Norway’s public sector balance sheet

ABSTRACT

An intertemporal public sector balance sheet is the most comprehensive way to evaluate long-term fiscal sustainability. But data constraints imply that it is still seldomly used. In this article, we illustrate the considerable value added of such an analysis over standard debt sustainability analyses, using the example of Norway and find surprising results: The immense wealth in its oil fund is insufficient to address future aging pressures, including because nonoil fiscal deficits have already grown large.

KEYWORDS:

• Public sector balance sheet
• intertemporal fiscal balances
• debt sustainability
• Norway

JEL CLASSIFICATION:

• H55
• H60
• H63
• H69

Acknowledgments

We are grateful to Miguel Alves, Sage de Clerk, Philip Gerson, Jason Harris, Jacques Miniane, Alexander F. Tieman, Bob Traa, Tobias Wickens, and IMF European Department Seminar participants for useful comments. The Norwegian Authorities, especially Frode Borgas, Dennis Fredriksen, Frank Emil Jøssund, Per Mathis Kongsrud, Jon Ivar Røstadsand, Nils Martin Stølen, and Siri Wingaard provided invaluable help with suggestions, data and other queries. We thank Rafaela Jarin for editorial support and Lubai Yang for research assistance. This research did not receive any specific grants from funding agencies in the public, commercial or not-for-profit sectors. All remaining errors are our own.

Disclosure statement

The views expressed in this paper are those of the authors and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.

Notes

¹ See further references in Brede and Henn (2019).

² Also, a 5 per cent assumption on the discount rate is made, which is in line with the Norges Bank’s 2 per cent inflation target plus the 3 per cent expected real return on the sovereign wealth fund.

³ Note that IFNW, unlike static net worth, excludes non-financial assets (other than oil and gas deposits). The reason is that most of these cannot be easily sold (e.g., in-city roads, sewers) or doing so would likely reduce future revenues (e.g., if some schools or court houses were sold and reduced human capital or the rule of law).

⁴ We assume, in line with the past crises, that there would be some permanent loss of GDP relative to the baseline. As a result, expenditures remain higher relative to GDP in the stress scenario, because some expenditures are independent of GDP (e.g., aging costs).

⁵ The wedge between the dashed red line and solid blue line in Figure 2 depicts the cumulative fiscal adjustment need implied by the 3-per cent fiscal rule.

⁶ For comparability these shocks are calibrated in line with those in Norwegian Government (2017).

⁷ Cabezon and Henn (2018) provide Norway’s public sector balance sheets starting in 1995 and also provide much further analysis on their structure, hedges, and mentioned mismatches. Brede and Henn (2019)) provide balance sheets for Finland from 2000.

⁸ Expenditures on accrued-to-date pensions are excluded, because the present value of these expenditures in all future years is already included in the liabilities term $D_t$. The change in accrued-to-date pension liabilities in t is comprised in $R_t^d$.

⁹ This includes all financial public sector assets of general government and public corporations as well as the present value of oil and gas deposits in the ground (as detailed in Table 1).

¹⁰ This includes liabilities of the general government and public corporations as well as the present value of accrued-to-date pension liabilities (as detailed in Table 1).

¹¹ This is consistent with a 2017 nonoil fiscal balance of −7.4 per cent of mainland GDP, given that pension expenditures and interest payments amounted to 10.4 and 1.2 per cent of mainland GDP, respectively, in that year.

¹² Fixing aging expenditures in terms of percentage of GDP seems to be intuitive given that society would likely choose to spend more on those in nominal terms if GDP rises. Also, social security contributions are determined in Norway as shares of employment compensation, which constitutes a large part of GDP.

¹³ From 2023 onwards, $\alpha =0.491$ and $\gamma =0.335$. Also, in all years before 2023 we have $\left(\alpha -\gamma \right)>0$.

¹⁴ Given our projected fiscal path, the only way that such gradual depletion could be avoided would be if assets yields were to considerably outstrip those on liabilities.