Reforms to public spending will help secure high living standards in Norway

20/06/2024 – Norway continues to enjoy high living standards, with gross domestic product (GDP) per capita far above the OECD average, though Norway’s lead has shrunk over the past 15 years.

The latest OECD Economic Survey of Norway projects GDP growth to rise from 0.5% in 2023 to 1.2% in 2024 and 2.1% in 2025. Inflation in Norway is trending down, with annual headline inflation having fallen below 4% by early 2024. The unemployment rate is projected to remain steady at around 4% in 2024 and 2025. The risks surrounding the outlook include geopolitical fragmentation and the impact of high borrowing costs on the housing market.

Monetary policy tightening has brought inflation down, though exchange rate depreciation and rising costs of transport, housing and food have kept it well above target. After high spending during the COVID-19 pandemic, Norway’s fiscal stance needs to be tightened. Continued monetary policy restraint coupled with efforts to contain government spending will be important to bring inflation back to target.

“Norway’s high level of public spending delivers important and high-quality public services, but looking ahead dwindling oil revenues and costs associated with population ageing will exert fiscal pressures”, OECD Country Studies Director Luiz de Mello said, presenting the Survey in Oslo alongside Norway’s Finance Minister Trygve Slagsvold Vedum. “The introduction of longer-term budgeting, an expenditure rule that aims at containing spending as a share of GDP, and enhancing the effectiveness of spending programmes would help keep Norway’s public finance position secure.”

Norway’s public spending as a share of GDP is the highest in the OECD and rising fast. Managing this trend would require making regional policy more cost-conscious, reinforcing coordination and cooperation in health and education, improving incentives to limit sickness and disability outlays, and revisiting agricultural subsidies.

Norway remains one of the OECD’s most productive countries, but productivity growth has weakened in recent years. Fostering skills that align better with labour market needs will revitalise productivity growth. The labour market is tight with employment and participation rates among the highest in the OECD. While skills levels are high and relatively evenly distributed, shortages of qualified labour have arisen, particularly in the technical and health care sectors. Ensuring that the education system delivers strong and relevant skills by strengthening vocational education and training will support efforts to address labour shortages and job mismatches.

Carbon emissions per capita remain just below the OECD average and are declining, particularly following the mass electrification of the transport sector over the past few years. Industry accounts for the highest share of emissions and the cost of reducing industry emissions is high. Higher and broader taxation of greenhouse gas emissions and prioritising lower‑cost emission cuts following careful cost-benefit analysis would help achieve emission reductions sustainably and more efficiently.

Thanks to its large domestic energy sources, Norway has weathered the energy crisis well. However, the planned expansion of electricity generation is lagging with demand projected to exceed supply by 2030. Electricity price differences across regions have widened and could be addressed by simplifying the licensing process for power generation and transmission across the country.

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