Norway’s fiscal rule has guided how the country manages its vast oil wealth for more than two decades. Research and policy advice from NHH contributed to the revision of the rule in 2017 — ensuring a more sustainable path for public spending and for future generations.
Since 2001, the fiscal rule (Handlingsregelen) has been the cornerstone of Norwegian fiscal policy.
It ensures that the spending of the Government Pension Fund Global (the Oil Fund) is smoothed over time and across generations, while also allowing spending of petroleum revenues to stabilize the economy and maintain high employment.
The rule states that, over time, withdrawals from the fund should equal the expected real rate of return. When the rule was introduced, this return was estimated at four percent. As global interest rates declined, the prospects for future investment returns become more modest, and as Norway’s oil and gas revenues were expected to taper off, the functioning of the rule and the assumptions underlying it needed a renewed investigation.
To assess the functioning of the fiscal rule, the government appointed an expert commission in 2014, chaired by Professor Øystein Thøgersen from NHH. The seven-member committee was asked to assess how the spending guidelines should be applied in light of the recent strong growth of the sovereign wealth fund and the long-term challenges related to increasing tax burdens as well as prospects for more modest financial returns.
The commission’s analysis was clear: a more gradual increase in the spending profile was warranted to better reflect financial prospects and strengthen fiscal sustainability. One of its recommendations was to reduce spending to a calculated three per cent return on the fund for the years to come.
This recommendation was soon reflected by the government decision in 2017 to reduce the expected real return from four to three percent (see 2016-2017 White paper on Long-Term Perspectives for the Norwegian Economy).
As the IMF 2018 later noted:
"The switch in 2017 from a 4 percent to a 3 percent rule, undertaken in response to the Thøgersen Commission, is very favorable: it stabilizes the fiscal path considerably over the next two decades."
(Counting the Oil Money and the Elderly: Norway’s Public Sector Balance Sheet, IMF 2018)
The commission’s recommendations were grounded in a large international research literature on the management of resource wealth. At NHH a long-standing research agenda on fiscal policy in resource-rich economies has contributed to this literature and has zoomed in on the particular case of the Norwegian petroleum wealth.
Key studies by Matsen and Thøgersen (2010), Steigum and Thøgersen (2003), Harding and van der Ploeg (2013), and Harding and Venables (2016) provided fundamental insights into:
Building on this foundation, more policy-oriented works - such as Gjedrem and Thøgersen (2017), Thøgersen (2015), and Steigum and Thøgersen (2015) - directly addressed the functioning of the fiscal rule and the need for a gradual phasing-in of petroleum revenues.
These academic and policy contributions added to the research literature that provided the analytical backbone for the appointed expert commission and the subsequent government decision in 2017.
The 2017 revision of Norway’s fiscal rule - lowering the expected return from four to three percent -has had lasting effects on national fiscal policy. It has ensured more responsible use of petroleum wealth, reinforced the long-term stability of public finances, and safeguarded the interests of future generations.
This change illustrates how NHH research and policy engagement can contribute to the shaping of key elements of Norwegian economic policy.
