Fiscal Management of Oil Resources in Booms and Busts - Economic Research Forum (ERF)

Fiscal Management of Oil Resources in Booms and Busts

Hilde C. Bjørnland


Date:
June, 2018

NO.
23

Length:
8 pages

Topic:
E3. Prices, Business Fluctuations, and Cycles
Q4. Energy
E6. Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook

In a nutshell

  • Sound resource management is crucial. There are huge costs associated with large and unpredictable swings in oil prices. If not well managed, the volatility can destabilise the domestic economy and undermine long-term growth. Resource-rich countries are therefore advised to adopt some type of fiscal policy framework (i.e., a spending rule), which, if operated counter-cyclically, should shelter the economy from oil price fluctuations and prevent over-spending on the part of the government.
  • Drawing on resource rich Norway’s experience, this paper explains how Norway effectively built up a savings fund, which, together with a fiscal spending rule, implied a gradually phasing in of oil revenues to the domestic economy. By spending only 4% of the Savings Fund every year, the sovereign wealth fund has grown and is today one of the largest in the world.
  • Still, despite adopting a spending rule, the Norwegian economy has not been insulated from oil price fluctuations. In recent research, my colleagues and I show that fiscal policy in Norway has been procyclical with oil prices. The main reason is that the inflow to the fund has grown at a time when the oil price has been increasing. Yet, the return (take out) from the Fund has remained fixed at 4% of the Fund’s total, implying more money to spend with higher oil prices. Thus, the problem is not having a rule pr. se, but that the rule has not been practised flexible enough.
  • In line with this, the Norwegian government has recently revised the fiscal rule down from 4% to 3%. The government has also emphasized that the rule should be practised flexible, being more contractive in the booms, while still allowing for expansionary fiscal policy in the recessions.
  • What about MENA countries? In a follow up paper, we show that government expenditures in many MENA countries seem correlated with business cycle fluctuations, also in those countries that have adopted a spending rule. Furthermore, fiscal policy seems mostly pro-cyclical in the commodity booms.
  • From a policy point of view, the implications of our research findings are therefore of general interest since they highlight both the strengths and the weaknesses of the fiscal framework adopted in resource-rich economies.
Authors

Hilde C. Bjørnland

Professor of Economics at the BI Norwegian Business School


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