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Norway goes Keynesian January 26, 2009

Posted by Sverre in : Norwegian politics, Political economy , trackback

keyneshalvorsenThe ongoing finance crisis has certainly given classic Keynesianism a new boost. And few countries have embraced this as clearly as Norway did today. The center-left government under Prime Minister Jens Stoltenberg from Labour (Arbeiderpartiet) and Finance Minister Kristin Halvorsen from the Socialist Left Party (Sosialistisk Venstreparti) introduced a massive expansion package aimed at combating unemployment.

The package expands the national budget directly with about 2o billion NOK (roughly 2.2 billion € or 2.86 b$), with nearly 17 billions increased expenditure and over 3 billion worth of tax cuts. With secondary effects, the government estimates a total expansive effect of 27 billion NOK, reducing the substantial oil-boosted government surplus. When correcting for petroleum-based offshore income, the government now estimates a government deficit of 119 billion NOK for 2009. This sums up to an expansion of the oil-corrected government budget of 2.3%, substantially higher than the 1.5% goal set by the EU.This represents a deviation for what has been known as Handlingsregelen, a term that can be roughly translated into the Rule of Thumb (or the Budgetary Rule according to Wikipedia). It states that only 4% of the expected capital gains from the government pension fund (formerly The Petroleum Fund) should be spent each year. This fund is in turn comprised of all the government surplus from the Norwegian offshore petroleum activity.

This is also a powerful political broadside before the upcoming parliament elections in Norway. The expansion of the budget, heavily focused towards public expenditure gives the package a strong leftist profile as well as allowing the government to support popular causes such as strengthening the economy of municipalities (which are responsible for primary education and care for the elderly among other things), more public building projects and increased spending on education and research.

This certainly represents a bold move, and a classical Keynesian one. It will be interesting to see if Norway’s oil economy will allow the government to soften the blow and if this was the right way to do it. Personally, I applaude.

You can find the details of the package here (PDF – in Norwegian).

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