Norway to dip into oil fund to pay for tax cut

By Joachim Dagenborg

OSLO (Reuters) - Norway's government said on Wednesday it will cut taxes next year to boost an economy hit by weak oil prices, and it plans to help pay for them with the first net withdrawal from its sovereign wealth fund since it was set up.

Announcing its second budget since taking office two years ago, the minority government of Prime Minister Erna Solberg said it plans to spend 2.8 percent of the $845 billion fund's value in 2016, up from 2.6 percent this year.

Part of the extra 23 billion crowns ($2.79 billion) will be used to fund a range of tax cuts, including a two-point reduction in both corporate tax and basic rate income tax to 25 percent.

But a halving of crude prices since mid-2014 has reduced the flow of cash from Norway's petroleum industry, so the government will withdraw more money from the oil fund than it puts in. That has never happened since the fund was set up as a sovereign wealth vehicle in 1998.

The wealth fund is the world's largest, holding about 1.3 percent of global stocks. It has ethical ambitions, avoiding investment in companies that produce nuclear weapons, anti-personnel landmines, cluster bombs or tobacco.

It invests mostly in stocks, bonds and real estate. It is stepping up the latter in an effort to boost its long-term return on investment, which has slightly undershot its four-percent target since 1998.

The fund has shrunk in recent months, in step with a global market rout led by uncertainty over the health of the Chinese economy. In August, its chief executive said the fund had lost five percent of its value in a month.

The two small centrist parties whose backing the government will need to pass the budget offered broad support for the tax cuts. But one of them questioned the extent of the withdrawals from the wealth fund, signaling some horse-trading before the package is put to a parliamentary vote in November.

'MORE EXPANSIVE'

Norway's economy has performed better than most of Europe's in recent years, but it is now slowing, leading the central bank to cut interest rates to a record low 0.75 percent last month.

The government said on Wednesday it saw mainland GDP growth, excluding the volatile oil and shipping sectors, at 1.8 percent in 2016, down from 2.0 percent forecast in May.

The slowdown meant a fiscal boost was necessary, Finance Minister Siv Jensen said.

"Presented with a challenging economic situation, the most important thing we can do now is to stimulate growth in the private sector facing competition from abroad," she told parliament.

In all, next year's tax cuts will be worth 9.1 billion crowns, part of a broader effort to stimulate the economy by 0.7 percent of the trend for mainland GDP.

Kyrre Aamdal, a senior economist at brokerage DNB Markets, described the fiscal plan as "a bit more expansive" than the country's central bank had expected.

"That is partly explaining why the Norwegian crown strengthens and yields have moved up today," he said.

The crown gained 0.8 percent to 9.26 per euro by 1152 GMT, boosted both by the budget and by a rise in oil prices.

The government will need the support of the Christian Democrats and Liberals to get the budget approved.

The former called the proposed tax reform a "good starting point for a broad compromise".

"I look forward to constructive negotiations in parliament to give this budget a clearer centrist profile," its finance spokesman Hans Olav Syversen said in a statement.

The Liberals' finance spokesman told parliament the tax reform plan was a step in the right direction but the increase of oil money was "worryingly expansive".

(Additional reporting by Henrik Stolen, Ole Petter Skonnord, Camilla Knudsen, Nerijus Adomaitis, Stine Jacobsen, writing by Gwladys Fouche, editing by Terje Solsvik and Larry King)

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