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Is Norway's Bird-in-Hand Stabilization Fund Prudent Enough? Fiscal Reactions to Hydrocarbon Windfalls and Graying Populations

Author

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  • Torfinn Harding
  • Frederick Van der Ploeg

Abstract

We estimate fiscal reaction functions for non-hydrocarbon tax and public spending shares of national income and for debt management strategies adopted by Norway and compare these with rules that would prevail under the permanent income hypothesis and bird-in-hand rule. We conclude that the fiscal reaction functions adopted by Norway have to some extent been forward-looking when it comes to the rising pension bill, but backward-looking when it comes to hydrocarbon revenues. Still, our results suggest that the imminent costs of a rapidly graying population are not sufficiently taken into account in the current fiscal rules, since Norway is on a trajectory of turning a current net asset-GDP-ratio close to one into a net debt-GDP-ratio of two in 2060. Something needs to give in the holy trinity: either the rules of the Stabilization fund have to be tightened, or civil servant salaries, benefits and pensions will no longer have to be fully indexed to market wages, or the retirement age has to be increased.

Suggested Citation

  • Torfinn Harding & Frederick Van der Ploeg, 2009. "Is Norway's Bird-in-Hand Stabilization Fund Prudent Enough? Fiscal Reactions to Hydrocarbon Windfalls and Graying Populations," CESifo Working Paper Series 2830, CESifo Group Munich.
  • Handle: RePEc:ces:ceswps:_2830
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    File URL: http://www.cesifo-group.de/DocDL/cesifo1_wp2830.pdf
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    References listed on IDEAS

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    1. Frederick van der Ploeg & Anthony J. Venables, 2011. "Harnessing Windfall Revenues: Optimal Policies for Resource‐Rich Developing Economies," Economic Journal, Royal Economic Society, vol. 121(551), pages 1-30, March.
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    Cited by:

    1. van der Ploeg, Frederick, 2010. "Aggressive oil extraction and precautionary saving: Coping with volatility," Journal of Public Economics, Elsevier, vol. 94(5-6), pages 421-433, June.
    2. El Anshasy, Amany A. & Bradley, Michael D., 2012. "Oil prices and the fiscal policy response in oil-exporting countries," Journal of Policy Modeling, Elsevier, vol. 34(5), pages 605-620.
    3. Issouf Samaké & Priscilla S Muthoora & Bruno Versailles, 2013. "Fiscal Sustainability, Public Investment, and Growth in Natural Resource-Rich, Low-Income Countries; The Case of Cameroon," IMF Working Papers 13/144, International Monetary Fund.
    4. Darko JUS & Christian BEERMANN & Markus ZIMMER, "undated". "An Empirical Assessment of the Effectiveness of Oil Taxes," EcoMod2010 259600084, EcoMod.

    More about this item

    Keywords

    permanent income hypothesis; oil windfall; sovereign wealth fund; graying population; pension bill; unsustainable public finances;

    JEL classification:

    • H20 - Public Economics - - Taxation, Subsidies, and Revenue - - - General
    • H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt
    • Q33 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Nonrenewable Resources and Conservation - - - Resource Booms (Dutch Disease)

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