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BUDGET

Norway dips deeper into oil riches

Norway plans to spend a record amount of its oil riches next year -- an election year -- to stimulate its economy hit hard by oil price weakness, a budget bill presented on Thursday showed.

Norway dips deeper into oil riches
Finance Minister Siv Jensen presented the government's budget proposal on Thursday. Photo: Heiko Junge/NTB Scanpix
The right-wing government plans to use 225.6 billion kroner (€25 billion, $28 billion at current exchange rates) of its oil revenues in 2017, or 20 billion kroner more than this year.
 
That corresponds to an extra 0.4 points of gross domestic product (GDP), the government said in the budget bill.
 
Norway's oil-dependent economy has slowed considerably as a result of the falling oil price, which has dropped from around $115 per barrel in mid-2014 to around $50 now.
 
But the economy is showing signs of recovery.
 
Thanks to interest rate cuts, a weaker Norwegian krone, and an expansionary budget policy, growth is picking up and the unemployment rate appears to be topping out at the enviable level of around 5.0 percent.
 
Mainland GDP — excluding oil, gas and shipping — is expected to tick in at 1.0 percent this year, 1.7 percent next year, and 2.4 percent in 2018, according to the government's forecasts.
 
“But it's too early to say that the Norwegian economy is cured,” Finance Minister Siv Jensen said as she presented the 2017 budget bill.
 
The government therefore plans to spend up to 3.0 percent of its sovereign wealth fund, the world's largest, today worth around 7.13 trillion kroner (€793 billion, $886 billion). That's more than the 2.8 percent used this year, but less than the 4.0 percent maximum that is authorised.
 
The country's September 2017 legislative elections look set to be a close race between the ruling coalition — made up of the Conservatives and the anti-immigration populist right — and the leftwing opposition.
 
The budget bill calls for tax breaks for households, a one-point reduction of the corporate tax rate to 24 percent, a tax hike on petrol, and sets a seven-percent target for biofuels' market share.
 
The minority government will now undertake negotiations with its centre-right allies in parliament to win their backing for the budget, which means it could see some amendments before being passed.

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ECONOMY

How is Denmark’s economy handling inflation and rate rises?

Denmark's economy is now expected to avoid a recession in the coming years, with fewer people losing their jobs than expected, despite high levels of inflation and rising interest rates, The Danish Economic Council has said in a new report.

How is Denmark's economy handling inflation and rate rises?

The council, led by four university economics professors commonly referred to as “the wise men” or vismænd in Denmark, gave a much rosier picture of Denmark’s economy in its spring report, published on Tuesday, than it did in its autumn report last year. 

“We, like many others, are surprised by how employment continues to rise despite inflation and higher interest rates,” the chair or ‘chief wise man’,  Carl-Johan Dalgaard, said in a press release.

“A significant drop in energy prices and a very positive development in exports mean that things have gone better than feared, and as it looks now, the slowdown will therefore be more subdued than we estimated in the autumn.”

In the English summary of its report, the council noted that in the autumn, market expectations were that energy prices would remain at a high level, with “a real concern for energy supply shortages in the winter of 2022/23”.

That the slowdown has been more subdued, it continued was largely due to a significant drop in energy prices compared to the levels seen in late summer 2022, and compared to the market expectations for 2023.  

The council now expects Denmark’s GDP growth to slow to 1 percent in 2023 rather than for the economy to shrink by 0.2 percent, as it predicted in the autumn. 

In 2024, it expects the growth rate to remain the same as in 2003, with another year of 1 percent GDP growth. In its autumn report it expected weaker growth of 0.6 percent in 2024.

What is the outlook for employment? 

In the autumn, the expert group estimated that employment in Denmark would decrease by 100,000 people towards the end of the 2023, with employment in 2024  about 1 percent below the estimated structural level. 

Now, instead, it expects employment will fall by just 50,000 people by 2025.

What does the expert group’s outlook mean for interest rates and government spending? 

Denmark’s finance minister Nikolai Wammen came in for some gentle criticism, with the experts judging that “the 2023 Finance Act, which was adopted in May, should have been tighter”.  The current government’s fiscal policy, it concludes “has not contributed to countering domestic inflationary pressures”. 

The experts expect inflation to stay above 2 percent in 2023 and 2024 and not to fall below 2 percent until 2025. 

If the government decides to follow the council’s advice, the budget in 2024 will have to be at least as tight, if not tighter than that of 2023. 

“Fiscal policy in 2024 should not contribute to increasing demand pressure, rather the opposite,” they write. 

The council also questioned the evidence justifying abolishing the Great Prayer Day holiday, which Denmark’s government has claimed will permanently increase the labour supply by 8,500 full time workers. 

“The council assumes that the abolition of Great Prayer Day will have a short-term positive effect on the labour supply, while there is no evidence of a long-term effect.” 

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