Caution: from Svein Gjedrem
Bank boss warns Oslo over oil cash
Norway's Central Bank governor Svein Gjedrem cautioned the government today against using all of the oil money it is allowed to spend in 2008 and 2009 to ensure the already revved-up economy does not overheat.
A rule from 2001 allows the government to use 4% of the country's oil fund annually to plug budget gaps, but complying is becoming easier as the value of the fund balloons.
The oil fund, called the Government Pension Fund - Global, is seen worth $266 billion at the end of 2006 and topping the value of Norway's annual GDP in 2007, boosted by high oil and gas prices.
Gjedrem said that based on forecasts for continued high oil prices, the amount of oil money the government is allowed to use to plug its underlying budget deficits may grow by nearly Nkr15 billion Norwegian ($2.33 billion) in both 2008 and 2009.
"With a period of strong expansion in the Norwegian economy, somewhat lower petroleum revenue spending may be in line with the fiscal rule," Gjedrem said in a prepared speech published on the Central Bank's website.
The Norwegian government has broken the fiscal rule every year since it was introduced by spending too much oil cash.
In the 2007 budget, the government's underlying structural deficit, before the gap is plugged by oil revenues, stands at Nkr71 billion, up Nkr6 billion from 2006.
"Our projections are based on the assumption that the central government budget will generate some stimulus to total demand and output in 2008 and 2009, but somewhat less than the expected (4%) return on the fund would imply," he said.
Gjedrem said the oil-driven boom in Norway's economy had strengthened the budget by Nkr30 billion over three years by boosting tax revenues and reducing spending on unemployment.
To safeguard against overheating by an economy that is already running near capacity, the central bank has been tightening policy since mid-2005.
When it raised rates by a quarter point to 3.25% this month, it said it may accelerate the pace of rate increases.
Sticking to that message, Gjedrem said: "The interest rate may gradually be raised to a more normal level at a somewhat faster pace than envisaged earlier, although it is unlikely that rates will be raised at every monetary policy meeting."