Norway increases oil wealth spending to ward off recession

Bloomberg

Norway’s government boosted the amount of oil money it will spend this year to a record, dipping deeper into its sovereign wealth fund to ward off a recession.
The government will use 205.6 billion kroner ($25 billion) of its oil wealth, up from the 195.2 billion kroner it estimated in October, according to the budget released in Oslo on Wednesday. The spending will have a stimulus effect of 1.1 percentage point, up from 0.7 percentage point in the initial budget.
“A key priority for the government in the current situation is to support growth and employment in sectors exposed to international competition,” Finance Minister Siv Jensen said in a statement. “Tax reform with lower taxes and increased spending on education and infrastructure, is essential in this respect.”
The added spending means the government plans to withdraw 84.2 billion kroner from its $860 billion wealth fund. That’s up from an October estimate of just 4.9 billion kroner, made before oil plunged at the end of last year, and is also higher than the 80 billion kroner estimate made by the fund in February.
The plunge in crude prices is squeezing the economy of western Europe’s biggest oil producer, driving up unemployment and threatening to halt growth. The central bank in March cut rates to a record low of 0.5 percent and signaled it was prepared to ease further to avoid an outright recession. According DNB ASA, Norway’s largest bank, the expansionary budget will cool the need for more rate cuts from the central bank.
“Increased fiscal stimulus damps the need for interest rate cuts from Norges Bank,” said Jeanette StroemFjaere and KyrreAamdal, analysts at DNB Markets. “Norges Bank will probably not refrain from a cut to 0.25 percent, but the chance of a zero interest rate is significantly weakened.” The increasing “oil deficit” will also mean bigger krone purchases by Norges Bank during the year, they said.