Mr. Svein Gjedrem:

I thank the committee for inviting me. As the Acting Chair mentioned, I am a former central bank governor in Norway. I also worked in the Ministry of Finance, the Treasury, for many years, ending my career there as a secretary general. I wrote my first note to my Minister on the Norwegian sovereign debt fund back in the early 1980s. That is my background. Now, I am also the chairman of the economic and development review committee of the OECD.

Can I please have some help with the presentation? Can the first page be displayed? I think that was the second one.

On the historical backdrop, Norway proclaimed sovereignty over the Norwegian continental shelf in 1963. It started to search for oil in 1966, discovered a huge oil field in 1969 and production started in the early 1970s. That production and the income from it is the source of the money that has gone into our oil fund. It is now called the pension fund rather than the oil fund, although it is not directly linked to public expenditure on pensions. There was a lot of discussion on how to deal with this money in the early 1970s. There was a White Paper on how the petroleum sector would affect the Norwegian economy in the 1970s. The petroleum taxation act was introduced in 1975, which was very important. The source of government income from the oil sector is taxation and direct ownership in the oil sector. The first proposal for creating a fund was in 1983. We developed that, and the petroleum fund Act came into force in 1990. The first deposit into the fund was in 1996, some 25 years after oil production started. It took a few decades before we got going with the fund. We had a lot of problems dealing with the oil income early on in the 1970s and 1980s.

The objectives for the oil fund in the short and medium were to improve welfare in Norway but also to avoid what we call the Dutch disease. Members may recall that in the Netherlands, gas was discovered in the huge Groningen field almost ten years before we discovered oil.

The huge Groningen gas field was not offshore but onshore. Based on that Groningen field and an optimistic view of the future, the Dutch started to spend a lot of money. They established a very high cost level and experienced a deterioration in the rest of the economy. That is called the Dutch disease. For us, it has been important in the short and medium term to avoid the kind of development the Dutch experienced based on the Groningen field. Also, there is a long-term objective of generational balance to which I will return.

We also looked into possible pitfalls connected with a potential oil fund. What we were very afraid of was that the oil fund would end up as Government budget number two for purposes not prioritised over the fiscal budget. It would make it easier to finance all kinds of expenditures over the fiscal budget through a kind of budget number two. It has been very important for us to protect the ordinary fiscal budget.

In addition, special interest groups, companies, groups of companies and other special interests would like to have their hands in the pockets and that could also reduce fiscal discipline with negative medium- and long-term impact. We also saw a need for avoiding a more lenient fiscal policy and budget policy in general.

The impacts of petroleum activities on the non-oil economy are more or less through two sources. The first is direct demand for goods and services from the petroleum activities in the North Sea towards the non-oil economy and the second is through the Government net cash flow and the use of Government oil revenues in the internal economy. The Norwegian domestic economy was open for demand in investment goods from the non-oil economy. That is open for an impact. When we have fluctuations in investment in the petroleum sector, it has an impact on the domestic economy. There is also the influence that arises when government spends the income from the oil sector.

The government take from the oil sector is very high. On the margin, the government takes 80% of income in the petroleum sector through taxes and other means.

If we look at petroleum revenues based on a generational approach, petroleum revenues have lasted for a generation or two in Norway. Nevertheless, they are temporary and very volatile. We look upon them not as income in a traditional sense but as income stemming from depletion of non-renewable natural resources. One very important objective of the oil fund is to transform windfall gain to a permanent increase in consumption. This is illustrated in the diagram on the slide. We had two or three generations of very high income from the oil sector but we want to use the oil fund to increase consumption, not only for these generations but for all future generations. That is one of the purposes of the oil fund. Then there is a need for separating current accrual from spending. We do that through the oil fund.

As for how the fund is organised, the right side of the next slide shows that all government incomes goes through the state budget but all petroleum revenue is transferred to the fund. The fund has two sources of income, namely, the government petroleum revenues and the return on investments. The fund can only invest abroad, not domestically.

There is only way to spend money from the fund, that is, through a general transfer to the state budget. That transfer equals, each and every year, the non-oil deficit. That means that we do not build up net assets or debt in the state budget. All government net financial savings go through the oil fund. When taking decisions on the transfer to finance non-oil deficits, we use a fiscal policy guideline that states that, over time, we could spend the fund's expected real return. When that rule is followed, it means that we save the oil wealth for all future generations. We spend only the real return from the fund, not the capital itself, and we are not building up deficits in the state budget. The fund, therefore, represents all net public financial investments.

The core principles are shown in the next slide. The first is that all government petroleum revenues are transferred to the fund, including the return on the fund. The second is that transfers from the fund may only be made to the fiscal budget. It is a general financing of the fiscal budget so that transfers are not earmarked for any specific purpose. These days, as I mentioned, it is called the government pension fund but it is in reality a general financing not earmarked for any specific purpose. The third principle is that the annual transfer is always equal to the non-oil deficit in the fiscal budget. That means that the fiscal budget will always be in balance as long as there is capital in the fund. All net financial savings take place in the fund. Lastly, the fund is invested abroad only.

To look back to the purposes of the fund, taking all the money and investing it abroad contributes to avoiding a Dutch disease. It means that we do not build up an unsustainable cost level in the domestic economy by building down the non-oil sector too fast or too much. That is important. When these core principles are followed, it also means that we preserve the oil wealth for all future generations. By investing only abroad, it also means more protections against special interests that want to put their hands in the pockets.

That is also an important part. It also means that the fund is not invested for special purposes, so it is not a budget No. 2 in parallel with the ordinary fiscal budget.

The fiscal rule, as I mentioned the petroleum revenue should be phased into the economy in line with the development in expected real return of the fund. To start with, we estimated the real return at 4% but adjusted that down to 3% from 2018. There is also an emphasis on stabilising the economy, with emphasis on a smooth and sustainable phasing in of petroleum revenues into the economy through the fiscal budget. Automatic stabilisers are allowed to operate with a focus on non-oil structural deficit. Discretionary fiscal policy is not ruled out. It means that in bad times when there is low activity in the domestic economy, we can spend more than this 3% rule, whereas when the domestic economy is tighter then we should spend less than this 3%. Fiscal policy should have a medium-term and long-term orientation of course.

The investment strategy is premised on fund objective, investment beliefs and fund characteristics and the highest possible long-term financial return within an acceptable level of risk. The investment strategy is characterised by broad diversification in almost all equity and bond markets in the world; by harvesting of risk premia; a moderate degree of active management; responsible management including cost efficiency in the management, and also of course transparency.

I will not go into detail on the investment strategy over time. It is anchored in the Parliament so that the most important choice for the Government and of the risk profile is the choice of the equity part of the fund. Starting in 1998, 40% was invested in equities. That increased to 60% in 2007 and to 70% in 2017. That actually means that the absolute risk in the fund is quite high. The reason for that of course is that the fund is capable of handling large losses in the short term in order to get a long-term return from equity investment.

On the slide on display, market development is expressed in Norwegian Krone in billions. These days, we have to pay 12 Norwegian Krone per bond euro. At the end of 2022 the size of the fund was approximately €1,000 billion. This is quite large for a country with 5 million inhabitants. It has gradually increased over the years.

That was my last point. I thank the committee for the opportunity to present briefly on this.