Managing the Norwegian
Petroleum Wealth:
The Government Pension Fund and the Fiscal Rule
Øystein Thøgersen
Reading
• Gjedrem, S. and Ø. Thøgersen (2017): "A fiscal rule for an oil-rich economy: The
Norwegian experience in light of theoretical insights”, in Finance in Society, Cappelen
Damm Akademisk, 69-92.
1. Point of departure: The petroleum wealth
• Petroleum wealth: The value of the petroleum resources in the ground.
• The petroleum wealth can be estimated by means of a simple NPV calculation:
• But, recall, a NPV calculation does not capture the potential value of flexible
production strategies, i.e., the real option value of the resources.
Calculating the petroleum wealth
• Underlying assumptions:
•
Resource volumes, oil and gas in each specific field
•
Existing fields
•
Future fields
•
Production trajectories for oil and gas in each field
•
Price paths for oil and gas (gas prices are field specific)
•
Operating costs, investments
•
Discount rate (risk adjusted?)
• Clearly: A lot of highly uncertain assumptions!
Calculating the petroleum wealth
• “Semi-official” wealth estimates:
•
Estimates from the 1980s (estimates from SSB, 7% discount rate, 1986 NOK)
•
•
1981: PW=2273 billions, 1988: 413 billions.
Since the 1990s estimates have been more stable (3% discounting, nominal NOK,
from Ministry of Finance)
•
NB 2019: PW = 6000 billions, public share 5100 billions
•
NB 2020: PW = 5700 billions, public share 4900 billions
•
NB 2021: PW = 5600 billions, public share 4500 billions
•
(and, at the same time, the financial Petroleum Fund, “GPFG“, is estimated to 10300
billions at the start of year 2021).
• Why is the public share so high?
•
Taxation (special tax system in the petroleum sector)
•
Direct public involvement
Oil price volatility
Uncertainty in the estimates
Estimated oil price. 2013 NOK/bbl.
From PW in the ground to financial wealth in the GPFG
Managing the petroleum wealth – big issues
Four major issues for the macroeconomic development:
1. Decisions on the production levels over time
2. Management of risk exposure
3. Sectoral adjustments (fear of Dutch disease?)
4. Optimal intertemporal spending decisions
•
Objective: Achieve smooth spending over a very long, maybe infinite, horizon
2. Key institutions
2.1 The Government Pension Fund Global
• The GPFG was established in 1990, first deposit 1996
• …is not a real pension fund…
• A public endowment fund, a big SWF
• Name of fund hints at political ambitions to secure welfare in the long run…
• Fund managed by Norges Bank, the Central Bank of Norway,
•
Norges Bank Investment Management (NBIM)
•
Ministry of Finance specifies the “benchmark” of the fund, NBIM has a certain “risk
budget” allowing them to take active bets in the markets.
•
Benchmark: 70% stocks, 30% bonds and real estate
• Market risks, operational risks, political risks
GPFG: Values in billions of NOK
Volatility in the return of the fund...
…and volatility in excess returns
Rebalancing
2.2 The semi-official fiscal rule
• Large and varying government petroleum revenues and the fiscal policy strategy
•
Short/intermediate run effects of fiscal policy on the business cycle
•
Long run intertemporal/intergenerational distribution of tax burdens and welfare
•
Intertemporal pooling of oil price risk
• The fiscal rule
•
Spending, in a normal year, should amount to the expected long run return on the GPFG
•
Expected long run return on the GPFG was originally estimated to 4% real return. This
figure was revised down to 3% in 2017
•
Spending is measured by the ”structural non-oil deficit”, i.e., the automatic stabilizers of
fiscal policy can work freely
Fiscal rule – spending profiles in theory
Structural non-oil deficit – Fiscal budget
• Non-oil deficit:
•
Gap between public expenditures and public income (tax revenues etc.) except net
cash flow from petroleum sector
•
Fiscal rule: In a normal year, i.e., “economy on trend path,” spending of petroleum
revenues should equal non-oil deficit
• Spending should equal structural non-oil deficit:
•
Economy may be below or above trend
•
Tax revenues highly sensitive to business cycle
•
Public transfers (unemployment benefits etc.) highly sensitive to cycle
•
Without any adjustments of non-oil deficit, fiscal rule procyclical
•
Structural non-oil deficit: Components in fiscal budget adjusted as if the economy was
operating on trend. In for example a downturn, tax income adjusted upwards and
unemployment benefits downwards
•
Consequence: Automatic stabilizers can work freely
The fiscal rule: Illustrating uncertainty in old 4% path
Source: NOU 2015:9
Fiscal rule: From 4% path to 3% path...
Source: NB 2017
Source: NB 2020
Variations in the estimated 4% and 3% paths
Variations in 4% path
Uncertainty in 3% path
Source: Stm 14/2021
Source: NOU 2015:9
Fiscal budget for 2021
Spending of petroleum revenues =
Structural non-oil deficit
The fiscal impulse: The change in the
structural non-oil deficit, as per cent of
trend GDP for Mainland Norway
Updated prospects 2021: Spending has peaked,
expect zero impulses ahead
Source: Stm 14/2021
Public expenditures as a share of GDP
Appendix: Tax-smoothing model
Tax smoothing model vs. fiscal rule
See Gjedrem & Thøgersen (2017)
Minimize total tax burden with respect to Tt
Stationary economy
A growing economy