Norway? No way!
Published in Insights, The New Zealand Initiative’s newsletter, 21 June 2013
It is one of those ideas that come up again and again without ever being properly scrutinised – that a sovereign wealth fund (SWF) like Norway’s is a fantastic idea that deserves to be copied elsewhere, even in New Zealand.
Last week, the National Business Review reported that Methanex New Zealand chief executive Harvey Weake is making the case for a Norwegian-style SWF. Government royalties from new oil and gas finds should go into this new fund to be available to future generations rather than for current consumption.
Aside from the questionable wisdom of putting money into a separate vehicle while the budget is in deficit, or indeed while the government has any net debt, there is another reason to be sceptical of the proposal. The Norwegian SWF does not make much sense even for Norway.
Norway is a spectacularly rich country, mainly thanks to its oil and gas reserves. Unfortunately, the high proceeds from this sector have led to complacency in other areas. In particular, state spending is high, and adjusted for petroleum, the government is running substantial budget deficits to sustain Norway’s generous welfare state.
As Norway’s oil boom will eventually come to an end when the country’s reserves run out, the Norwegian government has established a fund to secure Norway’s welfare state beyond the oil era. Whether this measure will in fact future-proof Norway’s competitiveness is an entirely different question.
Rather than thinking how welfare can continue after oil, perhaps the Norwegians should have thought more about the structure of their economy after the resources boom. It is in this area that the Norwegian model shows weaknesses.
Norway’s labour market is highly regulated, many industries are state owned, and both taxes and cost of living are high. Taken together, these factors negatively impinge on Norway as a place to do business. Rather than stashing away the money from the resources boom in its SWF and investing in a wide range of companies abroad, the Norwegians could have made their own country a more attractive place for households and investors alike.
If all the money currently going into the fund went to tax cuts, Norway would become a tax haven attracting enormous foreign investment; encourage entrepreneurship; and ultimately, diversify the structure of its economy. This would be a better insurance against the inevitable end of the boom.
The idea of copying the Norwegian example of an SWF in New Zealand is simple, tempting, attractive – and wrong.