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

  • Torfinn Harding
  • Frederick Van der Ploeg

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.

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Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 2830.

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Date of creation: 2009
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Handle: RePEc:ces:ceswps:_2830
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