OECD Economic Surveys OECD Economic Surveys NORWAY NORWAY Executive Summary February 2022
FEBRUARY 2022
Handling post-recovery challenges
Tackling climate change
NCH N
Ensuring enough affordable housing
U
IO
Strengthening productivity and employment
LA
• • • •
VE S R
2 . OECD ECONOMIC SURVEY OF NORWAY – EXECUTIVE SUMMARY
Key recommendations Handling post-recovery challenges
•
Maintain a close watch on price and wage inflation and continue to normalise monetary and fiscal conditions.
•
Stand ready to tighten macroprudential tools if strong house-price growth resumes.
•
Retain a prudent approach to fiscal budgeting in the coming years.
•
Use more productivity enhancing measures in public services, including spending reviews. Use cost-benefit analysis more extensively in public investment and retain the pruning of budget allocations through “efficiency dividends”.
Strengthening productivity and employment
•
Improve insolvency procedures through better routes to recovery for businesses in difficulty, including lighter penalties for failed entrepreneurs.
•
Continue to tackle weak points in business efficiency including through re-orienting agriculture support away from the most economically distorting forms of support, including import tariffs.
•
Strengthen incentives to reduce sick-leave absences, including through lowering sick-leave compensation and by extending employers’ participation in funding.
•
In disability benefits, in addition to retraining and other support, apply eligibility rules more strictly and strengthen treatment and rehabilitation requirements.
•
Index age dimensions of the pension system to life expectancy, such as the retirement-age range of 62 to 75 years.
•
Continue to align special pension provisions for groups such as nurses, national defence and the police with the mainstream pension system.
Ensuring enough affordable housing
•
Gradually phase in imputed rents to owner-occupied dwellings in income tax or gradually phase out mortgage-interest deductibility.
•
Introduce tax on capital gains from sales of owner-occupied dwellings, eliminating exemptions based on periods of ownership and occupancy.
•
Reduce disparities in wealth-tax discount rates applied to owner-occupied homes and other assets.
•
Increase loans for building social rental housing, particularly in cities such as Oslo with currently constrained supply.
•
Consider reducing labour income tax on low-income households, as a broad means of addressing housing affordability and other cost-of-living issues.
•
Ease national restrictions on land use.
•
Allow more small apartments in inner-city neighbourhoods.
•
Enable streamlined approval processes for small urban-infill projects.
Tackling climate change
•
Ensure continued follow through on the schedule of carbon-price increases. Augment this with additional greenhouse-gas reduction measures via regulation and investment, in particular in transport and agriculture.
•
Develop carbon pricing on emissions of methane and nitrous oxide in the agricultural sector.
•
Make electric vehicles gradually subject to VAT and the motor vehicle registration tax.
•
Push ahead with proposals to remove regulatory impediments to increased use of second-hand building materials.
OECD ECONOMIC SURVEY OF NORWAY – EXECUTIVE SUMMARY . 3
Consolidating economic recovery Spread of the Omicron variant of COVID-19 temporarily damped economic activity, which was hitherto recovering strongly, and led to further fiscal support. In the absence of renewed deterioration in the health and economic situation, fiscal deficit reduction should resume as planned and the withdrawal of monetary stimulus should continue. A close watch on price and cost developments is needed given recent energy-price and wage increases. Though the Omicron variant affected Norway more than previous waves of the pandemic, the cumulative cases and fatalities from COVID-19 remain substantially below the OECD average on a per capita basis. A high rate of vaccination has helped limit increase in hospitalisations and fatalities. However, outbreaks and need for further social distancing measures remain a risk. Figure 1. Norway’s per capita COVID-19 fatalities remain below the OECD average COVID-19 cumulative deaths per million inhabitants, 7 day moving average 2500
Norway
EU
OECD
2000 1500 1000 500 0 Mar-20
Sep-20
Source: Our World in Data.
Mar-21
Sep-21
Mar-22
Following a bounce-back from the phase-out of the latest restrictions, the level of economic output will run slightly above trend over the next two years. Annual economic growth is expected to turn out at 3.7% in 2022 and 2.2% in 2023. Household consumption will contribute significantly, helped by the pent-up spending power from savings accumulated during the initial phases of the pandemic. Strong headline consumer price inflation in recent quarters has been driven by large electricity price increases. Global supply bottlenecks in computer chips, lumber and shipping are also putting pressure on inflation. Furthermore, there are tentative signs of higher wage inflation. Some of these price and cost rises will most likely ease in the coming quarters. However, there is clear risk that a wage-price spiral could emerge.
4 . OECD ECONOMIC SURVEY OF NORWAY – EXECUTIVE SUMMARY
Figure 2. The Omicron wave led to a pause in recovery Mainland real GDP, index 2019 Q4 = 100, s.a.
Table 1. Strong growth in 2022 despite the Omicron wave (Annual growth rates, unless specified) Mainland GDP (December 2021) Mainland GDP
2020
2021
2022
2023
-2.3
4.2
4.2
1.7
-2.3
4.2
3.7
2.2
-6.6
5.0
6.6
3.1
1.8
3.9
2.2
1.2
Gross fixed capital formation
-5.6
-0.3
3.7
3.0
95
Exports of goods and services
-1.2
4.8
7.2
3.0
Imports of goods and services
-11.9
2.0
8.4
2.7
90
Unemployment rate (% of labour force)
4.6
4.3
3.5
3.2
Consumer price index (December 2021
1.3
3.4
2.0
1.4
Consumer price index
1.3
3.5
2.5
1.5
110
Pre-crisis growth path December 2021 Economic Outlook Provisional update
105
Private consumption Government consumption
100
2019
2020
2021
2022
2023
Note: The pre-crisis growth path is based on the November 2019 OECD Economic Outlook projection, with linear extrapolation. Source: OECD Economic Outlook 106 and 110 (databases); and provisional updates.
Withdrawal of macroeconomic stimulus should continue as the health situation improves. Fiscal revenues have grown and spending on government transfers has diminished since the initial large downturn in economic activity. Norges Bank began raising its key policy rate in September 2021 with an increase from zero to 0.25% and a further increase to 0.50% in December. The Bank forecasts a gradual rise to a rate of 1.75% towards the end of 2024. Thus far, the fiscal and monetary response to changing health and economic conditions has been appropriate.
Note: Unless otherwise stated, these projection numbers are from a provisional economic forecast by the OECD in February 2022. Source: OECD Economic Outlook 110; and OECD calculations.
House prices and mortgage debt are a concern for financial stability. Steep rises in house prices in the first year of the pandemic added to past price surges. Steady tightening of monetary policy has contributed to a moderation in price growth. However, prices remain elevated, and this and associated high levels of mortgage borrowing add to risks of a significant house-price correction with impacts on the wider economy.
OECD ECONOMIC SURVEY OF NORWAY – EXECUTIVE SUMMARY . 5
Figure 3. House prices surged during the pandemic Index 2010 = 100, s.a. 240 220
Oslo
Norway
OECD
200 180 160
Scope for public spending on new policy measures is set to shrink in the coming years due to slower wealth-fund growth, multi-year spending commitments and population ageing. Unlike in previous years, there will be limited scope within the fiscal rule for new spending initiatives, unless these are accompanied by revenue-raising or cost-saving measures. There will be even less fiscal space if cash flow from petroleum activities or returns to the fund turn out weaker than expected. Public-spending policy needs to focus on strengthening value for money.
140 120
Figure 4. The 2022 deficit has been budgeted to be below the fiscal rule’s guideline value
100 80 2010
2012
2014
2016
2018
2020
2022
Source: Calculations based on Real Estate Norway (Eiendom Norge) data; OECD (2021), Analytical house prices database.
A decline in the mainland fiscal deficit has been budgeted for 2022. The central government’s core deficit (adjusted for petroleum revenues and oil fund revenues) is estimated at 11.6% of mainland GDP for 2021. For 2022 a deficit of 9.5% was planned, though it is estimated to turn out at 10.4% due to the new COVID measures plus compensation for high electricity prices. This nevertheless continues to represent an appropriately prudent policy; the budgeted deficit will be below the guideline value according to the fiscal rule.
Projection of the 3% deficit path, % of trend mainland GDP 13
Structural non-oil deficit, including estimate for 2022
12
3 percent path
11 10 9 8 7 6
2015
2017
2019
2021
2023
2025
Note: The mainland structural deficit is the cyclically-adjusted total budget surplus excluding petroleum and oil fund revenues. The “3 percent path” is the deficit implied by the rule for wealth fund spending that stipulates a guideline spending of 3% of the value of the wealth fund. Source: Ministry of Finance, National Budget 2022.
6 . OECD ECONOMIC SURVEY OF NORWAY – EXECUTIVE SUMMARY
Strengthening sustainable productivity and employment Business-sector productivity growth has been picking up but remains below historical levels. The employment rate is no longer among those of top-ranking countries. Policy needs to ensure good conditions for business innovation and technology adoption. It also needs to address the opportunities and challenges of green transition. Financial pressure on businesses during the pandemic has underscored the important role of insolvency procedures in giving struggling businesses a chance to turn around. Resources need to be reallocated to more promising sectors and firms, including those related to faster digitalisation and green transition. Meanwhile, some areas of business support require reform, notably there is a need to reorient agricultural support away from economically distorting subsidies.
Norway’s generous sick leave and disability compensation systems, in addition to the pension system, remain major challenges for labour participation. Sick leave compensation remains more generous than necessary and disability pension systems could do more to facilitate return to work. Though good progress has been made on pension reform, there remains scope to improve linkage to life expectancy and there are challenges in some occupational pensions in the public sector.
Ensuring enough affordable housing Rising house prices during the pandemic have further reduced housing affordability for first-time homebuyers. Deteriorating accessibility of homeownership and high rent burdens underscore the need for structural reforms to lift new housing supply and temper demand for home buying. Altering regulation affecting land use, and more efficient planning processes around residential construction are key to making housing supply more responsive. More leeway is needed for the construction sector to respond to housing demand while retaining high standards on other fronts. Scope for adjustment lies in land-use rules, building standards, and planning processes, especially in the largest cities. Tax concessions for homeowners remain unusually generous compared with other OECD countries. These boost demand for housing, divert resources from more productive investments and inflate house prices, particularly in supplyconstrained cities. The tax subsidies also favour current owners at the cost of new homebuyers.
OECD ECONOMIC SURVEY OF NORWAY – EXECUTIVE SUMMARY . 7
Tackling climate change Norway’s CO2 emissions are low but are generated in sectors where cutting them is challenging. Norway has raised its ambition on emission reduction and is combining market-based instruments with regulation and support for green technology. There has been a welcome proposal to increase the price of carbon as part of a new climate action plan. Nevertheless, gaps in the coverage of carbon taxation remain, mainly on emissions of nitrous oxide and methane from the agricultural sector. Norway is making good progress in the adoption and development of green technologies. Electric vehicle adoption has matured to a point where tax concessions and other advantages can gradually be withdrawn. Substantial green-technology initiatives are underway, notably a flagship carbon-capture and storage programme (Longship). However, there is more ground to cover, including clearing regulatory obstacles to greater materials recycling and extending the service life of residential and other buildings.
OECD Economic Surveys
NORWAY
Norway has been more successful than many countries in limiting the spread and impact of COVID-19. The country has maintained good outcomes on many economic and social indicators. GDP per capita remains among the highest in the OECD. However, there are challenges in sustaining good outcomes amid post-pandemic economic adjustment, continued population aging and the urgency of tackling climate change. Labour force participation needs to increase to ensure the high levels of employment that are key to Norway’s socio-economic model. Higher productivity growth is essential for businesses to remain competitive. Meanwhile, economic activity must continue to adjust to achieve a faster decline in greenhouse-gas emissions. Housing in Norway has become even more expensive following a new surge in prices during the pandemic. This has further raised risks to macro-financial stability from elevated mortgage debt. Strong price growth has also made it harder for first-time homebuyers to enter the market. Many renters meanwhile devote a large proportion of their income to paying for housing. Fixing distortive taxation of dwellings will be essential to improve affordability, as will greater focus on the supply of housing. SPECIAL FEATURE: HOUSING AFFORDABILITY
oe.cd/NOR
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