(Bloomberg) -- Norway’s government plans a smaller reduction in budget spending next year than projected by the country’s central bank as it finances higher defense spending and tax breaks for lower earners ahead of an election.
The minority Labor-led cabinet forecasts a fiscal impulse — reflecting the annual change in structural budget deficit that excludes the oil economy — of 0.5% in 2025, according to a statement from the Finance Ministry on Monday. While the figure is down from 0.7% last year, it’s higher than 0.3% estimated by Norges Bank last month.
Windfall petroleum export gains following sanctions against Russia have underpinned budget spending by western Europe’s largest energy producer in past years, while it has also faced growing costs on Ukrainian refugees and on national defense.
A weaker krone has also helped to increase the size of the nation’s $1.7 trillion sovereign wealth fund, meaning more money could be spent without politicians having to breach their so-called fiscal rule that caps expenditure at 3% of the fund value.
“The budget framework seems to be somewhat more expansionary than Norges Bank has anticipated,” Karine Alsvik, an economist with Svenska Handelsbanken AB in Oslo, said in a note to clients. “All else being equal, this could contribute to delaying interest rate cuts.”
While the cabinet of Prime Minister Jonas Gahr Store is trailing in opinion polls ahead of elections next September, it has said it remains “fiscally responsible” to prevent Norway’s central bank from keeping monetary restraint for much longer.
Norges Bank is one of the most aggressively hawkish monetary authorities among the developed nations, with officials planning to keep the deposit rate at an almost 16-year high of 4.5% until early next year, mainly preoccupied by the krone weakness that is clouding their inflation outlook.
“Through the proposed National Budget for 2025, people will be financially better off, Norway’s preparedness against war and crime will be strengthened, and social and geographical differences will be reduced,” the cabinet said. “Unemployment is still low, wages are increasing faster than prices and businesses are thriving.”
Norway’s defense spending is projected to rise to 2.2% of gross domestic product next year, above NATO’s 2% target that the country has already met this year. Tax relief, including on low or average incomes, will amount to 17.5 billion kroner, the government said. The measures also include minor adjustments to a proposed exit tax that has been harshly criticized by the country’s business lobby and the opposition.
At the same time, organizations such as the International Monetary Fund have urged it to adopt a neutral budget stance for next year after an expansionary budget in 2024. They also called on the government to adopt reforms such as cutting sick leave and disability benefits to avoid longer-term budget pressures given that fossil fuel revenue is projected to dwindle in the years ahead.
The Socialist Left party, which is allied with the minority coalition, though not officially part of it, called the draft a “lost opportunity” for taking the needed measures to address climate change and reduce economic inequality, according to emailed comments.
The draft projects the structural budget deficit excluding the oil economy rising to 10.9% of mainland GDP next year versus 10.7% seen by the central bank. While spending from the wealth fund to cover the deficit will ease to 2.5% of the fund next year, its higher returns and krone weakness mean that amount will still grow in nominal terms to 460 billion kroner.
The ministry forecasts the mainland economy will grow 2.3% next year, versus the previous forecast of 1.9%, published in May. This year’s growth is seen at 0.7%, revised lower from 0.9% seen earlier. It sees underlying inflation slowing to 3.2% in 2025 and next year’s registered unemployment rising slightly to 2.2%.
(Updates with politicians, analyst comments from first paragraph.)
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