISA scores for reading, mathematics and science are also below those of the other Nordic countries, except Iceland. As in most other countries, the pandemic had an adverse impact on the results (Box 2.8), with Norway having one of the largest declines in mathematics. However, the decline started already earlier (Figure 2.11, Panel C, D and E). Recent OECD research has found that a fall of 8 points in the average country score in mathematics, science and reading in the OECD’s PISA tests of student achievement is associated with a long-term decline in aggregate productivity of 1% (Égert, Maisonneuve and Turner, 2023[42]). This suggests that the decline of close to 30 points in Norway’s average PISA score between 2015 and 2022 will eventually reduce aggregate productivity by close to 4 percentage points. Reversing the decline would lead to sizeable productivity gains.

Box 2.8. School closures during the pandemic

Norway was much less affected by the pandemic in terms of cases and death from a covid-19 infection than many other OECD countries. Though Norway did not report data, school closures were likely less prevalent than in many other countries. The PISA 2022 results suggest that school systems that spared more students from longer school closures had higher PISA scores, while their students enjoyed a greater sense of belonging at school. All kindergartens and schools in Norway were closed from 13 March to 26 April 2020. Thereafter, schools gradually re-opened, beginning with the youngest students. By 11 May 2020, all schools had been fully reopened (OECD, 2020[40]). Remote instruction was used during the school closures. Since the start of the school year 2020/21, schools have, for the most part, remained open. Except for peaks of infection rates when all schools were closed – at the start of the pandemic, around Christmas 2020, and Easter 2021 – it has been up to the municipality to decide on educational measures (Office of the Prime Minister, 2021[43]). When schools were notified of a covid-19 outbreak, all individuals who potentially could have had contact with the infected had to isolate for ten days. This meant that several classes and grades, and sometimes the entire school, switched to distance learning from one day to the next (Hall, Hardoy and Lundin, 2022[44]). Distance learning was facilitated by the availability of digital resources: less than 10% of students were in schools whose principal reported that shortages of digital resources hinder instruction to some extent or a lot.

Overall, it appears that the effect of the pandemic on school performance was probably small, but it exacerbated an already deteriorating performance, that had started before the pandemic.

The most recent PISA report (OECD, 2023[41]) provides several key results:

The PISA index of economic, social and cultural status can be used to compare the performance of students of similar socio-economic background in different countries. In Norway, 59% of students were in the top international quintile of the socio-economic scale, meaning that they were among the most advantaged students who took the PISA test. Their average score in mathematics was 492 points. In Estonia and Japan, students of similar socio-economic background scored much higher.
This index can also be used to order students from the most disadvantaged to the most advantaged within each country, and to create four groups of students of equal size. In Norway socio-economically advantaged students (the top 25% in terms of socio-economic status) outperformed disadvantaged students (the bottom 25%) by 81 score points in mathematics. This is somewhat smaller than the average difference between the two groups across OECD countries. Between 2012 and 2022, the gap in mathematics performance between the top and the bottom 25% of students in terms of socio-economic status widened in Norway, while the average gap across OECD countries remained stable.
The share of low-performing mathematics students is fairly high and has increased considerably since 2012, while the share of top performers is small and has declined somewhat. Since 2012 the proportion of students scoring below a baseline level of proficiency (Level 2) increased by nine percentage points in mathematics; by 11 percentage points in reading; and by seven percentage points in science.
Boys and girls performed at similar levels in mathematics but girls outperformed boys in reading by 42 score points. While girls are better in reading than boys in virtually all countries, the difference in Norway is especially large. Between 2012 and 2022, performance in mathematics declined to a similar extent among boys and girls.
The share of immigrant students has increased from 10% in 2012 to 16% in 2022. While 25% of all students were socio-economically disadvantaged in 2022, the corresponding share of those with an immigrant background was 54%. This gap is very large, as in many other OECD countries. 69% of immigrant students reported that the language they speak at home is different from the language in which they took the PISA assessment. In mathematics, the average difference in performance between immigrant and non-immigrant students was 36 score points in favour of non-immigrant students, a significant difference. However, the difference is smaller than in many other OECD countries. After accounting for students’ socio-economic profile and language spoken at home, a significant difference of 9 score points in favour of non-immigrant students was observed. The differences were even larger for reading.

As learning continues after the age of 15, performance in mathematics continues to rise. The Norwegian performance growth in numeracy between ages 15 and 24 is among the highest in the OECD (OECD, 2023[41]) and the education level of the Norwegian population is high, with the over 25 year-olds having strong reading, numeracy, and ICT skills (Ministry of Finance, 2021[5]). While basic skills acquired early in school are perfected throughout life, the Skills Outlook 2021 (OECD, 2021[45]) shows the importance of acquiring a strong and solid foundation in school: it is in the early years that essential skills are acquired and perfected. This implies that the deterioration in school performance could undermine the success of later learning in the coming years.

Policy should focus on cost containment, while improving outcomes

International experience suggests that education systems can lift both equity and overall achievement through improving early childhood education, raising teacher quality, tackling educational failure, and better targeting of funding to children’s needs. There must also be enough local support for schools to put policy into practice. The school environment and parental involvement also play a role (OECD, 2022[39]). Also cost containment is important, but there can be trade-offs and an increase in inequities needs to be avoided.

Cost containment is important, but faces some trade-offs

Partly due to their small size and demographic decline, rural schools tend to have smaller classes and fewer students per teacher than their urban counterparts, which can exert considerable pressure on public resources. Based on data from PISA 2018, both student-teacher ratios and class sizes tend to be smaller in rural as compared to urban schools in secondary education across OECD countries. There is no agreement on what constitutes a large, medium-sized or small school. Yet, regardless of where the boundary is drawn, research from different countries indicates that significant economies of scale can be achieved when increasing school size up to a certain enrolment level before returns to scale diminish or diseconomies of scale may emerge (OECD, 2022[39]).

Smaller municipalities may also have less experience and staff and thus face significant capacity constraints, which can create or exacerbate regional inequities. Capacity building at the local level is of particular importance in countries with many small municipalities. Some countries with many small providers have responded to capacity challenges by merging providers and thereby fostering better resource management. This has been the case in Norway and continuing with merging at least the still large number of small municipalities in Norway would help in this respect. And obstacles to inter-municipal cooperation should be removed. As noted above, municipalities have the obligation to educate every resident child, but have no incentive to accept non-resident pupils since they are not entitled to a corresponding compensation via the central government grant system. Other countries have moved responsibilities to higher levels of the administration or created new administrative bodies to administer resources for a larger number of schools. In Norway, to address capacity differences across local authorities, a collective competence development model for schools has been introduced. For instance, municipalities that report weak results in key education and training areas are offered state support and guidance (OECD, 2022[39]).

Trade-offs between cost and access need to be carefully managed. Countries can consider a broad spectrum of strategies to rationalise the organisation of the school network, which includes re-thinking how educational services are defined and distributed across school sites, fostering co-operation and resource sharing between providers, creating school clusters and engaging in consolidation. At the same time, the limits of consolidation need to be acknowledged and access to schools at a reasonable distance must be ensured, particularly for younger children (OECD, 2022[39]).

For cost containment also class size matters. In full-time equivalent terms, there are 11 students per staff member in upper secondary programmes, well below the OECD average of 14. A similar difference exists for vocational upper secondary programmes (OECD, Education GPS). In 2019, the limit on the pupil/teacher ratio was reduced to 15 in school years 1 to 4 and to 20 in years 5 to 10. 8 in 10 school principals who have received funding to reduce the pupil/teacher ratio reported that the additional resources are primarily used to add a second teacher in existing classes. Just over 4 in 10 say that the teachers are also used for intensive courses. Teachers have also benefited from below-average teaching hours (OECD, 2020[40]), though their salaries are not high in comparison with the median wage. National requirements for student/teacher ratios in schools are seen as a form of detailed governance by municipalities that prevents them from using resources appropriately (Ministry of Local Government and Regional Development, 2023[22]).

Given the high cost of class size reduction policies, they appear comparatively less efficient than other interventions to support student learning. While the effects of class size on student achievement are still debated, there is substantial evidence pointing to strong positive effects of small classes on the learning of particular student groups. This includes learners in their earlier years and from disadvantaged backgrounds (OECD, 2022[39]). To contain cost and provide funding for policy priorities there may be a case for relaxing the stringent pupil/teacher ratios, while providing support for specific groups of students.

Improving the outcomes of underperforming students

Universal policies, as compared to targeted policies (focusing on groups of students), are more appropriate in education systems where socio-economic status does not have a strong impact on student performance. In Norway, the across-school variation in PISA performance is very low in international comparison, while within-school variation is very high, a feature Norway shares with the other Nordic countries (Figure 2.12). An explanation may be that resources are not well targeted to students within schools with the greatest needs. Universal policies aim to improve performance through reforms that are applied equally across the system.

Teacher support in terms of providing extra pedagogical and motivational support to underperforming students is particularly important. The availability of teachers to help students in need had the strongest relationship to mathematics performance across the OECD, compared to other experiences linked to covid-19 school closures (OECD, 2023[41]). Yet, the teacher shortage in Norway has become worse. School principals reported that the shortage of teaching staff rose between 2018 and 2022. In 2022, 35% of students were in schools whose principal reported that the school’s capacity to provide instruction is hindered by a lack of teaching staff. In most countries, students attending schools whose principal reported shortages of teaching staff scored lower in mathematics than students in schools whose principal reported fewer or no shortages. Moreover, disadvantaged schools show a considerable shortage of teachers and educational material as compared to advantaged schools (Figure 2.13). This warrants an investigation into whether enough funding to compensate the extra difficulties that disadvantaged schools face is available.

Figure 2.12. Variation in mathematics performance between schools is low

Variation in mathematics performance between and within schools, 2022

Figure 2.13. Perceived shortages of resources in disadvantaged schools are considerable

Difference between advantaged and disadvantaged schools, negative values indicate greater shortages, 2022

The quality of teaching matters as well. Improving teacher qualifications has been a reform area for several years and a programme to improve the status and quality of teachers continues (OECD, 2019[46]). Reforms are necessary, because many teachers do not meet the qualification requirements in the subjects they teach (The Norwegian Education Mirror, 2020[27]). In 2022, 12% of pupils where in schools whose principal reported that the school’s capacity to provide instruction is hindered by inadequate or poorly qualified teaching staff (OECD, 2023[30]). The reforms underway include increased support for teachers’ continued education and the introduction of a five-year master’s-level degree for new entrants to the profession. A 2022 report recommended a new model for continuous professional development for teachers and other staff in kindergartens and schools. The government is now following up on the recommendations and will launch a new system for continued learning in 2025. Teachers also need to be better prepared to address diversity in schools.

Schools in Norway are often encouraged by the municipalities to introduce targeted interventions to help low achieving students by, for instance, organising extra-tutoring hours for students at risk of falling behind or providing extra-curricular activities for recent immigrant students to help improve their sense of belonging in the school. However, the municipalities do not have processes in place to evaluate the impact of targeted interventions and help disseminate evidence-based interventions across schools. Best practices are shared in networks of schools without a formal evaluation of their success. While the role of the school networks in disseminating best practices is a positive feature of the Norwegian education system, it needs to be reinforced with more rigorous external evaluations of school interventions in some key policy areas such as dropout prevention of low-performing students (Borgonovi, Ferrara and Maghnouj, 2018[47]).

Grants to schools are used successfully by many decentralised education systems to implement a policy priority. Norway uses grants and funding to the municipalities to incentivise action in priority policy areas. It would therefore be relatively easy to refine the focus of targeted funding that comes on top of the block grant provided to municipalities to help more underperforming students (Borgonovi, Ferrara and Maghnouj, 2018[47]). There may also be a case to leave more room for schools to focus on the quality of teaching as well as on better supporting underperforming students by relaxing the stringent pupil/teacher ratios.

The school environment matters for learning outcomes

Parent involvement in schools matters and has declined in many countries, including in Norway. In 2022, 6% of students in Norway were in schools whose principal reported that during the previous academic year at least half of all families discussed their child’s progress with a teacher on their own initiative and 82% on the teacher’s initiative. In 2018, the corresponding number was 19% and 89%. The PISA 2022 report suggests that systems that had a positive trend in parental involvement between 2018 and 2022 tended to show more stable or improved performance in mathematics.

Also, the school environment matters. Many students study mathematics in an environment that is not favourable to learning: in 2022, about 23% of students in Norway reported that they cannot work well in most or all lessons, which is close to the OECD average; 24% of students do not listen to what the teacher says, which is sizeable, but below the OECD average; 31% of students get distracted using digital devices (OECD average: 30%); and 25% get distracted by other students who are using digital devices (OECD average: 25%). While classroom interventions aiming to improve student achievement have often focused on providing direct academic support, research shows that these might not be enough to improve outcomes of students at the very bottom of the learning outcome distribution, a group where boys are over-represented. Preventing or addressing classroom disruptions has proven to be as central to improving students’ learning outcomes as addressing learning difficulties (Borgonovi, Ferrara and Maghnouj, 2018[47]).

School closures drove a global conversion to remote learning, leading to greater use of technology in classrooms and at home. Students who spend up to one hour per day on digital devices for learning activities in school scored 14 points higher in mathematics than students who spent no time, even after accounting for students’ and schools’ socio-economic profile. Yet technology, such as mobile phones, used for leisure, often seems to be associated with poorer results. Students who reported that they become distracted by other students who are using digital devices in at least some mathematics lessons scored 15 points lower than students who reported that this never or almost never happens. As reported above, the percentage of students in Norway getting distracted is high. On average across OECD countries, students were less likely to report getting distracted using digital devices when the use of cell phones on school premises is banned. In February 2024, the Ministry of Education and Research recommended strict regulation of mobile phone use in schools to reduce distractions, improve learning, and foster a peaceful school environment. The government has also proposed changes to the Education Act to clarify teacher’s ability to intervene in the classroom to prevent serious disruptions and harm to persons or objects. Infrastructure investment: project selection can be improved.

Gross public investment is high in international comparison, especially for transport infrastructure, which accounted for nearly 30% of public investment in 2022. The share of investment in the defence sector was 35.1%, while that of investment in the health sector was 9.8% and that in the education sector 11.1%. Public investment as a share of total investment has even risen since 2012, while it was stable or declined in other Nordic countries (Figure 2.14). Successive governments have given priority to spending the increasing petroleum revenue on knowledge and infrastructure investments, as well as growth-promoting tax reductions (Ministry of Finance, 2021[5]).

Figure 2.14. Public investment is among the highest in the OECD

Public investment as a per cent of total investment

Despite comparatively high spending, Norway’s transport network does not rank well according to some indicators. According to the World Economic Forum (WEF) indicators, Norway scores poorly on overall infrastructure, below average for road infrastructure overall and poorly on the road-quality component (Figure 2.15). Finland and Sweden, two other sparsely populated countries fare much better. WEF rankings only reflect the perceptions of business managers rather than the population at large but the scores suggest room to better match infrastructure development with demands and expectations, at least as far as the business community is concerned. The latest national transport plan admits that there is a maintenance backlog, the reduction of which will be a government priority during the planning period 2025-36 (Ministry of Transport, 2024[48]).

Public investment can enhance growth. New or improved transport links, for instance, alter the economic geography for businesses and households, reduce journey times, facilitate trade, connect communities and widen access to jobs. Theory suggests that the effect of public investment on growth is most likely positive and depends on the extent to which it crowds in or out private investment. If public and private capital are complementary (e.g. roads that connect enterprises), higher public investment can spur private investment. (Fournier, 2016[49]) found that the effect of public investment on growth is large: increasing the share of public investment in primary spending by one percentage point increases the long-term GDP level by about 5% in a sample of OECD countries. Growth benefits of public investment are larger in countries with an initially low stock of public capital, as the needs for public investment are larger. By contrast, in countries with a high public capital stock, the risk of selecting cost-inefficient projects is higher. As there is a financing cost for public capital, either through levying distortionary taxes or through raising public debt, at some level of the public capital stock, the net marginal return of public investment may turn negative. Given the high investment share in the past, the public capital stock in Norway is large. This implies that, while growth effects are still positive, they get smaller and that there is a premium on the careful selection of investment projects, including with respect to upgrading and maintenance work.

Figure 2.15. The quality of the road infrastructure is below the OECD average

2019

Beyond such aggregate considerations, public investment proceeds project by project. A project is economically profitable if the overall benefits to society exceed the costs. Such assessments, done by comparing the costs and benefits of a project, must include business needs as well as the impact on the population and on the environment. The benefits from a public investment depend on its purpose. For educational institutions, for instance, this may be improved research and education conditions, for ICT projects it may be a reduction in the time spent on regulatory compliance and for transport projects it may be travel-time savings, improved road safety and reduced pollution. Typical costs include investment and operating expenditure, as well as any negative effects on the environment.

An important reason for the high spending on transport infrastructure is Norway’s geography. The challenges in investing in transport infrastructure include long distances, mountainous terrain, rough weather conditions and sparsely populated areas. Transport sector planning is challenging also for other reasons. The climate commitments and the advent of automated, connected vehicles may within a few decades change the structure of the transport sector completely. Investments currently being planned are nonetheless supposed to deliver benefits for several decades. New technology may provide more environmentally-friendly solutions, improve mobility and lower costs in the transport sector. Improved mobility may at the same time increase transport demand. These developments are also changing what policy tools are best suited. For instance, an increasing share of zero-emission vehicles reduces the climate advantage of railway investment.

In Norway, major transport infrastructure projects are planned and decided on via National Transport Plans. The plans are usually submitted every four years and cover a 12-year period. The latest dates from 2024 and covers road, railway, airport and port projects for the period 2025-36 (Ministry of Transport, 2024[48]). Each transport plan contains a shortlist of projects. The shortlist is based on professional advice given by the transport agencies, public hearings and other policy considerations by the government. All projects with a cost estimate above NOK 1 billion pass through an appraisal process that assesses different solutions to the infrastructure problem being addressed. The resulting choice is then checked through a quality assurance process.

In the past, numerous extensive and costly changes were often made to projects in the planning phase. Project costs have often increased by more than 40% until planning was completed (Ministry of Finance, 2021[5]). Cost control for large projects has improved considerably with the introduction of external quality assurance by consultancies with experience in project planning and cost estimation. Project-specific stochastic cost estimates provide the basis for setting sizeable cost buffers (Samset et al., 2016[50]). This process takes place before the project can be considered for inclusion in the transport plan. A first assessment by (Samset et al., 2016[50]) showed that close to 80% of the projects staid within the budgeted cost. This is a notable improvement on the previous experience. Cost deviations from the target cost were distributed almost symmetrically around the expected value. An assessment of more recent projects should be undertaken.

After the quality assurance, the National Transport Plan is submitted as a White Paper to Parliament for discussion. Projects are rarely rejected at this point in the process as they have considerable momentum, with typically several years of deliberation, transport appraisals as well as both local and national support. The implementation of the National Transport Plan is contingent on sufficient funding in the annual budgets.

Measures taken to improve cost control in the road sector also show positive results with the creation of Nye Veier AS, a company wholly-owned by the government (Menon Economics, 2023[51]). The company’s activities include planning, construction, operation and maintenance of major highways.

Many selected projects have shown net negative benefits, as documented in the 2018 OECD Economic Survey of Norway (OECD, 2017[52]). (Olsson, Nyström and Pydokke, 2019[53]) compare the governance regimes in Sweden and Norway. They conclude that various governance reforms have introduced new procedures and methods in the planning process, but that the governance procedures have failed to prevent projects with low benefit-cost ratios in both countries. (Ydersbond et al., 2023[54]) examined how the reports are used by one of its primary user groups, the top politicians in the government and Parliament. After conducting 20 in-depth interviews, they concluded that the planning system does contribute to some unprofitable projects being rejected or modified, but that political factors are also important and can lead to the go-ahead of projects with low social value. Moreover, the assumptions underlying the cost-benefit analyses sometimes change over time in a way that implies higher estimated net benefits, for instance due to a lower discount rate or a longer period of analysis (Halse, Wangsness and Minken, 2021[55]). Despite the more favourable assumption in recent years, most projects still have negative net benefits.

The projects shortlisted for the National Transport Plan have traditionally not always been the most highly ranked in the economic and quality assessment. Politics often dominates the selection and the scope of spending gets expanded by projects with weak cost benefit results (Ministry of Finance, 2021[5]). To avoid the selection of economically weak projects, hard measures could, for instance, comprise a new end-stage filter that requires a minimum benefit-to-cost ratio for projects to proceed further. In any case, the benefit-to-cost ratio should be given more importance in the selection of projects. Moreover, ex-post evaluations could play a more prominent role as they provide insights into the performance and outcomes of transport infrastructure planning and decision making and help inform the public. Only a few are carried out per year.

The OECD’s indicators of the quality of regulatory frameworks of public infrastructure also point to room for improvement. The OECD Infrastructure Governance Indicator on regulatory frameworks for public infrastructure provides an overview of countries’ performance in promoting efficient regulatory frameworks and permit procedures, and ensuring good governance via independent and accountable economic regulators (OECD, 2023[3]). On this metric, Norway is close to the OECD average, with considerable room for improvement as compared to the best performing countries on all three sub-indices (Figure 2.16).

Figure 2.16. Regulatory frameworks for public infrastructure

2022

Sickness and disability benefits are too generous

Norway’s sick-leave compensation and disability benefit schemes provide comprehensive support and are an important component of employee rights and benefits and the wider welfare system. But the use of these systems is extensive: sickness absence and disability benefit recipiency levels in Norway are very high in international comparison and also higher than in Denmark, Finland and Sweden (Figure 2.17). For disability benefit recipiency the difference with Denmark, Finland and Sweden is considerable. There have been policy reforms, but they have not reduced benefit recipiency. Also spending on incapacity-related benefits far exceeds the OECD average. Other Nordic countries and the Netherlands have been successful in bringing down spending on such benefits (Figure 2.18) In Denmark, for instance, disability benefit is effectively unavailable for people under 40 years since 2013, while the Netherlands took a series of reform measures (Box 2.9). In addition, the rate of sickness leave, notably long-term absences, has increased since the pandemic. Curbing spending should be a central policy concern, because of lower employment and thus productive capacity of the economy, reduced socio-economic inclusiveness due to disengagement from working life, and high fiscal costs.

Box 2.9. Sickness and disability benefit reforms in the Netherlands

Against the background of very high sickness and disability payments in the early 1990s, the Netherlands introduced major reforms, which led to the privatisation of the previously publicly administrated and collectively financed sickness benefit scheme. In 1992, uniform premiums were changed to reflect a firm’s sickness absence rate. In 1994, payment of benefits during the first six weeks became the responsibility of the employer. Experience rating was also introduced in the disability benefit scheme and measures were taken to reduce inflows.

The Dutch reform experience demonstrates that employer incentives matter: when premiums to sickness and disability insurance became experience-rated, i.e. dependent on the employer’s sickness and disability record, new benefit claims fell drastically. The cost to employers of sickness and disability insurance rose significantly following the major reforms, which reduced incentives to move workers to disability. These reforms achieved their objective of lowering the overall cost of the system, which was high in international comparison as the scheme had come to function like a long-term benefit programme for less employable workers. However, they failed to fully bring beneficiaries back into the labour force, as a significant share of those who left benefits did not obtain substantive gainful employment. Moreover, the reforms also created incentives to circumvent the schemes by hiring workers with temporary contracts. As a result, a recent labour market reform package includes provisions to ease the burden of sickness and disability obligations for small- and medium-sized enterprises. The Dutch experience suggests that a trade-off exists between employer incentives to support the return to work of their sick-listed employees and disincentives to provide permanent contracts.

The Dutch also provide training that is tailored to the needs of the disabled. The No Limits at Work research agenda aims to expand the knowledge base on effective training for bringing disability benefit recipients back to work. The initiative to enrol in adult learning can come from the benefit recipient, the Public Employment Service, the employer or an organisation involved in re-integration. Relative to the overall benefit population, clients who followed the training were more often male and younger and about half were low-educated. The labour market effects of training disability benefit recipients are promising. Around 80% finished their training. About 60% who received training found a job – almost twice as high as those who did not receive training and 50% higher than those who only followed a re-integration process. About half still had a job five years later.

Source: OECD (2023), OECD Economic Surveys: Netherlands; (Hemmings and Prinz, 2020[56]); (OECD, 2022[57]).

Norway’s sick-leave system comprises mandatory compensation for those off work due to illness, funded by employers and the state. Disability support is fully state funded and has two components: an initial time-limited benefit, the Work Assessment Allowance (AAP) and long-term disability support, the Disability Benefit. The AAP emphasises rehabilitation, with the aim of limiting the number of those entering permanently the Disability Benefit scheme. There is a link between the sick leave and disability systems. Middle-aged and older benefit recipients tend to transition from a prolonged period of sick leave into the AAP benefit and then onto Disability Benefit support. Young benefit recipients tend to directly benefit from the AAP, as many have little to no work experience and therefore do not have access to the sick leave benefit.

Figure 2.17. Norway has a very high share of disability recipients and sickness day absence rate

Figure 2.18. Public spending on incapacity-related benefits is far above the OECD average

Public spending on sickness and disability

Norway’s high rates of sickness absence and disability do not primarily reflect the health of the population, but rather a combination of structural factors and policy design. Core issues are generous benefit levels and relatively light eligibility conditions for starting and remaining on benefit, resulting in low rates of rehabilitation (Box 2.10).

Box 2.10. Key features of the sickness and disability benefit schemes

Key features of the schemes are (Hemmings and Prinz, 2020[56]):

Sickness leave

Compensation at 100% of the previous salary for up to one year. A ceiling applies to the state-funded payment at a little above the average wage. Despite the ceiling, compensation is very generous in international comparison.
The employer pays sickness benefit for the first 16 calendar days, thereafter the benefit is state funded. The employer payment was lowered during the pandemic and raised again in July 2022.
Follow-up requirements include formulation of a return-to-work plan by employer and employee within four weeks, an expanded medical certificate and requirements regarding activity after eight weeks, (generally) a meeting after 26 weeks between the Norwegian labour and welfare administration, the employer and the person receiving sickness benefits.

Work assessment allowance

It aims to get individuals into employment. It targets those who have been assessed as having at least 50% impairment of work capacity.
Compensation is around two-thirds of the previous wage (with a minimum and a ceiling), with a three-year maximum duration, which can be extended, if certain requirements are met. It can be supplemented by a disability pension from an occupational scheme.
The receipt of the benefit is conditional on following an agreed activation plan.
Those reaching the end of one-year of sickness leave may apply to the scheme.

Disability benefit

It provides long-term disability support for those of working age (18 to 67 years).
Compensation is around two-thirds of the previous wage (with a minimum and a ceiling) and like for AAP it can be supplemented by a disability pension from an occupational scheme.
Income from employment is permitted though the benefit is partially withdrawn for income levels above certain limits.

Norway’s sickness leave compensation, in combination with disability benefit support, are a major channel for exit from the labour force. Active labour market policies have already intensified efforts by management to tackle sick leave and to strengthen early intervention, treatment and rehabilitation. However, economic incentives, particularly the generous public sick-leave compensation, are also part of the problem and there has been little progress in rectifying this issue. The full-salary compensation is provided for up to one year (which is exceptional in international comparison). The reduction of the sick- leave compensation rate towards the level of the other Nordic countries should be considered. As suggested by the Employment Commission, also partial employer coverage of long-term sickness absences should be introduced (Employment Commission, 2021[58]). The limited employer involvement in compensation is also problematic, because it provides little incentive for taking preventive measures or rehabilitation of those on prolonged sick leave (Palme and Persson, 2020[59]).

Past reforms had some success in reducing the disability claimant rate among older workers, but nearly 22% of the 55 to 67 year-olds are still receiving the disability benefit (Figure 2.19). There is thus considerable scope for further reduction in this age group. There is also a worrying increase in the share of young and middle-aged Norwegians claiming a disability benefit. Among these groups, entering the system directly, without first passing through the sick leave system, is more common than in other age groups.

The sharp rise in the number of young people entering the disability benefit scheme should be of great concern (Wittlund, Mykletun and Lorentzen, 2022[60]). Disability benefits function as an economic safety net for individuals with low educational attainment who have difficulties getting a foothold in the labour market. Among the young, entry into the disability scheme often concerns early school leavers and youth with little or no work attachment. A recent initiative, the Norwegian Inclusive Workplace Agreement contains several measures. One focuses on preventing transitions from employment to disability benefits via training. However, this has little relevance for young disability pensioners as the majority has weak labour market attachment. More emphasis should be placed on non-workplace interventions, including better educational support for struggling students.

Figure 2.19. Disability claimants by age

Recipients of disability benefit as a share of the population, %

(OECD, 2019[61]) and the (Employment Commission, 2021[58]) identified several options for reform of the disability benefit system, which should be pursued:

The application of rules should be stricter and access to the disability benefit limited through wider exclusion criteria and stronger treatment and rehabilitation requirements. In particular, the Employment Commission suggested to reduce AAP payments for younger cohorts and for individuals living at home with their parents.
Early intervention should be strengthened. International evidence suggests that the chances of returning to work and the effectiveness of rehabilitation measures decline steeply the longer individuals remain off work. Early intervention should also include targeted wage subsidies to encourage employers to hire those receiving health-related benefits. Norway makes comparatively little use of such subsidies, especially compared with its Nordic neighbours (Box 2.11).
Reform of the medical assessment procedure is necessary. Medical assessment is still predominantly carried out by the claimant’s own GP, making the system vulnerable to assessments biased in favour of the claimant. Across four countries, the acceptance rate ranged from a low of 43% in the Austrian disability pension scheme, to 90% in the Norwegian disability benefit scheme (OECD, 2022[57]). Including a medical assessment by practitioners other than the person’s own doctor appears appropriate.
Mental illness has increasingly been a cause of prolonged employee absences. Prompting greater employer interest in prevention could reduce such absences. Early identification and intervention through the provision of additional services directed at mental illness by the employment support services would help in this respect.

The planned spending review of health-related benefits should provide an opportunity to overhaul the disability and sick leave benefit schemes.

Box 2.11. Flex jobs in Denmark

Norway underperforms other countries when it comes to including people with functional impairments in the labour force. Functional impairments do not necessarily mean a reduced fitness for work. There should thus be a potential for increasing the labour supply of several groups.

Denmark introduced the flex jobs scheme in 1998. “Flex jobs” are flexible job arrangements with reduced hours for those with limited work capacity. If work capacity is significantly and permanently reduced due to illness, people can be referred to a flex job. A flex job allows maintaining contact with the job market by working a limited number of hours and having tasks adapted to the disability, even if somebody is injured or seriously ill. The municipality has to approve a flex job and an agreement with the job centre and the employer has to be concluded. The job centres play an active role in finding a concrete job for a person. The job centres also assist the worker and the business to find suitable work tasks, assess the need for accommodation and the number of hours to be worked.

Approval of a flex job agreement provides the following options: for those under 40 years old, a flex job can be granted for five years at a time; for those over 40, the person can - after a first temporary flex job of five years - be granted a permanent flex job if the municipality considers that the person cannot be re-integrated in the labour market. A flex job must be considered before a disability benefit can be granted, but people seldom progress from flex-jobs to ordinary employment.

In addition to their agreed wage, a flexible salary allowance of no more than 98% of the maximum unemployment payment is paid by the municipality. The salary and allowance may not exceed the salary one would receive if employed in the same position under normal conditions.

The flex jobs scheme in Denmark demonstrates that it is possible to find jobs for many of the people with a permanently reduced ability to work. Denmark is among the few countries, were there has been a visible improvement in both the employment rate of people with a disability and the disability employment gap. Around 70% of flex-jobs are in the private sector, while 30% are in the public sector, which means that they are somewhat overrepresented in the private sector. The design of such a scheme is also important. The number of hours worked of workers on flex-jobs is low, because financial incentives to increase the number of hours are weak. It would thus be important to earn more, when working more. This would not only raise the number of hours worked, but also reduce government spending.

Source: (Employment Commission, 2021[58]); (OECD, 2022[57]); (Finansforbundet, 2024[62]).

Agricultural subsidies should be pruned and greened

Norway’s subsidy and tariff support for agriculture is very large and in need of substantial reform to improve the efficiency and sustainability of agricultural production. The OECD’s latest Agriculture Policy Monitoring and Evaluation (OECD, 2023[63]) highlights that total support in 2020-22 equalled 83% of the value of production at farmgate prices, the highest in the OECD (Figure 2.20). While this is down significantly from 125% in 2000-02, it remains way above the OECD average of 25%. Transfers to producers made up 51% of gross farm receipts in 2020-22, also the highest in the OECD. Reforms have been limited and the main agricultural sectors remain highly insulated from world markets. Market price support is provided through high border protection and regulated primary domestic markets, while a large share of budgetary support remains coupled to current production. These coupled support measures are not only potentially the most trade distorting, but also tend to have a negative effect on productivity and on the environment. The share of support considered most market distorting, for instance support coupled with production, has declined by 9 percentage points over the past two decades but still stands at 52%.

Figure 2.20. Producer support for agriculture is the highest in the OECD

Total support estimate relative to agricultural production, 2000-02 and 2020-22

A key goal of the government is to sustain agricultural activity in rural areas across the country and to provide farmers with the same income opportunities as other groups, irrespective of farm size, region or production. To reduce primary income differences, support prices and payments differ across regions. Moreover, agricultural support is not shrinking. After growing by 9% in 2022 budget outlays are projected to grow by 31% in 2023. This is in line with an objective of the government’s platform on agriculture – to address what it considers insufficient income of farmers and low self-sufficiency of Norwegian agriculture.

Recent policy changes are enshrined in the annual agricultural agreement between the government and the two farmers’ organisations, which increased the support to producers sharply. These large increases were partly an effort to compensate for rising input costs stemming from the war in Ukraine. The agreement included an increase in target prices, additional budgetary support, an increase in agricultural tax deductions, and increased funding for regional environmental programmes. A temporary electricity subsidy was introduced in response to rising power prices in late 2021 and was continued following the outbreak of the war in Ukraine. Agricultural enterprises were given special treatment in the form of higher consumption limits than households and volunteer organisations, and no consumption limits on greenhouse and irrigation operations.

While income support is very high, the share of support that is targeted to environmental objectives is low. It should be possible to reform the support policy package with more targeted and decoupled measures that improve environmental outcomes and raise long-term productivity, while maintaining production capacity across the country.

Reforms should support productivity growth and environmental sustainability (OECD, 2023[63]):

Further reduction in the most economically distorting forms of agricultural support in order to strengthen exposure to market signals and eliminate output-related measures. The withdrawal of export subsidies is welcome, but distorting measures remain, including many import tariffs.
Re-orienting support towards general services – especially for the agricultural innovation system – could increase productivity growth while maintaining environmental protection and sustainable natural-resource management. Much of Norway’s productivity growth in the agricultural sector in recent years came from labour-saving initiatives, but did little to reduce environmental pressures. Research and outreach programmes should target sustainable agricultural practices to reduce the use of harmful inputs and emissions. Support for pest and disease control will also increase in importance as climate change could drive new incursions into Norway.
Reducing greenhouse gas emissions from agriculture without significant policy reform will become increasingly difficult. The conflicts between the agricultural and environmental policy goals need to be addressed. It is possible to achieve the objective of preserving production capacity and agricultural landscape across the country, while reducing the negative environmental impacts. This could be achieved more efficiently through decoupled support with payment rates that are adapted to each location, and subject to requirements for maintaining production capacity.

Main policy findings	Recommendations (key ones in bold)
The fiscal framework
Expenditure rules help contain spending. Norway is among the few countries that have not implemented any such rule.	Implement an expenditure rule that aims at containing spending as a share of GDP.
A medium-term fiscal framework is lacking.	Introduce a medium-term fiscal framework.
Even after the broadening of the remit of the fiscal council, it remains narrower than in other OECD countries with a fiscal council.	Broaden the remit of the Advisory Panel on Fiscal Policy Analysis.
Spending reviews take place regularly as part of the budget process, but they have a narrow focus and are not sufficiently broad-ranging.	Undertake more comprehensive spending reviews and give them a prominent role in the decision-making process.
Regional policy
Municipal mergers have been stopped. Cooperation among municipalities is still limited in some core sectors.	Enlarge the operational scale of small municipalities, through mergers or co-operation.
Healthcare
Despite considerable efforts, fragmentation of care between municipal health centres and hospitals persists.		Pursue efforts to improve the coordination of care between municipal health centres and hospitals.
Eligibility criteria for inclusion in the health benefit package are generous and out-of-pocket payments are the lowest in the OECD.		Tighten eligibility criteria and raise out-of-pocket payments to damp demand, but keep ceilings for such payments.
A Digital Health Strategy is being implemented.		Continue efforts to implement the Digital Health Strategy, promote telemedicine and better link and use health data.
Education
The share of poorly performing students has risen.		Sharpen the targeting of the grant system. Reduce the teacher shortage and continue to raise the quality of teaching.
Spending on education is very high in international comparison.		Lift the stringent pupil-teacher ratio and strengthen co-operation among municipalities.
Many students complain that they study in an environment that is not conducive to learning.		Improve the school environment, for instance, by restricting the use of mobile phones, to raise educational attainment. Strengthen further the position of teachers in the classroom.
Infrastructure investment
Often infrastructure projects with a low benefit cost ratio are selected.		The benefit-cost ratio should be given more importance in the selection of infrastructure projects.
Only few ex-post evaluations are undertaken.	Mandate more ex-post evaluations.
Sickness and disability benefits
Sick leave compensation is very generous. Employers pay little in terms of sick leave compensation.	Expand employer payments for long-term sickness leave, and consider reducing the sick leave compensation rate towards the level of the other Nordic countries.
Access to the disability benefit is very generous.	Reduce Work Assessment Allowance payments for younger cohorts and for individuals living at home.
Chances of returning to work decline steeply the longer individuals remain on sick leave.	Strengthen early intervention, especially for young people, so that they do not end up in the disability scheme.
Medical assessment for the admission to the disability benefit scheme is still often carried out by the claimant’s own general practitioner.	Add an independent medical assessment, for instance, by a doctor appointed by social security.
Agricultural subsidies
Exposure of agricultural producers to market signals is weak and output-related measures are prominent.	Move away from the most economically distorting and environmentally damaging forms of agricultural support, and consider reducing overall support.

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