Norway Oil Wealth Spending Is Seen Shrinking in Draft Budget

Norway’s government will rely less on its $1.2 trillion sovereign wealth fund next year as authorities seek to cool the overheated economy and prevent more aggressive tightening by the central bank.

The government has sought to trim spending of the oil wealth to avoid stoking inflation which remains near a 34-year high, and last week introduced new resource taxes that provoked a backlash from the country’s fish-farming industry. The aim is also to bring public finances on a more sustainable path after record withdrawals from the world’s largest wealth fund during the pandemic.

The minority cabinet led by Prime Minister Jonas Gahr Store on Thursday forecast the so-called structural non-oil fiscal deficit will shrink to 316.8 billion kroner ($30.3 billion), or 2.5% of the fund next year compared with a revised 2.6% this year. The central bank last month projected a 2.6% gap for next year.

“Economic policy must now be tightened, to reduce inflationary pressure and to help maintain employment at a high level,” the government said.

The finance ministry said it temporarily adjusted the calculation of the structural deficit “to ensure better alignment between how the high electricity prices affect the revenue and expenditure side of the structural fiscal balance,” reducing the gap by 40 billion kroner this year and 35 billion in 2023.

While the cabinet faces an increasing funding need of “tens of billions of kroner” next year on areas such as power price subsidies and integration of Ukrainian refugees, it needs to stem over-reliance on the fund at a time its returns are projected to dwindle due to fallout from surging inflation, monetary tightening and geopolitical conflicts.

The government expects the mainland economy to continue to expand next year by 1.7% after 2.9% growth seen in 2022. Nordea, the region’s largest lender, last month forecast an expansion of 1% for 2023, while the central bank has projected a contraction of 0.3% next year.

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