Trillion Dollar Baby

Author:Paul Cleary
Language: eng
Format: epub
Publisher: Schwartz Publishing Pty. Ltd

The fund mechanism entails that money will only be allocated to the fund when there is a budget surplus. This reflects an important point: running a budget surplus is the only way a government can accumulate financial assets on a net basis. If a fund is set up with an allocation rule that is not linked to actual surpluses, the accumulation of assets in the fund will not reflect actual savings.203

The second principle puts all of the fund capital into foreign currency, thereby taking it out of the domestic economy and putting some downward pressure on the Norwegian krone. This has proved to be fundamental to the success of the fund. Not only does it avoid creating a bubble during good times, it creates a natural hedge against lower oil prices, which can be used to boost the economy. It also means that the fund is able to invest in foreign assets at relatively lower prices during the boom years, when the krone is stronger. And during times of lower oil prices, when the krone is weaker, these assets can be cashed in and returned to the budget for a much greater return in local currency. As such, this design principle makes the fund a veritable cash cow. The third principle is that all spending of the fund’s return must be approved by parliament as part of the budget process.

As Einar Lie points out, these design features were the result of ‘Norway’s own hard-won experience’ in the first decades of oil development. The spending binge of the ’70s and ’80s influenced the budget integration. But Norway’s own poor record in managing an income insurance scheme established in 1967 strongly influenced the decision to invest all of the assets in foreign currency. What’s now known as the Government Pension Fund Norway suffered from excessive political influence, which meant that it was forced to lend at sub-commercial rates, and so its returns suffered.204

The politicians and advisers who created the fund did not think that much capital would ever be transferred into it, given the parlous state of Norway’s finances at the time. ‘There was no master plan to have an account with the size it is today,’ says Olsen. And even when the budget was balanced, the community’s expectations regarding the use of oil revenue meant that most of the increased revenue would likely be spent, just as was in the 1970s. ‘Experience over the previous 15 years had also indicated that Norway had been in a position to spend large amounts of oil revenue domestically, even though the macroeconomic consequences had been unfavourable,’ wrote Lie.205 Despite this pessimism, left-wing Norway, with its emphasis on discussion, debate and long-term planning, was certainly doing much better than so many other resource-rich countries.

While Norway clearly struggled during the 1970s and ’80s, the contrast with the UK over the same period is stark. Unable to capitalise on the opportunities presented by its new-found oil wealth, the country’s imploding industrial base led to rising unemployment and a financial bailout.

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