The Ministry of Finance’s committee scraps the current action rule for using oil money.
The Ministry of Finance has appointed a selection of ten economists who each year will advise on the use of money in the state budget. That is, «fiscal policy».
On Thursday, the committee came with its for the first time statement on spending. Like so many other committees on economics, this is also led by Professor Steinar Holden at the University of Oslo.
“There will be a need to adjust the rule of action,” it said at the top of one of Holden’s light sheets.
Diagnosis for today’s rule
The current rule for using oil money in the state budget is to use 3 per cent of the fund’s value at the beginning of the year.
First, Holden makes the diagnosis for today’s rule.
– The action rule we have now, where we will use the expected real return, will give too great a risk to fiscal policy in the future. When we can to a lesser extent count on replenishment of oil revenues, we will be very vulnerable if the fund value falls sharply, he says.
Can be a burden
Holden is “fairly certain” that a large fall in the fund’s value will come, but we do not know when.
– Then the current rule will be a great burden for fiscal policy, he says.
This burden consists of the fact that the use of oil money must in principle be cut in line with the fall in the fund’s value. This can interfere with the opportunities to finance many good causes. A fall in the fund’s value of 25 per cent will in principle mean a cut of NOK 90 billion in the state budget. This will be very painful and politically impossible.
As a rule, there is an opening to maintain the use of money in the event of a short-term fall in the fund’s value. But if the fall on the stock markets is prolonged, this will erode the fund. It violates the basic principle of the action rule of preserving the real value of the fund into the future.
In recent years, the fund has grown rapidly. A fall in the fund’s value in the event of a stock market fall is therefore offset by new money in the fund. Holden believes that this effect will be weaker in the future, as the extraction of oil and gas flattens out and gradually decreases.
A large majority in the committee will study an action rule where the fund’s annual cash income is the basis. These are over time much more stable than the fund’s value.
– This means that the starting point is the current income the fund receives: interest income, rent and dividends, Holden says.
In other words, tangible cash The Oil Fund is paid out every year. The advantage of this size is that it is much more stable than the fund’s total value.
In recent years, the fund’s cash income has been between NOK 200 and 240 billion. The value of the fund has varied much more.
But Holden will not slavishly cut its annual cash income. There are companies with large profits that do not pay dividends in individual years. They can defer payments for many years.
– One must take into account how one thinks the cash flow will change over time. There is reason to believe that it will increase over time, and that one can therefore use something more than the cash flow in the individual year.
This means that some of the future cash flow can be used in advance.
Sees the danger of investigating
As a rule, with cash income and other alternatives, a majority of the committee will study. One of the committee members does not support such an investigation. She believes that “the majority of the committee has not taken sufficient account of the political risk of putting the rule of action into play”.
Put another way: By opening up for studies, politicians can decide to adopt a rule that is worse than today.
One important rule governs how much oil money can be used. But is the rule outdated?
Natural to be tight
The committee has assessed the use of money in the state budget 2020–2022, disregarding the special pandemic measures. Holden says it “stands in contrast to the tight room for maneuver ahead”. It is not possible to continue like this.
Aftenposten / E24 asked Minister of Finance Trygve Slagsvold Vedum (Sp) at the press conference whether it hurts to be tight in spending in light of the committee’s assessment. He answered:
– It is completely natural. What is the point of economic policy? It’s creating good lives for you and me. That’s the whole point.
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