Introduction

“The goal of the economic policy is economic growth that contributes to work for everyone, more equitable distribution that reduces social and geographical differences, and a strong welfare state with good services regardless of people’s wallets and place of residence”. This is the first paragraph of Norway’s National Budget for 2023, and it shows that there is a close link between economic policy and welfare services in Norway.

It also shows the importance Norway attaches to having a strong workforce, which is seen as its most important resource. The main goal of the Norwegian employment policy is to make it possible for as many people as possible to participate in the labour market and contribute to society. This is a prerequisite for the sustainability of Norway’s welfare schemes; we must create before we can share.

In this chapter, I would like to present certain traits of the Norwegian model of economic governance that have contributed to realization of the current Norwegian system of welfare transfers and services. This welfare system has, in interaction with the coordinated labour market model, contributed to a high level of social, economic, and gender equality throughout Norwegian society. The priorities and circumstances of different countries vary, and the features of the Norwegian model might not be feasible for or transferable to other countries. This chapter aims to show how the Norwegian model has succeeded in fostering a trajectory of economic growth and development tailored to Norway’s particular situation and preconditions. Hopefully, it will carry interest also beyond Norway’s borders and lay a foundation for discussions on topics such as employment policy, redistribution, gender equality, and welfare policies across cultures and boundaries. It is important to develop dialogue and experience sharing on these issues, and at the Norwegian Embassy in Beijing, we follow China’s “common prosperity” policy with great interest.

The Norwegian model has never followed a fixed blueprint and is a label given in retrospect for the way in which the organization of our society has evolved. It includes responsible economic management aimed at providing a high level of employment through monetary and fiscal policy, an organized working life with coordinated wage setting based on cooperation and negotiations between the associations of employees, employers, and the government, as well as universal welfare services. The Norwegian system and culture expect that all who are capable of participating in the labour market do so, and seek—through free training and education—to facilitate everyone’s inclusion in the workforce. Norway has thus a relatively high retirement age, normally 67 for both men and women. Our high labour market participation, together with a broad tax base, generates income to the state, which in turn can be redistributed for the common good of society.

In the wake of broad class compromises in the 1930s, the Norwegian welfare system was gradually developed in the post-World War II era, at the same time that our Scandinavian neighbours were building up theirs. A universal welfare system financed by taxes is an important part of the Norwegian model, contributing to a low level of income inequality, a high degree of gender equality with high female employment rates as well as free education from primary school and accessible and affordable kindergarten before that.

Norwegians have always lived off their national resources and taken advantage of the possibilities the land and ocean have given them. The discovery of oil resources on the Norwegian continental shelf in 1969 has contributed to strong government finances. But, as several other countries have experienced, abundant petroleum resources are no guarantee of good and stable economic results. In order to maintain sustainable welfare services, it is more important to promote a high degree of employment through long-term economic policies, and sound management of human and natural resources.

Main Tools of Economic Governance

The Norwegian Tax System

A healthy tax system is key to maintaining a prosperous economy and funding universal public services and welfare schemes, which have made Norway an affluent and safe society. To achieve this, the Norwegian tax system is designed to promote fair distribution, value creation, and work incentives. As a central tool in the government’s policies to foster economic growth, tax revenues are also used to reduce inequalities between people socially, economically, and geographically. To promote these goals and ensure sufficient revenue, a broad tax base and a high level of participation in the labour force are indispensable prerequisites. Making sure that those with the highest incomes and most wealth contribute most helps generate sufficient revenue and a fair tax burden, but it also fosters trust. Besides taxation of income and capital, Norway also collects a value-added tax (VAT) on goods and, since 2001, on services. The VAT amounts to 15% or 25% depending on the goods or services to be purchased. The corporate income tax is 22%.

In general, Norwegian taxpayers seem to be willing to pay taxes. Reasons for this include transparency, which the national bureau Statistics Norway contributes to, and efficiency, through the digitalization of tax declarations and the tax authorities’ services. Combined with the opportunities to draw politicians to account, there is a high degree of trust in the system and that the money is well spent. Citizens seem to accept paying taxes when they see that they are used for high-quality services such as universal education, healthcare, and income security, which almost everyone benefits from over the course of their lifetime.

Income, wealth, and opportunities are often unevenly distributed geographically. To even out these disparities, successive Norwegian governments have developed policies that promote geographical redistribution. Payroll tax varies between regions from 14% in most of the country to zero in the northernmost part. Subsidies are offered to various industries located in the periphery, such as agriculture where national food security is an important aim. People living in certain rural areas are also offered free kindergarten and rapid down-payment on student loans.

In a world of sweeping transformations, Norwegian society is also changing—driven by an ageing population, the transition to green growth, digitalization, and globalization. To ensure the tax system’s feasibility, reviews are carried out on a regular basis.

The Government Pension Fund and Budgetary Rule

Redistributing Revenue Across Generations

When oil and gas were discovered on the Norwegian continental shelf in 1969, it sparked discussions about how revenue should be handled in order to benefit all Norwegians, including future generations. For the initial years, investments were substantially higher than revenues. In 1990, Norway established a Sovereign Wealth Fund, today known as the Government Pension Fund Global. After the first deposits were made in 1996, surging oil and gas production brought rapid growth of the fund over the following years, mirroring the high tax rates of almost 80% on surpluses in the petroleum sector. The state’s revenues from oil and gas extraction are now kept in the fund, together with the returns on the fund’s investments. Saving money for the welfare of future generations, the fund’s statutes and investment rules are regulated by the Parliament. The organization of the fund is supervised by the Ministry of Finance. Norges BankFootnote 1 Investment Management (NBIM) is operationally responsible for the investments of the fund and operates independently and free from political interference. As the fund’s capital cannot be invested in Norway, the majority of investments are made in low-risk international equities and bonds. At the time of writing, the fund stands at close to $1.4 trillion and is the second largest sovereign wealth fund in the world.

In accordance with its statutes and corporate governance objectives, NBIM makes public its expectations of how companies in its portfolio should address global challenges in their operations. The expectations are formulated in line with standards such as the UN Global Compact and the OECD’s guidelines for multinational companies, and largely coincide with the UN’s sustainability goals. NBIM has prepared expectation documents in the following eight areas: climate change, water management, human rights, children’s rights, tax transparency, anti-corruption, ocean sustainability, and biodiversity and ecosystems.

The Budgetary Rule

To avoid the so-called resource curse, around the millennium visionary politicians developed a fiscal rule of thumb to determine how much of the petroleum wealth saved in the fund the state can use to finance its expenses every year. Effective from 2002 on and named “the budgetary rule”, this fiscal rule says that “transfers from the fund to the central government budget shall, over time, follow the expected real return on the fund”. This is today estimated to about 3%. As “significant emphasis is placed on evening out economic fluctuations and contributing to sound capacity utilization and low unemployment”, the annual transfers may exceed 3% in difficult times and be well below that in normal times. The transfers are thus used in a counter-cyclical manner.

The budgetary rule has allowed a gradual in-phasing of petroleum revenues into the Norwegian economy, without risking Dutch disease and surging cost-inflation. The fiscal policy framework has thus aimed to preserve the real value of the fund for the benefit of future generations. Conversely, the fund and the fiscal rule insulate the budget from short-term fluctuations in petroleum revenues, and leave space for fiscal policy to counteract economic downturns. In the event of large oscillations in the value of the fund or in factors that affect the structural fiscal deficit of the mainland economy (excluding oil and gas), the adjustment in the use of fund revenues shall be smoothed out over several years, based on an assessment of its real rate of return in the next few years.

To sum up, the budgetary rule implies that government expenditure over time shall equal government revenues from the mainland economy plus the expected future real return from the fund. This rule has been followed under changing governments and parliamentarian majorities since its adoption around the turn of the millennium.

State Ownership

Private ownership is, as a rule, preferred in Norway’s mixed market economy and direct state ownership requires a special justification. The extent of state ownership is assessed in light of what is considered the most suitable alternative for achieving societal goals in contexts where the market alone does not provide the best socio-economic outcomes. In the area of common resources, the state owns a higher share in the domains of energy and the extraction of natural resources, but private companies also participate in this sector and contribute to a competitive business environment. It is, however, worth underlining that state-owned companies in Norway operate at an arms-length distance from the government, and are subject to the same rules and objectives as privately owned companies. The state can exercise its rights as a shareholder, but the company is managed and operated independently by its management personnel and board of directors. The latter is appointed by the Minister of Trade and Industry. Typically, the government focuses on the rate of return with many state-owned companies listed on the stock exchange and include private shareholders as well.

Since the petroleum sector is particularly profitable due to high resource rent, there is an additional 56% special tax rate on top of the normal corporate income tax of 22%, resulting in a full 78% tax on profits. The government also receives revenues from its 67% majority share of the Equinor energy company, and direct ownership of petroleum fields. All in all, about 90% of the petroleum resource rent goes to the government. Given the profitability of the petroleum sector, this generates significant revenues for the state.

The high tax rate has not been an obstacle in attracting foreign companies to the industry. The Norwegian government has developed flexible and risk-friendly policies that attract safe investments from foreign investors.

In October 2022, the government released a white paper on state ownership that aims for greener and more active state ownership. The Government will also develop and strengthen the state’s expectations of the companies it owns, including expectations in terms of climate, nature, risk management, transparency and reporting, working conditions, and remuneration of senior executives. By defining clear expectations of its companies, the state can take a more active role in pushing the companies it owns towards a greener, fairer, and more sustainable path.

Norway’s Welfare Society

The post-World War II era in Norway was characterized by political stability and broad consensus across the (main) parties. In 1945, all political parties ran for election on the same political platform, with a distinct social democratic flavour. Across party lines, there was broad consensus about avoiding a return to the class struggle of the interwar period. The aim of the government, supported by social partners and private business, was to lay a foundation for strong economic growth and secure increased living standards and social security. Empowered by sound economic development, the government introduced a range of public welfare and education services in the ensuing decades.

The discovery of oil on the Norwegian continental shelf in the late 1960s boosted investment in the Norwegian economy and fueled expansion of the universal welfare system, which was based on equal access to social services for everyone. Whilst the level of most welfare benefits depends on how many years individuals have been working and their earnings, it is an aim that the quality of public services should be such that it is accepted by individuals with high incomes as well.

Today’s public welfare schemes include, amongst others, free healthcare (beyond a small deductible) and education, generous maternity and paternity leave, retirement and disability pensions, unemployment benefits, 100% sick pay, and other welfare services and benefits. In addition to ensuring a strong social safety net, the interaction between the welfare system and a well-functioning labour market with small wage gaps, has contributed to a high employment rate, low income inequality, a high degree of transparency, equal opportunities, and social trust.

Internationally, there is a widely held perception that strong, overarching welfare services make people lazy, hindering innovation and economic growth. However, the Norwegian experience has been that welfare services such as free education and affordable and accessible healthcare, kindergarten and elderly care, enable more people—and women in particular—to work and contribute to economic growth. Thus, Norway has a high rate of employment especially amongst women. State funding is also utilized to support entrepreneurship and innovation, and some of the largest state-owned companies are at the forefront of supporting and investing in efforts that contribute to a greener future.

Welfare Services That Promote Gender Equality

From the 1970s in particular, a fundamental goal underpinning the Norwegian model has been to bring as many citizens as possible into the labour market regardless of gender and social background. The expansion of public services and higher education in the 1970s brought about a substantial increase in the number of women working outside of the home. As the population has become more heterogeneous, however, Norwegian policymakers have in recent years recognized the need to develop a more inclusive labour market that not only makes it possible for men and women, but also for immigrants, the young, the elderly, and people with disabilities to find gainful employment and continue working longer. Leveraging the potential of the entire population increases production and societal/macro productivity, and increases the state’s tax revenues.

Breaking with the traditional model of the housewife enabled more women to join the workforce, and created a dual-earner family structure that has contributed greatly to Norway’s economic and social progress over the past 50 years. In 1972, the employment rate of women in Norway was 44.7%; today it is 69.5%, only six percentage points lower than that of men. Although gender equality is good for the economy, enlarging the tax base, creating value, and forming the basis for a sustainable welfare state, there are more women working part-time than men and many immigrant women are outside the labour market.

The Norwegian Gender Equality Act was introduced 45 years ago, and today, the share of women in Parliament is close to 45%, whilst the share is 47% in the cabinet. There are several policies in place in Norway that promote gender equality in the workplace. One is the distribution of parental leave between men and women. Parents get 46 weeks of parental leave when a child is born. This period is divided into a maternal quota (15 weeks), a paternal quota (15 weeks), as well as a joint period of 16 weeks, in which the parents can decide who will work and who will stay home with the kids. Although this scheme treats mothers and fathers equally and allows every family to divide their parental quota in a way which is most suitable to them, the majority of men still only uses their minimum 15 weeks. However, the numbers are slowly changing as shorter time away from work increases female participation in work, advances women’s careers, and increases income. There are still discussions about how this scheme can be made more efficient in promoting gender equality in the labour market.

A related regulation in Norway is that employers are not allowed to ask questions related to family planning during job interviews. This is meant to avoid discrimination against women who might want to raise kids in the near future. Additionally, in order to promote female participation in the boards of public companies, Norwegian statutory law states that there must be a certain percentage of representation from both genders in such boards—generally at least 40%. This also shows that gender equality goes both ways.

Despite Norway’s longstanding, determined efforts to eradicate gender inequality in the workplace, there is still considerable room for improvement in terms of employment and income for women. The same pertains to ethnic minorities, people with disabilities, and youth with only a basic level education. Avoiding the creation of new forms of inequality as diversity in the workforce is growing and has become an important topic in Norwegian society today.

The Norwegian State Educational Loan Fund

Free education has been a hallmark of the Norwegian welfare state. Equal access to education is not only fundamental for developing a relevant, well-qualified workforce, and maintaining a high employment rate, it is also crucial to ensure broad participation in the democratic elements of civil society. Norway offers free compulsory and secondary education for all, and the government covers tuition costs in higher education and public universities. Furthermore, the Norwegian State Educational Loan Fund (Nw.: Statens lånekasse for utdanning) allocates grants and loans to all students in higher education, covering their living and other expenses whilst studying. The loan schemes are interest free until graduation, and the interest rate on loans after graduation is significantly lower than the market rate. After successfully passing exams each semester, up to 40% of the total loan can be converted into grants, essentially eliminating the loans retroactively. This financing scheme was established in 1947, and makes it possible for everyone to attend higher education institutions regardless their geographical, economic, and social circumstances, contributing to more equal opportunities irrespective of background. Of Norway’s then 5.4 million people, 304,900 were enrolled in higher education in the fall of 2021. Of these, 40% were men and 60% were women. This disparity partly indicates that female occupations are often more education-intensive, but partly also that parts of the young male population find it difficult to adjust to more skill-intensive careers.

The Right to Necessary, Equitable, and Affordable Healthcare

Everyone who lives in Norway has the right to necessary healthcare. Moreover, healthcare is free, beyond a small deductible. The government’s goal is to provide everyone with access to the same healthcare services. As Norway is a country with a relatively dispersed population, this goal requires a great deal of economic and human resources, especially when it comes to high-level services and readiness in rural areas. In order to secure emergency room services in all regions, the current government has increased allocations to local governments, particularly in the smallest municipalities.

An ageing population requires an increased need for attention and care. In Norway, around half of the population over 80 years old receive some form of government-funded care, and the number of people above the age of 80 is expected to increase substantially in the years to come. The services are either provided in the patient’s home or at an elder care institution. Government-funded elder care aims to take into account the needs and dignity of elderly people, whilst at the same time making it possible for their next of kin to work full time. In 2020, life expectancy in Norway was 84.9 years for women and 81.5 years for men.

New Challenges Ahead

Creating a perfect system for economic (and social) governance is nearly impossible, as most variations on any system have their advantages and disadvantages. Nevertheless, economic systems need to be well adapted to the changing situation in the countries that have adopted them, and a fair balance between competing ends and considerations must be found. This also means adapting the system in line with changing times, to face new challenges and seize new opportunities. A shared challenge for Norway and China going forward is addressing the demographic changes of an ageing population. This requires an even broader, more skilled, and efficient workforce, as well as smarter utilization of technology and human resources—particularly within the healthcare sector.

How can we ensure that our welfare system can handle a growing number of older pensioners with an increasing need for care? How can we finance such a system in the future? Is the current distribution of human resources across sectors and fields appropriate? Can digitalization be better implemented? What is the potential for innovation? Which measures can be implemented to support families in having more children? How do we at the same time best respond to the growing expectations of a population that has been accustomed to economic growth and increased living standards over time?

These questions display some of the hard choices Norway will face in the future, when the growth in petroleum revenues and returns from the pension fund are likely to plateau whilst expenditure and employment needed to cater for the elderly will soar. Although the Norwegian and Chinese systems and realities differ, we believe it would be highly valuable to engage in discussions and experience sharing with our Chinese counterparts on these and other issues going forward.