(Bloomberg) -- Norway’s growing defense spending will be the main driver of the projected widening in budget shortfall in the coming years, ahead of population aging, according to the country’s Finance Ministry.
Up to 2036, the increased outlays on defense are estimated to be as high as the higher spending on national insurance and health, care and education services combined, the finance ministry in Oslo said Friday in a white paper on the nation’s long-term economic perspectives. While the costs stemming from population aging will be “moderate” in coming years, they will increase beyond the 2030s, it said.
“A new security policy situation requires us to use more of society’s resources on defense and preparedness in the years ahead,” the ministry said.
For half a century, Norway’s revenues from its oil and gas reserves have underpinned the public finances and allowed the country to build up a $1.7 trillion sovereign wealth fund. While a budget rule keeps the spending from the fund over time at 3% of its expected real return annually, those budget injections have been growing in parallel with the expansion of the fund’s size.
That means Norway’s oil-adjusted structural budget deficit has grown from 4.9% of mainland gross domestic product in 2010 to close to 10% of GDP last year and is projected at 10.3% this year. Transfers from the fund have paid for more than a fifth of budget spending since the pandemic thanks in part to windfall gains following sanctions against Russia over its full-scale invasion of Ukraine.
While the cash flow from the fund is expected to be “higher than previously estimated” and “enable increased use of fund’s proceeds for a few years,” it is projected to decline in future, while the population aging will boost welfare spending needs at the same time.
Public spending is estimated to increase by 5.7% of mainland gross domestic product through 2060, the ministry said. That compares with an forecast of 5.6% in a similar document by the previous government in 2021.
Norway’s parliament in June approved a plan to almost double defense spending over the next 12 years to adapt to threats from neighboring Russia, with a focus on naval and air defense capabilities. The NATO member aims to reach its target for spending as part of the defense alliance — at 2% of gross domestic product — already in 2024, while a level of 2.7% of GDP is expected to be attained by 2030.
(Updates with quote, details from third paragraph.)
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