Revised national Budget accepted in Parliament

The revised national Budget received a majority vote of confidence in the Norwegian Parliament on 19 June 1998. Norway has experienced significant economic growth in recent years, but signs of increasing pressures and capacity constraints on the national economy are now emerging. The measures proposed in the revised Budget are seen by the social partners as insufficient to deal with the problems in the economy.

The revised national Budget, which was presented by the Government on 15 May 1998 (NO9805167N), received majority approval in the Norwegian Parliament on 19 June 1998. The minority coalition Government, comprising the Christian Democratic Party (Kristelig Folkeparti, Krf), the Centre Party (Senterpartiet, SP), and the Liberal Party (Venstre, V), managed to get a final four-point package deal through Parliament by subjecting it to a vote of confidence. The process of getting the revised Budget proposal accepted in Parliament has not been easy, as was predicted by the Government itself, and the final result bore little resemblance to the original proposal.

Overheated economy

Norway has experienced strong economic growth in recent years, and growth is expected to continue throughout 1998. However, at the same time there are now emerging signs of increasing pressures and capacity constraints in the national economy. This is particularly evident in the increasing shortages of skilled labour and accelerating wage growth. The rising pressures in the labour market have had the effect of accelerating growth in pay, and the implication of this may be rising costs and deteriorating competitiveness for domestic industry. The Bank of Norway, in its inflation report for the second quarter of 1998, argues that pressures in the Norwegian economy have intensified during the first five months of 1998. High import growth, rapidly falling unemployment and substantial nominal pay increases in connection with the spring pay settlements (NO9805164F) point to steadily mounting constraints on domestic production. The pressure is being accentuated by record high petroleum investment in 1998 and a sharp growth in private consumption.

New macroeconomic estimates

The Bank of Norway's inflation report for the second quarter of 1998 projects that GNP growth will be 3.5% in 1998, and will rise to 4.25% in 1999. Mainland GNP growth is estimated at 4% in 1998. Consumer prices will rise by 2.5% in 1998, and 3% in 1999. Figures for the 1997-8 period show a general growth in pay of 6%, which is approximately 1% more than the figures specified in the revised budget which was presented in May 1998. Statistic Norway suggests a 5.8% growth in pay from 1997 to 1998 (Økonomiske analyser 5/98). The Bank of Norway expects the growth in pay to rise to 6.75% by 1999. Unemployment is estimated at 3.25%. A further fall, to 2.5%, in the level of unemployment is expected for 1999, according to the new figures.

Measures to cool the economy

The Bank of Norway and the Organisation for Economic Cooperation and Development (OECD), along with many others, have warned against the recent developments, and have called for government measures in order to cool down the overheated economy. The revised budget proposal in its original form outlined several initiatives aimed at dealing with the problems. The proposal to extend the period during which employers pay sickness benefits, and the forced savings proposal, which meant obliging companies to set aside 2% of wage costs into a non-interest bearing account in the Bank of Norway, were both rejected early in the process of getting the Budget through Parliament. Increased taxes on electricity and oil were also dropped. The proposal suggesting a reduction in the allocation of funds to labour market initiatives, and to the running of the Government Employment Service, were sustained, although in a modified form. A final package deal received acceptance in Parliament on 19 June 1998.

The views of the social partners

Both the Norwegian Confederation of Trade Unions (Landsorganisasjonen i Norge, LO) and the Confederation of Norwegian Business and Industry (Næringslivets Hovedorganisasjon, NHO) have expressed worries about the present situation in the Norwegian economy, and also about the revised national Budget. They argue that the Government is not taking the problem of overheating seriously, and that a solution to the problem requires greater efforts by the political establishment.

NHO argues that the 1998 pay settlement breached the principle of moderation in the so-called "solidarity alternative" - the understanding that settlements should provide a moderate growth in pay in exchange for a government commitment to promote measures to increase employment - and has produced a growth in pay unparalleled in Norway's trading partner countries. This will have the effect of undermining the competitiveness of the Norwegian industry, especially in the geographical periphery. In order to deal with this problem, NHO proposes that: employees should bear a greater share of the costs in relation to sickness benefits; economic cuts should be made in the municipal sector; and major reforms, such as a cash benefit reform for parents with small children who do not use kindergartens, should be postponed.

Commentary

NHO and LO are lukewarm about the economic policy proposals suggested by the Government, on the grounds that they are inadequate to deal with the economic pressures facing the economy. The measures proposed in the revised national Budget led the NHO to react strongly, because of what it saw as an attempt to increase taxes on private enterprise. LO had a more positive attitude towards these proposals, but is sceptical about other reforms such as the cash benefit reform. The Government has made clear that it will continue with the "solidarity alternative". Support from the LO and other union organisations has been important for the pursuance of moderate pay settlements, and from LO's point of view it has been a requirement that important social arrangements are retained, and to a certain degree improved.

The Government has yet to come up with proposals to persuade the labour movement to change its attitude towards the present incomes policy. However, the 1998 pay settlement, coupled with developments in the Norwegian economy in general, has led people to question whether there is sufficient political support among the social partners, and politicians, to continue to pursue an economic policy of moderate growth in pay. Previous experience indicates that this type of incomes policy is easier to pursue during recessions, than in periods of economic growth and a tight labour market. Erling Stensnes, the parliamentary leader for the Christian Democratic Party, the largest party in the coalition Government, has called for the establishment of a committee to look closer at the question of pay policy. The proposal is similar to that from the former "employment commission" which submitted its report in 1992, and it implies persuading the social partners involved to reach a new consensus on a general pay policy. This call - which came during the national summer holiday period - received little enthusiasm from the other political parties. (Kristine Nergaard, FAFO Institute for Applied Social Science)