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Norway’s economy insulated from falling oil prices

Norway’s economy insulated from falling oil prices

Oslo: Norway has reaped huge dividends from its oil reserves, but it has saved far more of that money than Alberta. It is also making plans for a future beyond oil. Part of the 2015 Atkinson Series on public policy.

It’s mid-January 2015 and the price of oil is half what it was four months ago. In Alberta, the provincial government is panicking and threatening to cut social programs. In Ottawa, the federal government is nervously reassessing revenue projections.

And in Norway, where the economy is also based on oil and gas development?

It’s just another day at the office.

Norwegian Prime Minister Erna Solberg declares that the Norwegian economy will continue to thrive. Finance Minister Siv Jensen has already delivered a budget that features increased spending, tax cuts and a surplus.

How is this possible in a country of only five million people (Alberta has just over four million) that produces less oil than Alberta but also has to deal with the unpredictability of roller-coaster oil prices?

The Norwegians pay very high taxes, including a 25-per-cent sales tax, but they also have well-funded social programs — in Norway the term “welfare state” is not a pejorative. The government doesn’t resort to cutting health care, education and social service programs when the price of oil slides.

And they don’t run deficit budgets.

There is universal child care. Post-secondary education is free. Seniors receive generous pensions and there is abundant public housing

The Norwegians have also managed to save almost $900 billion (U.S.) — the largest sovereign wealth fund in the world — since offshore oil was discovered in their waters in the late 1960s. Norway doesn’t take a royalty share of its oil and gas production like Alberta. Instead, the government heavily taxes the petroleum producers’ profits, takes a substantial equity share in many projects and earns stock dividends from a government-controlled oil and gas company.

Tax revenue from the petroleum sector accounts for about 30 per cent of government revenues, but this revenue is not based on royalties (taxes) per barrel of oil produced and it is not tied to the fluctuating price of oil, as in Alberta. Instead, oil and gas companies operating in Norway pay a 28 per cent corporate tax plus a 50-per-cent petroleum tax on profits, for a total tax of 78 per cent.