Norway's oil problem sets election stage after spending binge

By Sveinung Sleire on 4/19/2017

OSLO (Bloomberg) -- Norway can’t afford an abrupt cut in spending if the economy of western Europe’s biggest oil and gas producer is to continue growing, according to the man who most polls suggest will be prime minister after elections this year.

Jonas Gahr Store, the leader of Norway’s opposition Labor Party, warned against a sudden adjustment after record expenditure by the current center-right government as the nation debates how to wean itself off its addiction to oil spending.

“The concern with the government now saying that the era of ever increasing oil-cash spending has to stop is that we may see an abrupt halt” for the economy, he said in an interview after a press conference in Oslo on Tuesday. “We have to take responsibility so that the economy is steered in a manner that doesn’t produce sudden jolts, which is bad for both consumers and companies.” 

Polls show Gahr Store is poised to unseat the Conservative-led government of Prime Minister Erna Solberg in elections in September. The Labor leader is promising tax increases to pay for measures to keep more people in the workforce.

Norway is only just emerging from a slump in its oil industry, which was hammered by a plunge in crude prices that started in 2014. The government has relied on record spending to avoid a recession, with use of the nation’s oil wealth this year equivalent to about 8% of GDP. Its massive sovereign wealth fund is the world’s biggest, with about $915 billion in funds.

While unemployment has dropped from a two-decade high, much of that development follows a decline in the labor market. Norway’s employment rate last year dropped to the lowest in 21 years.

Gahr Store said he will target “activity reforms” to bring more people into the workforce. The Labor Party, in its shadow budget for this year proposed using 4 billion kroner ($470 million) less in oil money than the 225.6 billion kroner planned by the government.

But Labor has been losing ground in recent polls, and is now at 31.2%, down from more than 40% in early 2015, according to an average of April surveys by Labor and its potential allies in parliament are backed by 53.2% of voters, compared with 44.8% for the two ruling parties and its current support groups.

Gahr Store will need the backing of the Center Party, which enjoys about 12.4% voter support and has been gaining followers by arguing for a renegotiation of trade terms with the European Union. Norway is a member of the European Economic Area, which obligates it to allow the free movement of people and to pay for access to the single market.

The Center Party’s views on Norway’s relations with the rest of Europe have been known for years and there’s also no backing in parliament for quitting the EEA, Gahr Store said. The Labor Party’s support for the EEA agreement won’t change, he said.

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