Sep 09, 2013

    More money, more problems for Norway

    NORWAY, which goes to the polls today, is an island of prosperity in Europe, with so much money that it literally doesn't know what to do with it.

    The Nordic country faces an embarrassment of riches as it tries to figure out how to spend its huge pile of oil money without damaging the economy in the long run.

    "All countries around us are forced to reduce their spending," said Mr Oeystein Doerum, chief economist at Norway's largest bank, DNB.

    "Our biggest challenge is that our oil wealth is so huge, we run the risk of wasting it on substandard projects that are not profitable enough."

    The dilemma is all the more real because the populist right gathered in the Progress Party, which wants to abandon the cautious policies espoused by other parties, is likely to form a government with the Conservatives after the election.

    Norway has the largest sovereign wealth fund in the world, weighing in at US$750 billion (S$956 billion). To make sure that the fund keeps growing, the government can withdraw no more than 4 per cent a year - the projected annual return - in order to balance its budget, which otherwise would be in the red.

    Launching a lone assault on this consensus, the Progress Party wants to remove the fiscal-spending rule and spend more money on education, research and infrastructure, to lay the foundation for future growth that would prove profitable for the state in the medium term.

    The problem is that the Conservatives, who are likely to lead a post-election coalition with the Progress Party, actually think the current arrangement is too generous, pointing out that, as the fund continues to grow, the amount of petro-money available to the government expands proportionally.

    "The most important point of negotiation between the Progress Party and us is on the nature of the expenses, not on whether to exceed the 4 per cent," said Conservative leader Erna Solberg, Norway's likely next prime minister.

    Even though the Norwegian economy has slowed down, excessive injection of public money could be destabilising.

    "Everything depends on how the money is spent," said Mr Torbjoern Eika, head of research at Statistics Norway. "If we choose to lower taxes, the negative effects on the economy are less pronounced...because it tends to stimulate savings in the short term."