Former central bank chief wants to pause Norway's oil fund spending rule

Øystein Olsen, the former governor of Norway's central bank, is calling for a temporary suspension of the country's fiscal rule governing the use of oil fund revenues. Olsen argues that the "handlingsregel," which limits how much of the oil fund can be spent annually, has become counterproductive.

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We must bid farewell to the handlingsregel and put it on pause as a guideline for fiscal policy from one year to another.

In an interview with Dagens Næringsliv, Olsen stated, "We must bid farewell to the handlingsregel and put it on pause as a guideline for fiscal policy from one year to another." He believes that as the oil fund expands, the rule inadvertently leads to expansionary monetary policy. Olsen, now working part-time as an economist at the think tank Civita, has previously advocated for fiscal tightening.

Despite adjustments to the rule, such as lowering the spending cap from 4% to 3% in 2017, state budgets have continued to increase due to the fund's overall growth. Olsen points out that while politicians have largely adhered to the percentage limit, except in 2020 and 2021, the rule has "almost functioned as a driver, bringing public expenditures up to a high level." He is concerned that this trend could impact price growth and interest rates within Norway.

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Oil money spending continues to increase, even though it is still within three percent.

Olsen suggests that while increased spending might be necessary, it should be directed towards appropriate foreign investments that do not affect domestic price levels. He fears that the current application of the fiscal rule is not serving its original purpose of acting as a constraint on oil money usage but rather as an enabler of higher public spending.

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Originally, the fiscal rule was intended as a barrier to the use of oil money. In recent years, it has been the opposite – it has almost functioned as a driver, bringing public expenditures up to a high level.