News for the global economy continues to be bleak. Norway, which has the world’s largest sovereign wealth fund, could start to make withdrawals from the $830 billion fund as early as next year. The fund, which has been built up over the past 20 years to provide for “future generations” is being affected by the decline in oil prices.
On Wednesday, Norway’s minority government will reveal its budget plans expected to address tax cuts and new spending measures.
Prime Minister Erna Solberg is doing everything possible to avoid a recession as the value of the country’s key commodity continues to slump. The downward spiral of oil prices is affecting Norway’s $500 billion economy – which is heavily reliant on the natural resource. With tax revenue from the extraction of petroleum down 42% from last year, next year’s budget spending will likely be greater than its income.
Kyrre Aamdal, senior economist at DNB ASA in Oslo observed that, “We have reached a point where we will from now on see that the oil-corrected balance will be above the cash flow – that’s based on oil prices increasing slowly in the future.” He noted that tapping into the country’s sovereign wealth fund marks a point that was not expected for “several more years.”
Norway’s government stated in the spring that its non-oil budget shortage would be a record $21.6 billion. With oil output decreasing and prices continuing to fall, the country’s petroleum income dropped almost 30% lower than projections. The projections assumed a $69 per barrel price. Unfortunately for Norway, oil has averaged only $56 per barrel this year. As of 8:20 a.m. Tuesday morning, London time, oil was traded at $49.13 per barrel.
Taxes collected on petroleum extraction were also down significantly from the same period last year.
To compound matters, tapping into the wealth fund to cover budget necessities comes at a time when the fund’s managers warn that it faces diminished investment returns due to record-low interest rates.
Despite the bad news, Norway’s government officials contend that only the fund’s investment returns will actually be used for the budget needs – and not the principal of the fund itself. Knut Anton Mork, senior economist at Svenska Handelsbanken AB in Oslo stated that, “no one will ever need to break the piggy bank.”
The fund’s managers also point out that the fund will not have to sell assets – but rather use the cash it earns from dividends and bond interest.
In addition to using some of the fund’s interest and dividends to assist with the country’s budget, Norway plans to release a proposal that will include tax reforms and other cost-saving measures. DNB’s Aamdal pointed out that, “There is room for more active fiscal policy to stimulate in downturns.”