## wp18190 — Annex I and Selected Sections (Static Public Sector Balance Sheet; PSBS projections and stress tests)

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### Overview and purpose of public sector balance sheet analysis
- Public sector balance sheet aggregates the present value of all public assets and liabilities and the future fiscal path to judge long-term fiscal sustainability.
- Two-step approach:
  - Derive a static balance sheet (data and compilation described in Annex I).
  - Augment the static balance sheet with net present values of all future fiscal balances to obtain an intertemporal balance sheet (IFNW), then subject it to stress tests to determine a prudent fiscal buffer.
- Advantages highlighted:
  - Accounts for offsetting effects of public investment (debt increase vs asset accumulation and future revenues).
  - Provides a broader concept of government net worth superior to simple debt sustainability analyses.
  - Particularly important for Norway given substantial public sector assets.

### Key components of the static public sector balance sheet
- Assets included:
  - Public buildings, infrastructure, and land.
  - Present value of remaining oil and gas reserves to be extracted over coming decades.
  - Government Pension Fund Global (GPFG) assets (size noted below).
- Public corporations:
  - Includes financial and non-financial public corporations—enterprises over which the state directly exerts control; captures revenues and risks not recorded in general government statistics.
- Existing pension liabilities:
  - Obligations related to work already performed (pay-as-you-go system funded by government contributions and payouts).

### Numerical findings and headline statistics (preserve source numbers exactly)
- Static public sector net worth for Norway stood around 340 percent of mainland GDP as of 2017.
- Static public sector net worth at end-2017: 342 percent of mainland GDP (alternate figure: 341.7 percent of mainland GDP reported in tables).
- GPFG assets made up just over 300 percent of mainland Norway’s GDP at end-2017; GPFG share of general government financial assets: 303 percent of mainland GDP; GPFG (percent of mainland GDP) in historical table: 302.7 (2017).
- GPFG asset composition as of end-2017:
  - 66.6 percent equities
  - 30.8 percent fixed-income investments
  - 2.6 percent unlisted real estate investments
- GPFG operational facts:
  - First net transfer to the GPFG occurred in 1996.
  - The GPFG’s annual real yield on a Norwegian krone basis was 5.8 percent on average over the past two decades.
  - During 2014–17, the GPFG’s investment returns outstripped its oil revenue inflows by a factor of 2.6.
  - During 2016 and 2017, withdrawals from the GPFG to finance the government non-oil deficit were for the first time higher than inflows to the fund from petroleum sales.
- Fiscal positions:
  - The 2017 structural non-oil deficit has come close to 8 percent of mainland GDP.
  - Non-oil fiscal deficits were less than 2 percent of mainland GDP in the early 2000s and have risen to close to 8 percent of mainland GDP—an expansion of more than 6 percentage points of mainland GDP since the late 1990s.
- Major liabilities and memorandum items:
  - Existing pension liabilities (relating to work performed until end-2017): 252 percent of mainland GDP.
  - Other liabilities of the general government: 58 percent of mainland GDP (debt securities: 24 percent; loans and accounts payable: 25 percent; another debt securities item: 9 percent).
  - Nominal mainland GDP (NOK billions): 2,803.8 (memorandum item).

### Structure of Norway’s static PSBS (2017 detailed breakdown)
- Nonfinancial assets and oil/gas PV:
  - General government nonfinancial assets: 237 percent of mainland GDP.
    - Present value of remaining oil and gas deposits: 149 percent of mainland GDP (calculated using Norwegian Ministry of Finance projections consistent with a long-term oil price of around US$60 per barrel and a nominal discount rate of 5 percent).
    - General government nonfinancial assets other than oil and gas: close to 90 percent of mainland GDP.
- Financial assets:
  - General government financial assets: 366 percent of mainland GDP.
  - Financial assets outside the GPFG: 8 percent of mainland GDP (non-consolidated; note).
  - Other financial assets outside GPFG: loans and debt securities: 41 percent of mainland GDP; deposits and accounts receivable: 18 percent of mainland GDP.
- Public corporations and central bank:
  - Contribution to static net worth: almost 50 percent of mainland GDP.
  - Equity of nonfinancial public corporations including the central bank: about 48 percent of mainland GDP (thereof, 8½ percent of mainland GDP are accounted for by the central bank).
  - Assets of nonfinancial public corporations including the central bank: 151 percent of mainland GDP.
  - Liabilities of nonfinancial public corporations including the central bank: 103 percent of mainland GDP.
  - Largest public corporations (end-2016 equity as percent of mainland GDP): Equinor 18.9 percent; Telenor 7.1 percent; Statkraft 2.7 percent.

### Static vs intertemporal outcomes and IFNW baseline results
- Despite static net worth around 340 percent of mainland GDP, IFNW in 2017 was negative at close to -240 percent of mainland GDP (historical table: IFNW = −237.9 (2017) and intertemporal component ≈ −446.6; IFNW calculation described as L = A + G − C − E).
- PV estimates (2017, percent of mainland GDP / exact table entries):
  - PV of future revenues: about 3,200 percent of mainland GDP (3,205.5 in table).
  - PV of future primary expenditures: about 3,650 percent of mainland GDP (3,652.1 in table).
  - Expenditure on future pensions: 568.6
  - Health care expenditure (PV): 548.5
  - Long-term care expenditure (PV): 351.1
  - Other primary expenditure (PV): 2,186.9
- About four tenths of the PV of future expenditures is related to aging costs.
- Interpretation:
  - Norway’s negative IFNW is driven mostly by high non-age-related primary expenditure: PV close to 2,200 percent of mainland GDP, almost double Finland’s (comparative statement).
  - Excluding oil-related wealth, Norway’s general government nonfinancial assets are comparable to Finland’s.

### Baseline modeling assumptions and projection framework
- Medium-term projections use April 2018 WEO extended through 2023; beyond 2023 rely on growth accounting.
- Long-term real mainland GDP growth assumed to stabilize at around 1½–1¾ percent, driven by:
  - Annual labor productivity growth of 1¼ percent.
  - Employment growth of 0.3–0.5 percent.
- Fiscal assumptions:
  - Fiscal revenues assumed to remain constant relative to mainland GDP; expenditure ratio assumed to vary only in response to aging costs.
  - IFNW excludes non-financial assets other than the value of remaining oil and gas deposits to avoid double counting.
- Discounting and present-value conventions:
  - A nominal discount rate of 5 percent is used to obtain present values of future pension liabilities and to compute PVs of future revenues/expenditures.
  - Present values cover period 2018 to infinity, with post-2100 values assumed constant in real terms and treated as a perpetuity.

### Stress test calibration and prudent IFNW buffer
- Calibrated moderately severe shock: average of late 1980s Nordic Banking crisis and the Global Financial Crisis (2008–09).
  - Key shock assumptions include:
    - Real mainland GDP falls 5½ percent below the baseline (timing: hit in 2019; specific path: real mainland GDP growth 2019: −1.3; 2020: 0.6; thereafter recovery).
    - In 2019, global equity prices fall by some 25 percent and housing prices by some 20 percent, with mean reversion after the crisis.
    - Permanent fall in oil prices of 15 percent relative to baseline (in stress calibration).
- Stress-test results (baseline vs stress without/with post-crisis policy adjustment):
  - An IFNW buffer of around 95 percent of mainland GDP would allow Norway to withstand a severe shock without the need for post-crisis fiscal adjustment (the 2023 IFNW absent any post-crisis policy adjustment would be 95 percent of mainland GDP lower than baseline).
  - An IFNW buffer of approximately 25 percent of mainland GDP would be sufficient to offset the deterioration in net worth of the crisis years but would require post-crisis consolidation to return fiscal balances to baseline (stress-with-post-crisis-adjustment scenario yields IFNW about 25 percent lower than baseline).

### Scenario analysis — key sensitivities and quantified impacts on IFNW (percent of mainland GDP unless noted)
- GPFG real yield (baseline yield = 3 percent):
  - 2 percent real yield → IFNW decreases by 100 percentage points to −339 percent of mainland GDP.
  - 4 percent real yield → IFNW rises to −75 percent of mainland GDP.
- GPFG asset stock one-off change (value at end-2017 ≈ 300 percent of mainland GDP):
  - One-time increase or decrease in GPFG value by 20 percent in 2018 → IFNW rises or falls by 60 percent of mainland GDP.
- Oil/gas production and price scenarios:
  - Higher oil/gas production (production remains around present level until end-2040s, then declines as in baseline) → IFNW increases by about 65 percent of mainland GDP.
  - Higher/lower oil/gas prices (permanent ±100 krone ≈ US$12 from 2024 forward) → IFNW boosts or diminishes by about 25 percent of mainland GDP.
    - For oil prices alone to reach the lower end of the prudent buffer range, spot price per barrel would need to reach about 180 U.S. dollars (described as unprecedented).
- Productivity and employment scenarios:
  - Baseline productivity: 1¼ percent annual labor productivity growth from 2024 onwards; a permanent ±½ percentage point shock considered.
    - Higher productivity: IFNW would come reasonably close to the zero threshold.
    - Lower productivity: IFNW would fall to −360 percent of mainland GDP.
  - Employment 10 percent higher by 2060 → IFNW would increase by some 65 percent of mainland GDP but remain negative.
- Public sector efficiency and health care cost scenarios:
  - Reducing annual growth in nominal non-pension expenditures by ¼ percentage point → IFNW would come close to the lower end of the prudent buffer range.
  - Health care adverse scenario: additional 1 percentage point nominal growth in health care costs → IFNW would decline by about 135 percent of mainland GDP to −372 percent of mainland GDP.
  - Health care upside: IFNW would be −77 percent of mainland GDP.

### Fiscal policy scenarios and consolidation implications (quantified)
- Passive baseline (deficits increase one-to-one with aging costs): Norway’s IFNW would be negative at close to −240 percent of mainland GDP.
- Continued adherence to the fiscal rule (spending only the GPFG’s expected real return):
  - Fiscal rule evolution: expected real return spending rule set at 4 percent until early 2017; revised to 3 percent in early 2017.
  - IFNW implied by adhering to the fiscal rule ad infinitum: 44 percent of mainland GDP (reported also as “slightly over 60 percent” in another comparison under specific assumptions; note: several IFNW outcome figures are reported across scenarios—baseline adherence cited yields IFNW of 44 percent).
  - Continued adherence to the fiscal rule would achieve a positive IFNW of slightly over 60 percent of mainland GDP in stress-test interpretation (scenario-dependent statement).
- Frontloaded adjustment:
  - A hypothetical frontloaded adjustment of 5 percent of mainland GDP would achieve the same boost to IFNW as adherence to the fiscal rule from the 2030s onwards.
  - A hypothetical one-time fiscal consolidation of savings of 4 percent of mainland GDP implemented relatively soon would be sufficient to bring IFNW to zero (alternate consolidation sizing reported).
  - Permanent savings of 1 percentage point of mainland GDP starting in 2024 would improve the intertemporal component—and thereby IFNW—by 60 percent of mainland GDP.
  - Permanent fiscal adjustment of 1 percent of mainland GDP by 2024 improves IFNW by 60 percentage points of mainland GDP.
- Timing trade-offs:
  - A one-time consolidation of 5 percent of mainland GDP by 2024 would put Norway into the middle of the desirable buffer range (IFNW: +60, as illustrated).
  - If a one-time consolidation were delayed until 2034, it would need to be 0.6–0.7 percent of mainland GDP larger to reach an IFNW of 60 percent of mainland GDP.
  - Gradual consolidation of about 2 percent of mainland GDP phased in over the medium term likely leads to the most stable fiscal path, reducing non-oil deficits to around 5½–6 percent of mainland GDP and maintaining IFNW in the prudent buffer range under baseline assumptions.

### Expenditure composition, benchmarking, and areas for savings
- Primary expenditure comparisons:
  - When measured as percent of overall GDP (including oil), Norway’s primary expenditure stands moderately below the average of the three other Nordic countries.
  - If expressed as a percentage of mainland GDP, primary expenditure in Norway would be 7½ percentage points higher than in Nordic peers.
- Specific spending deviations:
  - Transport spending is more than 1 percent of GDP higher than Nordic peers.
  - Sickness and disability spending is very high at 8 percent of mainland GDP and exceeds peers by a large margin.
  - Health care spending: Norway spends 1 percentage point of GDP more on health care than other Nordics on average; baseline nominal health care cost growth is 4½ percent annually during 2024–53.
- Policy levers for savings:
  - Tightening eligibility and reducing incidence for disability pensions.
  - Controlling health care costs closely over the next decades.
  - Reviewing transport and hospital services for potential savings.
  - Improving public sector efficiency and conducting expenditure reviews to keep expenditure growth below nominal GDP growth.

### Risks, hedges, and robustness considerations
- Volatility drivers:
  - Static net worth volatility mainly from fluctuations in oil and gas prices and in asset prices.
  - Natural hedges:
    - NOK tends to depreciate when oil prices fall, offsetting falling asset prices in NOK terms.
    - Oil price increases raise value of remaining oil and gas deposits but can diminish GPFG value in NOK terms via NOK appreciation.
    - These hedges may weaken as oil reserves decline.
- Risks and consequences:
  - A correction in global asset prices is a risk; asset valuations are high by many measures and a correction or lower returns are possible.
  - Net inflows into the GPFG are now negative because of high nonoil fiscal deficits; a severe asset price bust would likely decrease GPFG value considerably and imply that the 3-percent fiscal rule would require fiscal tightening over the longer term.
  - Mismatched risks from asynchronous changes in assets and pension liabilities as oil reserves are extracted and converted to financial wealth.
- Sensitivity and uncertainty in IFNW:
  - IFNW is sensitive to financial market valuations, assumptions about oil prices, oil production trajectories, productivity, employment, and health care cost growth.
  - Intertemporal balance sheet equals difference between two large PV figures, making it sensitive to small changes in assumptions; therefore useful for scenario analysis rather than as a precise point estimate.

### Recommended policy directions (quantified and qualitative)
- Implement credible fiscal rules or credible commitments to existing rules (e.g., the 3-percent rule) to bolster long-run sustainability.
- Begin reforms early to avoid larger adjustment needs later; Norway’s large static net worth provides leeway to smooth needed adjustments over time.
- Prioritize public sector efficiency improvements and health care cost control; relatively small but continuous efficiency gains can have large impacts.
- Consider gradual consolidation during the current upcycle (examples: phasing in about 2 percent of mainland GDP) to reduce future consolidation pressures and support competitiveness.
- Avoid reacting to single-year asset-price–induced plunges in net worth; act if net worth stays persistently depressed.

*Source: IMF staff—Annex I, Annexes II–III, and selected sections from wp18190 (excerpt).*

### Annex I. Static Public Sector Balance Sheet—Data and Methodology ................................. 38

### Annex I. Static Public Sector Balance Sheet—Data and Methodology

### Overview and purpose of public sector balance sheet analysis
- Public sector balance sheet aggregates the present value of all public assets and liabilities and the future fiscal path to judge long-term fiscal sustainability.
- Two-step approach:
  - Derive a static balance sheet (data and compilation described in Annex I).
  - Augment the static balance sheet with net present values of all future fiscal balances to obtain an intertemporal balance sheet (IFNW), then subject it to stress tests to determine a prudent fiscal buffer.
- Advantages:
  - Accounts for offsetting effects of public investment (debt increase vs asset accumulation and future revenues).
  - Provides a broader concept of government net worth superior to simple debt sustainability analyses and more informative for policy decisions.
  - Particularly important for Norway given substantial public sector assets.

### Key components included in the static public sector balance sheet
- Assets:
  - Public buildings, infrastructure, and land.
  - Present value of remaining oil and gas reserves to be extracted over coming decades.
  - Government Pension Fund Global (GPFG) assets (size noted below).
- Public corporations:
  - Includes financial and non-financial public corporations—enterprises over which the state directly exerts control.
  - Captures revenues and risks (quasi-fiscal deficits, explicit/implicit support) not recorded in general government statistics.
- Existing pension liabilities:
  - Obligations related to work already performed (pay-as-you-go system funded by government contributions and payouts).

### Numerical findings and key statistics (preserve source numbers exactly)
- Static public sector net worth for Norway stood around 340 percent of mainland GDP as of 2017.
- GPFG assets made up just over 300 percent of mainland Norway’s GDP at end-2017.
- The GPFG’s annual real yield on a Norwegian krone basis was 5.8 percent on average over the past two decades.
- The 2017 structural non-oil deficit has come close to 8 percent of mainland GDP.
- Non-oil fiscal deficits were less than 2 percent of mainland GDP in the early 2000s and have risen to close to 8 percent of mainland GDP—an expansion of more than 6 percentage points of mainland GDP since the late 1990s.
- In a passive baseline scenario wherein deficits increase one-to-one in line with aging costs, Norway’s IFNW would be negative at close to -240 percent of mainland GDP.
- Continued adherence to the fiscal rule would achieve a positive IFNW of slightly over 60 percent of mainland GDP.
- A hypothetical frontloaded adjustment of 5 percent of mainland GDP would achieve the same boost to IFNW as adherence to the fiscal rule from the 2030s onwards.
- Fiscal rule evolution:
  - Expected real return spending rule set at 4 percent until early 2017; revised to 3 percent in early 2017.
- GPFG operational facts:
  - First net transfer to the GPFG occurred in 1996.
  - During 2014–17, the GPFG’s investment returns outstripped its oil revenue inflows by a factor of 2.6.
  - During 2016 and 2017, withdrawals from the GPFG to finance the government non-oil deficit were for the first time higher than inflows to the fund from petroleum sales.
- Public-sector fiscal dynamics:
  - Over the past two decades, GPFG returns were high due to positive financial market trends.
  - Public sector wages expanded faster than in peer countries during the period of expanded fiscal use of the GPFG.

### Interpretation and policy implications
- Static vs intertemporal outcomes:
  - Despite a highly positive static fiscal position (around 340 percent of mainland GDP), IFNW is negative under a passive aging-inclusive baseline (close to -240 percent of mainland GDP).
  - The divergence arises from rising non-oil fiscal deficits and mounting aging costs.
- Policy choices:
  - Fiscal action to address aging pressures will ultimately be necessary because IFNW reflects an intertemporal budget constraint.
  - Continued adherence to the fiscal rule (spending only the GPFG’s expected real return, currently 3 percent) is projected to require significant fiscal adjustment from the 2030s onwards and would yield a positive IFNW of slightly over 60 percent of mainland GDP, providing a sufficient buffer per stress-test findings.
  - A hypothetical frontloaded adjustment of 5 percent of mainland GDP would preempt future consolidation needs and achieve a comparable improvement in IFNW immediately.
- Trade-offs and considerations:
  - Higher fiscal spending out of oil revenues raises risks of reducing competitiveness, including via higher domestic wages; such effects should be weighed when designing fiscal policy.
  - Norway’s large static net worth provides leeway to smooth needed adjustments over time.
  - The balance sheet approach highlights areas for potential savings by benchmarking fiscal expenditures to peers (e.g., Finland) and helps avoid creative accounting that obscures true fiscal position.

### Comparative context and robustness considerations
- Cross-country perspective:
  - Finland’s recent public sector balance sheet (Brede and Henn, 2018) shows the reverse pattern: negative static net worth but slightly positive IFNW.
  - Forthcoming IMF Fiscal Monitor expansion of fiscal balance sheet analyses will allow broader international comparisons.
- Sensitivities and uncertainties:
  - IFNW is sensitive to financial market valuations, assumptions about oil prices, and oil production trajectories.
  - The intertemporal balance sheet requires numerous assumptions about future fiscal paths and is subject to considerable uncertainty; it is therefore particularly useful for scenario analysis rather than point estimates.

*Source: IMF staff—Annex I. Static Public Sector Balance Sheet—Data and Methodology (excerpt).*

### 15.      These deficits could rise further—subject to performance of the GPFG. For the

### 15.      These deficits could rise further—subject to performance of the GPFG. For the

### Projected deficits and GPFG performance
- The Norwegian authorities project that the 3 percent rule would imply that deficits could remain broadly constant as a percentage of mainland GDP for the next years.
- Past forecasts have consistently underpredicted the future GPFG asset stock, partly due to better-than-expected global asset price developments.
- If the pattern of GPFG overperformance were to continue and spending were to evolve in line with the fiscal rule, deficits could rise further.

### B. Structure of Norway’s Static PSBS in 2017
- Static public sector net worth at end-2017: 342 percent of mainland GDP.
- Largest assets:
  - GPFG and remaining oil and gas deposits are the largest assets.
  - General government nonfinancial assets: 237 percent of mainland GDP.
    - Present value of remaining oil and gas deposits: 149 percent of mainland GDP (calculated using the Norwegian Ministry of Finance’s projections consistent with a long-term oil price of around US$60 per barrel and a nominal discount rate of 5 percent).
    - General government nonfinancial assets other than oil and gas: close to 90 percent of mainland GDP; mainly buildings and other physical infrastructure.
- Financial assets:
  - General government financial assets: 366 percent of mainland GDP.
  - GPFG share of general government financial assets: 303 percent of mainland GDP.
  - GPFG asset composition as of end-2017:
    - 66.6 percent equities
    - 30.8 percent fixed-income investments
    - 2.6 percent unlisted real estate investments
  - Financial assets outside the GPFG: 8 percent of mainland GDP (non-consolidated; see note).
  - Other financial assets outside GPFG: loans and debt securities: 41 percent of mainland GDP; deposits and accounts receivable: 18 percent of mainland GDP.
- Public corporations and central bank:
  - Contribution to static net worth: almost 50 percent of mainland GDP.
  - Equity of nonfinancial public corporations including the central bank: about 48 percent of mainland GDP (thereof, 8½ percent of mainland GDP are accounted for by the central bank).
  - Assets of nonfinancial public corporations including the central bank: 151 percent of mainland GDP.
  - Liabilities of nonfinancial public corporations including the central bank: 103 percent of mainland GDP.
  - More than two thirds of public corporations’ assets are financial in nature.
  - Largest public corporations: Equinor (formerly Statoil), Telenor, Statkraft.
    - At end-2016 total value of equity: Equinor 18.9 percent of mainland GDP; Telenor 7.1 percent of mainland GDP; Statkraft 2.7 percent of mainland GDP.
- Liabilities:
  - Existing pension liabilities (relating to work performed until end-2017): 252 percent of mainland GDP (largest liability).
  - Other liabilities of the general government: 58 percent of mainland GDP.
    - Debt securities: 24 percent of mainland GDP.
    - Loans and accounts payable: 25 percent of mainland GDP.
    - (Another) debt securities item: 9 percent of mainland GDP.
  - Nominal mainland GDP (NOK billions): 2,803.8 (memorandum item).

### C. Evolution of Norway’s Static Net Worth and Risks and Hedges in Norway’s Static PSBS
- Volatility drivers:
  - Volatility in static net worth mainly from fluctuations in oil and gas prices and in asset prices.
  - Policymakers should avoid reacting to single-year fluctuations and instead prepare reforms adaptable to many scenarios.
  - Gradual, forward-looking reforms are advisable; maintaining spending increases below nominal GDP growth may suffice if introduced early.
- Three oil-price periods and static net worth behavior:
  - 1995–2003 (low oil prices): static net worth fluctuated around 100–110 percent of mainland GDP.
    - GPFG grew to 65 percent of mainland GDP by end of period.
    - Spot oil prices rose from US$17 to US$28 per barrel between 1995 and 2003.
    - Present value of remaining oil and gas deposits was 9 percent higher in 2003 than in 1995 in NOK terms; nominal mainland GDP increased by 58 percent over the same period.
  - 2004–13 (high oil prices): static net worth rose to 480 percent of mainland GDP.
    - GPFG grew by 85 percent of mainland GDP from new inflows.
    - Asset price rises contributed another 58 percent of mainland GDP to GPFG.
    - Other items added 36 percent of mainland GDP, mainly from public corporations’ asset accumulation.
    - Revaluation in present value of remaining petroleum reserves added some 200 percent of mainland GDP.
  - 2014–17 (moderate oil prices): lower oil prices decreased static net worth, but high GPFG asset returns cushioned the fall.
    - Post-2014 oil price decline depressed net worth by close to 240 percent of mainland GDP.
    - GPFG’s asset value increased by 95 percent of mainland GDP during the same period due to global asset price increases, even as net inflows halted because of expanding fiscal deficits.
- GPFG returns and natural hedges:
  - Annual changes in GPFG value have been quite stable over time; even during 2008 and 2009 GPFG grew by more than 10 percent each year.
  - Natural hedge 1: NOK tends to depreciate when oil prices fall; oil price declines often coincide with global slowdowns and falling asset prices, so krone depreciation offsets falling asset prices in NOK terms.
  - Natural hedge 2: Oil price increases raise value of remaining oil and gas deposits but can diminish GPFG value in NOK terms via NOK appreciation.
  - These hedges may weaken as oil reserves decline, increasing exposure to asset price fluctuations.
- Implications of continued GPFG overperformance:
  - Higher global asset valuations would make Norway richer but pose fiscal challenges:
    - The 3-percent fiscal rule would become laxer in nominal terms.
    - Without policy change, higher nonoil deficits could result, potentially elevating competitiveness concerns given already high wage levels and making later consolidation more difficult.
- Risks:
  - A correction in global asset prices constitutes a risk; asset valuations are high by many measures and a correction or lower returns are possible.
  - Net inflows into the GPFG are now negative because of high nonoil fiscal deficits; a severe asset price bust would likely decrease GPFG value considerably and imply that the 3-percent fiscal rule would require fiscal tightening over the longer term, potentially weighing temporarily on growth.
  - Mismatched risks from asynchronous changes in assets and pension liabilities:
    - Public pension liabilities in nominal terms increase gradually and will do so more rapidly as Norway shifts to a prolonged adverse aging trend.
    - Much of Norway’s assets are subject to financial market and oil price fluctuations; the importance of financial market fluctuations will increase relative to oil prices as oil reserves are extracted and converted to financial wealth.
- Historical forecast performance:
  - Historical forecasts for the GPFG asset stock have tended to underpredict actual outcomes; figure shows multiple National Budget (NB) forecasts versus actual, indicating upward surprises in GPFG asset stock.

*Source: wp18190 (PDF chapter/section content).*

### 30.      The intertemporal balance sheet adds present values of future revenues and

### 30.      The intertemporal balance sheet adds present values of future revenues and 

### Overview
- The intertemporal balance sheet augments the static balance sheet by adding present values (PVs) of future revenues and expenditures, recognizing governments’ power to raise taxes and the need to finance future expenditures.
- The intertemporal component is the PV of all future primary balances projected to infinity, adjusted to exclude expenditures on existing pensions and oil revenues and GPFG yields that are included in static net worth.

### Uncertainty and sensitivity
- The intertemporal balance sheet is subject to considerably more uncertainty than the static balance sheet because:
  - Assumptions on future fiscal paths and underlying macroeconomic variables are required.
  - Net worth equals the difference between two large gross PV figures (PVs of all future revenues and expenditures), making it sensitive to small changes in underlying flows.
- Consequence: moderate but permanent policy changes can have large impacts; conversely, small changes in assumptions can materially affect IFNW.

### Key modeling assumptions and baseline methodology
- WEO projections (April 2018) for Norway are extended through 2023 and supplemented with asset price projections; long-term projections beyond 2023 rely on simple growth accounting.
- Long-term real mainland GDP growth assumed to stabilize at around 1½–1¾ percent, driven by:
  - Annual labor productivity growth of 1¼ percent.
  - Employment growth of 0.3–0.5 percent.
- Employment growth is based on authorities’ labor force projections (population projections combined with labor force participation rates by gender, age, and migration background).
- Fiscal revenues assumed to remain constant relative to mainland GDP; expenditure ratio assumed to vary only in response to aging costs.
- IFNW excludes non-financial assets other than the value of remaining oil and gas deposits to avoid double counting, because most public non-financial assets facilitate economic activity and tax revenue generation and are difficult to sell without hurting long-run revenue flows.

### IFNW baseline results and comparison to Finland
- Norway’s IFNW in 2017: negative at close to -240 percent of mainland GDP.
- Norway’s intertemporal component in 2017: about -450 percent of mainland GDP.
- PV estimates (2017, percent of mainland GDP):
  - PV of future revenues: about 3,200 percent of mainland GDP (3,205.5 in table).
  - PV of future primary expenditures: about 3,650 percent of mainland GDP (3,652.1 in table).
  - Expenditure on future pensions: 568.6
  - Health care expenditure (PV): 548.5
  - Long-term care expenditure (PV): 351.1
  - Other primary expenditure (PV): 2,186.9
- About four tenths of the PV of future expenditures is related to aging costs.
- Static net worth and memorandum items (2017, percent of mainland GDP / NOK figure):
  - Static Net Worth: 341.7
  - Nonfinancial assets other than oil/gas deposits: 88.1
  - Public Corporations' Nonfinancial Assets: 44.9
  - Nominal mainland GDP (NOK billions): 2,803.8
- Interpretation:
  - Large GPFG and PV of oil/gas explain Norway’s high static net worth; oil-related wealth adds some 450 percent of mainland GDP to Norway’s static net worth.
  - Excluding oil-related wealth, Norway’s general government nonfinancial assets are comparable to Finland’s.
  - Finland (2017 estimates) has static net worth of about -160 percent of GDP but a positive intertemporal component that results in positive IFNW.
  - Norway’s negative IFNW is driven mostly by high non-age-related primary expenditure: PV close to 2,200 percent of mainland GDP, almost double Finland’s.
- Fiscal implication example:
  - Permanent savings of 1 percentage point of mainland GDP starting in 2024 would improve the intertemporal component—and thereby IFNW—by 60 percent of mainland GDP.
  - A hypothetical one-time fiscal consolidation of savings of 4 percent of mainland GDP implemented relatively soon would be sufficient to bring IFNW to zero.

### Stress test and prudent IFNW buffer
- Rationale: targeting IFNW = 0 may be insufficient; a buffer is prudent to withstand shocks and maintain positive IFNW.
- Calibrated moderately severe shock: average of two recent crises (late 1980s Nordic Banking crisis and the Global Financial Crisis of 2008–09).
  - Shock assumptions include:
    - Real mainland GDP falls 5½ percent below the baseline.
    - In 2019, global equity prices fall by some 25 percent and housing prices by some 20 percent, with mean reversion after the crisis.
  - Stress tests exclude banking sector contingent liabilities given Norwegian banks’ high capital buffers.
- Stress test results (comparison of baseline and stress without/with post-crisis policy adjustment in 2023):
  - An IFNW buffer of around 95 percent of mainland GDP would allow Norway to withstand a severe shock without the need for post-crisis fiscal adjustment.
    - The 2023 IFNW absent any post-crisis policy adjustment would be 95 percent of mainland GDP lower than baseline.
  - An IFNW buffer of approximately 25 percent of mainland GDP would be sufficient to offset the deterioration in net worth of the crisis years but would require post-crisis consolidation to return fiscal balances to baseline.
  - The stress-with-post-crisis-adjustment scenario assumes fiscal consolidation in 2024 to return fiscal balances to the baseline path; IFNW under this assumption would be 25 percent lower than the baseline.

### Scenario analysis: asset and oil price sensitivities and policy levers
- Scenarios explore alternative asset returns, asset stock changes, production, and oil price shifts, plus domestic policy-controllable variables.
- Key scenario impacts on IFNW (all percent of mainland GDP unless otherwise noted):
  - GPFG real yield scenarios (baseline yield = 3 percent):
    - 2 percent real yield → IFNW decreases by 100 percentage points to -339 percent of mainland GDP.
    - 4 percent real yield → IFNW rises to -75 percent of mainland GDP.
  - GPFG asset stock one-off change (value at end-2017 ≈ 300 percent of mainland GDP):
    - One-time increase or decrease in GPFG value by 20 percent in 2018 → IFNW rises or falls by 60 percent of mainland GDP.
  - Higher oil/gas production (production remains around present level until end-2040s, then declines as in baseline) → IFNW increases by about 65 percent of mainland GDP.
  - Higher/lower oil/gas prices (permanent ±100 krone ≈ US$12 from 2024 forward) → IFNW boosts or diminishes by about 25 percent of mainland GDP.
    - For oil prices alone to reach the lower end of the prudent buffer range, spot price per barrel would need to reach about 180 U.S. dollars (an unprecedented level).
- Note: Scenarios abstract from interactions such as extraction speed changes induced by price shifts; extraction brought forward during high prices could increase positive impact.

*Source: IMF Staff calculations and estimations based on the provided chapter text.*

### 46.      On the one hand, this first set of scenarios suggests that policy action will likely

### wp18190 - 46.      On the one hand, this first set of scenarios suggests that policy action will likely

### Scenario analysis: external environment and macroeconomic assumptions
- Baseline IFNW: about -240 percent of mainland GDP.
- External-environment scenarios:
  - Good external environment alone would be unlikely to lift IFNW to the prudent buffer range.
  - Buffer needed to withstand a major shock with positive IFNW: 25-95 percent of mainland GDP.
- Productivity scenarios:
  - Baseline assumes 1¼ percent annual economy-wide labor productivity growth from 2024 onwards.
  - Scenario assumes a permanent increase or decrease of ½ percentage point relative to the baseline.
  - Higher productivity: IFNW would come reasonably close to the zero threshold.
  - Lower productivity (adverse): IFNW would fall to -360 percent of mainland GDP.
- Employment scenarios:
  - Employment growth rates adjusted during 2024–60 to result in 10 percent higher or lower employment by 2060.
  - If 10 percent higher employment were achieved, IFNW would increase by some 65 percent of mainland GDP, but still remain firmly in negative territory.
- Public sector efficiency scenarios:
  - Baseline: annual growth in nominal non-pension expenditures is about 3¾ percent per year in most years after 2024.
  - Scenario: annual growth rate reduced or increased by ¼ percentage point.
  - Upside (more efficient public sector): IFNW would come close to the lower end of the prudent buffer range.
- Health care cost scenarios:
  - Baseline: nominal health care costs increase by 4½ percent annually during 2024–53.
  - Adverse scenario: an additional 1 percentage point nominal growth in health care costs.
  - Adverse outcome: IFNW would decline by about 135 percent of mainland GDP to -372 percent of mainland GDP.
  - Upside outcome: IFNW would be -77 percent of mainland GDP.

### Findings on volatility, timing, and policy flexibility
- Norway’s IFNW can fluctuate substantially year to year owing to large exposure to asset and commodity prices.
- Policymakers should:
  - Not react to short-term fluctuations in IFNW, but respond to longer-term shifts reasonably assumed to be permanent.
  - Use Norway’s high static net worth and strong institutions to implement reforms early to keep aging-driven adjustment needs manageable.
  - If the external environment turns out better than projected, gradually relax fiscal policy while safeguarding buffers.

### Fiscal paths, consolidation scenarios, and implications
- Credible commitment to the 3-percent rule:
  - Would guarantee long-run fiscal sustainability.
  - Would generate an IFNW of 44 percent of mainland GDP.
  - The rule implies very limited consolidation over the next 15 years, with steeper consolidation later; the rule could be accommodated until 2029 and would then require consolidation in step with aging pressures until the early 2040s.
- Early consolidation:
  - Permanent fiscal adjustment of 1 percent of mainland GDP by 2024 would improve IFNW by 60 percentage points of mainland GDP.
  - A hypothetical one-time consolidation of 5 percent of mainland GDP by 2024 would put Norway into the middle of the desirable buffer range (IFNW: +60, as illustrated).
  - If such a one-time consolidation were delayed until 2034, it would need to be 0.6–0.7 percent of mainland GDP larger to reach an IFNW of 60 percent of mainland GDP.
- Gradual consolidation:
  - Gradually consolidating earlier—by about 2 percent of mainland GDP—would deliver a more stable intertemporal fiscal path.
  - Phasing in a 2 percent consolidation over the medium term likely leads to the most stable fiscal path.
  - This would reduce non-oil deficits to around 5½–6 percent of mainland GDP and could be maintained over this century under baseline assumptions while retaining IFNW in the prudent buffer range.
- Other fiscal considerations:
  - The current upcycle provides an opportunity to partly reverse the fiscal stimulus of 2½ percent of mainland GDP induced during 2014–17.
  - Improving public sector efficiency (e.g., regular public expenditure reviews) could realize savings and help keep expenditure growth below nominal GDP growth for some years.

### Expenditure composition, benchmarking, and areas for savings
- Primary expenditure comparisons:
  - When measured as percent of overall GDP (including oil), Norway’s primary expenditure stands moderately below the average of the three other Nordic countries.
  - If expressed as a percentage of mainland GDP, primary expenditure in Norway would be 7½ percentage points higher than in Nordic peers.
- Specific spending areas:
  - General public services spending is in line with the Nordic average, but transport spending is more than 1 percent of GDP higher than Nordic peers.
  - Social spending is below the Nordic average because pension spending is currently low, but spending on sickness and disability is very high at 8 percent of mainland GDP and exceeds peers by a large margin.
  - Health care spending: Norway spends 1 percentage point of GDP more on health care than other Nordics on average; baseline nominal health care cost growth is 4½ percent annually during 2024–53.
- Policy levers implied:
  - Tightening eligibility and reducing incidence for disability pensions (eligibility criteria historically lax) could contain sickness and disability spending.
  - Controlling health care costs closely over the next decades is important for fiscal sustainability.
  - Potential savings in transport and hospital services merit review.

### Conclusions and policy recommendations
- The public sector balance sheet approach provides a comprehensive framework to assess long-run fiscal sustainability, combining static net worth (including government assets, public corporations, and pension liabilities) and intertemporal financial net worth (IFNW).
- Key quantified summary:
  - Static net worth: some 340 percent of mainland GDP.
  - IFNW: about -240 percent of mainland GDP.
- Implications:
  - Norway has not oversaved; further actions will ultimately be needed to address aging pressures because current nonoil deficits are already large and aging is beginning.
  - Governments should abstain from immediate reactions to asset-price–induced plunges in net worth, but stand ready to act if net worth stays persistently depressed.
- Recommended policy directions:
  - Implement credible fiscal rules or credible commitments to existing rules (e.g., the 3-percent rule) to bolster long-run sustainability.
  - Begin reforms early to avoid larger adjustment needs later.
  - Prioritize public sector efficiency improvements and health care cost control.
  - Consider gradual consolidation during the current upcycle to reduce future consolidation pressures and support competitiveness.

*Source: IMF staff analysis in wp18190 (excerpt provided).*

### 59.      For Norway, a positive intertemporal financial net worth in the range of

### wp18190 - 59.      For Norway, a positive intertemporal financial net worth in the range of

### Desirable IFNW buffer and shock-absorption scenarios
- A positive intertemporal financial net worth (IFNW) in the range of 25-95 percent of mainland GDP would be desirable for Norway.
- A buffer at the lower end of this range could absorb the immediate impact of a large shock while maintaining positive IFNW, but would require fiscal adjustments after the crisis to bring fiscal balances back onto the projected baseline.
- A buffer of 95 percent of mainland GDP would be sufficient to weather a large shock without need for subsequent fiscal adjustment, while maintaining a positive IFNW.

### Fiscal rule, implied IFNW, and rule change effects
- The IFNW implied by adhering to Norway’s fiscal rule ad infinitum lies within the prudent buffer range at 44 percent of mainland GDP.
- The switch in 2017 from a 4 percent to a 3 percent rule, undertaken in response to the recommendations of the Thøgersen commission (Norwegian Government, 2015), is described as very favorable: it stabilizes the fiscal path considerably over the next two decades.
- While the 3-percent rule envisages little consolidation over the next fifteen years—when aging pressures are most intense—it implies that consolidation has to exceed increases in aging costs thereafter.

### Benefits of earlier consolidation and competitiveness considerations
- Undertaking some fiscal consolidation earlier would:
  - send an earlier signal that fiscal policy is committed to maintaining IFNW in the prudent buffer range;
  - generate an even more stable long-term fiscal path and reduce needs to realize savings in the future;
  - help keep competitiveness concerns at bay by helping to contain wage pressures and by reducing the footprint of the government on the economy.
- Norway’s large assets and strong institutions mean it could defer consolidation, but economic upswings provide opportunities to make headway.

### Public sector efficiency and policy priorities
- Enhancing public sector efficiency and exploring savings potential in specific areas, and keeping a vibrant economy, would safeguard fiscal sustainability.
- Scenario analysis suggests that relatively small but continuous efficiency improvements in public services and health care delivery can have large impacts on fiscal sustainability.
- Benchmarking versus peers suggests potential for fiscal savings in several areas, including transport, disability allowances, and health care spending.
- Policies to underpin high employment and productivity—enhancing work incentives and incentivizing innovation—are paramount to continue generating needed revenues to underpin Norway’s social model.

### International perspective and forthcoming analyses
- Comparison to Finland (Brede and Henn, 2018) shows Finland’s IFNW is slightly positive, while Norway’s is negative in that comparison—intuitive given Finland’s much lower fiscal deficits and that it has already absorbed some aging pressures.
- The IMF’s October 2018 Fiscal Monitor (IMF, 2018) will provide static balance sheets for a larger series of countries to inform comparisons.
- The authors hope such work incentivizes governments to put in place reporting systems to compile balance sheets and use them in charting fiscal paths.

### Annex I — Data and methodology highlights (static public sector balance sheet)
- Constructing a public sector balance sheet is data intensive; Norway’s good data reporting aided the exercise but adjustments and estimations were necessary.
- Non-financial assets
  - Used Statistics Norway’s data on fixed assets supplemented with land holdings.
  - Time series available through 2017 (Statistics Norway Table 09181); breakdown by asset type through 2015 (Statistics Norway Table 11189).
  - Data on land holdings available only for 2012–14 from Eurostat and suggest land holdings were worth about 12 percent of mainland GDP in 2014.
  - For years before and after 2012–14, the value of land holdings was extrapolated by assuming it remained constant as a percentage of mainland GDP.
  - Valuation basis for non-financial assets in Statistics Norway is depreciated replacement cost at market prices; Perpetual Inventory Method (PIM) used to estimate capital stock of fixed assets and consumption of fixed capital.
- Present value of oil and gas reserves
  - Supplement non-resource non-financial assets with the present value of oil and gas reserves remaining in the ground.
  - To compute present value at end-2017 and future years, used estimates on state net cash flows from petroleum production through 2085 provided by the Norwegian Ministry of Finance.
  - For 2016 and before, computed present value using projected petroleum production volumes from the Norwegian Petroleum Directorate’s Resource Reports and oil and gas prices from the corresponding vintage of the IMF World Economic Outlook (WEO) projections.
  - Translated total petroleum production value into the state’s net revenue using historic ratios; used a 5 percent discount rate to compute present values.
  - Assumed petroleum production would cease in 2090 and used linear intrapolation to derive estimates for oil revenues for the years between 2085 and 2090.
  - The Ministry’s underlying data assume oil price of around US$60, specifically of 519 NOK per barrel in 2018 and NOK 484 in 2019.
  - Noted that the July 2018 WEO update would increase prices in 2018 and 2019 by about 15 and 5 percent, respectively, but long-run prices from the early 2020s onwards are projected slightly lower than in the April 2018 WEO; deviating to reflect the May/June 2018 uptick would not materially change results.
- Double counting considerations with SDFI and public corporations
  - The government’s State Direct Financial Interest (SDFI) implies a direct participation in extraction; since present value of all revenue flows from oil and gas is accounted for, the value of oil production licenses of the SDFI (reported as equity investments) must be excluded to avoid double counting.
  - These SDFI licenses are reported at 7 percent of mainland GDP in 2017.
  - Examined Equinor’s balance sheet and found it does not include value of the oil/gas directly; assets relate largely to extraction infrastructure. The government’s 67 percent stake in Equinor is not used to correct public corporation values; the stake was valued at 12.7 percent of mainland GDP at end 2016 and does not change conclusions.
- Financial assets and liabilities
  - Detailed consolidated financial accounts for general government taken from Statistics Norway (Table 10788) and Eurostat; data include GPFG holdings.
  - For presentation, added a breakdown into assets held by the GPFG and the general government at large using data from Norges Bank Investment Management.
- Public corporations and Norges Bank
  - Balance sheet data on non-financial public corporations available from Statistics Norway (Tables 07865 and 05419) from 1999 onwards; extrapolated 1995–98 by maintaining 1999 ratios to mainland GDP.
  - Data are not fully consolidated among public enterprises or between public enterprises and general government; total public sector assets and liabilities may be inflated, but net worth measures are unaffected.
  - Added Norges Bank’s assets and liabilities based on its annual reports and IMF Monetary and Financial Statistics.
- Financial public corporations and government stakes
  - Financial public corporations were not considered separately due to limited published balance sheet data; these institutions are relatively small.
  - Government holds a 34 percent stake in DNB but does not exert active control; thus the stake is included as an equity investment in general government assets rather than as part of public corporations.
- Pension liabilities: existing vs future
  - Obtained projected total pension expenditures through 2100 from the Norwegian Ministry of Finance and split into “existing” (included in the static balance sheet) and “future” (included in the intertemporal component).
  - Existing pension liabilities pertain to work performed up to the present and are included in the static balance sheet; future pension liabilities arise from work performed from this point forward.
  - Statistics Norway provided estimates of how much of all future pension expenditure in each year from 2018 onwards relates to work performed up to 2017; used these to compute present value of existing pension in 2017.
  - Example: existing pension liabilities accrued until 2017 account for 96 percent of all pension expenditure for 2018 (and the remaining 4 percent pertain to pensions of persons retiring in 2018); this proportion is used to compute present values for other years.
  - The breakdown into existing and future pension liabilities does not affect intertemporal net worth measures, as IFNW depends on the sum of existing and future pension liabilities.

*IMF Working Paper content (wp18190), selected sections and annex material as provided in the source content.*

### 12.      To obtain present values of future pension liabilities, assumptions on an

### wp18190 - 12.      To obtain present values of future pension liabilities, assumptions on an

### Discount rate and present value of pension liabilities
- A nominal discount rate of 5 percent is used to obtain present values of future pension liabilities.
- Rationale:
  - Norges Bank inflation target (and many other advanced country central banks): 2 percent.
  - Expected real long-term return on a balanced asset portfolio: around 3 percent.
  - Norges Bank studies on expected real return of the GPFG’s balanced portfolio referenced (see Norges Bank, 2016, and references therein).

### Consolidation: purpose and scope
- Purpose: eliminate cross-holdings between entities of the public sector so that liabilities of one public sector entity held as assets by another are removed, shortening the public sector balance sheet but not affecting net worth measures.
- Public sector composition: general government (GG), public sector corporations, and the central bank.
- Consolidation types: across subsectors and within subsectors.
- Within-subsector consolidation:
  - Already performed by Statistics Norway for general government (eliminating cross-holdings between central government (CG) and local government (LG)).
  - Not an issue for the central bank (single entity).
  - For public corporations, Statistics Norway data are not consolidated and creditor-debtor relationship data among them are unavailable; assets and liabilities of public corporations’ sector are likely inflated, but net worth measures remain primary and unaffected.

### Consolidation across subsectors — five specific eliminations (with 2017 impact)
- Equity of CG-owned public corporations:
  - Excluded from liabilities of public corporations and from equity investment assets of general government.
  - In 2017, reduces both items by NOK 840 billion (30 percent of mainland GDP).
  - Data source: State Ownership Reports (Norwegian Ministry of Trade, Industry and Fisheries, various years).
- Equity of LG-owned public corporations:
  - Excluded from both liabilities of public corporations and equity investment assets of general government.
  - In 2017, reduces both items by NOK 78 billion (3 percent of mainland GDP).
  - Data source: Statistics Norway for 2015–17; values extrapolated back in time using the same growth rate as CG’s equity holdings in public corporations.
- Equity of the central bank:
  - Excluded from financial liabilities of public corporations and equity investment assets of general government.
  - In 2017, reduces both items by NOK 252 billion (9 percent of mainland GDP).
  - Data source: IMF’s Monetary and Financial Statistics.
- General government deposits at the central bank:
  - Eliminated from general government financial assets and financial liabilities of the central bank.
  - In 2017, reduces both items by NOK 163 billion (6 percent of mainland GDP).
  - Data source: IMF’s Monetary and Financial Statistics.
- General government securities held by the central bank:
  - Central bank has not held government securities since 2004; limited amounts before then are eliminated for years before 2004.
  - For 2003, eliminates NOK 23 billion (2 percent of mainland GDP) from both general government financial liabilities and financial assets of the central bank.
  - Data source: IMF’s Monetary and Financial Statistics.

### Additional elimination to avoid double counting
- Petroleum production licenses held by the State Direct Financial Interest:
  - Value of these licenses is included in general government equity assets by Statistics Norway (7 percent of mainland GDP in 2017).
  - Eliminated from general government equity assets in this analysis to avoid double counting, because a present value estimate for all future government revenues from remaining oil and gas deposits is already included.

*Source: IMF staff analysis as presented in the provided content.*

### ANNEX II — Projections underlying the Intertemporal Balance Sheet (PSBS)

#### Medium-term projections (through 2023) — approach
- Baseline forward projection uses macroeconomic framework underlying the April 2018 WEO, updated to reflect developments up to May 2018.
- Over the medium term:
  - Real mainland GDP projected to grow by 2–2½ percent annually.
  - Employment growth around 1 percent per year.
  - Unemployment returns to estimated NAIRU of 3¾ percent.
- Additional assumptions needed to project asset and liability stocks.

#### Assumptions on future asset and liability transactions
- General government (GG) and GPFG:
  - Start from non-oil fiscal deficit and path of GG gross debt given by April 2018 WEO figures.
  - Gross debt increases in nominal terms to keep broadly constant relative to mainland GDP; entire net increase met by new issuance (valuation effects assumed zero).
  - Financial assets accumulated outside GPFG set at NOK 100 billion for all years until 2023.
  - Withdrawals from GPFG remain near 2017 value given stable non-oil deficits.
  - GPFG nominal annual return assumed at 5 percent; GPFG size remains stable close to 300 percent of mainland GDP.
  - Transactions in GG nonfinancial assets projected using GG investment data from April 2018 WEO.
- Public corporations (excluding central bank):
  - Operating balance held constant at 2016 value of 9¼ percent of mainland GDP.
  - 4¾ percent of mainland GDP invested in non-financial assets (as in 2016).
  - Transactions in financial assets set to zero; remainder used to reduce liabilities.
- Norges Bank operating balance held close to zero (2016 value maintained).

#### Valuation changes (baseline)
- Valuation changes of non-financial assets proxied with the house price index.
- Valuation changes of financial liabilities assumed zero.
- Currency and deposits and other accounts receivable grow by short-term interest rate.
- Debt securities’ valuation varies inversely with the long-term bond yield.
- Valuation gains/losses of equities and financial derivatives projected using 5 percent nominal return (same as GPFG).
- Public corporations’ balance sheets projected using same rules.
- Present value of existing pension liabilities repeated for each year 2018–2023 using procedure from Annex I paragraph 11, splitting future pension expenditure into existing and future work and computing present value of the existing-pension-related stream.

#### Table II.1 — Key Variables under Baseline Assumptions (Percentage change, unless otherwise indicated; Percent of mainland GDP)
- Real mainland GDP growth: 2018: 2.5; 2019: 2.4; 2020: 2.3; 2021: 2.2; 2022: 2.2; 2023: 2.2
- Nominal mainland GDP growth: 2018: 5.3; 2019: 6.6; 2020: 5.7; 2021: 5.2; 2022: 4.8; 2023: 4.6
- CPI inflation: 2018: 1.9; 2019: 2.0; 2020: 2.0; 2021: 2.0; 2022: 2.0; 2023: 2.0
- Employment growth: 2018: 0.8; 2019: 1.1; 2020: 1.1; 2021: 1.1; 2022: 1.1; 2023: 1.1
- Unemployment rate (Percent): 2018: 3.9; 2019: 3.7; 2020: 3.7; 2021: 3.7; 2022: 3.7; 2023: 3.7
- Non‐oil fiscal balance: 2018: ‐7.6; 2019: ‐7.6; 2020: ‐7.6; 2021: ‐7.6; 2022: ‐7.6; 2023: ‐7.6
- Non‐oil primary balance: 2018: ‐8.8; 2019: ‐8.8; 2020: ‐8.8; 2021: ‐8.8; 2022: ‐8.8; 2023: ‐8.8
- Non‐oil revenues: 2018: 49.1; 2019: 49.1; 2020: 49.1; 2021: 49.1; 2022: 49.1; 2023: 49.1
- Expenditure: 2018: 57.9; 2019: 57.9; 2020: 57.9; 2021: 57.9; 2022: 57.9; 2023: 57.9
- Primary expenditure: 2018: 56.7; 2019: 56.7; 2020: 56.7; 2021: 56.7; 2022: 56.7; 2023: 56.7
- Pension expenditure: 2018: 10.5; 2019: 10.6; 2020: 10.7; 2021: 10.8; 2022: 10.9; 2023: 11.0
- Existing pensions: 2018: 10.4; 2019: 10.3; 2020: 10.2; 2021: 10.2; 2022: 10.1; 2023: 10.1
- Future pensions: 2018: 0.1; 2019: 0.3; 2020: 0.5; 2021: 0.6; 2022: 0.8; 2023: 0.9
- Health care expenditure: 2018: 6.7; 2019: 6.7; 2020: 6.6; 2021: 6.7; 2022: 6.8; 2023: 6.9
- Long‐term care expenditure: 2018: 4.1; 2019: 4.1; 2020: 4.2; 2021: 4.2; 2022: 4.2; 2023: 4.2
- Other primary expenditure: 2018: 34.2; 2019: 34.1; 2020: 33.9; 2021: 33.8; 2022: 33.6; 2023: 33.5
- Interest expenditure: 2018: 1.2; 2019: 1.2; 2020: 1.2; 2021: 1.2; 2022: 1.2; 2023: 1.2
- Memorandum item — Nominal mainland GDP (NOK billions): 2018: 2,953; 2019: 3,147; 2020: 3,328; 2021: 3,500; 2022: 3,667; 2023: 3,834
- Note: Percent of mainland GDP for fiscal items; source: Fund staff projections.

#### Long-term projections (beyond 2023) — approach and key assumptions
- Growth accounting based on productivity and labor force projections extended through 2100.
- Long-run potential growth for mainland Norway estimated around 1¾ percent (April 2018 WEO).
- Labor productivity assumed to stabilize around 1¼ percent over the long term (main driver); population growth makes a smaller positive contribution.
- Labor force projections provided by Norwegian Ministry of Finance through 2100, using population projections and participation rates by gender and age; baseline uses version accounting for migration background (more conservative).
- Combining labor productivity and labor force yields real mainland GDP; adding Norges Bank 2 percent inflation target gives nominal mainland GDP.
- Fiscal variables assumed constant ratios relative to mainland GDP, adjusted for increasing age-related expenditure.
  - Non-oil fiscal revenues assumed to remain at projected 2023 level of 49.1 percent of mainland GDP.
  - Other primary expenditures assumed constant at 2023 level of 33.5 percent of mainland GDP.
  - Pension, health, and long-term care expenditures as share of mainland GDP use projections from Norwegian Ministry of Finance out to 2100.
- Present values of future revenues and expenditures calculated using 5 percent nominal discount rate; present values cover period 2018 to infinity, with post-2100 values assumed constant in real terms and treated as a perpetuity.

### ANNEX III — Calibration of the Stress Test

#### Stress scenario design
- Shock timing: assumed to hit in 2019.
- Scenario mirrors average of late 1980s Nordic Banking crisis and Global Financial Crisis (2008–09).
- Assumptions:
  - Real mainland GDP falls by 1.3 percent in 2019 and grows by 0.6 percent in 2020, compared to baseline growth above 2 percent.
  - Relative to medium-term potential growth of 2.2 percent, the stress scenario implies lost growth of 5½ percent.
  - Unemployment peaks at 5.6 percent in 2021 (from slightly below 4 percent in current level).
  - Permanent fall in oil prices of 15 percent relative to baseline.

#### Table III.1 — Key Variables Under Stress Assumptions (Percentage change, unless otherwise indicated; Percent of mainland GDP)
- Real mainland GDP growth: 2018: 2.5; 2019: ‐1.3; 2020: 0.6; 2021: 2.1; 2022: 3.5; 2023: 3.3
- Nominal mainland GDP growth: 2018: 5.3; 2019: 1.2; 2020: 3.1; 2021: 5.2; 2022: 6.5; 2023: 6.0
- CPI inflation: 2018: 1.9; 2019: 0.5; 2020: 1.1; 2021: 2.1; 2022: 2.4; 2023: 2.3
- Employment growth: 2018: 0.8; 2019: 0.2; 2020: ‐0.1; 2021: 1.1; 2022: 2.1; 2023: 1.6
- Unemployment rate (Percent): 2018: 3.9; 2019: 4.5; 2020: 5.6; 2021: 5.6; 2022: 4.7; 2023: 4.2
- Non‐oil fiscal balance: 2018: ‐7.6; 2019: ‐9.3; 2020: ‐9.9; 2021: ‐9.8; 2022: ‐9.2; 2023: ‐8.6
- Non‐oil primary balance: 2018: ‐8.8; 2019: ‐10.5; 2020: ‐11.2; 2021: ‐11.0; 2022: ‐10.4; 2023: ‐9.9
- Non‐oil revenues: 2018: 49.1; 2019: 50.0; 2020: 50.6; 2021: 50.6; 2022: 50.2; 2023: 49.9
- Expenditure: 2018: 57.9; 2019: 60.5; 2020: 61.8; 2021: 61.6; 2022: 60.6; 2023: 59.7
- Primary expenditure: 2018: 56.7; 2019: 59.3; 2020: 60.6; 2021: 60.4; 2022: 59.3; 2023: 58.5
- Pension expenditure: 2018: 10.5; 2019: 11.2; 2020: 11.6; 2021: 11.6; 2022: 11.5; 2023: 11.5
- Existing pensions: 2018: 10.4; 2019: 10.9; 2020: 11.0; 2021: 11.0; 2022: 10.7; 2023: 10.5
- Future pensions: 2018: 0.1; 2019: 0.3; 2020: 0.6; 2021: 0.6; 2022: 0.8; 2023: 1.0
- Health care expenditure: 2018: 6.7; 2019: 7.0; 2020: 7.2; 2021: 7.3; 2022: 7.2; 2023: 7.2
- Long‐term care expenditure: 2018: 4.1; 2019: 4.3; 2020: 4.5; 2021: 4.5; 2022: 4.4; 2023: 4.4
- Other primary expenditure: 2018: 34.2; 2019: 35.5; 2020: 36.0; 2021: 35.7; 2022: 34.9; 2023: 34.2
- Interest expenditure: 2018: 1.2; 2019: 1.3; 2020: 1.3; 2021: 1.3; 2022: 1.3; 2023: 1.2
- Memorandum item — Nominal mainland GDP (NOK billions): 2018: 2,953; 2019: 2,989; 2020: 3,082; 2021: 3,242; 2022: 3,454; 2023: 3,663

*Source: Fund staff projections and estimates as presented in the provided content.*

### 2.      With firms retaining some labor, output falls more than employment in the

### 2.      With firms retaining some labor, output falls more than employment in the

### Macroeconomic impacts of the stress scenario
- Real mainland GDP is assumed to fall by 1.3 percent in 2019 and hardly grow in 2020, before surpassing the baseline as labor is reabsorbed.
- Inflation displays a similar path to GDP: it dips relative to baseline and then rebounds above baseline as the economy recovers.
- Employment is assumed to stagnate in 2019 and 2020, compared to growth about 1 percent in the baseline.
- Unemployment peaks at 5.6 percent in 2021 before gradually returning back to the baseline.
- After the crisis, real mainland GDP converges back toward the baseline, but remains somewhat lower.
- Total labor compensation follows a similar pattern to GDP but the drops in employment and in labor compensation are more muted than that in mainland GDP due to labor retention by firms.
- Because labor compensation drops less than mainland GDP, the non-oil revenue ratio increases in the stress scenario even though revenues fall in nominal krone terms.

### Asset prices and valuation shock calibration
- House prices are assumed to drop in 2019 by about 20 percent in the stress scenario relative to the baseline, followed by a gradual recovery.
- Equity prices are assumed to fall by 25 percent in 2019 in the stress scenario, with a somewhat quicker recovery compared to housing prices.
- Rationale for the 25 percent equity drop:
  - During the GFC, global equities (MSCI All-Country World Equity Index) experienced a larger than 50 percent peak-to-trough decline; the decline between mid-2007 and mid-2010 was 25 percent.
  - The Shiller 10-year trailing price-earnings (PE) ratio for U.S. stocks in the S&P500 index "currently exceeds 30" and "CAPE historical 1888-2018 average: 16.9" are cited; a 25 percent correction would still leave Shiller’s cyclically-adjusted PE measure considerably above its long-run historical average, which could be justified by the low interest rate environment.

### Fiscal implications and scenarios
- The fiscal balance deteriorates under the stress scenario, mainly driven by higher expenditures.
- General government revenues fall in absolute krone terms but initially increase relative to mainland GDP because income taxes fall by less than output due to labor retention.
- Expenditures increase during the crisis on account of automatic stabilizers, such as higher expenditures on unemployment benefits.
- Expenditures remain above the baseline in the long term because:
  - (i) mainland GDP in levels suffers a permanent loss, and
  - (ii) some expenditures’ growth is independent of GDP (e.g., health care expenditures driven by aging remain the same in nominal terms).
- Absent additional post-crisis fiscal consolidation efforts, fiscal deficits would remain elevated compared to the baseline.
- Quantified policy scenario outcomes illustrated:
  - Without any post-crisis fiscal effort, expenditures remain above the baseline path by 1–1¼ percent of mainland GDP.
  - This negatively affects the intertemporal component, so that IFNW would be about 95 percent of mainland GDP lower.
  - If a post-crisis fiscal effort is made to bring expenditures and thereby the fiscal deficit back to baseline, IFNW would only be about 25 percent of mainland GDP lower.

### Historic public sector balance sheets (selected metrics and levels reported in source)
- Static Net Worth (A = B + D − F) examples (percent of mainland GDP): 113.0 (1995), 127.6 (1996), 119.9 (1997), 55.8 (1998), 66.9 (1999), 147.4 (2000), ... 341.7 (2016), [value truncated in source].
- General Government Assets (percent of mainland GDP): 399.7 (1995), 411.4 (1996), 392.6 (1997), 320.3 (1998), 331.4 (1999), 415.8 (2000), ... 603.0 (2017).
- Oil and gas (in ground) as percent of mainland GDP: 269.5 (1995), 277.5 (1996), 256.3 (1997), 185.1 (1998), 190.3 (1999), 247.6 (2000), ... 149.1 (2017).
- GPFG (percent of mainland GDP): 0.0 (1995), 5.3 (1996), 12.0 (1997), 16.8 (1998), 20.7 (1999), 33.8 (2000), ... 302.7 (2017).
- Existing Pension Liabilities (percent of mainland GDP): 272.2 (1995), 272.7 (1996), 267.4 (1997), 262.5 (1998), 263.4 (1999), 261.2 (2000), ... 251.5 (2017).
- Intertemporal Component (G = H − I, percent of mainland GDP): −332.2 (1995), −335.6 (1996), −333.1 (1997), −328.6 (1998), −333.3 (1999), −340.8 (2000), ... −446.6 (2017).
- PV of Future Revenues (H, percent of mainland GDP): 4,947.4 (1995), 4,863.3 (1996), 4,679.8 (1997), 4,514.3 (1998), 4,452.5 (1999), 4,333.9 (2000), ... 3,205.5 (2017).
- PV of Future Primary Expenditures (I, percent of mainland GDP): 5,279.6 (1995), 5,198.9 (1996), 5,012.9 (1997), 4,842.9 (1998), 4,785.8 (1999), 4,674.7 (2000), ... 3,652.1 (2017).
- Intertemporal Financial Net Worth, IFNW (L = A + G − C − E, percent of mainland GDP): −348.7 (1995), −337.3 (1996), −341.1 (1997), −400.1 (1998), −394.5 (1999), −314.6 (2000), ... −237.9 (2017).
- Memorandum item: Nominal mainland GDP (NOK billions): 828.6 (1995), 876.4 (1996), 946.6 (1997), 1,020.1 (1998), 1,074.5 (1999), 1,144.8 (2000), ... 2,803.8 (2017).

*Source: Authors' calculations and estimations based on various data sources (Statistics Norway and Fund Staff estimates as cited in the source).*

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_Source: https://www.imf.org/-/media/files/publications/wp/2018/wp18190.pdf_