Norway is ratcheting up withdrawals from its $890 billion sovereign wealth fund to support a recovery as it foresees a continued slump for the nation’s petroleum industry.
The government is boosting oil wealth spending by 10 percent to 225.6 billion kroner ($28 billion) next year, according to the 2017 budget released in Oslo Thursday. It will withdraw 121.2 billion kroner from its wealth fund, up from 95.7 billion kroner this year. Still, as the economy is now showing signs of recovering, the stimulus to the economy will fade to 0.4 percentage point from the 1.1 percentage point impulse unleashed this year.
The wealth fund is coming under increasing pressure from the government at a time when it’s struggling to meet return targets amid record low interest rates. The fund’s income from dividends, real estate and bonds will be 207.5 billion kroner next year, enough to cover the growing withdrawals, according to budget estimates.
“Norway will emerge stronger from the challenging restructuring the economy now experiences,” Finance Minister Siv Jensen said in a statement. “The budget for 2017 contains targeted measures to counteract unemployment in the regions and industries that are hardest hit by the drop in oil prices.”
The government predicted falling oil and gas production next year while raising its oil price outlook. The mainland economy will grow 1.7 percent next year, up from 1 percent this year. Unemployment will fall to 4.3 percent by 2018 from 4.7 percent this year. Still, investments in the offshore industry will decline 10 percent next year and 6.8 percent in 2018, continuing a two-year decline.
The government is cutting taxes by 6.5 billion kroner. Corporate taxes will also be lowered and the government is spending 4 billion kroner to support the labor market.
The minority government needs backing from the smaller Liberal Party and the Christian Democrats to pass the budget, its last before elections next year.
The Liberals said in a statement that negotiations are likely to be hard.
Fiscal policy is “very close Norges Bank’s forecast and the budget should have no impact on monetary policy,” said Gaute Marius Langeland, an analyst at Nordea Bank in Oslo. “But remember that this is a proposal. The minority government will probably have to make some changes to get the support it needs from its partners in the Parliament. But the signals given from these parties do not imply that the final budget will be significantly more expansionary.”
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