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Norway Urged To Revise Fiscal Policy

Thursday, March 11, 2010

The Organization for Economic Cooperation and Development (OECD) has called on Norwegian authorities to revise fiscal policy in light of the nation’s recovering economy. The organization has recommended that the authorities withdraw fiscal support, to begin reigning in the deficit, and gear future fiscal policy towards incentivizing productivity and labour participation.

The OECD has noted that the government’s objective to bring the deficit to within 4% of GDP by 2013 is appropriate and would place the Norweigan authorities in better stead when meeting its next predicament - financing an ageing population. Efforts towards reigning in the deficit, the OECD has said, should begin with the gradual withdrawal of fiscal support, provided under the 2009 and 2010 budget.

Despite an increase in the deficit as a result of the economic crisis, the OECD has advised the authorities that Norway's already high level of taxation should not be increased.

However, on fiscal support, the OECD observed that subsidies and tax reliefs provided to Norway's industries, while not particularly high at present, are on the rise, particularly for housing.

“Generous tax treatment of housing, for which there is no obvious economic justification, is likely to distort investment decisions and may have contributed to the house price boom. Reform of housing taxation should include measures to phase out the asymmetries resulting from the deductibility of interest payments on owner-occupied dwellings without taxing imputed rent, and from the remaining substantial discount applied to housing for the wealth tax,” the report advocates.

Continuing, the report emphasizes the need to incentivize labour participation. To this end, the OECD recommends that: “Marginal tax rates at high income levels could be reduced, partly to reduce the incentive to misreport labour income as more favourably treated capital income. Reducing progressivity could also increase returns to education, and thus provide stronger incentives to undertake higher education studies. Revenues losses from such measures could be fully compensated by the increases in housing taxation.”

Further the OECD advocates that fiscal consolidation efforts should include measures to reduce sick leave and disability spending:

“Reforming sick leave and disability benefits would be doubly beneficial for public finances, by on the one hand allowing sizeable expenditure savings and, on the other, increasing participation and hours worked, thereby boosting tax revenue.”

“Current fiscal policy must also be seen in the context of longer-term objectives, as overspending today widens the long-term fiscal gap," the report notes, concluding: "Filling this gap, estimated by the Finance Ministry at an excess of spending over revenue of 6% of GDP in 2060, will require the completion of the pension reform, both to reduce expenditure and to encourage higher labour participation."