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Fast Comment NorwayRevised fiscal budget for 2019: Surprisingly expansionary

  1. Revenue spending increasing to NOK 238bn this year, up from NOK 220bn in 2018
  2. Fiscal impulse of 0.5 percent this year, above Norges Bank's estimate
  3. All else equal: increases the possibility for two more rate hikes this year
Revenue spending increasing to NOK 238bn this year, up from NOK 220bn in 2018; impulse of 0.5 percent
The full document was just released, with some of the key data made public earlier this morning. The revised budget for 2019 shows revenue spending, as measured by the structural non-oil deficit, at NOK 238bn. This is up from NOK 220bn in 2018. As a result the fiscal impulse, calculated as the change in the structural non-oil deficit, measured as change of trend in GDP, rises to 0.5 percent. The government says the reason is that it spent less last year, with an impulse of -0.4 percent, so that the total effect for 2018-19 can be deemed as broadly neutral. There are (at least) two things to say about this. For starters, 2018 is already in the past, but even when summing up 2018-19, the net result is modestly expansionary. One might question the need for this, as the economy is already hovering around/somewhat above, its natural capacity constraints. To see this, note that capacity utilisation at the corporate level is already running a bit above its long-term average (cf. Norges Bank’s Regional Network). From the labour market side, labour participation has already recovered from the cyclical drop during the oil crisis, which has boosted the supply side. However, labour demand has also proven to be solid, as evident from the broad-based growth in employment. As a consequence, unemployment has dropped back. Given still solid signals for overall employment growth, the outlook is for a further downtrend in unemployment this year. The second key topic is that the fiscal stance is expansionary relative to Norges Bank’s expectations. In its March Monetary Policy Report, Norges Bank assumed a fiscal impulse of -0.3 percent in 2018, and +0.2 percent in 2019. As stated, the revised budget implies -0.4 percent in 2018 and +0.5 percent for 2019. On net, this adds 0.2 percentage points to GDP growth relative to Norges Bank’s assumptions. Summing up, the fiscal stance is more expansionary than what Norges Bank has factored in. Norges Bank has already stated explicitly that it intends to hike the policy rate in June. However, all else equal, the fiscal stance implies the risk has also increased for another rate hike during the second half of this year.


Disclaimer

Marius Gonsholt Hov

Senior Economist

Norway

maho60@handelsbanken.no

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