Norway: Reduced structural non-oil budget deficit in revised 2012-budget

The Government will on Tuesday 15 May present its revised 2012-budget. During the years with the present majority government, the revised budgets presented in the spring have contained few, if any, new initiatives on the expenditure or income side. The main purpose of the revised budget has been to revise forecasts on the tax income and rule-based expenditure items. In addition, the Government proposes adjustments/corrections in appropriations that during the first months of the year have proved to be too low (or high) compared to the intended activity level.

We expect the revised budget for 2012 to be of the same character, no new initiatives, only changes in forecasts and corrections in appropriations. The Government will be careful with turning the budget more expansionary given the fiscal tightening going on in most other countries, the extremely low interest rate level internationally and the already strong NOK. The budget proposal for 2012 had a neutral fiscal stand. We expect the revised budget to maintain that, or to be turned slightly expansionary, which often has been the case in recent years.

During both 2010 and 2011, the structural non-oil tax income grew more strongly than forecasted in the original budget, which, together with other factors, lowered the non-oil structural budget deficits significantly. In 2010 the structural deficit became NOK 36.1 bn lower than originally estimated, and in 2011 NOK 34 bn lower. As late as in October last year the estimate on the non-oil structural budget deficit proved to be NOK 15 bn higher than the final accounts now shows.

We expect that the revisions made in the non-oil structural budget deficit for 2011 since October last year to have consequences also for 2012. In the budget proposal for 2012 presented in October last year, the Government estimated a structural non-oil deficit for this year of NOK 122.2 bn, being 3.9% of the petroleum fund, or Pension Fund International (PFI). According to the fiscal rule, the structural non-oil budget deficit should over time be 4% of PFI. The deficit was somewhat above the 4% rule in 2009 and 2010. We expect the estimated structural non-oil budget deficit in 2012 to be lowered by some NOK 15 bn from the level presented in the original budget, i.e. to about NOK 107 bn. As the PFI also turned out to become larger by the end of 2011 than forecasted in the original budget presented in October, this will reduce the estimated non-oil structural deficit in 2012 to 3.2% of the PFI. In 2011 the non-oil structural budget was at 3.0% of PFI.

The outcome must deviate significantly from the indications above before we expect to see market reactions. In recent years, the market has seldom reacted to the budget and the revised budget.

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