2002 OECD Economic Surveys: Norway 2002

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This 2002 edition of OECD's periodic review of Norway's economy  examines recent economic developments, policies and prospects and includes special features on enhancing the effectiveness of public spending and on policies to boost potential output growth.

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Enhancing the Effectiveness of Public Spending

At more than 50 per cent of mainland GDP, Norway’s public spending is very high by international comparison. This partly reflects two important choices of Norwegian society, namely ensuring an extensive and universal welfare system and maintaining a decentralised settlement pattern in the country: local governments provide a wide range of public services, even in the most remote jurisdictions so as to retain people, and often at a high cost. Within this context however, the distribution of spending responsibilities across government levels also raises efficiency issues while the funding system of local governments does not provide strong incentives to contain local spending. Several additional factors contribute to high spending: the incentive structure for public bodies and their employees does not promote efficiency gains; competitive pressures on public service suppliers are largely lacking; and the use of price signals to contain demand for public services is limited. Abundant petroleum revenues have so far mitigated strains on public finances and the current double-digit budget surplus makes it politically difficult to implement public sector reforms. This economic context has also been reflected in the new fiscal framework, which is expansionary over the medium and long term. But tensions will arise with the projected decline in oil revenues beginning later in this decade. In particular, strong projected public employment growth seems unsustainable, as it crowds out private sector labour demand, creates wage pressures in the public sector and results in higher government outlays. Better control of public spending is necessary in order to cope with the fiscal consequences of ageing and of the depletion of oil reserves. It could also allow a reduction in the high tax burden, which would boost potential output growth.

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