The Perils of State Petroleum Ownership
Contrary to first impressions, there is something rotten in the Kingdom of Norway. With net financial assets at 170 percent of GDP, the government seems to have amassed a wealth that dwarfs that of King Croesus. However, the social democratic state's liabilities to employees, welfare recipients, pensioners, and others financed by the public purse are much higher - with aging as the main long-run driver of fiscal unsustainability. Thus, already exorbitant tax rates are set to swell further. The payroll tax, for example, which is currently 14 percent, is estimated to gradually have to be tripled to keep the state solvent - given trend growth of transfers and public resource use per capita.
What sets Norway apart from southern European fiscal follies is the state's petroleum intake. For decades public coffers have been drowning in oil and gas income. Since 1996 budget surpluses have been invested in a sovereign wealth fund. Now, however, the peak of both sources of income is in sight. Petroleum production peaked in 2004; it has since then dropped 17 percent, and it is set to fall another 20 percent by 2030. In about 10 years there will be no more budget surpluses to invest in the sovereign wealth fund, according to the government's projections. Also, state-owned financial assets are no panacea; the wealth fund delivered a meager 0.6 percent annual rate of return from the first quarter of 1997 to the second quarter of 2012 when deflated by the high price growth of state expenditures.
Norway has recently seen an influx of foreigners. Immigrants hurt public finances, though, if they, like blue-eyed ethnic Norwegians, typically end up as either employees or clients of the state. Paradoxically, higher private productivity growth too is no solution to the fiscal challenges. Private productivity growth drives private sector wage growth, which is reflected in public sector wage drift. Also, indexed public expenditures are hiked when private sector productivity increases. In sum, therefore, higher private productivity is a fiscal loss. "No more pigments, procreation or private sector productivity, please, we only have so much petroleum wealth", is the Treasury's bleak, hidden slogan.
More public productivity would be welcome. But public bureaucracies are to efficiency as black holes are to light. Public healthcare providers, especially, swallow more resources than they can digest. An increase in work effort per capita would help public finances. And there is plenty of spare capacity.
Last year, despite almost no unemployment, hours worked per capita were 3 percent lower in Norway than in the U.S. But the trend is rather to boost welfare benefits that increase leisure time; next year fathers are given another week of publicly paid parental leave. The post-war dominant Labor Party is morphing into a Leisure Party. Lower tax rates would clearly stimulate work effort. But there is little support for a positive tax revenue effect large enough to close the fiscal gap. Also, since the median voter, by a wide margin, is a tax recipient, not a taxpayer, tax cuts are politically unpopular.
The machinery of petroleum-driven social democratic politics will probably keep going until it hits the wall. A modest pension reform a few years ago was likely the last attempt to shrink the growth of public spending. The government's proposal to increase state spending next year 6.2 percent in nominal terms and 2.9 percent in real terms hardly raised oppositional eyebrows. Spending cuts seem unlikely until voters are shocked by a crisis. And actually raising taxes off the chart to try to keep the state solvent would probably, and contrary to modeling assumptions, shrink public revenues by pushing taxpayers gradually into inactivity.
Norway is different from Greece; there is more money in petroleum than in olive oil. But the public riches are not going to last. Demographics and populist, social democratic politics threatens to drive the northern European state's finances off a chilly cliff. If nothing is done to shrink the state, IMF officials will one day come knocking at the Treasury's door.
