Norway: Tax reform takes center stage as uncertainty around September elections mounts
August 28, 2017
Political debate is heating up ahead of the 11 September parliamentary election, as the main political parties unveil their tax policies and the gap between Jonas Gahr Støre’s Labour Party and the ruling Conservative party narrows. Prime Minister Erna Solberg is benefiting from the strong economic recovery after the period of dismal economic performance in 2014–2016 that followed a plunge in oil prices. The most recent surveys signal that the Conservatives and their center-right allies are now slightly ahead of the center-left coalition. While uncertainty about the outcome of the presidential election, especially regarding the direction of the new tax system, has the potential to present downside risks to the country’s economic outlook, the elections should not bring a sharp reversal to Norway’s economy, as the main parties all recognize the importance of the oil sector and support more moderate withdrawals from the intergenerational fund. Along with oil and gas exploration, the key themes of the September election are tax reform and oil wealth spending.
The Labour Party advocates raising NOK 15 billion (USD 1.9 billion) in new taxes by hiking the country’s wealth tax. Conversely, the Conservative Party stands for targeted tax cuts. While Solberg’s party had initially called for eliminating the wealth tax, she recently said that this will take place gradually. Although both of the main parties are in favor of reducing the pace of withdrawal from the country’s massive USD 979 billion oil wealth fund, the Labour Party has accused the ruling center-right coalition of eroding the fund. In 2016, Solberg’s government was the first administration since the fund’s creation in 1998 to record a net withdrawal, in order to supplement the state budget. Norway’s authorities have a self-imposed fiscal spending rule that allows the government to withdraw 3% of the fund’s value to finance the annual budget deficit.
None of the main alliances appear to be in a position to secure a majority in the 169-seat parliament, and they will be forced to find new coalition partners in order to obtain an outright majority. The tight race between the two main camps has brought the Green Party into the spotlight, as it can tip the scales, most likely in favor of the Labour Party. However, Gahr Støre has already rejected the Green Party’s main demands of stopping exploration and putting an end to the oil industry in 15 years. In turn, the leftist Red Party has stated that if it makes it past the 4% threshold, it will likely support the candidate from the Labour Party. There is also mounting speculation that some of the alliances’ junior parties could switch allegiances and join the opposing camp in order to ensure a stable government.